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

The Pre-Contractual Duty of Utmost Good Faith  

April 27, 2022July 25, 2022By Tan Pui Yen
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The Pre-Contractual Duty Of Utmost Good Faith

1. Introduction

Section 17 MIA provides as follows:-

A contract of marine insurance is a contract based upon the utmost good faith

Section 17 together with sections 18 to 20 are applicable for insurance contracts entered into up until 12.8.2016.

After this date the applicable sections are sections 4 and 6 is the Insurance Act 2015.

The Insurance Act of 2015 introduces 5 changes to sections 17 to 20 MIA:- 

  1. The definition of the assured’s knowledge (which is relevant to define the scope of the assured’s duty of disclosure) and the insurer’s knowledge (which operates as an exception to the assured’s duty of disclosure). ( sections 4 and 6 of the Insurance Act 2015).
  2. There is a new requirement that the assured must disclose material circumstances in a manner which is reasonably clear and accessible to a prudent insurer. (See section 3(3)(b) of the Insurance Act 2015). 
  3. The deletion of the exception to the duty of disclosure based on the existence of a warranty in the policy rendering disclosure superfluous (this exception is currently in section18(3)(d)MIA). (See section 3(5) of the Insurance Act 2015, which is based on section18(3) MIA but omits the old section 18(3)(d)).
  4. The abolition of the broker’s independent duty of disclosure (currently in section 19 MIA). The assured must now disclose material information actually known to the person(s) responsible for the assured’s insurance. (See sections 4(2)(b) and 4(3)(b) of the Insurance Act 2015.
  5. The abolition of avoidance as a general remedy for any breach of the duty of utmost good faith and its replacement with a new range of remedies in respect of the assured’s breach of duty of fair presentation. (See sections 8 and 14(1) and Sch.1 of the Insurance Act 2015. The abolition of avoidance as a general remedy will have the effect of abrogating the insurer’s duty of disclosure (even though the duty itself is not abolished). Section 12 of the Insurance Act 2015 also introduces remedies for the assured’s fraudulent claim.

2. The Origin Of The Duty Of Utmost good Faith

The origins of the duty of utmost good faith is clear but it brings about two issues to the fore:-

a) Does the duty of good faith arise as a positive legal duty imposed by the law or is it no more than a duty imposed by an implied term of (or implied condition precedent to) the contract?

b) Does the duty of good faith have its origins in the common law, equity or both?

The first issue is settled now because the Courts have held that the duty is imposed by general law and not merely by an implied term (Orakpo v Barclays Insurance Services, Manifest Shipping Co Ltd v Uni-Polaris Shipping Co Ltd (The Star Sea) and S Merc-Scandia XXXXII v Certain Lloyd’s Underwriters (The Mercandian Continent)).

The second issue is becoming less important now due to the increasing number of case laws deciding duty of good faith.

3. Purpose Of The Duty Of Utmost Good Faith

The purpose of the duty of utmost good faith is said to be two fold:

a) To prevent fraud and encourage good faith (Carter v Boehm); and

b) To ensure that there is a full exchange of information relating to the risk (Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co Ltd).

The above first purpose is very straightforward. In the case of Carter v Boehm, the Court held that the duty of utmost good faith is binding on both the insured and the insurer. The duty owed by the insurer is not so important due to the lack of knowledge on his part. This was only examined in a later case of Banque Keyser Ullman SA v Skandia (UK) Ins Co Ltd which was affirmed in Banque Financiere de la Cite v Westgate Ins Co Ltd. In these cases the court decided that the only remedy available is that of avoidance, which is only available to the insurer, due to the lack of knowledge. 

The second purpose is more complex as it is very subjective in nature. The assured knows much about the subject-matter of the insurance contract and the risks to which the subject-matter will be exposed. For example, the assured as the owner of the ship to be insured will be aware of the ship’s condition and trading patterns. By contrast, the insurer will generally only know that which the assured tells the insurer or that which the insurer knows in the course of his or her business. It is unlikely (although not uncommon) that the insurer will inspect the ship before deciding to insure it.

