Carter v Boehm and Pre-Contractual Duties in Insurance Law: A Global Perspective after 250 Years 9781509916047, 9781509916078, 9781509916054

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CARTER v BOEHM AND PRE-CONTRACTUAL DUTIES IN INSURANCE LAW: A GLOBAL PERSPECTIVE AFTER 250 YEARS Revisiting Carter v Boehm (1766) 3 Burr 1905, the collected papers in this book are intended as a catalyst for rethinking the pre-contractual duties in insurance law and the related principle of utmost good faith at a critical era for insurance law. In so doing, it endeavours to provide insurance law students, academics, practitioners and judges with new perspectives for a keen understanding of this fundamental aspect of insurance law, which has become increasingly dynamic under both common law and civil law legal traditions. It will explore to what extent and why the doctrines of pre-contractual duties in insurance law under the two major legal traditions are converging, as well as the implications of such convergence. It will be of great interest to students, academics and practitioners in the field of ­insurance law. This book is the culmination of a colloquium held on 30 November & 1 ­December 2016 in Singapore and convened by the Centre for Banking and Finance Law, of the Faculty of Law, National University of Singapore for the 250th anniversary of the landmark English insurance law case Carter v Boehm (1766) 3 Burr 1905.

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Carter v Boehm and Pre-Contractual Duties in Insurance Law A Global Perspective after 250 Years

Edited by

Yong Qiang Han and Greg Pynt

HART PUBLISHING Bloomsbury Publishing Plc Kemp House, Chawley Park, Cumnor Hill, Oxford, OX2 9PH, UK HART PUBLISHING, the Hart/Stag logo, BLOOMSBURY and the Diana logo are trademarks of Bloomsbury Publishing Plc First published in Great Britain 2018 Copyright © The editors and contributors severally 2018 The editors and contributors have asserted their right under the Copyright, Designs and Patents Act 1988 to be identified as Authors of this work. All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or any information storage or retrieval system, without prior permission in writing from the publishers. While every care has been taken to ensure the accuracy of this work, no responsibility for loss or damage occasioned to any person acting or refraining from action as a result of any statement in it can be accepted by the authors, editors or publishers. All UK Government legislation and other public sector information used in the work is Crown Copyright ©. All House of Lords and House of Commons information used in the work is Parliamentary Copyright ©. This information is reused under the terms of the Open Government Licence v3.0 (http://www.nationalarchives.gov.uk/doc/ open-government-licence/version/3) except where otherwise stated. All Eur-lex material used in the work is © European Union, http://eur-lex.europa.eu/, 1998–2018. A catalogue record for this book is available from the British Library. Library of Congress Cataloging-in-Publication data Names: Carter v Boehm (1766) after 250 years (Conference) (2016 : National University of Singapore, Faculty of Law).  |  Han, Yong Qiang, editor.  |  Pynt, Greg, editor.  |  National University of Singapore. Centre for Banking and Finance Law, organizer.  |  National University of Singapore. Faculty of Law, host institution. Title: Carter v Boehm and pre-contractual duties in insurance law : a global perspective after 250 years / edited by Yong Qiang Han and Greg Pynt. Description: Oxford, UK : Hart Publishing, 2018.  |  Includes papers presented at a colloquium held at the Faculty of Law, National University of Singapore on 30 November and 1 December 2016 (the 250th anniversary of Carter v Boehm).—ECIP Preface.  |  Includes bibliographical references and index. Identifiers: LCCN 2018000158 (print)  |  LCCN 2018000911 (ebook)  |  ISBN 9781509916061 (Epub)  |  ISBN 9781509916047 (hardback : alk. paper) Subjects: LCSH: Insurance policies—Congresses.  |  Disclosure of information—Law and legislation—Congresses. Classification: LCC K1241.A6 (ebook)  |  LCC K1241.A6 C37 2016 (print)  |  DDC 346/.086—dc23 LC record available at https://lccn.loc.gov/2018000158 ISBN: HB: 978-1-50991-604-7 ePDF: 978-1-50991-605-4 ePub: 978-1-50991-606-1 Typeset by Compuscript Ltd, Shannon

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FOREWORD

A tour de force! That is the natural reaction to the first reading of the book edited by Yong Qiang Han and Greg Pynt. Publishing a book of several hundreds of pages on a non-existing topic is a tour de force, isn’t it? Some people might say that good faith exists (or not) and that adding something like ‘utmost’ thereto is unworthy. For a Cartesian spirit, the question reminds me of another debate, which was very accurate one century ago: is it logical to speak of an abuse of right? Either you exercise a genuine right, and you cannot commit any abuse; or you have done something wrong, and it cannot be the exercise of a right. Vicious circle … We all know that today the concept of abuse of a right is a worldwide reality. Joking aside, however, if the concept of ‘utmost’ good faith did not make any sense, why would have people as pragmatic as the English people (purportedly) created it in Carter v Boehm (1766) and applied it for centuries? Why would it be used in the field of reinsurance, again populated chiefly by pragmatic people? Obviously, the question of the future of the concept of ‘utmost’ good faith should be posed, in the light of the pre-contractual duties of the applicant, and from a comparative law perspective. The book discusses many issues and topics related to ‘utmost’ good faith, simple good faith and bad faith when the insurance applicant has to fulfil the duty to declare (or to disclose) the essential facts underlying the risk. Essential facts: what does it mean? Or relevant facts: same question. Who knows? The reader will soon find that there are still many countries with the system of the spontaneous declaration, even if it is losing speed and is less and less popular throughout the world. Here is something strange: Belgium and France are very close, including their legal regimes of contract (Civil Code, etc.). In Belgium, the system of the spontaneous declaration is still in force, but in France, the applicant fulfils his duty just by giving true responses to the questions asked by the insurer. On such an important topic, European harmonisation is still a long way away. Globally, the way to harmonisation in this regard might be even longer. Let’s be optimistic, and perhaps, overoptimistic: the trend is for a harmonisation of the legal regimes of the pre-contractual duties of the insured (or to be more precise, the applicant, and during the life of the insurance contract, the insured)—not today, not tomorrow, but probably the day after tomorrow. And then, what about the concept of ‘utmost’ good faith? As is rightly ­concluded in this book, it is of declining importance because the traditional duty of v­ oluntary disclosure has been diluted. But the view can be turned upside down, dare I say

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it. What does it mean? Anyone who has been a judge, an arbitrator or a mediator, knows a phenomenon which stays, perhaps, in his subconscious. Practically, the problem of good faith is presented by the insurer as a problem of … bad faith. And it is true that quite often, the assertion is raised very quickly, and in a rather audacious way. When it happens, the judge, the arbitrator or the mediator can be tempted to transpose to bad faith the concept normally reserved for the sole good faith: and ‘utmost good faith’ becomes ‘utmost bad faith’, the only one to be affected by the harshest sanction, avoidance of the contract. In other words, a weak bad faith will be considered as good faith, and mala fides will be found only in uberrimae mala fides. At the end of the day, there is a new question, as has also been noted in the conclusion of this book: how many more years must we wait for a revolutionary (or an evolutionary?) change to be brought by the Big Data technology? An insurer might be a subsidiary of one or several members of one or another Big Brother Company. So, between an insurance applicant and the insurer, who will have the knowledge and the means to gather the necessary information for concluding an insurance contract? These questions are perhaps good for a new book to follow the success which this book deserves. Jérôme Kullmann Président de l’AIDA (International Insurance law Association) Professeur à l’Université Paris Dauphine Directeur de l’Institut des Assurances de Paris Dauphine

PREFACE

It is widely thought that in Carter v Boehm (1766), Lord Mansfield ­established the principle, or as it is often thought of, the duty, of utmost good faith (uberrima fides in Latin) in insurance law and also the rules on a policyholder’s pre-contractual duty of disclosure. During the first two decades of this century, the rules of pre-contractual duties in insurance law in major insurance markets have undergone significant changes. On 30 November and 1 December 2016 (the 250th anniversary of Carter v Boehm), a colloquium was held at the Faculty of Law, National University of Singapore for the purpose of looking at and looking into these changes. There were also three reasons why it was appropriate to have this anniversary colloquium in Singapore. First, Singapore is an important insurance hub, with a large number of major international insurers and reinsurers based here providing a full range of insurance services to meet the needs of the domestic market and more importantly the wider Asian regional markets. The law of pre-­contractual duties operate every week, if not every day, in Singapore and in the region. ­Second, the facts of Carter v Boehm occurred in the Indonesian coastal city of Bengkulu (then Bencoolen, also known as Fort Marlborough,1 the subject matter insured under the policy in question in Carter v Boehm). Today, Bengkulu is a one-hour flight north to Batam, Indonesia, and a 40 minute ferry ride from there to the south of Singapore. Third, from February 1819 to June 1823 B ­ encoolen had direct jurisdiction over Singapore2 under a treaty signed between the local Malayan rulers and Sir Thomas Stamford Raffles, the then Lieutenant-Governor of Bencoolen3 who has ever since been remembered more as the founder of the free port Singapore. The precursor of the title and post Lieutenant-Governor of ­Bencoolen was Deputy-Governor of Bencoolen, a post from which Mr Roger Carter, the claimant/insured in Carter v Boehm, resigned in 1767. It is perhaps serendipitous that it was a nineteenth-century holder of an official post, once held by

1 

K Tan, The Singapore Legal System 2nd edn (Singapore, NUS Press, 1999) 28. ibid 29. 3  Thomas Stamford Raffles was the Lieutenant-Governor of Bencoolen from 1817 to 1822. After landing in Singapore on 28 January 1819, he managed to sign a treaty with local rulers on 2 February 1819. From and through that treaty, he established Singapore as a free port. He deputized administrative affairs to his fellow and returned to Bencoolen on 28 June 1819, where he stayed and carried out reform for three years before he returned to Singapore in October 1822. In two years he had to leave for good, voyaging back to London due to his ill health. 2 

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the claimant/insured in the landmark insurance law case Carter v Boehm (1766), who founded S­ ingapore, which has grown into an insurance hub in the twentyfirst century! In Singapore, the Bencoolen Street has existed since the modern free trading port was founded in the 1820s and has been a heritage street over recent decades. Those participating in our colloquium stayed at the Rendezvous Hotel, bounded on one side by Bencoolen Street. During the two days of our colloquium, part of Bencoolen Street was closed to traffic for work associated with the construction of Bencoolen Station, part of the extended Singapore downtown MRT (mass rapid transport) line due to be opened on 21 October 2017. The well-conserved Fort Marlborough in Bengkulu is but one reminder—and hopefully Benglulu or Bencoolen might be another—of how important it is for us to continue to reflect upon the influence of Lord Mansfield’s seminal decision in Carter v Boehm on how insurance lawyers think about pre-contractual duties in insurance law 250 years after he handed down his decision at the Guildhall in London. We hope this edited book makes an important contribution to that ­discussion. For this purpose, we have tried to keep the laws in different jurisdictions under discussion in this book up-to-date to 14 December 2017. Yong Qiang Han Greg Pynt

ACKNOWLEDGEMENTS

The colloquium was kindly sponsored by the Centre for Banking and Finance Law, NUS Faculty of Law. For this, I would like to extend my heartfelt thanks to Associate Professor Dora Neo, the CBFL’s Director, and Professor Hans Tjio, the Co-Director, for supporting my idea of having this research project and for steering the way forward during the course of the colloquium being co-organized by Leanne Hwee and Shi Li Chua, the CBFL’s management assistants and facilitated by Associate Professor Hwee-Ying Yeo. My thanks also go to Professor Martin Davies and Mr Greg Pynt: Martin showed early interest in the research idea when we met in March 2016 on my conference trip to New Orleans. Then and there he suggested me to contact ­Greg Pynt, who happened to be organizing a separate event due in O ­ ctober 2016 among Australian insurance lawyers. Later, Greg gladly accepted my invitation to co-edit a book out of the CBFL insurance law conference in Singapore. It has been a pleasure for me to work with both of them. Huge thanks certainly go to all speakers/contributors for the colloquium and book. In this regard I am particularly grateful to Professor Birgit Kuschke and Professor Jeffrey Stempel, who did not come to Singapore to have the benefit (or bane?) of the colloquium but still gladly contributed their chapters. My thanks are also extended to the two very positive and helpful anonymous reviewers of the book proposal and to Bill Asquith as well as other members of the Hart Publishing team for working together to publish this book. The managers of the late Professor Hasson’s estate, Wiley Publishing, and the Modern Law Review have kindly allowed us to republish his classic article on the topic. Similarly, ­LexisNexis allowed republishing, as sub-chapters in this book, of the adaptations of three articles in its Insurance Law Journal (2012, vol 23). Acknowledgements are made individually in footnotes for these republishings. Infinite thanks and love to my wife Jessie. Soon after much of my editing started substantially in June, we became first-time expectant parents. She was as understanding as I was sorry while I had to juggle the editing and other research with trying my best to take care of her and our beloved angel Yeedore along the ­challenging journey of a new life which we wish had joined us. Yong Qiang Han

