Essay: Insurance contracts

INTRODUCTION
Insurance contracts are a special class of contracts which are guided by certain basic principles like those of utmost good faith, insurable interest, proximate cause, indemnity, subrogation and contribution. These principles are mostly guided by common law principles from which they have developed. They have also been modified by principles of contract and by statutes as in the case of the Marine Insurance Act, 1963 which has to a certain extent relaxed the basic principles of insurance law.
The principle of utmost good faith is one of the most important principles underlying the law of insurance. The principle of utmost good faith distinguishes insurance from most other contracts. Utmost good faith (Uberrimae fidei) is complete and total honesty; all statements must be true and all material facts must be revealed otherwise insurance could not avoided.
There may be general perception that the duty of good faith lies on the insured alone. Contrary to this general perception, the doctrine lies on all essential parties of an insurance contract.
COMPONENTS OF UTMOST GOOD FAITH
Utmost good faith is usually divided into three components: representations, non disclosures and warranties.
‘ Representations
Representations are the written or oral statements made by the insured. Many of these representations are responses to questions to determine whether the applicant is insurable or not and how much premium should be charged.
‘ Non-Disclosure
Non disclosure is the failure to disclose material information. However, an insurance company can repudiate a claim on the bases of concealment.
‘ Warranties
A warranty is a promise by the insured relating to acts or to something which they agree to do or not to. The warranty becomes part of the insurance contract.
THE DUTY OF GOOD FAITH
The duty is described as requiring the insurer and the insured to act honestly with each other throughout the duration of the policy. More recently in Australia, the insurer’s post-contractual duty of good faith has been described by the Queensland Supreme Court in Re Zurich Australian Insurance Ltd [1998] QSC 209 as acting with due regard to the insured’s interest in situations where the insurer has a conflict of interest (such as in paying out on claims). It is not a fiduciary duty in that it does not require a party to regard the other party’s interest higher than its own. The duty does, however, involve notions such as honesty and fairness. As such, the duty of good faith can be seen as involving both an objective and subjective element.
What does ‘act with due regard’ or ‘fairness’ mean? This is the objective element. This objective element is combined with the notion of ‘honesty’, the subjective element.
THE INSURER
The duty of good faith has resulted in the following general duties for the insurer:
Generally, an insurer must not misrepresent facts about the policy (or any other facts) that are material to the policy. Material facts as defined in the Marine Insurance Act 1906: ‘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 insurer must also disclose any relevant policy terms that have major consequences such as denial of claims.
The insurer must ask the insured specific questions relevant to the risk. Failure to do so waives the insurer’s ability to claim that the insured failed to disclose the relevant fact. The insurer may ask the insured about circumstances which
A. are known to the insurer;
B. is what a reasonable person in the circumstances would know is a matter relevant to the risk; and
C. is something which the insurer would not be expected to specifically ask about.
The insurer must inform the insured in writing about the insured’s duty of disclosure and the effect of non-disclosure.
The insurer must draft its policies in clear, plain English so that the policy can be easily understood by the insured. Also, the insurer must bring to the insured’s attention any unusual terms of the policy usually known as exceptions. This is merely a manifestation of the insurer’s duty to have due regard to the insured when drafting its policies.
When deciding whether to approve claims, the insurer’s interests may conflict with the insured’s interests. The duty of good faith therefore requires the following from the insurer:
1. to manage, administer and process claims efficiently and without undue delay;
2. to decline claims only with reasonable evidence or belief that the claim should be declined;
3. to investigate the claim before declining a claim;
Any insurance (compulsory or not) can be avoided for breach of good faith for breach of good faith i.e. misrepresentation or non-disclosure). However, legislation prevents insures from repudiating some claims on the grounds of breach of warranty or condition. For example the road traffic act 1988 prohibits a motor insure from avoiding liability on the grounds of certain breaches of policy conditions or warranties, but specifically allows avoidance for misrepresentation on non disclosure. Similar rules apply to employers’ liability insurance.
AGENCY
A broker is generally considered to be the agent of the insured. As such, the actions of the broker will be seen as the actions of the insured. This means a broker’s actions may effectively result in the insured breaching its duty of good faith. This can happen in a variety of ways:
‘ making a false claim;
‘ intentionally leaving out relevant information (either in entering into the policy or in making a claim);
The insured’s duty of good faith is generally only that of disclosure and the duty to not make false claims. This means that the insurer is unlikely to bring an action for the breach of good faith – rather, the insurer will merely cancel the contract for non-disclosure or deny a fraudulent claim. Nevertheless, the result for the broker is still the same – whatever losses the insured suffers as a result of the broker’s actions will result in the insured bringing a claim of negligence against the broker.
A broker has no duty of good faith to the insurer on its own account – it only owes that duty to the insurer as agent of the insured.
The agent must not allow his own personal interest to conflict with those of his principal.