Due to this perceived imbalance of knowledge, the law imposes a duty of disclosure on the assured to inform the insurer of all circumstances which are material to the risk. This duty of disclosure is the most regularly encountered instance of the duty of good faith (and is provided for in sections 18, 19 and 20MIA). Such disclosure allows for a fair calculation of the risk to be made (Uzielli v Commercial Union Insurance Co).

4. Duration Of The Duty Of Utmost Good Faith

The pre-contractual duty of disclosure exists prior to the making of the insurance contract and comes to an end at the time when the contract is made. It therefore can be important to identify when the contract of insurance is made. Section 21 MIA provides that ‘a contract of marine insurance is deemed to be concluded when the proposal of the assured is accepted by the insurer, whether the policy be then issued or not…’.

After the contract is made, the duty of utmost good faith changes in its scope. If the insurer is required to agree to an additional premium, for example, pursuant to a ‘held covered’ clause or if the parties seek to vary or amend the contract – where essentially the insurer is required to exercise underwriting judgment – the pre-contractual duty of disclosure will revive for that purpose. The Insurance Act 2015 does not address the assured’s duty of disclosure in connection with the operation of ‘held covered’ clauses.

After the contract is made, the duty of good faith continues until litigation commences in respect of a particular claim, at which point the duty ceases as regards that claim.

5. Modification Of The Duty Of Utmost Good Faith

Insofar as the MIA applies, it is open to the parties to modify the duty of good faith by contract. That is, the parties may contractually agree that the duty of good faith may be:

a) Enlarged, requiring, for example, the assured to disclose more than he or she would have to disclose as a matter of law (Hussain v Brown).

b) Restricted, requiring, for example, the assured to disclose less than would normally be required by the duty as a matter of law (Jones v The Provincial Insurance Company).

c) Waived, in which case the duty does not apply (HIH Casualty and General Insurance Ltd v Chase Manhattan Bank).

Such contractual modifications of the duty of good faith are generally fully effective. However, no contract can protect a contracting party from his or her own fraud if that fraud induced the making of the contract.

One of the most common contractual modifications made to the duty of good faith is made by the use of a particular contractual provision, commonly referred to as the ‘basis clause’. The basis clause often provides that the assured’s answers in an insurance proposal form or all of the information provided by the assured to the insurer will be the ‘basis’ of the insurance contract; or it may provide that such answers or information will be ‘incorporated’ into the contract; or it may provide that such answers or information are ‘warranted’ to be true. 

Such clauses have the effect of making the accuracy or truth of the assured’s proposal a condition precedent to the insurer’s liability under the insurance contract such that if the answers or information are untrue, the insurer’s liability under the entire contract is discharged. This has the same effect as ‘avoiding’ the insurance contract. How then is this a modification of the duty of good faith imposed as a matter of law? It is a modification because if a statement is warranted to be true and it is untrue, the insurer is no longer liable, even if the relevant statement was not ‘material’ and even if the statement did not induce the making of the insurance contract. 

The duty of good faith may be modified unilaterally by the insurer (i.e. not by contract). For example, the insurer may voluntarily waive disclosure of certain information. Further, the insurer may seek to impose a duty of disclosure on the assured by asking the assured a specific question, thus requiring the assured to answer the question truthfully (The Bedouin, Keeling v Pearl Assurance Company Limited and Schoolman v Hall). This is at odds with s.20(1) MIA which permits the insurer to avoid the insurance contract by reason of a misrepresentation only if that misrepresentation is ‘material’. The answer to this inconsistency may be that, in the event that the insurer asks the assured questions, the assured cannot rely on the exceptions to the duty of disclosure set out in s.18(3) of the Marine Insurance Act 1906. 