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TABLE OF CONTENTS

Foreword���������������������������������������������������������������������������������������������������������������������v Preface���������������������������������������������������������������������������������������������������������������������� vii Acknowledgements���������������������������������������������������������������������������������������������������� ix List of Contributors������������������������������������������������������������������������������������������������� xiii Table of Cases������������������������������������������������������������������������������������������������������������xv Table of Statutes�����������������������������������������������������������������������������������������������������xxxi

1. Introduction�������������������������������������������������������������������������������������������������������1 Yong Qiang Han and Greg Pynt Part I: Revisiting Carter v Boehm and Pre-contractual Duties in Insurance Law 2. Carter v Boehm (1766) 3 Burr 1905�����������������������������������������������������������������11 3. The History of a Landmark: Carter v Boehm��������������������������������������������������23 Stephen Watterson 4. The Doctrine of Uberrima Fides in Insurance Law— A Critical Evaluation����������������������������������������������������������������������������������������87 Reuben A Hasson Part II: Pre-contractual Duties in Insurance Law: Common Law Jurisdictions 5. Pre-contractual Duties in Australia���������������������������������������������������������������111 Peter Mann, Greg Pynt and Samantha Traves 6. Pre-contractual Duties in the UK Insurance Law after 2015: Old (or New?) Wine in New Bottles?������������������������������������������������������������143 Yong Qiang Han 7. Pre-contractual Duties under American Insurance Law������������������������������171 Martin Davies and Jeffrey W Stempel Part III: Pre-contractual Duties in Insurance Law: Civil Law Jurisdictions 8. Pre-contractual Duties under the Chinese Insurance Law���������������������������199 Yong Qiang Han and Feng Wang

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  9. Pre-contractual Duties under the French Insurance Law����������������������������229 Sebastien Leroy 10. Pre-contractual Duties under the German Insurance Law��������������������������261 Manfred Wandt and Kevin Bork 11. Pre-contractual Duties under the Japanese Insurance Law��������������������������293 Satoshi Nakaide 12. Pre-contractual Duties under the Swiss Insurance Law�������������������������������323 Andrea Stäubli Part IV: Pre-contractual Duties in Insurance Law: Mixed Legal System, Reinsurance and Brokers 13. Good Faith and Pre-contractual Duties under South African Insurance Law�������������������������������������������������������������������������������������������������353 Birgit Kuschke 14. Pre-contractual Duties in European Insurance Contract Law���������������������381 Helmut Heiss and Ulrike Mönnich 15. Pre-contractual Utmost Good Faith of the Reinsured���������������������������������411 Jeffrey W Stempel 16. Placement of Insurance and the Role of Brokers������������������������������������������429 Rob Merkin 17. Conclusions: (Utmost) Good Faith and Pre-contractual Duties Globally in the Twenty-first Century�������������������������������������������������447 Yong Qiang Han

Index�����������������������������������������������������������������������������������������������������������������������471

LIST OF CONTRIBUTORS

Kevin Bork PhD Candidate and Research Assistant, Faculty of Law, Goethe University Frankfurt am Main Martin Davies Admiralty Law Institute Professor of Maritime Law, Tulane University Law School; Director of the Maritime Law Centre Yong Qiang Han Adjunct Senior Research Fellow, Faculty of Law, National University of Singapore; PhD (University of Aberdeen) Reuben Hasson Emeritus Professor of Law, Osgoode Law School, York University, Canada Helmut Heiss Professor of Law, University of Zurich; Chairman of the Project Group on a Restatement of European Insurance Contract Law; counsel, mbh attorneys-at-law, Zurich Birgit Kuschke Associate Professor in the Department of Private Law, University of Pretoria, South Africa Sebastien Leroy PhD, Faculty of Law, National University of Singapore Peter Mann Barrister, Ground Floor Wentworth Chambers, Sydney Robert Merkin QC Professor of Law, University of Exeter; Honorary Professor of Law, University of Queensland; Special Counsel, DLA Piper Ulrike Mönnich Partner, mbh attorneys-at-law, Zurich

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List of Contributors

Satoshi Nakaide Professor of School of Commerce, Waseda University, Tokyo Greg Pynt Barrister, Francis Burt Chambers, Perth; General Editor of the Insurance Law Journal Andrea Stäubli Prager Dreifuss Attorney-at-law, Zurich; PhD Candidate (University of Zurich) Jeffrey W Stempel Doris S and Theodore B Lee Professor of Law, William S Boyd Law School, ­University of Nevada Las Vegas Samantha Traves Lecturer in Commercial Law, TC Beirne School of Law, University of Queensland; Consultant to BarryNilsson; Member, Queensland Civil and Administrative Tribunal Manfred Wandt Professor of Law; Director of Institute for Insurance Law, Goethe University Frankfurt am Main Feng Wang Lecturer, Dalian Maritime University, China; PhD (University of Exeter) Stephen Watterson University Lecturer; John Collier Fellow, Trinity Hall and Faculty of Law,­ University of Cambridge

TABLE OF CASES

A & D Douglas Pty Ltd ACN 008 404 180 v Lawyers Private Mortgages Pty Ltd ACN 010 556 751 [2006] FCA 520���������������������������������������������������117 A/S Ivarans Rederei v Puerto Rico Ports Authority, 617 F2d 903 (1st Cir 1980)���������������426 ABN AMRO Bank NV v Bathurst Regional Council [2014] FCAFC 65����������������������������119 ABSA Bank Ltd v Fouche 2003 1 SA 176 (SCA)����������������������������������������������������������367, 371 Acme Markets Inc v Federal Armored Express Inc 648 A2d 1218 (Pa Super Ct 1994)�����185 ACN 074971109 Pty Ltd (As Trustee for the Argot Unit Trust) v National Mutual Life Association of Australasia Ltd (ACN 004 020 437) [2008] VSCA 247; (2008) 21 VR 351��������������������������������������������������������������������������������������������������������������132 Administrateur, Natal v Trust Bank van Afrika Bpk 1979 (3) SA 824 (A)������������������ 371–72 Advance (NSW) Insurance Agencies Pty Ltd v Matthews (1987) 4 ANZ Ins Cas 60-813�������������������������������������������������������������������������������������������������������������������������117 Advance (NSW) Insurance Agencies Pty Ltd v Matthews [1989] HCA 22; (1989) 166 CLR 606��������������������������������������������������������������������������������������������������114, 116 Advani Enterprises Inc v Underwriters at Lloyds 140 F3d 157; 1998 AMC 2045 (2d Cir 1998)���������������������������������������������������������������������������������������������������������������������175 Afrox Healthcare Bpk v Strydom 2002 (6) SA 21 (SCA)��������������������������������������������357, 360 AGF Marine Aviation & Transport v Cassin 544 F3d 255; 2008 AMC 2300 (3d Cir 2008)���������������������������������������������������������������������������������������������������������������������174 AIG Centennial Ins Co v O’Neill 782 F3d 1296, 2015 AMC 1217 (11th Cir 2015)���������������������������������������������������������������������������������������������������������174, 179 Akedian Co Ltd v Royal Insurance Australia Ltd (1997) 148 ALR 480������������������������������113 Alaz Sportswear v Public Service Mutual Ins Co 600 NYS 2d 63 (NY App Div 1993)������175 Albany Insurance Co v Anh Thi Kieu 927 F2d 882; 1991 AMC 2211 (5th Cir 1991)�������175 Alexander Stenhouse Ltd v Austcan Investments Pty Ltd (1992) 57 SASR 343; (1992) 7 ANZ Ins Cas 61-116�������������������������������������������������������������������������������������������129 Alexander Stenhouse Ltd v Austcan Investments Pty Ltd [1993] HCA 22; (1993) 7 ANZ Ins Cas 61-166�������������������������������������������������������������������������������������������129 Allen v QBE Syndicate 1886 at Lloyds [2010] QDC 4��������������������������������������������������������117 Allen v Sixteen Stirling Investments (Pty) Ltd 1974 (4) SA 164 (D) 169���������������������������371 Amaca Pty Ltd v McGrath as liquidators of HIH Underwriting and Insurance (Australia) Pty Ltd [2011] NSWSC 90�����������������������������������������������������������������������������122 American Home Assurance Co v Masters Ships Management SA 423 F Supp 2d 193; 2007 AMC 1888 (SD NY 2006)��������������������������������������������������������������������������������174, 177 American Paint Service v Home Ins Co of New York 246 F 2d 91, 94 (3d Cir 1957)��������177 AMEX Life Assurance v Superior Court, 930 P 2d 1264 (CA 1997)����������������������������������412 Anderson Shipping v Guardian National Insurance 1987 (3) SA 506 (A)�������������������������372 Anderson v Pacific Fire & Marine Insurance Co (1871–72) LR 7CP 65����������������������������157 Aneco Reinsurance Underwriting Ltd v Johnson & Higgins Ltd [2002] Lloyd’s Rep IR 91��������������������������������������������������������������������������������������������������������������432

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Aneco v Johnson & Higgins [2002] 1 Lloyd’s Rep 157��������������������������������������������������������431 Ange v First East Auction Holdings Pty Ltd (ACN 083 112 505) [2011] VSCA 335; (2011) 284 ALR 638����������������������������������������������������������������������������������������������������������133 Anglo-African Merchants Ltd v Bayley [1970] 1 QB 311���������������������������������������������������431 Anonymous (c 1693) Skin 327; 90 ER 146����������������������������������������������������������������������������46 Aon New Zealand Ltd v Attorney- General (2009) 15 ANZ Insurance Cases 61–800������431 Appleson v H Littlewood Ltd [1939] 1 AH ER 464 (CA)���������������������������������������������������106 Arab Bank plc v Zurich Insurance Co [1999] 1 Lloyd’s Rep 262����������������������������������������442 Arthrude Press Ltd v Eagle Star & British Dominions Insurance Co. (1924) 18 Ll LR 382������������������������������������������������������������������������������������������������������������96 Asfar & Co v Blundell [1896] 1 QB 123���������������������������������������������������������������������������������49 Assicurazioni Generali SpA v Arab Insurance Group (BSC) [2002] EWCA Civ 1642������423 August v Provident Life and Accident Insurance Co 772 F Supp 2d 1197 (CD Cal 2011)�������������������������������������������������������������������������������������������������������������������190 Australia and New Zealand Bank Ltd v Colonial and Eagle Wharves Ltd [1960] 2 Lloyd’s Rep 241����������������������������������������������������������������������������������������������������93 Australian & New Zealand Banking Group v RQA Accountants Pty Ltd [2013] NSWSC 165�����������������������������������������������������������������������������������������������������������456 Azar v Prudential Insurance Co of America 68 P 3d 909 (NM App 2003)������������������������190 Baker v Lombard Continental Insurance plc (unreported, EWHC, 1996)������������������������441 Banque Financiere de la Cite SA v Westgate Insurance Co Ltd [1991] 2 AC 249 (HL)�������������������������������������������������������������������������������������������������������462 Banque Keyser Ullman SA v Skandia (UK) Insurance Co Ltd [1990] 1 QB 665 (CA)����������������������������������������������������������������������������������������������163, 165 Barkhuizen v Napier 2007 (5) SA 323 (CC)����������������������������������������������������������362–64, 370 Bates v Hewitt (1867) LR 2 QB 595�������������������������������������������������������11, 50–51, 91–92, 157 Bauer Tonkin Insurance Brokers v CIC (1996) 9 ANZ Ins Cas 61-298�����������������������������118 Bayer South Africa (Pty) Ltd v Frost 1991 4 SA 559 (A)���������������������������������������������� 371–72 Becker v Marshall (1922) 12 Ll LR 413 (CA)����������������������������������������������������������95–97, 102 Beckwith v Sydebotham (1807) 1 Camp 116; 170 ER 897����������������������������������������������������50 Bede Polding College v Limit (No 3) Ltd [2008] NSWSC 887�������������������������������������������131 Bell v Bell (1810) 2 Camp 475; 170 ER 1223�������������������������������������������������������������������������50 Bell v Liberty Mutual Insurance Co 676 SE 2d 428 (Ga App 2009)�����������������������������������192 Bendzak v Midland National Life Insurance Co 440 F Supp 2d 970 (SD Iowa 2006)������195 Benson v Leaders Life Ins Co 339 P3d 843 (Okla 2012)�����������������������������������������������������186 Bhasin v Hrynew [2014] 3 SCR 495�������������������������������������������������������������������������������������453 Biggar v Rock Life Assurance Co [1902] 1 KB 516��������������������������������������������������������������429 Blackburn Low & Co v Haslam (1888) 21 QBD 144����������������������������������������������������������439 Blackburn Low & Co v Vigors (1887) 12 App Cas 531�������������������������������������������������������157 Bonner v Cox Dedicated Corporate Member Ltd [2006] Lloyd’s Rep IR 385�������������������431 Botha v Rich NO 2014 (4) SA 124 (CC)������������������������������������������������������������������������������364 Boyd v Dubois (1811) 3 Camp 138 ER 1331�������������������������������������������������������������������������50 Bradley and Essex and Suffolk Accident Indemnity Society, Re [1912] 1 KB 415 (CA)���167 Breland v Schilling 550 So 2d 609 (La 1989)�����������������������������������������������������������������������193 Brewtnall v Cornhill Motor Insurance Co Ltd (1930) 40 LJLR 166�����������������������������������108 Bridges v Hunter (1813) 1 M&S 15; 105 ER 6�����������������������������������������������������������������������79 Brink v Humphries & Jewell (Pty) Ltd 2005 (2) SA 419 (SCA) 421����������������������������������371 Bristol &c Aerated Bread Company v Maggs (1890) 44 ChD 622����������������������������������������11

