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

Remedies

April 27, 2022July 25, 2022By Tan Pui Yen
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Remedies

1. Avoidance

i) Meaning Of Avoidance

Avoidance is a remedy available to the innocent party. However, it is a remedy which does not apply automatically. The innocent party, commonly the insurer, has to elect to exercise the remedy and the election has to be communicated to the party in breach. If the insurer does not exercise the remedy, the insurance contract remains valid and effective.

Avoidance is often referred to as ‘rescission’. It may be that avoidance is a common law remedy and rescission is the equivalent remedy in equity. Both remedies achieve the same result, namely the setting aside of the insurance contract with the result that both parties are put in the same position as they were in immediately prior to the conclusion of the insurance contract (i.e. the same position they would have been in had there been no contract of insurance).

Putting the parties in the same pre-contractual position is referred to as restitutio in integrum. This means that all consideration which has passed between the parties in the performance of the contract has to be returned. Therefore, all claims proceeds paid by the insurer to the assured have to be returned to the insurer. In addition, all premium paid by the assured to the insurer must be returned to the assured. 

The return of premium is provided for in section 84(3)(a) MIA. However, there appears to be an exception of fraud (permitting the retention of premium) in that if the assured has been guilty of a fraudulent non-disclosure or misrepresentation, no premium is to be returned. This is at odds with the normal position in equity where rescission for fraudulent misrepresentations in respect of ordinary contracts requires restitutio in integrum (Clarke v Dickson).

Avoidance clearly exists as a remedy for both breaches of duty prior to or at the time of the conclusion of the insurance contract as sections 17, 18(1) and 20(1) MIA make clear.

However, the application of the remedy of avoidance to post-contractual breaches of the duty of good faith, particularly in respect of the making of fraudulent claims, has recently been the subject of debate.

The debate has taken shape as follows:-

a) On the one hand, it is said that the Courts have recognised that the making of a fraudulent claim, and indeed all post-contractual fraud aimed at the other contracting party, constitute breaches of the duty of good faith. As section 17 MIA provides that if one party fails to observe the duty of good faith, the other party may avoid the insurance contract, it follows therefore that the remedy of avoidance applies to breaches of the post-contractual duty of good faith. There is no hardship upon the assured because the remedy serves as an appropriate deterrent against insurance fraud, which is a blight on the industry.

b) On the other hand, it is said that there is a separate common law rule dealing with fraudulent claims providing for a different remedy from avoidance. Section 17 MIA is not intending to refer to a post-contractual duty of good faith, but only the duty in its pre-contractual guise. This argument is contrary to a number of authorities but is supported by Agapitos v Agnew (The Aegeon) and Axa General Insurance Ltd v Gottlieb. However, it also ignores the decision of the Court of Appeal confirming the availability of the remedy of avoidance for breaches of the post-contractual duty of good faith (other than in respect of claims), albeit subject to specified restrictions (namely, that the fraud is material to the insurer’s liability under the policy and that the fraud is sufficiently serious as to justify the termination of the contract on the grounds of a repudiatory breach) (K/S Merc-Scandia XXXXII v Certain Lloyd’s Underwriters (The Mercandian Continent).

In the event of avoidance, it is the contract which is avoided, not the policy. The policy is the physical embodiment of the contract. Indeed, the policy might encompass numerous contracts. This is so particularly in the case of composite policies, where there may be numerous assureds insured under the one policy (New Hampshire Insurance Company v MGN Ltd, Arab Bank plc v Zurich Insurance Co). In such cases, if there has been a non-disclosure by only one assured under a composite policy, but not by another assured, the insurer is entitled to avoid the insurance contract only against the assured who is guilty of the non-disclosure and not against the innocent assured. However, if the policy is a joint policy so that the interests of the assureds are exactly the same and are inextricably intertwined, the insurer may avoid the entire insurance contract affecting all joint assureds. Where one policy contains different sections, each section might be construed as separate contracts, in which case the remedy of avoidance will apply separately to each section (Dalecroft Properties Ltd v Underwriters).

ii) Loss Of The Right Of Avoidance

The insurer’s (and the assured’s) right to avoid may be lost in one of the following ways:-

a) By affirmation (or waiver by election).

b) By equitable estoppel (or waiver by estoppel).

c) By a breach of the duty of good faith by the party wishing to avoid.