The agent’s duty of good faith to the principal requires full disclosure, not just of matters that relate to a possible conflict of interest, but of any information acquired in the course of the agent’s duties that might affect the principal’s position. In Keppel v Wheeler (1972), an estate agent who had been engaged to sell the principal’s house allowed the latter to accept an offer of ??6,150 and failed to inform him of a higher offer of ??6750 which he had subsequently received. The seller recovered ?? 600 in damages from the estate agent, which was the difference between to two offers.
THE INSURED
The duty of utmost good faith is a reciprocal duty which rests on both insured and insurer but in practice breaches by an insured are common.
In the case of representation, the insured has the duty of making true statements. A false statement may cause the insurer to avoid the contract altogether. A false statement, if it is to affect the validity of the agreement must;
‘ be one of fact
‘ be made by a party to the contract
‘ be material
‘ induce the contract
‘ cause loss or disadvantage to the insurer relying on it
An insurer may avoid a policy on grounds of innocent, fraudulent or negligent misrepresentation. This right is limited in respect of innocent misrepresentation.
The law imposes a positive duty of disclosure as part of a general duty of uberrimae fidei especially on the insured. The summary of the doctrine was given in Rozannes v Bowen (1928), ‘As the underwriter knows nothing and the man who comes to him to ask to insure knows everything, it is the duty of the assured, to make a full disclosure to the underwriter without being asked of the material circumstances. This is expresses by saying it is a contract of utmost good faith’
Material facts must be disclosed by the insured to the in insurer. Material facts have been statutorily defined on two occasions: The Marine Insurance Act 1906, Section 18(2), provides: “Every circumstance is material which would influence the judgment of a prudent underwriter in fixing the premium or determining whether he will take the risk”. The Road Traffic Act 1934, Section 10(5), reads: “The expression ‘material’ means of such a nature as to influence the judgment of a prudent insurer in determining whether he will take the risk, and, if so, at what premium and on what conditions”.
The similarity in the definitions can readily be seen and both can be traced to their parent, Lord Mansfield, in his judgment in Carter v. Boehm. The common factor is that the insurer or underwriter alone determines ‘what is material’.
Facts which need NOT be disclosed by the Insured or Insurer:
‘ Facts of law
‘ Facts which the Insurer should know (e.g. common knowledge, current affairs)
‘ Facts which lessen the risk (security fittings, sprinklers, alarms)
‘ Facts which the Insurer should have noticed from other information given (e.g. if the
‘ proposer has referred to other records)
‘ Facts related to the Insurer’s survey
‘ Facts covered by policy conditions
‘ Facts which the proposer could not reasonably be expected to know
‘ Convictions which have been spent under the Rehabilitation of Offenders Act 1974.
Facts which must be disclosed:
‘ Facts which make a risk greater than usual
‘ Facts which would increase the possibility of a loss
‘ Previous claims or losses
‘ Facts which reduce an Insurer’s subrogation rights
‘ The existence of other Policies
‘ Facts relating to and descriptions of the subject matter of the insurance.
The duty of disclosure at common law begins at the commencement of negotiations for a contract and ends when the contract is formed. Sometimes, the conditions of a policy extend the common law position by requiring full disclosure during the currency of the contract.
The duty of disclosure at the time of renewal depends on the type of contract. For long term contracts, the insurer is obliged to accept the renewal premium if the insured wishes to continue the contract. There is no duty of disclosure operating at renewal. For other businesses, disclosure is revived. Material facts must be disclosed during renewal negotiations.
A breach of good faith may take the form of misrepresentation, either innocent or fraudulent or/and non-disclosure. The non disclosure may either be innocent of fraudulent. Fraudulent is also known as concealment.
If an insured frauds insurer when claiming the insurer has the right to repudiate the entire claim as well as terminate the contract from date of breach as in Galloway v GRE (1999).
CONCLUSION
The English law on misrepresentation and non disclosure has been subject to criticism for many years. , mainly on the grounds that is weighted unfairly against the proposer. However, the aggrieved party in a breach of duty of utmost good faith may:
‘ Repudiate the contract entirely;
‘ Sue for damages if concealment is involved
‘ Waive his right to any or all these measures and allow the contract to carry on unhindered.
The injured party must avoid the contract as a whole; an insurer cannot at the same time avoid liability for an individual claim and affirm the rest of the contract.
In other jurisdictions such as the US, the courts have introduced the concept of a tort of bad faith, which is based on the power imbalance between the insurer and the insured. The tort adopts the principle that insurance is entered not only for profit but for peace of mind. This has resulted in breaches allowing not only compensatory and punitive damages, damages for emotional distress. As such, it has resulted in vast amounts of litigation. Example of US bad faith which may result in emotional distress damages is an insurer offering to settle claims for an amount less than that the amount of the claim with no reason other than the insurer knows that the insured desperately needs the money and is unable to wait for trial to contest the amount.
In summary, the duty of good faith is on the insured, insurer as well as intermediaries and breach of this doctrine may render repudiation of the contract, sue for damages or even waive rights.