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Brotherton v Aseguradora Colseguros SA (No 2) [2003] 2 All ER 298 (Comm)��������������423 Brown v Cassens Transport Co, 546 F 3d 347 (6th Cir 2008)���������������������������������������������195 Bruwer v Nova Risk Partners Ltd [2010] ZAGPJHC 96�����������������������������������������������������371 Btesh v Royal Ins Co Ltd of Liverpool 49 F2d 720; 1931 AMC 1044 (2d Cir 1931)����������176 Butler v Clarendon America Ins Co 317 Fed Appx 648 (9th Cir 2009)�����������������������������175 Butler v Clarendon America Ins Co 494 FSupp 2d 1112; 2007 AMC 1620 (ND Cal. 2007)������������������������������������������������������������������������������������������������������������������175 Byrne v Australian Airlines Ltd (1995) 185 CLR 410��������������������������������������������������� 454–55 Calhoun v Yamaha Motor Corp USA 216 F3d 338 (3d Cir 2000)��������������������������������������175 Cantiere Meccanico Brindisino v Janson [1912] 3 KB 452���������������������������������������������������94 Cargo Africa CC v Gilby’s Distillers and Vintners 1996 (2) SA 324 (C)����������������������������370 Carlingford Australia Gen’ l Ins Ltd v St Paul Fire & Marine Ins Co 722 F Supp 48 (SDNY 1989)���������������������������������������������������������������������������������������������������������������������427 Carter v Boehm (1766) 3 Burr 1905, 97 ER 1162; (1766) 1 Black W 593, 96 ER 342������������������������������������������������������������������������������������������ i, v, vii, viii, 1–3, 9–108, 111, 140, 144–48, 162–63, 176, 179–80, 200–01, 218, 229, 232–34, 260–62, 326, 353, 414, 416, 418–20, 426–27, 447–49, 456, 468–69 Carvill America Inc v Camperdown UK Ltd [2006] Lloyd’s Rep IR 1�������������������������������432 Case 205/84 Commission of the European Communities v Federal Republic of Germany [1986] ECR 3755������������������������������������������������������������������������������������������410 Case C-386/00 Axa Royale Belge SA v Georges Ochoa and Stratégie Finance SPRL [2002] ECR I-02209����������������������������������������������������������������������������������������������������������404 Case C-518/06 Commission of the European Communities v Italian Republic [2009] ECR I-3491������������������������������������������������������������������������������������������������������������410 Case E-1/05 EFTA Surveillance Authority v The Kingdom of Norway [2005] EFTA Ct Rep 234�������������������������������������������������������������������������������������������������������404, 410 Case E-11/12 Beatrix Susanne Koch, Lothar Hummel and Stefan Müller v Swiss Life (Liechtenstein) AG [2013] EFTA Ct Rep 272��������������������������������404–05, 407 Cases E-15/15 and E-16/15 Franz-Josef Hagedorn v Vienna-Life Lebensversicherung AG and Rainer Armbruster v Swiss Life (Liechtenstein) AG [2016]��������������������������������������������������������������������������������������������������������������������������405 Cass 2e civ, 19 mai 2016, no 15-12.767��������������������������������������������������������������������������������253 Cass, ass plén, 2 mars 2007 no 06-15.267; R, 443.���������������������������������������������������������������255 Cass, ch mixte, 7 févr 2014, no 12-85.107.���������������������������������������������������������������������������241 Catlin (Syndicate 2003) at Lloyds v San Juan Towing and Marine Services Inc 778 F3d 69, 2015 AMC 694 (1st Cir 2015)��������������������������������������������������������174, 179 Cave v Cave (1880) 15 Ch D 639������������������������������������������������������������������������������������������441 CE Heath Casualty & General Insurance Ltd v Grey (1993) 32 NSWLR 25; 7 ANZ Ins Cas 61-199�������������������������������������������������������������������������������������������������������116 Celik v NRMA [2000] NSWC 380���������������������������������������������������������������������������������������119 Certain Underwriters at Lloyds London v Giroire 27 FSupp 2d 1306, 1998 AMC 2153 (SDFla 1998)�����������������������������������������������������������������������������������������174 Certain Underwriters at Lloyds London v Inlet Fisheries Inc 518 F3d 645, 2008 AMC 305 (9th Cir 2008)������������������������������������������������������������������������������������������174 CGU Insurance Ltd v AMP Financial Planning Pty Ltd [2007] HCA 36; (2007) 235 CLR 1������������������������������������������������������������������������������������������������������114, 453

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CGU Insurance Ltd v Porthouse [2008] HCA 30; (2008) 235 CLR 103����������������������������118 Charman v Gordian Run-Off Ltd [2003] Lloyd’s Rep IR 337��������������������������������������������431 Cheong Heng Loong Goldsmiths (KL) Sdn Bhd v Capital Insurance Bhd [2004] 1 MLJ 353��������������������������������������������������������������������������������������������������������������421 Chiariello v ING Groep NV 2006 AMC 2135 (ND Cal. 2006)�����������������������������������177, 178 Christiana General Ins Corp v Great American Ins Co 979 F2d 268, 279–80 (2d Cir 1992)���������������������������������������������������������������������������������������������������������������������427 Cigna Property and Casualty Ins Co v Polaris Pictures Corp 159 F3d 412, 420 n3, 1999 AMC 1, 11 n3 (9th Cir 1998)����������������������������������������������������������������������������������175 Civ 1er, 13 déc 2012, no 11-27.631���������������������������������������������������������������������������������������254 Civ 1er, 15 oct 1991, no 90-11.725���������������������������������������������������������������������������������������239 Civ 1er, 18 sept 2008 no 06-17.859��������������������������������������������������������������������������������������259 Civ 1er, 29 juin 2016 no 15-17.502���������������������������������������������������������������������������������������258 Civ 1er, 9 mai 2001, no 98.20-107����������������������������������������������������������������������������������������254 Civ 1ere, 1 déc 1993, no 91-17.201���������������������������������������������������������������������������������������238 Civ 1ere, 10 févr 1987, no 85-15.329������������������������������������������������������������������������������������254 Civ 1ere, 21 nov 2006, no 05-15.674������������������������������������������������������������������������������������257 Civ 1ere, 30 mai 2006, no 03-14.275������������������������������������������������������������������������������������249 Civ 1ere, 31 oct 2012, no 11-15.529�������������������������������������������������������������������������������������256 Civ 1ere, 5 nov 1996��������������������������������������������������������������������������������������������������������������256 Civ 1re, 25 mai 1988, no 85-15.598��������������������������������������������������������������������������������������237 Civ 1re, 27 mars 2001, no 98-19.48��������������������������������������������������������������������������������������251 Civ 1re, 6 juin 2000, no 97-19.241���������������������������������������������������������������������������������������236 Civ 2e civ, 4 nov 2004, no 03-17.888������������������������������������������������������������������������������������256 Civ 2e, 10 déc 2015, no 14-25.046, no 14-29.811����������������������������������������������������������������244 Civ 2e, 10 déc. 2015, no 14-26297����������������������������������������������������������������������������������������257 Civ 2e, 11 janv 2007, no 06-11.478���������������������������������������������������������������������������������������251 Civ 2e, 11 juin 2015, no 14-17.971���������������������������������������������������������������������������������������244 Civ 2e, 11 juin 2015, no 14-18.141; see also Civ 2eme, 24 mars 2016, no 15-14858���������257 Civ 2e, 12 avr 2012, no 11-30.075����������������������������������������������������������������������������������������240 Civ 2e, 12 févr 2009, no 08-12.425���������������������������������������������������������������������������������������238 Civ 2e, 12 juin 2014, no 12-35.162�������������������������������������������������������������������������������254, 256 Civ 2e, 12 mai 2011, no 10-10.412���������������������������������������������������������������������������������������239 Civ 2e, 12 sept 2013, no 12-22.649���������������������������������������������������������������������������������������251 Civ 2e, 14 avr 2016, no 15-18.226����������������������������������������������������������������������������������������245 Civ 2e, 15 déc 2011, no 10-24.430����������������������������������������������������������������������������������������253 Civ 2e, 15 nov 2011, no 10-19.694���������������������������������������������������������������������������������������240 Civ 2e, 17 avril 2008, no 07-13052���������������������������������������������������������������������������������������237 Civ 2e, 17 jan 2008, no 06-19330�����������������������������������������������������������������������������������������254 Civ 2e, 17 juin 2010, no 09-67.081���������������������������������������������������������������������������������������239 Civ 2e, 19 févr 2009 no 07-21.655����������������������������������������������������������������������������������������246 Civ 2e, 19 mai 2016, no 15-20.233���������������������������������������������������������������������������������������244 Civ 2e, 19 nov 2015, no 14-17.010���������������������������������������������������������������������������������������244 Civ 2e, 19 nov 2015, no 14-26.351���������������������������������������������������������������������������������������251 Civ 2e, 19 oct 2006, no 05-18.886����������������������������������������������������������������������������������������239 Civ 2e, 1er juin 2011, no 10-19.630��������������������������������������������������������������������������������������258 Civ 2e, 21 oct 2004, no 03-16.328����������������������������������������������������������������������������������������256 Civ 2e, 23 juin 2016, no 15-12113����������������������������������������������������������������������������������������255

