THE DOCTRINE OF UTMOST GOOD FAITH Prepared by

THE DOCTRINE OF UTMOST GOOD FAITH Prepared by: Ms. Norazimah Mazlan

INTRODUCTION • The doctrine of utmost good faith is known as “uberrimae fidei. ” • The word ‘utmost’ refers to the highest degree of good faith. • This principle applies to every kind of insurance.

THE RATIONALE • There is an imbalance of information regarding the risk between the assured and the insurer. . Assured has a broad information on the subject matter insured. The insurer only knows what the assured reveals.

PURPOSE OF THE DOCTRINE • To prevent fraud • To ensure that there is a full exchange of information relating to the risk

SECTION 17 MIA 1906 • A contract of marine insurance is a contract based upon the utmost good faith, and, if the utmost good faith is not observed by either party, the contract may be avoided by the other party. 1. The doctrine of utmost good faith is a basis of contract of marine insurance. 2. If either party fails to observe utmost good faith, the contract may be avoided

CARTER V BOEHM Lord Mansfield: “Good faith forbids either party by concealing what he privately knows , to draw into a bargain, from his ignorance of that fact, and his believing the contrary”

CONSEQUENCES OF THIS DOCTRINE ASSURED: BROKER: • Assured’s duty of full disclosure before and at the time of the contract. (s. 18 MIA 1906) Broker’s duty of disclosure to place the risk (s. 19 MIA 1906) • Assured’s duty to abstain from misrepresentation before and at the time of the contract (s. 20 MIA 1906) INSURER: Reciprocal duty of disclosure and abstain from misrepresentation

DUTY OF DISCLOSURE

(s. 18 MIA 1906)Assured’s duty of disclosure • 18. — Disclosure by assured. (1) Subject to the provisions of this section, the assured must disclose to the insurer, before the contract is concluded, every material circumstance which is known to the assured, and the assured is deemed to know every circumstance which, in the ordinary course of business, ought to be known by him. If the assured fails to make such disclosure, the insurer may avoid the contract.

(s. 19 MIA 1906) Broker’s duty of disclosure 19. Disclosure by agent effecting insurance. Subject to the provisions of the preceding section as to circumstances which need not be disclosed, where an insurance is effected for the assured by an agent, the agent must disclose to the insurer— (a) Every material circumstance which is known to himself, and an agent to insure is deemed to know every circumstance which in the ordinary course of business ought to be known by, or to have been communicated to, him; and (b) Every material circumstance which the assured is bound to disclose, unless it come to his knowledge too late to communicate it to the agent.

DUTY OF DISCLOSURE • S. 18 – The assured must disclose every material circumstances known to him • S. 19 – Any person placing insurance on behalf of assured must disclose material facts known to him whether or not they were known to the assured. • Duty of disclosure comes to an end when the contract between the parties is concluded. (S. 21)

WHAT ARE MATERIAL FACTS/CIRCUMSTANCES THAT NEED TO BE DISCLOSED?

WHAT ARE MATERIAL FACTS/CIRCUMSTANCES THAT NEED TO BE DISCLOSED? • S. 18(2) MIA Every circumstance is material which would influence the judgment of a prudent insurer in fixing the premium, or determining whether he will take the risk.

• The facts / circumstances are material if it would influence a prudent insurer in considering the proposed insurance either to take / reject the risk and on what terms, including premium. • The standard is what is material from the insurer’s perspective. It is not what the insured might consider ought to be disclosed. • It is a matter of fact. (depends on the facts of that particular case)

CIRCUMSTANCES REQUIRING DISCLOSURE Physical hazard Risk presented by attributes/qualities of the insured property. e. g. Ø Age and construction of the ship Ø The voyage that the ship is undertaking Ø The nature of the cargo that is being carried

Moral hazard Assured’s background which indicates that the assured may pose enhanced risk to the insurers. e. g. Dishonesty Assured’s claim history Serious financial difficulties faced by the assured Criminal record of the assured

EXAMPLES OF NON DISCLOSURE OF MATERIAL FACT

EXAMPLES OF NON DISCLOSURE OF MATERIAL FACT PREVIOUS CLAIMS EXPERIENCE Marc Rich & Co AG v Portman MR were traders in crude oil who insured their cargoes and liabilities as charterers of vessel. Demurrage liabilities is a covered risk. The routes and ports frequented by MRs vessels were often congested, leading to such liabilities. In obtaining such cover, MR’s broker did not inform, nor were asked about previous experience of such liabilities.

• PREVIOUS CONVICTION Previous conviction of the assured is material because it increase the likelihood of fraud or exaggerated claims. The fact that the assured is under investigation or has been charged for a crime which he did not commit is a material fact. The Dora A previous conviction of the skipper of a yacht unknown to the assured. The insurer can avoid the policy.

• UNSEAWORTHINESS OF THE SHIP Termaine v Phoenix Ins. Co Held: A failure to disclose that the vessel was unseaworthy and sunk and in need of repairs was material in an application to renew and extend the insurance.

EFFECT FOR FAILURE TO DISCLOSE • The contract will be avoided. • The premium will be returned to the assured except in case of fraud. • No damages are available for breach of utmost good faith.

EXAMPLES OF MATTERS WHICH NEED NOT BE DISCLOSED -S. 18(2) In the absence of inquiry from the insurer, the following circumstances need not be disclosed: (a) Any circumstance which diminishes the risk; The Dora The insure yachts was kept in secured mooring as the security precaution diminished the risk.

b) Any circumstance which is known or presumed to be known to the insurer. ØCircumstances which is in the public domain and known globally. Ø e. g. üphysical risk- the fact that there was hurricanes, earthquakes, tsunami ü at certain part of the world. üPolitical risks – likelihood of conflict or war.

MISREPRESENTATION

MISREPRESENTATION 20. — Representations pending negotiation of contract. (1) Every material representation made by the assured or his agent to the insurer during the negotiations for the contract, and before the contract is concluded, must be true. If it be untrue the insurer may avoid the contract.

REPRESENTATION • Representations are statements made by insured or his agent, during the negotiation for the contract, and before the contract is concluded.

MATERIAL REPRESENTATION • A representation is material which would influence the judgment of a prudent insurer in fixing the premium, or determining whether he will take the risk.

EFFECT OF MISREPRESENTATION • The effect of misrepresentation is the same as nondisclosure • The insurer may avoid the contract.

DOCTRINE OF UTMOST GOOD FAITH ON THE INSURER

• The insurer owes a reciprocal duty to the assured. • At the making of the insurance contract, the insurer owes the assured a duty of disclosure and is bound to abstain from misrepresentation.

CONCLUSION ON THE DOCTRINE OF UTMOST GOOD FAITH • The doctrine of utmost good faith in disclosure and representation of facts is no longer applied once the contract of insurance is concluded, because the underwriter will no longer be in a position to exercise underwriting judgment. • Exception : when the contract is being amended

REFERENCES • Bennett, H, The Law of Marine Insurance, (2 nd ed. , 2004), ch. 4. • Parks, A. L. , The Law and Practice of Marine Insurance & Average. Vol. 1 (1987, Cornell Maritime Press) Chapter X • Rose, F, Marine Insurance: Law and Practice (2 nd ed. , 2012), ch. 5 • Soyer, B. Marine Insurance Fraud. (2014, Informa Law from Routledge)

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