The insurer will have affirmed the insurance contract and lost the right of avoidance when he or she elects to affirm the contract with full (actual, not constructive) knowledge of the facts giving rise to his or her right of avoidance and his or her right to avoid. In such cases, the insurer is treated as having waived the right of avoidance ‘by election’. 

An insurer may be entitled to a reasonable time to conductits enquiries before making an election to affirm the contract: (Sea Glory Maritime Co v Al Sagr National Insurance Co (The Nancy)). 

Affirmation consists of a statement or conduct on the part of the insurer which unequivocally communicates to the assured that the insurer considers that the insurance contract remains on foot even though there has been a breach of the duty of good faith. Such conduct may include the payment of a claim, the acceptance of premium or the exercise of a contractual right in the insurance contract, unless that contractual right is severable from the insurance contract (e.g. the right to proceed under a jurisdiction or arbitration clause).

The right to avoid may be lost by equitable estoppel where the insurer unequivocally communicates to the assured that the contract remains in existence notwithstanding the breach of the duty of good faith, provided that the assured relies on that representation to his or her detriment. 

The assured may rely on an estoppel even if the insurer did not have full knowledge of the breach of the duty of good faith and of the right to avoid, provided that the representation suggests to the assured that the insurer had such knowledge. For example, if the insurer informs the assured that the contract remains effective before the insurance contract expires (such representation being made in a manner suggesting that the insurer is aware of the right to avoid) but subsequently seeks to avoid the insurance contract, the assured may argue that the insurer is estopped from avoiding the contract because the assured relied on the insurer’s representation by not obtaining alternative insurance cover to take the place of the avoided cover. 

This argument would be more difficult to raise if the insurer made the representation after the insurance contract expired. As to the loss of the right of avoidance by equitable estoppel (IHC v Amtrust Europe Ltd).

The conduct of the insurer which might represent to the assured that the contract remains in existence and has not been avoided, is the same for equitable estoppel as it is for affirmation.

It has recently been suggested by the Court of Appeal that the doctrine of utmost good faith might prevent an insurer from exercising a right to avoid where the insurer has demonstrated a lack of good faith in respect of a particular claim or in avoiding the policy (Drake Insurance plc v Provident Insurance plc). 

2. Damages

The Court of Appeal has held that damages are not available as a remedy for breach of the duty of utmost good faith (Banque Keyser Ullmann SA v Skandia (UK) Insurance Co Ltd).

The Court reached this view on the grounds that the duty of good faith was not contractual or fiduciary in nature and that its breach did not constitute a tort and because section 17 MIA makes no reference to any remedy other than avoidance.

To many, this is a surprising decision considering that:

  • The duty of good faith is a common law duty and damages are a common law remedy.
  • As avoidance is often a useless remedy in the hands of the assured, this might provide a decent alternative to the assured in the event that the insurer is guilty of breaching the duty of good faith.
  • If section 17MIA was intended to be exhaustive in identifying the remedies for breach of the duty of good faith, one would expect that forfeiture would not be available for the making of a fraudulent claim and one would expect the section to be more explicitly worded.

However, damages may be available on other grounds, for example:

  • in deceit
  • for breach of a common law duty of care
  • under the Misrepresentation Act 1967
  • for breach of contract if the assured’s duty of disclosure is a term of the contract.

It has been said that the duty not to present a fraudulent claim is an implied term in the contract of insurance. If so, or if there is an express term to that effect, it is arguable that a breach of this term would allow the insurer to recover damages in the event that a fraudulent claim is presented (London Assurance v Clare). However, recent authorities suggest that the duty not to present a fraudulent claim is a duty imposed only by the law and does not arise by reason of an implied term.

3. Forfeiture

In Britton v Royal Insurance Co, the Court referred to the fact that many insurance policies contain provisions to the effect that the assured shall not present fraudulent claims and if he or she did so the contract would be void and all benefit forfeited. 

The Court further said that such provisions conformed with the legal position. Since then, the Courts have seized upon the judgment as supporting the notion that in the event of a fraudulent claim the assured suffers a forfeiture of benefit under the policy. 