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Civ 2e, 23 mai 2013, no 12-19.952���������������������������������������������������������������������������������������238 Civ 2e, 24 mai 2006, no 04-14.024���������������������������������������������������������������������������������������255 Civ 2e, 24 mars 2016, no 15-14858��������������������������������������������������������������������������������������257 Civ 2e, 3 févr 2011, no 10-30.569�����������������������������������������������������������������������������������������239 Civ 2e, 3 juill 2014, no 13-18.760�����������������������������������������������������������������������������������������237 Civ 2e, 3 juin 2010, no 09-15.876�����������������������������������������������������������������������������������������237 Civ 2e, 3 mars 2016, no 15-13.500���������������������������������������������������������������������������������������248 Civ 2e, 3 sept 2009 no 09-10.475������������������������������������������������������������������������������������������252 Civ 2e, 30 juin 2016, no 15-18855, no 15-19.772����������������������������������������������������������������248 Civ 2e, 30 juin 2016, no 15-22.842���������������������������������������������������������������������������������������239 Civ 2e, 4 févr 2016, no 15-13.850�����������������������������������������������������������������������������������������246 Civ 2e, 4 oct 2012, no 11-23.897������������������������������������������������������������������������������������������247 Civ 2e, 5 févr 2004, no 01-0358��������������������������������������������������������������������������������������������251 Civ 2e, 5 févr 2015, no 13-28.538�����������������������������������������������������������������������������������������244 Civ 2e, 7 avril 2011, no 10-17.221����������������������������������������������������������������������������������������255 Civ 2e, 7 mars 2006, no 05-12.338���������������������������������������������������������������������������������������251 Civ 2e, 8 mars 2006 no 05-11.319����������������������������������������������������������������������������������������251 Civ 2e, 8 mars 2012, no 11-10.857���������������������������������������������������������������������������������������240 Civ 2e, 8 sept 2005, no 04-16.487�����������������������������������������������������������������������������������������239 Civ 3e, 2 févr 2005, no 03-15.409�����������������������������������������������������������������������������������������252 Civ 3e, 20 nov 1991, no 90-10.286���������������������������������������������������������������������������������������256 Civ 3e, 8 juill 2015, no 13-25.223�����������������������������������������������������������������������������������������246 Civ, 1er, 14 oct 2015, no 14-21.855��������������������������������������������������������������������������������������255 Civ 2e, 13 Juil 2006, no 05-17.331����������������������������������������������������������������������������������������254 Clark-Peterson Co Inc v Independent Insurance Associates Ltd 492 NW 2d 675 (Iowa, 1992)��������������������������������������������������������������������������������������������������������������� 193–94 Com 1er déc 2015, no 14-22.134������������������������������������������������������������������������������������������255 Com 1er déc, 2015, no 14-22.134�����������������������������������������������������������������������������������������258 Com 9 fév 2016, no 14-23.210����������������������������������������������������������������������������������������������257 Com, 10 mars 2015, no 13-26.794���������������������������������������������������������������������������������������255 Com, 10 mars 2015, no 14-10.712���������������������������������������������������������������������������������������255 Com, 11 juin 2014, no 13-17.273�����������������������������������������������������������������������������������������254 Com, 13 sept 2011, no 10-20.644���������������������������������������������������������������������������������255, 258 Com, 16 sept 2014, no 13-19.459�����������������������������������������������������������������������������������������255 Cominos v Cominos (1972) 127 CLR 588���������������������������������������������������������������������������122 Commercial Union Assurance Company of Australia Pty Ltd v Beard [1999] NSWCA 422; (1999) 47 NSWLR 735; (2000) 11 ANZ Ins Cas 61-458������������������116, 117 Commercial Union Ins Co v Detyens Shipyard, Inc 147 FSupp 2d 413, 423, 2001 AMC 2121, 2131 (D SC 2001)���������������������������������������������������������������������������������174 Commercial Union Ins Co v Flagship Marine Services Inc 982 FSupp 310, 313 (SD NY 1997)�������������������������������������������������������������������������������������������������������������174 Commercial Union Insurance Co of SA Ltd v Lotter 1999 (2) SA 147 (SCA)����������368, 372 Commercial Union v Beard [1999] NSWCA 422; [2000] 11 ANZ Ins Cas 61-458���������������������������������������������������������������������������������������������116, 119 Compagnie de Reassurance d’Ile de France v New England Reins Corp 57 F3d 56, 80 (1st Cir 1995), cert denied, 516 US 1009��������������������������������������������������������������������422 Container Transport International Inc v Oceanus Mutual U/W Association (Bermuda) Ltd (No 1) [1984] 1 Lloyd’s Rep 476 (CA)���������������������������������������� 80, 149, 157, 448, 476

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Conveyor & General Engineering Pty Ltd v Basetec Services Pty Ltd [2014] QSC 30������������������������������������������������������������������������������������������������������������������136 Court v Martineau (1782) 3 Doug 161, 99 ER 591;��������������������������������������������������������48, 90 Crema v Cenkos Securities [2010] EWCA Civ 1444�����������������������������������������������������������445 Crim 10 jan 2012, no 11-81.647�������������������������������������������������������������������������������������������240 Crim 18 sept 2007, no 06-84.807�����������������������������������������������������������������������������������������240 Crim 2 déc. 2014, no 14-80.933�������������������������������������������������������������������������������������������236 Crim 9 sept 2014, no 13-84.198�������������������������������������������������������������������������������������������251 Crim 18 mars 2014, no 12-87.195����������������������������������������������������������������������������������������244 Crim 21 oct 2014, no 13-85.178�������������������������������������������������������������������������������������������244 Crim 31 mai 2016, no 15-82.252������������������������������������������������������������������������������������������244 Crosby v National Foreign Trade Council, 530 US 363, 120 S Ct (2000)���������������������������189 Dalglish v Jarvie (1850) 2 Mac & G 231�������������������������������������������������������������������������93, 145 Davenport v Charsley, 1886, 54 LT 344����������������������������������������������������������������������������������11 Dawsons Ltd v Bonnir [1922] 2 AC 413��������������������������������������������������������������������������������96 De Costa v Scandret (1723) 2 P Wms 169, 24 ER 686���������������������������������������������������46, 145 De Waal NO v Metropolitan Lewens Bpk 1994 (1) SA 818 (O)�����������������������������������������372 Decision of the Swiss Federal Supreme Court 4A_285/2009 of 22 October 2009������������332 Decision of the Swiss Federal Supreme Court 4A_316/2008 of 3 October 2008��������������325 Decision of the Swiss Federal Supreme Court 4C.98/2007 of 29 April 2008�������������������������������������������������������������������������������324–26, 345–46, 348–49 Decision of the Swiss Federal Supreme Court 5C.267/2004 of 1 June 2005��������������325, 348 Decision of the Swiss Federal Supreme Court BGE 118 II 333����������������������������������331, 336 Decision of the Swiss Federal Supreme Court BGE 134 III 511���������������������������������� 328–32 Decision of the Swiss Federal Supreme Court BGE 136 III 334���������������������������������� 330–31 Decision of the Swiss Federal Supreme Court BGE 75 II 158��������������������������������������������330 Decision of the Swiss Federal Supreme Court BGE 92 II 342������������������������������������� 330–31 Decisions of the Swiss Federal Supreme Court 4A_150/2015 of 29 October 2015���������������������������������������������������������������������������������������������329–30, 334 Decisions of the Swiss Federal Supreme Court BGE 90 II 449; 5C.45/2004 of 9 July 2004; 5C.85/2004 of 11 November 2004; 5C.267/2004 of 1 June 2005; 4C.98/2007 of 29 April 2008������������������������������������������������������������������������������������345, 349 Decisions of the Swiss Federal Supreme Court BGE 99 II 67���������������������������������������������330 Deutsche Ruck v Walbrook [1995] 1 Lloyd’s Rep 153���������������������������������������������������������439 Dodd v Commercial Union Insurance Co, 365 NE 2d 802 (Mass, 1977)������������������191, 192 Dumitrov v SC Johnson & Son Superannuation Pty Ltd [2006] NSWSC 1372����������������130 Dunn v Ocean Accident and Guarantee Corp Ltd (1933) 50 TLR 32��������������������������������429 Durrell v Bederley (1815) Holt 283; 171 ER 244�������������������������������������������������������������������47 Eagle Star Insurance Co v Spratt [1971] 2 Lloyd’s Rep116�������������������������������������������������431 East River Steamship Corp v Transamerica Delaval Inc 476 US 858, 106 S Ct 2295 (1986)��������������������������������������������������������������������������������������������������������173 Eddy Lau Constructions Pty Ltd v Transdevelopment Enterprise Pty Ltd [2004] NSWSC 273�����������������������������������������������������������������������������������������������������������122 El Ajou v Dollar Land Holdings plc (No 1) [1994] 2 All ER 685�������������������������������� 440–41 Elton v Larkins (1831) 5 Car & P 86; 172 ER 888; (1832) 8 Bing 196; 131 ER 376; (1832) 5 Car & P 385����������������������������������������������������������������������������������������������������������49 Empress Assurance Corp Ltd v Bowring & Co Ltd (1905) 11 Com Cas 107���������������������431

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Entwell Pty Ltd v National and General Insurance Co Ltd (1991) 6 WAR 68; 6 ANZ Ins Cas 61-059�������������������������������������������������������������������������������������������������������117 ERC Frankona Reinsurance v American National Insurance Co [2005] EWHC 1381 (Comm)������������������������������������������������������������������������������������������������������441 Erie Railroad Co v Tompkins 304 US 64 (1938)�����������������������������������������������������������������181 Espin v Pemberton (1859) 3 De G & J 547��������������������������������������������������������������������������441 Ewer v National Employers’ Mutual General Insurance Assn. Ltd [1937] 2 All ER 193�������������������������������������������������������������������������������������������������������������������������96 Facer v Vehicle and General Insurance Co Ltd [1956] 1 Lloyd’s Rep 113��������������������������429 Farm Bureau Mutual Insurance Co v Sandbulte, 302 NW 2d 104 (Iowa 1981)����������������194 Fidelity-Phoenix Fire Ins Co v Pilot Freight Carriers Inc 193 F2d 812 (4th Cir 1952)�����186 Fienstein v Nigli 1981 (2) SA 684 (A) 700���������������������������������������������������������������������������371 Fireman’s Fund Ins Co v Wilburn Boat Co 300 F2d 631 (5th Cir. 1962)���������������������������415 Firemans Fund Ins Co v Great American Ins Co of New York, 822 F3d 620, 2016 AMC 1217 (2d Cir 2016)���������������������������������������������������������������������������������174, 179 Fitzherbert v Mather (1785) 1 TR 12�����������������������������������������������������������������������������������434 Foley v Tabor (1861) 2 F & F 663, 175 ER 1231��������������������������������������������������������������49, 90 Foreign Credit Corp v Aetna Casualty & Surety Co 276 FSupp 791, 793–94 (SD NY 1967)��������������������������������������������������������������������������������������������������������������������177 Fort v Lee (1811) 3 Taunt 381, 128 ER 151;���������������������������������������������������������������������������50 Freeland v Glover (1806) 7 East 457, 103 ER 177,�����������������������������������������������������������������50 Friere v Woodhouse (1815–1817) Holt 572, 171 ER 345������������������������������������������������49, 90 Frost v James Finlay Bank Ltd [2002] Lloyd’s Rep IR 503��������������������������������������������������431 Gandy v Adelaide Marine Insurance Co (1871) LR 6 QB 746����������������������������������11, 49–50 Garnat Trading & Shipping (Singapore) PTE Ltd v Baominh Insurance Co [2011] 1 Lloyd’s Rep 589; [2011] EWCA Civ 773���������������������������������������������������113, 157 Gates and Downer v Madison County Mutual Ins. Co 1 Selden (NY) 469 (1851)�����������104 Gaunt v Gold Star Insurance Co Ltd [1991] 2 NZLR 341 (HC)����������������������������������������438 Gedge v Royal Assurance Corporation [1900], 2 QB 222]���������������������������������������������������11 General Accident v Tanter (The Zephyr) [1984] 1 Lloyd’s Rep 58�������������������������������������431 Gibbs v Mercantile Mutual Insurance (Australia) Ltd [2003] HCA 39; (2003) 214 CLR 604����������������������������������������������������������������������������������������������������������������������138 GIO General Ltd v Wallace [2001] NSWCA 299; (2001) 11 ANZ Ins Cas 61-506���������������������������������������������������������������������������������������������118, 121 Giragosian 57 F3d 50; 1995 AMC 2542 (1st Cir 1995)�������������������������������������������������������178 Glasgow Assurance Corp Ltd v William Symondson & Co (1911) 16 Com Cas 109��������431 Glasgow Assurance Corp v Symondson (1911) 16 Com Cas 109, 119��������������������������������94 Glicksman v Lancashire and General Assurance Co [1927] AC 139����������������������95, 97, 108 GMA v Unistorebrand International Insurance AS [1995] LRLR 333�������������������������������441 Godfrey v Britannic Assurance Co [1963] 2 Lloyd’s Rep. 515��������������������������������������������100 Goshawk Dedicated Ltd v Tyser & Co Ltd [2007] Lloyd’s Rep IR 224�������������������������������431 Grace v Leslie & Godwin Financial Services Ltd [1995] LRLR 472���������������������������� 431–32 Grand Ventures Inc v Whaley 622 A 2d 655 (Del Super, 1992)������������������������������������������192 Great Lakes Reinsurance (UK) PLC v Barrios 2009 AMC 482 (SD Fla 2008)�������������������174 Great Lakes Reinsurance (UK) PLC v Durham Auctions, Inc, 5 85 F3d 236; 2010 AMC 185 (5th Cir 2009)����������������������������������������������������������������������������������176, 180 Great Lakes Reinsurance (UK) PLC v Roca 2009 WL 200252 (SD Fla 2009)��������������������176