However, if the Insurance Act 2015 applies, although it is open to the parties to the marine insurance contract to contract out of the provisions of the Insurance Act 2015 with respect to the duty of fair presentation or remedies for fraudulent claims, under ss.16–17 of the 2015 Act, where the relevant contractual term puts the assured in a worse position as regards the duty of fair presentation or the insurer’s remedies for a fraudulent claim, that contractual term will be of no

effect, unless, having regard to the characteristics of the assured and the circumstances of the transaction: 

  1. the term is clear and unambiguous as to its effect, and
  2. either (a) the insurer takes sufficient steps to draw the term to the assured’s attention before the contract or variation, or (b) the assured (or its agent) had actual knowledge of the term.

Section 9 of the Insurance Act 2015 prohibits and renders ineffective basis clauses in insurance contracts, although it remains possible for specific facts to be the subject of warranties. 

6. Actionable Non-Disclosure

The duty requires the assured to disclose to the insurer all material facts known to the assured relating to the risk which is to be insured, or which ought in the ordinary course of business to be known to the assured. As discussed above, the duty continues up until the contract of marine insurance is concluded.

If the insurer wishes to exercise a remedy for a breach of the duty of disclosure, as provided for in s.18 MIA or sections 3(3)(a)-(b) and 3(4) of the Insurance Act 2015, the insurer will have to establish the following ingredients of an actionable non-disclosure:-

a)There has been a failure to disclose on the part of the assured.

b) The matter not disclosed is a circumstance.

c) The circumstance is material.

d) The circumstance was known to the assured or ought to have been known to the assured in the ordinary course of business.

e)The non-disclosure induced the insurer.

The insurer equally may avoid the insurance contract if there has been a failure to disclose by the broker, the assured’s agent, pursuant to section 19 MIA. The Insurance Act 2015, if it applies, omitted s.19 MIA.

7. Actionable Misrepresentation

Apart from non-disclosure the assured also has a duty not to misrepresent to the insurer. An insurer will be entitled to a remedy in the event of an actionable misrepresentation, as provided for in section 20 MIA and section 3(3)(c) of the Insurance Act 2015, if he or she can establish the following elements:-

a) The assured has made a representation.

b) The representation is one of fact or expectation or belief.

c) The representation is material.

d) The representation is false.

e) The insurer has been induced by the misrepresentation.

There is a marked difference between a non-disclosure and a misrepresentation. One is silence on the part of the assured and the other is a positive representation made by the assured but the distinction between a failure to disclose and a positive misrepresentation might be ‘imperceptible’ (Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co Ltd).

As a general rule, mere silence will not support an action for deceit or other misrepresentation (HIH Casualty and General Insurance Ltd v Chase Manhattan Bank).

8. Circumstances Not Disclosed Or Misrepresented

The circumstance which is the subject-matter of the non-disclosure or misrepresentation must be a fact. The assured’s duty is a duty to disclose facts upon which the underwriter will exercise his or her judgment in deciding whether or not to insure the assured. It is not a duty requiring the assured to give the insurer advice as to whether he or she should insure the risk.

Section 20(3) MIA and section 3(3)(c) of the Insurance Act 2015 appear to distinguish between facts and expectations or beliefs. They highlight the difference between the statement ‘The ship is red and black’ and the statement ‘I believe the ship is red and black’. The first statement is a statement of fact; the second statement is a statement of belief. However, the holding of a particular expectation or belief is itself a fact.

If an assured believes that his or her vessel is in poor condition, that belief might have to be disclosed, even though as a matter of fact the vessel is in good condition.

If a particular opinion or belief is represented as an opinion or belief, there will be a misrepresentation only if it is made otherwise than in good faith (i.e. dishonestly) (sections 20(3) and 20(5) MIA; Kamidian v Holt, Zeller v British Caymanian Insurance Company Ltd). 

If the assured represents his or her belief as A, but in fact it is B, it follows that the assured has been dishonest, because the assured has represented his or her belief as something which he or she did not in fact believe.