The Court of Appeal has now confirmed on several occasions that forfeiture is a remedy for the making of a fraudulent claim. 

However, there is uncertainty as to what forfeiture means. It is clear that it means that the assured automatically loses rights under the insurance contract. Unlike the remedy of avoidance, this does not require the insurer to elect whether or not to have the benefit under the policy forfeited. The uncertainty exists because it is not presently clear what rights are forfeited.

Three possible meanings exist:

a) The forfeiture applies only to the fraudulent claim itself (this possibility was described as having ‘force’ in Axa General Insurance Ltd v Gottlieb). Recent authority suggests that the forfeiture of benefit at common law is limited to the claim or cause of action which is itself fraudulent, or which is fraudulent in part (Axa General Insurance Ltd v Gottlieb, Churchill Car Insurance v Kelly).

b) The forfeiture applies only to the prospective benefit of the policy, that is, all benefit available as from the time of the fraudulent claim (Insurance Corporation of the Channel Islands Ltd v McHugh, The Aegeon) such that any benefit available before the fraudulent claim remains unaffected.

c) The forfeiture extends to all benefit under the policy, including claims which have arisen in the past and claims which will arise in the future (Orakpo v Barclays Insurance Services, The Mercandian Continent (first instance)).

The availability of forfeiture as a remedy for a fraudulent claim has been rendered largely academic by the introduction of s.12 of the Insurance Act 2015.

4. Insurance Act 2015

Section 14 of the Insurance Act 2015 abolishes the general remedy of avoidance for breach of the duty of utmost good faith. In its place, the 2015 Act:-

  1. Provides for a range of remedies for breach of the duty of fair presentation (section 8 and Sch.1). The applicable remedy depends on (a) whether the breach was ‘deliberate’ or ‘reckless’ (these terms are defined in sections 8(5)), and (b) the extent of the insurer’s inducement.
  2. Provides for a range of remedies for the assured’s fraudulent claim (section 12). The remedies for breach of the duty of fair presentation are set out in

Sch.1, Part 1:-

1. If the breach was deliberate or reckless:

a. the insurer is entitled to avoid the insurance contract, and

b. the insurer may retain the premium.

2. If the breach was neither deliberate nor reckless:

a. if the insurer would not have entered into the insurance contract at all, the insurer may avoid the insurance contract but must return the premium

b. if the insurer would have entered into the insurance contract in any event, but on different terms:

other than in respect of premium, the contract may be treated as if it had been written on those terms charging a higher premium, the insurer may reduce the recoverable claim proportionately by reference to the increase in premium.

The remedies for breaches of the duty of fair presentation in respect of variations are set out in Sch.1, Part 2:

1. If there was a deliberate or reckless breach:

a. the insurer may terminate the contract from the date of the making of the variation

b. the insurer may retain all premium.

2. If the breach was neither deliberate nor reckless:

a. if the insurer would not have agreed the variation, the contract may be treated as if the variation had not been made and the insurer must return any extra premium

b. if the insurer would have agreed the variation but on different terms, the contract may be treated as if it were varied on those terms

c. if the insurer would have charged a higher premium for the variation, the insurer may proportionately reduce any claim recoverable under the original or varied contract.

These remedies in Sch.1 depend on the election of the insurer; they are not automatic. Accordingly, the right to exercise such remedies may be lost by election or equitable estoppel.

The insurer’s remedies for the assured’s fraudulent claim are set out in section 12:

1. The insurer is not liable to pay the claim. This probably includes even the genuine parts of the claim (Axa General Insurance Ltd v Gottlieb).

2. The insurer may recover any sums paid by the insurer in respect of the claim.

3. The insurer may by notice terminate the contract with effect from the time of the fraudulent act. If terminated,

a. the insurer may refuse all liability in respect of a relevant event occurring after the fraudulent act

b. the insurer may retain the premium.

4. The insurer remains liable for relevant events occurring before the fraudulent act.

It is unclear what remedies will be available for breaches of the duty of utmost good faith not dealt with in the Insurance Act 2015.

  • For further enquiries or clarification, kindly contact us.