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Great Lakes Reinsurance (UK) PLC v Sea Cat I LLC 653 FSupp 2d 1193; 2010 AMC 703 (WD Ok 2009)����������������������������������������������������������������������������������������174 Great Lakes Reinsurance (UK) PLC v Southern Marine Concepts Inc 2009 AMC 1093 (SD Tex 2008)�������������������������������������������������������������������������176, 180 Green v Bowden (1759) (noted in Weskett, Theory, Laws and Practice of Insurance 115–18)����������������������������������������������������������������������������������������������������������46 Greenhill v Federal Insurance Co Ltd [1927] 1 KB 65 (CA)������������������������������������������������80 Griffith v American National Fire Ins Co 1997 AMC 2745 (D Del 1996)�������������������������175 Ground Gilbey Ltd v Jardine Lloyd Thompson UK Ltd [2011] EWHC 124 (Comm)�����431 Group Josi Re v Walbrook Insurance Co Ltd [1996] 1 WLR 1152�������������������������������������440 Hammer Waste Pty Ltd v QBE Mercantile Mutual Ltd (2002) 12 ANZ Ins Cas 61-553�����������������������������������������������������������������������������������������������������116 Hampshire Land Co, Re [1896] 2 Ch 743��������������������������������������������������������������������442, 446 Hams v CGU Insurance Ltd [2002] NSWSC 273; (2002) 12 ANZ Ins Cas 61-525�����������127 Harrower v Hutchinson (1869–70) LR 5 QB 584���������������������������������������������������������11, 157 Hartley v James Turner Contracting Pty Ltd [2000] WADC 215���������������������������������������132 Haywood v Rodgers (1804) 4 East 590, 102 ER 957������������������������������������������������49, 51, 157 Hazel v Whitlam [2005] Lloyd’s Rep IR 168������������������������������������������������������������������������436 Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465 (HL)������������������������������165 Helicopter Equipment Ltd v Marine Insurance Co Ltd [1986] 1 NZLR 448 (HC)����������438 Hendry Rae & Court v FAI General Insurance Co Ltd (1991) 5 WAR 376�����������������������121 Heniser v Frankenmuth Mut Ins 534 NW 2d 502, 506 (Mich 1995)���������������������������������186 Henwood v Prudential Insurance Co (1967) 64 DLR (2d) 715 (Sup Ct Can)����������104, 108 Herbohn v NZI Life Ltd [1998] QSC 122; (1998) 10 ANZ Ins Cas [61-410]��������������������119 HIH Casualty and General Insurance Ltd v Chase Manhattan Bank [2003] UKHL 6���������������������������������������������������������������������������������������������������������149, 440 HIH Casualty and General Insurance Co v JLT Risk Solutions [2007] Lloyd’s Rep IR 717������������������������������������������������������������������������������������������������431 HIH Marine Services Inc v Fraser 211 F3d 1359, 2000 AMC 1817 (11th Cir 2000)���������������������������������������������������������������������������������������������������������174, 176 Hing v Security & General Insurance Co (NZ) Ltd (1985) 4 ANZ Insurance Cases 60-696 (HC)������������������������������������������������������������������������������������������������������������438 HJ Inc v Northwestern Bell Telephone Co, 492 US 229; 109 S Ct 2893 (1989)�����������������195 Hobbins v Royal Skandia Life Assurance Ltd [2012] HKCFI 10����������������������������������������431 Hodgson v Marine Ins Co, 9 US 100 (1809)������������������������������������������������������������������������419 Hodgson v Richardson (1764) 1 Black W 463; 96 ER 268����������������������������������������������������46 Holtzhausen v ABSA Bank Ltd 2008 (5) 630 (SCA) 635����������������������������������������������������372 Home Ins Co v Cohen 357 SW 2d 674 (Ky 1962)���������������������������������������������������������������177 Horne v Poland [1922) 2 KB 364���������������������������������������������������������������������������������� 101–03 Horsell International Pty Ltd v Dive Two Pty Ltd [2013] NSWCA 368�����������������������������431 Hough v Guardian Fire and Life Assurance Co Ltd (1902) 18 TLR 273����������������������������429 Hull v Cooper (1811) 14 East 479; 104 ER 685���������������������������������������������������������������������50 Humana Inc v Forsyth 525 US 299; 119 S Ct 710 (1999)�������������������������������������������189, 194 Ins Co v Dunham 78 US (11 Wall) 1; 20 LEd 90 (1870)�����������������������������������������������������173 Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd [1989] QB 433; [1988] 2 WLR 615���������������������������������������������������������������������������������������������133, 148, 168 International Ship Repair & Marine Services v St Paul Fire & Marine Ins Co 922 F Supp 577; 1997 AMC 225 (MD Fla 1996)�������������������������������������������������174

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International Shipping Co (Pty) Ltd v Bentley 1990 (1) SA 680 (A) 701��������������������������372 Involnert Management Inc v Aprilgrange Ltd [2015] EWHC 2225 (Comm)�����������432, 445 Ionides v Pender (1873–74) LR 9 QB 531���������������������������������������������������������������������47, 157 Iscor Pension Fund v Marine and Trade Insurance Co Ltd Co Ltd 1961 (1) SA 178 (T)�������������������������������������������������������������������������������������������������������������������������368 Jerrier v Outsurance Insurance Company 2015 (5) SA 433 (KZP)����������������������369–70, 373 Jetivia v Bilta [2015] UKSC 23���������������������������������������������������������������������������������������������442 Joel v Law Union and Crown Insurance [1908] 2 KB 863 (CA)����������������������������93–94, 100 Jones v Environcom Ltd (No 2) [2010] EWHC 759 (Comm)�������������������������������������������431 K/S Merc-Scandia XXXXII v Lloyd’s Underwriters (The Mercandian Continent) [2001] EWCA Civ 1275����������������������������������������������������������������������������������������������������149 Kalabakas v Chubb Insurance Company of Australia Ltd [2015] VSC 705�����������������������444 Kane Fisheries Ltd v Universal Guarantee Assurance Co Ltd (in liq) HC Christchurch A103/83, 2 July 1986���������������������������������������������������������������������������������������������������������438 Katrina Canal Breaches Litigation, In re 495 F 3d 191 (5th Cir, 2007)������������������������������193 King v Allstate Ins Co 806 F2d 1537 (11th Cir. 1990)�������������������������������������������������416, 420 King v Allstate Ins Co 906 F2d 1537 (5th Cir 1990)�����������������������������������������������������������187 Kingscroft Insurance Co Ltd v Nissan Fire & Marine Insurance Co Ltd (No 1) [1999] Lloyd’s Rep IR 371������������������������������������������������������������������������������������������������440 Kinyû shôji hanrei No 1372, 30. Supreme Court Decision 22 April, 2011�������������������������321 Klaxon Co v Stentor Elec Mfg Co 313 US 487 (1941)��������������������������������������������������������181 Knight v US Fire Ins Co 804 F2d 9; 1987 AMC 1 (2d Cir 1986)��������������������������������174, 420 La Banque Financière de la Cite SA v Westgate Insurance Co Ltd [1990] 1 QB 665���������122 La Banque Financière de la Cité SA v Wetsgate Insurance Co Ltd [1989] 2 All ER 952 (HL); [1990] 2 ALL ER 947 (HL); [1991] 2 AC 249 (HL)������������������������144, 163–65, 169 La Reunion Francaise SA v Christy 122 FSupp 2d 1325; 1999 AMC 2499 (MD Fla 1999)�����������������������������������������������������������������������������������������������������������174, 176 Laidlaw v Organ 15 US 178 (1817)��������������������������������������������������������������������������������������421 Leading Synthetics Pty Ltd v Adroit Insurance Group Pty Ltd [2011] VSC 467���������������118 Lebon v Straits Insurance Co. (1894) 10 TLR 517 (CA)�������������������������������������������������������94 Legros v Great American Ins Co of New York 865 So 2d 786 (La App 3 Cir 2003)����������176 Lewis v Norwich Union Healthcare Ltd [2010] Lloyd’s Rep IR 198����������������������������������436 Lewis v Rucker (1761) 2 Burr 1167; 97 ER 769���������������������������������������������������������������������43 Liberty Life Association of Africa Ltd v De Waal 1999 (4) SA 1177 (SCA)�����������������������368 Life Association of Scotland v Foster and Others (1873) 11 Macph 351���������������������������101 Lindenau v Desborough (1826) 8 B&C 586������������������������������������������������������������������� 90–93 Liverpool & London & Globe Ins Co v Kearney 180 US 132 (1901)���������������������������������187 Locker Woolf Ltd v W Australian Insurance Co [1936) 1 KB 408 (CA)������������������������������94 Lockwood & Lockwood v Insurance Australia Ltd [2010] SASC 140; (2010) 107 SASR 299��������������������������������������������������������������������������������������������������������������������126 London Assurance v Mansel (1879) 11 ChD 363����������������������������������������������������������� 92–94 Louisiana Insurance Guaranty Association v Interstate Fire & Casualty Co 630 So 2d 759 (La 1994)���������������������������������������������������������������������������������������������194 Lucena v Craufurd (1806) 2 Bos & Pul NR 269; 127 ER 630������������������������������������������������42 Lynch v Dunsford (1811) 14 East 494����������������������������������������������������������������������������������439 Lyons v JW Bentley (1944) 77 Ll LR 335���������������������������������������������������������������������102, 436 M’Lanahan v Universal Ins Co 26 US 170 (1928)���������������������������������������������������������������426 Mackintosh v Marshall (1843) 11 M&W 116, 152 ER 739���������������������������������������������49, 90

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Maio v Aetna Inc, 221 F 3d 472 (3d Cir, 2000)��������������������������������������������������������������������195 Manifest Shipping Co Ltd v Uni-Polaris Shipping Co Ltd (‘The Star Sea’) [2001] 1 All ER 193 (Comm)�����������������������������������������������������������������������������������149, 448 Manifest Shipping Co Ltd v Uni-Polaris Shipping Co Ltd (‘The Star Sea’) [2001] 1 All ER 743; [2001] UKHL 1��������������������������������������������������������145, 148–49, 151, 450–51, 453–54 Manifest Shipping Co Ltd v Uni-Polaris Shipping Co Ltd (‘The Star Sea’) [2003] 1 AC 469����������������������������������������������������������������������������������������������������������������177 Mann, MacNeal & Steeves Ltd v Capital Counties Insurance Co [1921] 2 KB 300����������105 Manor Park Homebuilders Ltd v AIRG Europe (Ireland) Ltd [2009] 1 ILRM 190����������420 Marc Rich & Co AG v Portman [1996] 1 Lloyd’s Rep 430; [1997] 1 Lloyd’s Rep 225 (CA)��������������������������������������������������������������������������������������������������������������� 80–81 Markel American Ins Co v Fitt 528 FSupp 2d 1010; 2008 AMC 387 (SD Cal 2007)���������175 Marsh v CGU Insurance Ltd [2003] NTSC 71; (2003) 12 ANZ Ins Cas 61-569���������������128 Marsh v CGU Insurance Ltd [2004] NTCA 1���������������������������������������������������������������������128 Matton Developments Pty Ltd v CGU Insurance Ltd (No 2) [2015] QSC 72�����������453, 455 Maxitherm Boilers Pty Ltd v Pacific Dunlop Ltd [1998] 4 VR 559; (1997) 10 ANZ Ins Cas 61-393���������������������������������������������������������������������������������������������� 132–33 Mayne Nickless Ltd v Pegler [1974] 1 NSWLR 228����������������������������������������������������112, 113 Mayne v Walter (1782) (noted in Park, A System of the Law of Marine Insurances) 195–96�������������������������������������������������������������������������������������������������������������48 Mayne v Walter (1787) in the report in Park, The Law of Marine Insurances (1787) ������������������������������������������������������������������������������������������������������� 89–90 McClain v Coverdell & Co, 272 F Supp 2d 631 (ED Mich 2003)���������������������������������������195 McLanahan v Universal Insurance Co 26 US (1 Pet) 170; 1998 AMC 285 (1828)����� 173–74 Mercantile Steamship Co Ltd v Tyser (1880) LR 7 QBD 73�������������������������������������������������49 Merchants’ & Shippers’ Ins Co v St Paul Fire & Marine Ins Co 219 AD 636; 220 NYS 514 (1st Dept 1927, aff ’d); 246 NY 616; 159 NE 674 (1927); 1927 AMC 577 (NY App Div 1927)�������������������������������������������������������������������������175, 426 Messagemate (Aust) Pty Ltd v National Credit Insurance (Brokers) Pty Ltd [2002] SASC 327; (2003) 12 ANZ Ins Cas 61-546��������������������������������������������������131, 134 Mid Essex Hospital Services NHS Trust v Compass Group UK and Ireland Ltd (t/a Medirest) [2013] EWCA Civ 20��������������������������������������������������������������������������������148 Midaz Pty Ltd v Peter McCarthy Insurance Brokers Pty Ltd (1998) 10 ANZ Ins Cas 61-394; [1999] 1 Qd R 279����������������������������������������������������������������������������������������117 Moens v Heyworth (1842) 10 M&W 147, 157����������������������������������������������������������������������93 Moore Stephens v Stone & Rolls Ltd [2008] EWCA Civ 644����������������������������������������������442 Moradi-Shalal v Fireman’s Fund Insurance Co 758 P 2d 58 (Cal 1988)��������������������190, 192 Morrison v Universal Marine Insurance Co (1872) LR 8 Ex 40; (1873) LR 8 ER 197���������������������������������������������������������������������������������������������������������49, 151, 157 Mukheiber v Raath 1999 (3) SA 1065 (SCA) 1069������������������������������������������������������� 371–72 Mutual and Federal Ins Co v Oudtshoorn Municipality 1985 (1) SA 419������������������������������������������������������������������������������������������������ 148, 353, 368, 372, 451 Mutual Insurance Company of New York v Ontario Metal Products Co [1925] AC 344 (PC)����������������������������������������������������������������������������������������������������������100 Napier Discount Meats Ltd v Commercial Union General Insurance Co Ltd (1992) 7 ANZ Insurance Cases 61-160 (HC)������������������������������������������������������������������438 National Ins Co Ltd v S Joseph [1973] 2 MLJ 195��������������������������������������������������������������420