Where the assured holds a belief, but without much evidence (e.g. an irrational fear), it is a question of fact whether the assured’s fear is material. However, it is less likely that such matters will have to be disclosed.

Where the belief or fear is one which is supported, even in part, by the surrounding circumstances, it is more likely that the belief or fear should be disclosed (The Shakir III).

The assured’s intentions might have to be disclosed if material. A representation of intention if honestly held will not be a misrepresentation even if the representor (i.e. the person who makes the representation) subsequently (i.e. after the contract) changes his or her mind. However, if an intention is stated to be otherwise than it is, there has been a misrepresentation. It has been held that a representation of intention is not a representation of belief or expectation: St Paul Fire & Marine Insurance Co (UK) Ltd v McConnell Dowell Constructors Ltd and Limit No. 2 Limited v AXA Versicherung AG).

Rumours, intelligence and allegations may have to be disclosed if material, even if they are untrue or groundless. Section 18(5) MIA and section 7(2) of the Insurance Act 2015 provide that ‘the term “circumstance” includes any communication made to, or information received by, the assured. As to the obligation of disclosure of allegations of dishonesty, see the Court of Appeal’s decision in North Star Shipping Ltd v Sphere Drake Insurance plc.

However, the mere fact that a particular circumstance might give rise to a suspicion or inference of a material circumstance by the insurer which the assured knows is not true, then the particular circumstance will not be material on that ground alone. For a recent decision confirming that if a particular circumstance might give rise to a suspicion or inference of a material circumstance by the insurer which the assured knows is not true, the particular circumstance will not be material on that ground alone (Sea Glory Maritime Co v Al Sagr National Insurance Co (The Nancy)).

9. Knowledge And The Duty Of Disclosure

The assured is bound to disclose a material fact if it is ‘known’ to him or her (Section 18(1) MIA and section 3(4)(a) of the Insurance Act 2015). The test of what the assured ‘knows’ differs under MIA and under the 2015 Act. Accordingly, each statute must be considered separately.

Knowledge for the purposes of s.18 MIA may be one of three types:-

a) First, knowledge actually possessed by the assured. All that matters is that the assured knows the material fact. If the assured knows the material fact but does not appreciate that it is material, he or she will still be in breach of duty if no disclosure is made. Further, the assured will be taken as having actual knowledge of a fact if the assured was not actually aware of a fact but would have been had he or she not willfully shut his or her eyes to the fact. That is, the assured will be deemed to be actually aware of a circumstance if he or she suspected that the circumstance might exist and deliberately refrained from making an inquiry in order to avoid becoming aware of it. In the case of companies, a fact is actually known to a company if it is known by the ‘directing mind and will’ of the company in a given situation (The Star Sea, Group Josi Reinsurance Co Ltd v Walbrook Insurance Co Ltd).

b) Secondly, the assured may have imputed knowledge. If a fact is known by the assured’s agent, then such knowledge will be attributed or imputed to the assured. An agent’s knowledge will not be imputed to the assured, however, where the knowledge concerns the agent’s own fraud upon his or her principal. That is, if an agent has acted fraudulently towards a third party, the agent’s knowledge of such fraud may be attributed to the principal. 

However, if the agent has acted fraudulently towards his or her own principal (for example, by embezzling funds belonging to the principal), knowledge of such fraud will not be attributed to the principal.

