Marine Insurance Law, The doctrine of utmost good faith and insurance contracts

The Assured’s Post-Contractual Duty of Good Faith

April 27, 2022July 25, 2022By Tan Pui Yen
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The Assured’s Post-Contractual Duty Of Good Faith

1. Introduction

The Court of Appeal in The Mercandian Continent confirmed that the duty of good faith continues beyond the making of the insurance contract, in respect of claims and in respect of the performance of the contract generally.

However, the duty is merely one not to be fraudulent. The duty binds both the assured and the insurer. However, as with the pre-contractual duty, it is a duty which is more likely to be felt by the assured as the duty most commonly arises in the context of claims made by the assured for an indemnity under the marine insurance policy.

2. Duty In Respect Of Claims

i)Scope Of The Duty

The only duty lying on the assured in respect of claims is a duty to abstain from fraud.

The presentation of a fraudulent claim will therefore constitute a breach of the duty of utmost good faith. It has been questioned by the Court of Appeal whether the presentation of a fraudulent claim is embraced by the duty of utmost good faith at all. 

The Court of Appeal in the The Mercandian Continent suggested a twofold test of materiality in the context of post-contractual fraud, namely that:-

(a) the fraud is relevant to the insurer’s liability or defence to liability under the policy; and 

(b) the fraud is sufficiently serious to permit the insurer to terminate the insurance contract for a repudiatory breach of contract. 

In The Aegeon, the Court doubted whether there was such a requirement of materiality in respect of fraudulent claims generally, but accepted that there was a requirement of materiality in respect of the use of fraudulent devices (see below). The Court stated that the device is material if it ‘would, if believed, have tended, objectively but prior to any final determination at trial of the parties’ rights, to yield a not insignificant improvement in the insured’s prospects…’

In Versloot Dredging BV v HDI-Gerling Industrie Versicherung AG (The DC Merwestone) the Supreme Court held that a ‘fraudulent device’ did not constitute a fraudulent claim and that there was, in effect, a materiality requirement that if the insurer would be liable to indemnify the assured in respect of the claim, absent any lie, the making of such a lie is necessarily collateral. There is no separate requirement of inducement in respect of a fraudulent claim; the presentation of the fraudulent claim without more is sufficient to constitute a breach of the duty of good faith (Royal Boskalis Westminster NV v Mountain and The Aegeon)

ii)Types Of Fraudulent Claims

A fraudulent claim may take a number of different forms:

a) The assured may deliberately procure the loss and present a claim under the insurance policy. Such a loss would in any event be excluded from cover pursuant to section 55(2)(a) MIA.

b) The loss may be genuine, but the assured may lie about the circumstances of the loss in order to attempt to prevent the insurer relying on a particular policy term or exclusion in defence to the assured’s claim.

c) The loss may be genuine and may be covered by the policy, but the assured may lie to exaggerate the extent or nature of his or her loss.

In each of these cases, there will have been a breach of the duty of utmost good faith. However, there appears to be a separate requirement of materiality only in the last-mentioned case (i.e. the use of a fraudulent device).

Until the decision of the Supreme Court in Versloot Dredging BV v HDI Gerling Industrie Versicherung AG, an assured could be guilty of fraudulent claim where the loss was genuine and covered by the policy, but the assured employed a fraudulent device in order to attempt to induce the insurer to accept the claim, even though the insurer would be liable to pay the claim in any event. 

However, the Supreme Court held that such a fraudulent device does not constitute a breach of the duty relating to the presentation of fraudulent claims. That is, if the insurer would be liable to indemnify the assured in respect of the claim, absent any lie, the making of such a lie is necessarily collateral and will not constitute a fraudulent claim in itself. It is presently uncertain whether or not there can be a fraudulent claim by the use of a fraudulent non-disclosure or whether there can only be a fraudulent claim by a fraudulent misrepresentation in connection with the claim (Marc Rich Agriculture Trading SA v Fortis Corporate Insurance NV).

iii)Other Duties

Outside the realm of the making of an insurance claim, there are limited opportunities for the assured to be bound by the post-contractual duty of good faith. In The Mercandian Continent, the Court of Appeal said that the assured is obliged to refrain from fraud in the performance of all aspects of the insurance contract (i.e. beyond the making of insurance claims) and that any failure to observe that obligation will constitute a breach of the duty of good faith.

Three examples of post-contractual fraudulent conduct which might amount to a breach of the duty of good faith are:

a) Sometimes the amount of premium is provisionally fixed when the contract is agreed, but will be adjusted afterwards when it becomes clear what values are at risk. If the assured declared those values inaccurately and fraudulently, that may constitute a breach of the post-contractual duty of good faith.

b) An insurer may have a contractual right of inspection of the property insured

or the assured’s records even when no claim is being presented under the policy. If the insurer exercises a right of inspection and the assured fraudulently misrepresents the condition of the property or the records available, that misrepresentation may amount to a breach of the post-contractual duty of good faith.

c) The assured may be obliged to notify certain circumstances to the insurer pursuant to the terms of the insurance contract. If the assured fraudulent misinforms the insurer, that may amount to a breach of the duty of good faith.

As matters stand, there is a separate requirement of materiality which must be satisfied before the insurer can exercise any remedy in response to such breaches of the post-contractual duty of good faith. 

In The Mercandian Continent, the Court of Appeal held that the insurer could avoid the insurance contract in the event of the assured’s post-contractual fraud, provided that:-

(a) the fraud is relevant to the insurer’s liability or defence to liability under the policy; and 

(b) the fraud is sufficiently serious to permit the insurer to terminate the insurance contract for a repudiatory breach of contract. 

It is difficult to see how requirement (a) can be established in connection with post-contractual conduct which is unrelated to claims. It might also be said that it is difficult to imagine any fraudulent conduct which would not be sufficiently serious so as to amount to a repudiation of the contract. In answer, it might be argued that a fraudulent claim of only £1,000 in the context of overall claims in the aggregate amount of £1,000,000 or in the context of an insured value of £1,000,000 might not be sufficiently serious. On the other hand, any fraud might be regarded as fundamentally inconsistent with the utmost good faith on which the marine insurance contract is based.

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