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National WesternLife Insurance Deferred Annuities Litigation, In re 467 F Supp 2d 1071 (SD Cal 2006)�������������������������������������������������������������������������195 Nautilus Insurance Co v Country Oaks Apartments Ltd, 566 F 3d 452 (5th Cir 2001)�������������������������������������������������������������������������������������������������������������������193 Navegacion Goya SA v Mutual Boiler & Machinery Insurance Co 411 FSupp 929; 1977 AMC 175 (SD NY 1975)������������������������������������������������������������������������������������������178 Neufeld v Balboa Insurance Co 101 Cal Rptr 2d 151 (Cal App 4 Dist 2000)��������������������191 New Hampshire Ins Co v C’est Moi Inc 519 F3d 937; 2008 AMC 931 (9th Cir 2008)�����������������������������������������������������������������������������������������������������������174, 176 New Hampshire Ins Co v Home Savings and Loan Co of Youngstown 2008 WL 2446066 (ND Oh 2008)��������������������������������������������������������������������������� 174–175 New Hampshire Ins Co v Home Savings and Loan Co of Youngstown 581 F3d 420, 2009 AMC 2448 (6th Cir 2009)����������������������������������������������������������������������������������������174 Newsholme Brothers v Road Transport and General Insurance Co Ltd [1929] 2 KB 356����������������������������������������������������������������������������������������������������������������429 Newsholme v Road Transport Insurance Co Ltd [1929] 2 KB 356������������������������������������106 Nobel v Kennoway (1780) 2 Doug 510����������������������������������������������������������������������������������90 North & South Trust Co v Berkeley [1971] 1 All ER 980����������������������������������������������������431 Northeast Georgia Cancer Care LLC v Blue Cross & Blue Shield of Georgia Inc 776 A 2d 1260 (NH, 2001)�����������������������������������������������������������������������������������������192 Novick v Comair Holdings 1979 (2) SA 116 (W)���������������������������������������������������������������369 NRG Victory Australia Ltd v Hudson [2003] WASCA 291�������������������������������������������������121 O & R Jewellers Ltd v Terry [1999] Lloyd’s Rep IR 436������������������������������������������������������436 O’Neill v Phillips [1999] UKHL 24; 1 WLR 1092���������������������������������������������������������������114 Ocean Finance & Mortgages Ltd v Oval Insurance Broking Ltd [2016] EWHC 160 (Comm)������������������������������������������������������������������������������������������������� 431–32 Oehlmann v Metropolitan Life Insurance Co 644 F Supp 2d 521 (MD Pa 2007)�������������190 Ojo v Farmers Group Inc 356 SW 3d 421 (Tex 2011)���������������������������������������������������������188 Ontario Inc v Lloyd’s London, Non-Marine Underwriters (2000) 184 DLR (4th) 687 (ONCA)��������������������������������������������������������������������������������������������420 Orb Holdings Pty Ltd v Lombard Insurance Company (Australia) Ltd [1995] 2 Qd R 51���������������������������������������������������������������������������������������������������������������119 Pacific Gas and Electric Co v State Energy Resources Conservation and Development Commission, 461 US 190; 103 S Ct 1713 (1983)������������������������������������������������������������188 Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co Ltd [1994] 2 Lloyd’s Rep 427; [1995] 1 AC 501 (HL)�������������������������������������������������������������������������� 47, 51, 113, 149, 151, 160–61, 169, 204, 423, 461 Paul v Virginia 75 US 168 (1869)�����������������������������������������������������������������������������������������171 Paxman v Union Assurance Society Ltd (1923) 39 TLR 424����������������������������������������������429 PCW Syndicates v PCW Reinsurers [1996] 1 WLR 1136�������������������������������������������� 440–42 Penn Mut Life Ins Co v Mechanics’ Savings Bank & Trust Co 72 F 413 (6th Cir 1896)���������������������������������������������������������������������������������������������������104, 181, 423 People ex rel Lewis v Safeco Insurance Co of America 414 NYS 2d 823 (NY Sup 1978)����189 People v Far West Ins Co 93 Cal App 4th 792 (2001)����������������������������������������������������������185 People v Surety Ins Co 136 Cal App 3d 556 (1982)�������������������������������������������������������������185 People v Wilcox 53 Cal 2d 651 656–67 (Cal 1060)��������������������������������������������������������������185 Permanent Trustee Australia Co Ltd v FAI General Insurance Co Ltd [2001] NSWCA 20; (2001) 50 NSWLR 679��������������������������������������������������������������������������������116

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Permanent Trustee Australia Co Ltd v FAI General Insurance Co Ltd (in liq) [2003] HCA 25; (2003) 214 CLR 514����������������������������������������������������������������������� 116–18 Permanent Trustee Australia Ltd v FAI General Insurance Company Ltd [2003] HCA 25����������������������������������������������������������������������������������������������������116–18, 443 Planche v Fletcher (1779) 1 Doug 251; 99 ER 164��������������������������������������������������������� 48–49 Porter v GIO Aust Ltd [2003] NSWSC 66; (2003) 12 ANZ Ins Cas 61-573���������������131, 134 Poynton v Cran 1910 AD 205�����������������������������������������������������������������������������������������������370 Prentis Donegan & Partners Ltd v Leeds & Leeds Co Inc [1998] 2 Lloyd’s Rep 326���������445 Prepaid Services Pty Ltd v Atradius Credit Insurance NV (2013) 302 ALR 732; 17 ANZ Ins Cas 61-981; [2013] NSWCA 252����������������������������������������������������������116, 121 President Versekeringsmaatskappy Bpk v Trust Bank van Afrika Bpk en ‘n Ander 1989 (1) SA 208 (A)�������������������������������������������������������������������368 Prime Slight Ltd v Lavarello [2013] UKPC 22��������������������������������������������������������������������220 Proudfoot v Montefiore (1867) LR 2 QB 511����������������������������������������������������������������������439 Prudential Ins Co v Benjamin 3 28 US 408 (1946)�������������������������������������������������������������172 Puritan Ins Co v Eagle Steamship Co SA 779 F2d 866; 1986 AMC 1240 (2d Cir 1985)�������������������������������������������������������������������������������������������������������������174, 422 QBE Mercantile Mutual Ltd v Hammer Waste Pty Ltd [2003] NSWCA 356��������������������116 QBE Seguros v Morales-Vazquez 2016 WL 5462806 (DPR 2016)�������������������������������������179 Qilingile v SA Mutual Life Assurance Society Ltd 1991 (2) SA 399 (W)���������������������������368 Qilingile v SA Mutual Life Assurance Society Ltd 1993 (1) SA 69 (A)����������������������368, 372 R v Immigration Offıcer at Prague Airport [2005] 2 AC 1������������������������������������������ 456–57 R v Vlotman 1912 AD 136����������������������������������������������������������������������������������������������������370 Rabinowitz & another v Nedequity 1980 (1) SA 403 (W)��������������������������������������������������366 Rallod Transportation Co v Continental Insurance Co 727 F2d 851 (9th Cir 1984)��������178 Regina Fur Co. v Bossom [1957] 2 Lloyd’s Rep 466��������������������������������������������������������������98 Rego v Connecticut Placement Facility 593 A 2d 491 (Conn 1991)����������������������������������177 Reid & Co v Harvey (1816) 4 Dow PC 97, 106; 3 ER 1102���������������������������������������������������47 Reid v Hardware Mut Ins Co 166 SE 2d 317 (SC 1969)������������������������������������������������������186 Republic Fire Ins Co of North America v Weides 81 US (14 Wall) 375, 382–83 (1872)�������������������������������������������������������������������������������������������������������������������177 Rivaz v Gerussi (1880) 6 QBD 222�����������������������������������������������������������������������������������������47 Roberts v Fonereau (1742) (noted in Park, A System of the Law of Marine Insurances 176)�������������������������������������������������������������������������������������������������������������������46 Roberts v Avon Ins Co [1956] 2 Lloyd’s Rep. 240����������������������������������������������������������� 96–97 Rocco Pezzano Pty Ltd v Unity Insurance Brokers (1995) 8 ANZ Ins Cas 61-288������������131 Roche v Roberts (1921) 9 Ll LR 59��������������������������������������������������������������������������������������436 Rodman v State Farm Mutual Automobile Insurance Co, 208 NW 2d 903 (Iowa, 1973)����������������������������������������������������������������������������������������������������������������������193 Rookes v Thurmond (1743) (noted in Weskett, Theory, Laws and Practice of Insurance 114–15)����������������������������������������������������������������������������������������������������������46 Roselodge Ltd v Castle [1966] 2 Lloyd’s Rep 113����������������������������������������������������������� 98–99 Ross v Bradshaw (1761) 1 Black W 312; 96 ER 175��������������������������������������������������������46, 51 Rowley v London and North Western Railway Company 1873 LR 8 Ex 231����������������������11 Royal Ins Co v Story 40 So 2d 719 (Ala App 1949), cert denied 40 So 2d 724 (1949)������177 Rozanes v Bowen [1928] 32 LI L Rep 98 (AC)��������������������������������������������������������������88, 419 Ruston Investments Ltd v Nice HCAuckland CP533/93, 6 September 1994���������������������438 SA Eagle v Norman Welthagen Investments (Pty) Ltd 1994 (2) SA 122 (A)���������������������372

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Sandwich Chef of Texas Inc v Reliance National Indemnity Insurance Co 111 F Supp 2d 867 (SD Tex 2000)�������������������������������������������������������������195 Schoolman v H all. [1951] 1 Lloyd’s Rep 139 (CA)������������������������������������������������68, 98, 105 Schultz NO v Meyerson 1933 WLD 199������������������������������������������������������������������������������369 Seaman v Fonnerau (1742) 2 Str 1183; 93 Eng Rep 1115 (1378-1865)���������������������������������������������������������������������������������������������46, 145–46, 448–49 Seaton v Heath [1899] 1 QB 790; [1900] AC 135����������������������������������������������������������11, 420 Security Mutual Casualty Co v Affiliated FM Ins Co 471 F2d 238, 241 (8th Cir 1972)������������������������������������������������������������������������������������������������������������ 426–27 Shepherd v National Mutual Life Association of Australasia Ltd (1995) 8 ANZ Ins Cas 61-233�������������������������������������������������������������������������������������������������������120 Shoolbred v Nutt (1782) (noted in Park, A System of the Law of Marine Insurance, 229a)�����������������������������������������������������������������������������������������������49, 51 Showpiece Homes Corp v Assurance Co of America, 38 P 3d 47 (Colo, 2001)��������������������������������������������������������������������������������������������������������190–91, 192 Sibbald v Hill (1814) 2 Dow 263������������������������������������������������������������������������������������94, 157 Simner v New India Assurance Co Ltd [1995] LRLR 240���������������������������������������������������439 Simpson & Co v Thomson (1877) 3 App Cas 279����������������������������������������������������������������42 Smith v Reynolds (1856) 1 H&N 221; 156 ER 1184��������������������������������������������������������������42 Smoot v Physicians Life Insurance Co, 87 P 3d 545 (NM App 2003)��������������������������������190 Société Anonyme d’Intermediaires Luxembourgeois (SAIL) v Farex Gie [1995] LRLR 116�������������������������������������������������������������������������������������������������������� 440–41 Sphere Drake v European International Underwriting [2004] Lloyd’s Rep IR 525����������431 Spurling v Bradshaw Ltd [1956] 1 WLR 461�����������������������������������������������������������������������134 St Paul Fire and Marine Ins Co v Abhe & Svoboda Inc 798 F3d 715, 2015 AMC 2113 (8th Cir 2015)��������������������������������������������������������������������������������174, 179 St Paul Fire and Marine Ins Co v McConnell Dowell Constructors Ltd [1995] 2 Lloyd’s Rep 116��������������������������������������������������������������������������������������������������113 St Paul Ins Co of Illinois v Great Lakes Turnings Ltd 829 FSupp 982, 1993 AMC 2539 (ND Ill 1993)�����������������������������������������������������������������������������������������174 Steelmet Inc v Caribe Towing Corp 747 F2d 689, 1985 AMC 956 (11th Cir 1 984)���������������������������������������������������������������������������������������������������������174, 176 Stephenson v State Bank of New South Wales (1996) 39 NSWLR 101������������������������������122 Stipcich v Metropolitan Life Insurance Co 277 US 311 (1928)����������������������������������107, 187 Stone v Reliance Mutual Insurance Association [1972] 1 Lloyd’s Rep 469������������������������429 Stoot v Fluor Drilling Services Inc 851 F2d 1514; 1989 AMC 20 (5th Cir 1988)��������������179 Suid-Afrikaanse Nasionale Lewensassuransiemaatskappy Bpk v Louw & Collins Afslaers (Edms) Bpk 1997 (1) SA 592 (A) 608���������������������������������������������������372 Sumitomo Marine & Fire Ins Co v Cologne Reinsurance Co 75 NY 2d 295 (NY 1990)��������������������������������������������������������������������������������������������������������������������������422 Sumitomo Marine & Fire Ins Co v Cologne Reinsurance Co 552 NE 2d 139 (NY 1990)��������������������������������������������������������������������������������������������������������������������������427 Sun Mutual Ins Co v Ocean Ins Co 107 US 485 (1883)������������������������������������������������������426 Suncorp General Insurance Ltd v Cheihk [1999] NSWCA 238; (1999) 10 ANZ Ins Cas 61-442�����������������������������������������������������������������������������������������������������120 Suncorp Metway Insurance Limited v Mason Place Pty Ltd [2011] QDC 209�����������������130 Synergy Health (UK) Ltd v CGU Insurance Plc [2010] EWHC 2583 (Comm)����������������431 Taishin-in 26.6.1915 (Minroku 21.1044)�����������������������������������������������������������������������������303