There are (at least) three classes of agents:-

i) The agent to insure (the broker). The broker’s knowledge will be imputed to the assured, provided that it was acquired in the broker’s capacity as the assured’s broker. The broker is subject to a personal duty of disclosure under section 19 MIA. Only the broker who deals with the insurer comes within section 19 MIA, not a broker previously employed by the assured (Blackburn Low & Co v Vigors, HIH Casualty and General Insurance Ltd v Chase Manhattan Bank).

ii)The agent who has knowledge concerning the subject-matter of the

insurance (e.g. the master of the ship, a cargo superintendent, a port

agent, a warehouseman (Proudfoot v Montefiore).

iii)General agents who are well acquainted with the assured’s affairs (e.g.

a director or a general manager) (Blackburn Low & Co v Vigors).

c) the assured may have constructive or deemed knowledge. Section 18(1) MIA provides that ‘…the assured is deemed to know every circumstance which, in the ordinary course of business, ought to be known by him…’ (see also section 19 MIA). If the assured is a consumer or otherwise not in business, there can be no constructive knowledge attributable to the assured (Economides v Commercial Union Assurance Co plc).

Knowledge for the purposes of section 3(4)(a) of the Insurance Act 2015 are as follows:-

Sections 4 and 6 of the Insurance Act 2015 set out new tests of the knowledge on the part of the assured. There remain separate categories of actual knowledge and constructive knowledge. What counts as actual knowledge depends on whether the assured is an individual or a company or unincorporated association. 

Under section 4(2), the individual assured actually knows only:

  1. what is actually known to the individual
  2. what is actually known to one or more individuals who are responsible for the assured’s insurance (insurance agent). A person who is responsible for the assured’s insurance is defined in section 4(8)(b).

Under section 4(3), an assured who is not an individual actually knows only what is known to one or more individuals who are:

  1. part of the assured’s senior management. Section 4(8)(c) defines ‘senior management’ to mean ‘individuals who play significant roles in the making of decisions about how the insured’s activities are to be managed or organised’
  2. responsible for the assured’s insurance. See section 4(8)(b).

The assured’s actual knowledge includes the assured’s ‘blind-eye’ knowledge. 

Section 6(1) provides that ‘references to an individual’s knowledge include not only actual knowledge, but also matters which the individual suspected, and of which the individual would have had knowledge but for deliberately refraining from confirming them or enquiring about them’.

Assureds, whether or not individuals, are also obliged to disclose material circumstances which the assured ought to know (section 3(4)(a) of the 2015 Act). Section 4(6)–(7) of the 2015 Act defines what an assured ought to know, namely an assured ought to know what should reasonably have been revealed by a reasonable search of information available to the insured (whether the search is conducted by making enquiries or by any other means). This includes information held within the assured’s organisation or by any other person (e.g. an agent or co-assured). This definition of constructive knowledge has the potential to broaden the duty of disclosure as it rests on the assured.

10. Materiality And Inducement 

i) Materiality

The requirement of materiality is made clear in sections 18(1) and 20(1)MIA and sections 3(3) and 3(4) of the Insurance Act 2015.

That means the materiality of a circumstance or representation is not determined by applying legal principles, but determined by applying the test of materiality to the facts of the case.

If the assured makes a misrepresentation (not a non-disclosure) fraudulently (i.e. knowing that the representation was untrue), theinsurer may avoid the insurance contract even if representation was not material (Sibbald v Hill, The Bedouin and Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co Ltd).

Under MIA, a circumstance or representation is material if it ‘would influence the judgment of a prudent insurer in fixing the premium, or determining whether he will take the risk’ (sections 18(2) and 20(2)).

This test is often referred to as ‘the prudent insurer test’ or ‘the prudent underwriter test’. The chief point to note about the ‘prudent insurer test’ is that the prudent insurer does not refer to the actual insurer, but to a hypothetical insurer in the position of the actual insurer. The test is said to be objective, because it ensures that a circumstance is not material merely because the actual insurer, who may be unreasonable, considers it to be material.

The same ‘prudent insurer’ test of materiality is adopted by the Insurance Act 2015: section 7(3). In addition, section 7(4) gives examples of what may be material circumstances:-

  1. special or unusual facts relating to the risk
  2. any particular concerns which led the insured to seek insurance cover for the risk
  3. anything which those concerned with the class of insurance and field of activity in question would generally understand as being something that should be dealt with in a fair presentation of risks of the type in question.