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Talga v MBC International Ltd (1976) 133 CLR 622����������������������������������������������������������122 Tarzian v West Bend Mutual Fire Ins Co 221 NE 2d 293 (Ill App 1966)���������������������������177 Tate & Sons v Hyslop (1885) 15 QBD 368�����������������������������������������������������������������������������49 Tennant v Henderson (1813) 1 Dow PC 324; 3 ER 716��������������������������������������������������������49 The Bedouin [1894] P 1����������������������������������������������������������������������������������������������������������49 The Victorian Managed Insurance Authority v Dura (Australia) Constructions Pty Ltd (ACN 004 284 191) (Domestic Building) [2011] VCAT 113������������������������������������������132 Thebes Shipping Inc v Assicurazioni Ausonia Spa 5 99 FSupp 405 (SD NY 1 984)����������174 Thomson v Buchanan (1782) 4 Brown PC 482; 2 ER 329��������������������������������������������� 49–50 Thomson v Weems (1884) 9 App CM 671����������������������������������������������������������������������������96 Thornton v Shoe Lane Parking Ltd [1971] 2 QB 163; [1971] 1 Lloyd’s Rep 289; [1970] EWCA Civ 2��������������������������������������������������������������������������������������������������134, 168 Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; (2004) 219 CLR 165����������133 Tosich v Tasman Investment Management Ltd (2008) 250 ALR 274; [2008] FCA 377���������������������������������������������������������������������������������������������������������117, 444 Travelers Indem Co v Scor Reinsurance Co 62 F3d 74; 76 (2d Cir 1995)��������������������������416 Tremaine v Phoenix Assurance Co 4 5 P2d 210; 1935 AMC 753; (Cal App 1 Dist 1935)�������������������������������������������������������������������������������������������������������176 Unigard Sec Ins Co Inc v North River Ins Co 4 F3d 1049; 1054 (2d Cir 1993)�����������������416 United States v Fabe 508 US 491 (1991)������������������������������������������������������������������������������172 United States v South-Eastern Underwriters 322 US 533 (1944)���������������������������������������171 US Department of Treasury v Fabe 508 US 113 S Ct 2202 (1993)�������������������������������������189 US v Turkette 452 US 576; 101 S Ct 2524 (1981)����������������������������������������������������������������195 Vallance v Dewar (1808) 1 Camp 503; 170 ER 1036�������������������������������������������������������������49 Village Northridge Homeowners’ Association v State Farm Fire and Casualty Co 237 P 3d 598 (Cal 2010)����������������������������������������������������������������������� 190–91 Wagner v Travelers Property Casualty Co of America, 209 P 3d 1119 (Colo App 2008)���������������������������������������������������������������������������������������������������������������191 Weber v Santam Versekeringsmaatskappy Bpk 1983 (1) SA 381 (A)���������������������������������368 Weiss v First Unum Life Insurance Co 482 F 3d 254 (3d Cir 2007)�����������������������������������195 Westbury v Aberdein (1837) 2 M & W 267; 150 ER 756������������������������������������������������������50 Whiten v Pilot Insurance Co [2002] DLR (4th) 257; 2002 SCC 18�����������������������������������421 Wilburn Boat Co v Fireman’s Fund Insurance Co 348 US 310; 75 S Ct 368 (1955)����������������������������������������������������������������������������������������������������� 173–74 Wiley v African Realty Trust 1908 TH 104��������������������������������������������������������������������������370 Williams v Touchet (1759) (noted in Weskett, Theory, Laws and Practice of Insurance 118)����������������������������������������������������������������������������������������������������������������46 Wilson v Ducket (1762) 3 Burr 1361, 97 ER 874������������������������������������������������������������������46 Windsor Mount Joy Mutual Insurance Co v Giragosian 57 F3d 50; 1995 AMC 2542 (1st Cir 1995)����������������������������������������������������������������������������������������178 Winter v Irish Life [1995] 2 Lloyd’s Rep 274�����������������������������������������������������������������������436 Wisconsin Public Intervenor v Mortier, 501 US 597; 111 S Ct 2476 (1991)����������������������188 WISE Underwriting Agency Ltd v Grupo Nacional Provincial SA [2004] EWCA Civ 962���������������������������������������������������������������������������� 53, 80–81, 157, 426 Wise Underwriting Agency v Grupo National Provincial SA [2004] 14 Mealey’s Reins Rep No 23 A (QB 2003); [2004] 15 Mealey’s Reins Rep No 7 a (CA 2004)�������������������������������������������������������������������������������������������������������426

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Wolff v Horncastle (1798) 1 Bos & Pul 316�����������������������������������������������������������������147, 449 Yam Seng PTE Ltd v International Trade Corporation Ltd [2013] EWHC 111 (QB)������148 Yamaha Motor Corp v Calhoun 516 US 199; 116 S Ct 619 (1996)������������������������������������173 Yorke v Yorkshire Insurance Co [1918] 1 KB. 662�������������������������������������������������������� 99–100 Zurich Australian Insurance Ltd, Re [1999] 2 Qd R 203��������������������������������������453, 455–57 Zurich General Accident and Liability Insurance Co v Leven 1940 SC 406����������������������������������������������������������������������������������� 4, 103, 150, 152, 263, 459

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Australia Corporations Act������������������������������������������������������������������������������������������� 2, 6, 124, 430, 437 Parts 7.6–7.9����������������������������������������������������������������������������������������������������������������������136 Electronic Transactions Act 1999 (Cth)�����������������������������������������������������������������������124, 135 s 5���������������������������������������������������������������������������������������������������������������������������������������136 s 9(1)(d)�����������������������������������������������������������������������������������������������������������������������������136 Financial Services Reform Act 2001 (Australia)������������������������������������������������������������������430 Insurance (Brokers and Agents) Act 1984 (Australia)��������������������������������������������������������437 s 12�������������������������������������������������������������������������������������������������������������������������������������430 Insurance Contracts Act (ICA) 1984 (Cth) (Australia)����������������������������������������������������������1 s 8�����������������������������������������������������������������������������������������������������������������������112, 137, 139 s 9�����������������������������������������������������������������������������������������������������������������������112, 137, 139 s 9A������������������������������������������������������������������������������������������������������������������������������������138 s 11(10)(a)�����������������������������������������������������������������������������������������������������������������120, 129 s 11(10)(b)�������������������������������������������������������������������������������������������������������������������������120 s 11(9)��������������������������������������������������������������������������������������������������������������������������������116 s 12�����������������������������������������������������������������������������������������������������������������������������113, 115 s 13���������������������������������������������������������������������������������������������������������������113, 132, 454–55 s 14���������������������������������������������������������������������������������������������������������������113, 132, 134–35 s 21����������������������������������������������������������������������������������������������������� 114–116, 123, 433, 443 s 21(1)����������������������������������������������������������������������������������������������������������112, 115–18, 460 s 21(1)(a)��������������������������������������������������������������������������������������������������� 116, 118, 433, 443 s 21(1)(b)��������������������������������������������������������������������������������������������������� 116, 118, 433, 443 s 21(2)������������������������������������������������������������������������������������������������������������������������� 118–19 s 21(3)������������������������������������������������������������������������������������������������������������������118–19, 206 s 21(1)(a)���������������������������������������������������������������������������������������������������������������������������118 s 21(1)(b)���������������������������������������������������������������������������������������������������������������������������118 s 21A���������������������������������������������������������������������������������������������������� 2, 5, 114–21, 123, 140 s 21B���������������������������������������������������������������������������������������������������� 2, 5, 114–21, 123, 140 ss 21A and 21B����������������������������������������������������������������������������������������������������2, 5, 114–21 s 22����������������������������������������������������������������������������������������� 112, 115–21, 123, 128–29, 463 s 22(1)(d)���������������������������������������������������������������������������������������������������������������������������112 s 22(3)��������������������������������������������������������������������������������������������������������������������������������120 s 22(6)��������������������������������������������������������������������������������������������������������������������������������120 s 23�������������������������������������������������������������������������������������������������������������������������������������114 s 27�������������������������������������������������������������������������������������������������������������������������������������114 s 27A����������������������������������������������������������������������������������������������������������������������������������114 s 28�����������������������������������������������������������������������������������������������������������������������433–34, 437

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s 28(1)�������������������������������������������������������������������������������������������������� 115, 121, 433–34, 460 s 28(2)������������������������������������������������������������������������������������������������������������������121, 433–34 s 28(3)����������������������������������������������������������������������������������������������������112, 121–22, 433–34 s 29������������������������������������������������������������������������������������������������������������������������������ 433–34 s 31�����������������������������������������������������������������������������������������������������������������113, 122, 435–6 s 31(1)����������������������������������������������������������������������������������������������������������������122, 433, 435 s 31(2)����������������������������������������������������������������������������������������������������������������122, 433, 435 s 31(3)������������������������������������������������������������������������������������������������������������������������122, 435 s 31(3)(a)�������������������������������������������������������������������������������������������������������������������433, 435 s 31(3)(b)�������������������������������������������������������������������������������������������������������������������433, 435 s 31(4)��������������������������������������������������������������������������������������������������������������������������������122 s 33�������������������������������������������������������������������������������������������������������������������������������������114 s 33A��������������������������������������������������������������������������������������������������������������������������114, 124 s 33B��������������������������������������������������������������������������������������������������������������������������114, 124 s 33C��������������������������������������������������������������������������������������������������������������������������114, 124 s 33D��������������������������������������������������������������������������������������������������������������������������114, 124 ss 33A, 33B, 33C and 33D�����������������������������������������������������������������������������������������������������6 s 35�������������������������������������������������������������������������������������������������123, 125–26, 129, 134–35 s 35(2)������������������������������������������������������������������������������������������������������������������������� 125–29 s 37�����������������������������������������������������������������������������������������������������������������������123, 129–35 s 37C����������������������������������������������������������������������������������������������������������������������������������124 s 37D����������������������������������������������������������������������������������������������������������������������������������124 s 44(1)��������������������������������������������������������������������������������������������������������������������������������123 s 49(1)��������������������������������������������������������������������������������������������������������������������������������123 s 52�������������������������������������������������������������������������������������������������������������������������������������112 s 58������������������������������������������������������������������������������������������������������������������������������ 123–24 s 68(1)��������������������������������������������������������������������������������������������������������������������������������123 s 71������������������������������������������������������������������������������������������������������������������������������ 134–35 s 71(2)��������������������������������������������������������������������������������������������������������������������������������134 Insurance Contracts Amendment Act 2012 (Cth)��������������������������������������������������������������124 Insurance Contracts Amendment Act 2013 (Australia)���������������������������������������������433, 443 Insurance Contracts Regulations 1985 (Cth)����������������������������������������������������������������������123 Reg 2B����������������������������������������������������������������������������������������������������������������������������5, 119 Regs 5–28���������������������������������������������������������������������������������������������������������������������������124 Reg 14(a)(xi)���������������������������������������������������������������������������������������������������������������������125 Reg 29D�����������������������������������������������������������������������������������������������������������������������������126 Marine Insurance Act 1909 (Cth) (MIA 1909) (Australia)����������������������������������112, 138–39 s 4���������������������������������������������������������������������������������������������������������������������������������������137 s 25�������������������������������������������������������������������������������������������������������������������������������������437 ss 24–26�����������������������������������������������������������������������������������������������������������������������������433 UK Consumer Insurance (Disclosure and Representations) Act 2012 [UK]��������2, 113, 139–40, 143–45, 155, 162, 169, 211, 264, 354, 429, 433, 456, 459, 461–62, 466 ss 2 and 3�������������������������������������������������������������������������������������������������������������������140, 390