The characteristics of the hypothetical prudent insurer are:-

a) The judgment of the prudent underwriter is to be ‘governed by the principles and calculations on which underwriters in practice act’ (Ionides v Pender).

b) The prudent underwriter must be experienced, rational, ordinary, prudent and intelligent, and fair and reasonable (Stribley v Imperial Marine Insurance Company, Tate & Sons v Hyslop and Associated Oil Carriers Limited v Union Insurance Society of Canton Limited).

In order to be material, the circumstance in question must have a particular effect on the prudent insurer’s judgment in respect ofdetermining whether he or she will enter into the contract of insurance on particular terms or determining the amount or rate of premium.

In Pan Atlantic Insurance Ltd v Pine Top Insurance Ltd (following Container Transport International Inc v Oceanus Mutual Underwriting Association (Bermuda) Ltd), the House of Lords held that matter may be material even if did not have a decisive impact on the insurer’s final decision. 

The Court said that:-

a) ‘Influence’ does not mean ‘decisively influence’ such that the material circumstance must have an impact or effect on the decision of the prudent insurer whether or not he will take the risk or in fixing the premium;

b) The circumstance is material if it has ‘an effect on the thought processes of the insurer in weighing up the risk’; and

c) It was also said that materiality refers to ‘all matters which would have been taken into account by the underwriter when assessing the risk’.

It may also be necessary to prove that there is an objective connection between the risk being insured and the circumstance which has to be disclosed or represented accurately.

ii) Inducement

It must be demonstrated that the actual insurer (not the hypothetical prudent insurer) was induced to enter into the insurance contract on the terms agreed by reason of the non-disclosure or misrepresentation (Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co Ltd; following Berger & Light Diffusers Pty Ltd v Pollock and disapproving Container Transport International Inc v Oceanus Mutual Underwriting Association (Bermuda) Ltd).

The House of Lords in Pan Atlantic held that there was such a requirement because such a requirement existed in respect of ordinary contracts which was preserved by section 91(2) MIA. This requirement makes sense because otherwise the absurd situation might arise that the actual insurer might be entitled to avoid an insurance contract by reason of a non-disclosure which was material to a hypothetical prudent insurer but which had not induced the actual insurer to enter into the contract.

Section 8 of the Insurance Act 2015 imposes an express requirement that the insurer must have been induced by the breach of the assured’s duty of fair presentation of the risk before the insurer can exercise of the remedies provided for in Sch.1 to the 2015 Act. 

Inducement means that the misrepresentation or non-disclosure must make an effective or material contribution to the underwriter’s decision to agree to enter into the insurance contract on the terms actually agreed. The underwriter must therefore be induced to agree to a particular course to which he or she would not have consented had he or she benefited from complete disclosure. It is therefore not sufficient if the underwriter would only have wanted to undertake further inquiries if he or she had been fully informed (O’Kane v Jones; compare Moore Large & Co Ltd v Hermes Credit and Guarantee plc). If, therefore, the insurer would still have entered into the insurance contract had he or she been aware of the information not disclosed or the truth, but would have increased the premium or would have imposed an exclusion, the insurer may be said to have been induced by the non-disclosure or misrepresentation.

ii) Proving Materiality And Inducement

In order to prove that the assured has breached the duty of pre-contractual disclosure, the insurer bears the onus of proving both materiality and inducement.

This is determined by the Court in assessing the impact of the circumstance or the representation on the mind of the hypothetical prudent underwriter, and probably, in assessing the connection between the circumstance and the risk being insured. For this purpose, the Court is often in a position to determine materiality based on the nature of the information and an understanding of the insured risk. In many cases, however, the Court will have the benefit of expert evidence given by an underwriter or insurance broker, which will cast a light on what a prudent insurer would want to be told in his or her assessment of the risk. Even though expert evidence is often called to prove or disprove the materiality of a particular circumstance, the Court may well be able to judge materiality without the benefit of such evidence (Synergy Health (UK) Ltd v CGU Insurance plc).

Inducement must be proved as a fact. It is sometimes said that inducement may be presumed if a material non-disclosure or misrepresentation is proved, if the underwriter cannot be called to give evidence or there is no reason to suppose that he or she acted other than prudently. This ‘presumption’ is not an inflexible rule, but merely a guide to the Court in reaching any inference on the factual question whether or not the underwriter was induced. It is not a presumption of law (Laker Vent Engineering Ltd v Templeton Insurance Ltd). 

With respect to the so-called inference of inducement, it has been said that no inference should be drawn if the underwriter is called to give evidence: Sea Glory Maritime Co v Al Sagr National Insurance Co (The Nancy)

11. Exceptions To The Duty Of Disclosure

i)The traditional exceptions to the assured’s duty of disclosure are set out in section18(3)MIA and section 3(5) of the Insurance Act 2015.

Section 18(3) provides that the assured is not obliged to disclose the following circumstances:

a) Any circumstance which diminishes the risk (section18(3)(a)).

b) Any circumstance which is known or presumed to be known to the insurer. The insurer is presumed to know matters of common notoriety or knowledge, and matters which an insurer in the ordinary course of his or her business, as such, ought to know (section18(3)(b)).

c) Any circumstance as to which information is waived by the insurer (section 18(3)(c)).

d) Any circumstance which it is superfluous to disclose by reason of any express or implied warranty (section 18(3)(d)).

Section 18(3) also provides that these exceptions apply ‘in the absence of inquiry’, meaning that the insurer has not asked any question about the circumstances in question. This highlights the fact that these exceptions are exceptions to the duty of disclosure. They do not exonerate the assured in the event that: (a) the insurer asks a question about the circumstance in question; or (b) the assured has made a misrepresentation.

Section 3(5) of the Insurance Act 2015 provides for the same exceptions. Section 3(5) of the Insurance Act 2015 provides that, in the absence of enquiry, the duty of fair presentation does not require the assured to disclose a circumstance if:-

a) it diminishes the risk

b) the insurer knows it

c) the insurer ought to know it

d) the insurer is presumed to know it, or

e) it is something as to which the insurer waives information.

ii)Diminishing Risk

The assured need not disclose any circumstance which diminishes the risk. In Carter v Boehm the Court held that the assured need not disclose any circumstance which ‘lessens the risque agreed and understood to be run by the express terms of the policy’.

iii)Circumstances Known To The insurer

The assured need not disclose any circumstance ‘which is known or presumed to be known to the insurer. The insurer is presumed to know matters of common notoriety or knowledge, and matters which an insurer in the ordinary course of his business, as such, ought to know’. (Section 18(3)(b) MIA).

There are various types of knowledge which the insurer may possess. First, if the circumstance is actually known to the insurer, the exception applies. It does not matter where the information came from.

Secondly, the insurer may have imputed to him or her, the knowledge of his or her agent.

Thirdly, if the circumstance is a matter of ‘common knowledge’ (such as the movement of the tides and currents, the seasons, the location of the major ports of the world, the usual hazards associated with the sea, the existence of natural disasters), it need not be disclosed. 

Fourthly, the insurer will be deemed to know matters which he or she ought to know in the ordinary course of his or her business:

a) The insurer will know the ‘normal risks’ associated with the insured activity, but will not be taken to know any ‘unusual risks’.

b) However, if the knowledge in question is knowledge obtained in the past, the insurer will not be deemed to have that knowledge if it was not or could not reasonably be present to his or her mind at the time of the presentation, even if the information is located in the records of the insurer.

c) It may be that information which is held in public records might be deemed to be known to the insurer, depending on the insurer’s course of business.

d) The insurer will be deemed to know the characteristics and usages of the insured trade: for example characteristics of a port (The Shakir III, Marc Rich & Co AG v Portman); normal or usual charterparty clauses (The Bedouin); the nature of the vessel (Cantiere Meccanico Brindisino v Janson, George Cohen Sons & Co v Standard), the nature of the cargo (Mann, MacNeal & Steeves Ltd v Capital & Counties Insurance Company Ltd); and the master’s discretion at sea (Middlewood v Blakes)

e) Information held in electronic databases which are accessible and accessed by underwriters in the ordinary course of business may be deemed to be known to the insurer: (Sea Glory Maritime Co v Al Sagr National Insurance Co (The Nancy)).

f) Just because the information is available to the insurer does not mean that the insurer ought to have inquired into the information (Hua Tyan Development Ltd v Zurich Insurance Co Ltd (The Ho Feng 7)).

Under Section 5 Of the Insurance Act 2015

The knowledge of the insurer which counts as an exception to the assured’s duty of disclosure is explained in section 5 of the 2015 Act:-

  1. Actual knowledge: an insurer knows something only if it is known to one or more of the individuals who participate on behalf of the insurer in the decision whether to take the risk, and if so on what terms (whether the individual does so as the insurer’s employee or agent, as an employee of the insurer’s agent or in any other capacity). This is a reference to the insurer’s underwriter(s).
  2. Constructive knowledge: an insurer ought to know something only

if:

a. an employee or agent of the insurer knows it, and ought reasonably to have passed on the relevant information to the individual underwriter, or

b. the relevant information is held by the insurer and is readily available to the individual underwriter.

3. Presumed knowledge: an insurer is presumed to know:

a. things which are common knowledge, and

b. things which an insurer offering insurance of the class in question to insureds in the field of activity in question would reasonably be expected to know in the ordinary course of business.

iv)Waiver

The assured need not disclose any circumstance as to which information is waived by the insurer i.e. the assured does not have to disclose to the insurer any information of which the insurer has indicated to the assured that he or she does not require disclosure.

The waiver may be expressly provided for in the contract itself (Property Insurance Co Ltd v National Protector Insurance Co Ltd, HIH Casualty and General Insurance Ltd v Chase Manhattan Bank ). The waiver may be implied. 

There are various types of implied waiver: 

a) Implied waiver may be based on the questions asked by the insurer. For example, if the insurer asks the assured about the number of the vessel’s crew, but does not ask how many passengers are usually on board, it may be argued that the insurer has waived disclosure about the number of ship’s passengers. As to waiver by reason of questions asked by the insurer (Bate v Aviva Insurance UK Ltd).

b) Where the assured provides a summary of the material facts, if the insurer is reasonably put on notice of the possible existence of further material facts, his or her failure to ask for such information might amount to a waiver, provided that the insurer can reasonably assume that the details which have not been disclosed will not vitiate or prejudice his or her assessment of the risk. Any summary should include unusual or exceptional matters. For example, if the assured mentions to the insurer the number of lifeboats on board the insured vessel, but does not inform the insurer who manufactured the lifeboats, the insurer may have waived disclosure of such information, unless the manufacturer was a person who was notoriously unsafe.

c) Implied waiver based on the state of the insurer’s knowledge. For example, the insurer may know that a particular type of cargo is often carried in containers; the insurer may waive disclosure of the types of containers used in the trade.

d) As to waiver based on the state of the insurer’s knowledge (Sea Glory Maritime Co v Al Sagr National Insurance Co (The Nancy)).

v)Information Which Is Superfluous By Reason Of A Warranty

The assured need not disclose any circumstance which it is superfluous to disclose by reason of any warranty in the insurance contract (section 18(3(d) MIA). In Cantiere Meccanico Brindisino v Janson, it was said that if there was an implied warranty of seaworthiness of the insured vessel under a voyage policy (pursuant to section 39(1) MIA), there was no obligation on the assured to disclose matters affecting the vessel’s seaworthiness.

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