Table of Statutes

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s 2���������������������������������������������������������������������������������������������������������������������������52, 151–52 s 2(2)���������������������������������������������������������������������������������������������������������� 5, 52, 151–54, 435 s 2(5)����������������������������������������������������������������������������������������������������������������������������������150 s 3�����������������������������������������������������������������������������������������������������������������������������������������52 s 3(1)����������������������������������������������������������������������������������������������������������������������������������153 s 3(2)����������������������������������������������������������������������������������������������������������������������������52, 435 s 3(2)(e)�����������������������������������������������������������������������������������������������������������������52, 435–36 s 3(3)����������������������������������������������������������������������������������������������������������������������������������153 s 3(5)����������������������������������������������������������������������������������������������������������������������������������153 s 4(1)��������������������������������������������������������������������������������������������������������������������������� 152–54 s 4(2)����������������������������������������������������������������������������������������������������������������������������������154 s 5���������������������������������������������������������������������������������������������������������������������������������52, 435 s 5(1)����������������������������������������������������������������������������������������������������������������������������������154 s 5(2)����������������������������������������������������������������������������������������������������������������������������������154 s 5(3)����������������������������������������������������������������������������������������������������������������������������������154 s 5(5)(a)�����������������������������������������������������������������������������������������������������������������������������153 Schedule 1 para 6��������������������������������������������������������������������������������������������������������������154 Schedule 1 para 7��������������������������������������������������������������������������������������������������������������154 Schedule 1 para 8��������������������������������������������������������������������������������������������������������������155 Schedule 2�������������������������������������������������������������������������������������������������������������������������435 Financial Services and Market Act 2000 s 228(2)������������������������������������������������������������������������������������������������������������������������������153 Insurance Act 2015 (UK)����������������������������������������������������������������� 2, 5, 80, 113, 139, 143–45, 150–51, 169, 186, 211, 264, 413, 433, 451, 456, 457, 460, 462, 466 s 3(1)����������������������������������������������������������������������������������������������������������������������������������155 s 3(2)����������������������������������������������������������������������������������������������������������������������������������155 s 3(3)����������������������������������������������������������������������������������������������������������������������������������155 ss 3(3)(a) and (b)����������������������������������������������������������������������������������������������������������������52 s 3(4)������������������������������������������������������������������������������������������������������������������������������������52 s 3(4)(a)���������������������������������������������������������������������������������������������������������������������� 156–57 s 3(4)(b)�����������������������������������������������������������������������������������������������������������������������81, 157 ss 3(4) and 3(5)�������������������������������������������������������������������������������������������������������������������52 s 3(5)������������������������������������������������������������������������������������������������������������������156, 159, 463 ss 3–7�����������������������������������������������������������������������������������������������������������������������������������52 s 4(3)����������������������������������������������������������������������������������������������������������������������������������158 s 4(4)����������������������������������������������������������������������������������������������������������������������������������158 s 4(5)����������������������������������������������������������������������������������������������������������������������������������158 s 4(7)����������������������������������������������������������������������������������������������������������������������������������158 s 4(8)(a)�����������������������������������������������������������������������������������������������������������������������������158 s 4(8)(b)�����������������������������������������������������������������������������������������������������������������������������158 s 4(8)(c)�����������������������������������������������������������������������������������������������������������������������������158 s 7(2)��������������������������������������������������������������������������������������������������������������������������� 156–57 s 7(3)����������������������������������������������������������������������������������������������������������������������������������161 s 7(4)����������������������������������������������������������������������������������������������������������������������������������161 s 7(5)����������������������������������������������������������������������������������������������������������������������������������161 s 8�����������������������������������������������������������������������������������������������������������������������������������������52

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s 8(1)����������������������������������������������������������������������������������������������������������������������������������161 s 8(1)(a)�����������������������������������������������������������������������������������������������������������������������������161 s 10(7)(a)���������������������������������������������������������������������������������������������������������������������������173 s 15(1)��������������������������������������������������������������������������������������������������������������������������������162 s 16(2)���������������������������������������������������������������������������������������������� 6, 162, 167, 203, 206–09 s 17(2)����������������������������������������������������������������������������������������������������������������162, 166, 168 s 17(3)����������������������������������������������������������������������������������������������������������������������6, 167–68 s 21(1)–(3)���������������������������������������������������������������������������������������������������������������������������52 s 23(2)��������������������������������������������������������������������������������������������������������������������������������173 Sch 1������������������������������������������������������������������������������������������������������������������������������������52 Schedule 1 para 2��������������������������������������������������������������������������������������������������������������161 Schedule 1 para 5��������������������������������������������������������������������������������������������������������������162 Marine Insurance Act 1906 (‘MIA 1906’) (UK)����������������������������������2, 52, 61, 137, 139, 144, 151, 433, 448, 465, 469 s 17������������������������������������������������������������������������������������������ 50, 149–50, 163–64, 166, 168, 200–01, 447, 451, 454–57, 466 s 18����������������������������������������������������������������������������������50, 53, 149, 166, 420, 447, 456, 466 s 18(1)������������������������������������������������������������������������������������������������� 50, 156, 164, 166, 420, 440, 447, 456, 466 s 18(2)�������������������������������������������������������������������������������������������������� 50, 153, 160, 423, 439 s 18(3)������������������������������������������������������������������������������������������ 51, 156, 159, 447, 456, 466 s 18(5)�������������������������������������������������������������������������������������������������������� 156, 447, 456, 466 s 19��������������������������������������������������������������������������������������� 156, 155–56, 169, 447, 456, 466 s 19(b)�������������������������������������������������������������������������������������������������������� 436, 447, 456, 466 s 20������������������������������������������������������������������������� 149–50, 155–56, 166, 169, 447, 456, 466 s 20(4)��������������������������������������������������������������������������������������������������������������������������������156 s 20(5)��������������������������������������������������������������������������������������������������������������������������������156 s 33�������������������������������������������������������������������������������������������������������������������������������������173 Marine Insurance Act 1907 (UK) s 17�������������������������������������������������������������������������������������������������������������������������������������150 Unfair Contract Terms Act 1967������������������������������������������������������������������������������������������151 US 18 Delaware Code s 2711���������������������������������������������������������������������������������������������������������������������������������175 8 Vt Stat Ann § 3736��������������������������������������������������������������������������������������������������������������������������������184 Alabama Code § 27-14-7���������������������������������������������������������������������������������������������������������������������������184 KRS § 304.14-110����������������������������������������������������������������������������������������������������������������������184 Massachusetts General Laws ch 175 s 186�����������������������������������������������������������������������������������������������������������������������������������175 McCarran-Ferguson Act���������������������������������������������������������������������������������171, 188–89, 194 Organized Crime Control Act of 1970, Pub L No 91-452 § 901(a)�����������������������������������������������������������������������������������������������������������������������������194 § 904(a)�����������������������������������������������������������������������������������������������������������������������������195

Table of Statutes

 xxxv

Racketeer Influenced and Corrupt Organizations Act (RICO) 18 USC����������������������������196 §§ 1961–68������������������������������������������������������������������������������������������������������������������������194 § 1961(4)���������������������������������������������������������������������������������������������������������������������������195 Restatement of the Law of Liability Insurance (RLLI)��������������������������������������������������������172 s 7���������������������������������������������������������������������������������������������������������������������������������������182 s 8�������������������������������������������������������������������������������������������������������������������������������� 182–83 s 9�������������������������������������������������������������������������������������������������������������������������������� 182–83 s 30�������������������������������������������������������������������������������������������������������������������������������������185 Unfair Claims Deceptive Practices Act (UCDPA), Co Rev Stat Ann § 10-3-1101�����������������������������������������������������������������������������������������������������������������������190 Unfair Competition Law (UCL)(Cal Bus & Prof Code) § 17200����������������������������������������������������������������������������������������������������������������������190, 192 Unfair Insurance Practice Act (40 Penn Stat Ann) §§ 1171.1–1171.15������������������������������������������������������������������������������������������������������������190 West’s Ann Cal Ins Code § 790.03���������������������������������������������������������������������������������������������������������������������190, 192 China Consumer Rights and Interest Protection Act 2013������������������������������������������������������������222 s 28�������������������������������������������������������������������������������������������������������������������������������������223 Contract Act 1999���������������������������������������������������������������������������������������������������������200, 222 s 39�����������������������������������������������������������������������������������������������������������������������214–15, 219 s 52�����������������������������������������������������������������������������������������������������������������������������208, 210 s 54������������������������������������������������������������������������������������������������������������������������������ 208–10 s 54(2)��������������������������������������������������������������������������������������������������������������������������������210 Insurance Act 1995 (Chinese)��������������������������������������������������������������������������������������199, 200 s 17(1)��������������������������������������������������������������������������������������������������������������������������������214 Insurance Act 2009 (Chinese)�������������������������������������������������������������������� 2, 199, 204–05, 212 s 5�������������������������������������������������������������������������������������������������������������������������200–01, 213 s 16���������������������������������������������������������������������������������������������������201–03, 206–07, 209–10 s 16(2)������������������������������������������������������������������������������������������������������������������203, 206–09 s 16(4)��������������������������������������������������������������������������������������������������������������������������������207 s 16(5)��������������������������������������������������������������������������������������������������������������������������������207 s 17����������������������������������������������������������������������������������������� 201, 203, 213–14, 219–23, 227 s 17(1)������������������������������������������������������������������������������������������������������������������213–14, 218 s 17(2)��������������������������������������������������������������������������������������������213–14, 216–18, 220, 221 Maritime Act 1992����������������������������������������������������������������������������������������������������������������202 s 222(1)������������������������������������������������������������������������������������������������������������������������������204 PEICL Article����������������������������������������������������������������������������������������������������������������������������3 Article 2: 102 (1)�������������������������������������������������������������������������������������������������394–95, 397 SPC Interpretation II to the Insurance Act����������������������������������������������������������199, 203, 227 s 5���������������������������������������������������������������������������������������������������������������������������������������204 s 6(1)��������������������������������������������������������������������������������������������������������������������������202, 205 s 7�������������������������������������������������������������������������������������������������������������������������������209, 211 s 11(1)��������������������������������������������������������������������������������������������������������������������������������216 s 11(2)������������������������������������������������������������������������������������������������������������������������217, 223 s 12�������������������������������������������������������������������������������������������������������������������������������������216

xxxvi 

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s 13(1)��������������������������������������������������������������������������������������������������������������������������������217 s 13(2)������������������������������������������������������������������������������������������������������������������������218, 221 Tort Liability Act 2009����������������������������������������������������������������������������������������������������������207 France Code Civil (the French Civil Code)���������������������������������������������������������������230, 233–34, 248 Art. 1112-1��������������������������������������������������������������������������������������������������������232, 249, 454 Art. 1130����������������������������������������������������������������������������������������������������������������������������237 Art. 1132����������������������������������������������������������������������������������������������������������������������������237 Art. 1134����������������������������������������������������������������������������������������������������������������������������231 Art. 1135����������������������������������������������������������������������������������������������������������������������������231 Art. 1137����������������������������������������������������������������������������������������������������������������������������237 Art. 1188����������������������������������������������������������������������������������������������������������������������������231 Art. 1194����������������������������������������������������������������������������������������������������������������������������231 Code de Commerce������������������������������������������������������������������������������������������������������233, 248 Art. 348������������������������������������������������������������������������������������������������������������������������������234 Code de la consommation (Consumer code) Art. L 224-102�������������������������������������������������������������������������������������������������������������������250 Code des Assurances�����������������������������������������������������������������������������������������������������235, 241 Insurance Code (the Code)������������������������������������������������������������������ 124, 230, 232, 243, 460 Art. A 112��������������������������������������������������������������������������������������������������������������������������250 Art. A 112-1�����������������������������������������������������������������������������������������������������������������������249 Art. L 112-2���������������������������������������������������������������������������������������������������������������� 249–50 Art. L 112-2-1��������������������������������������������������������������������������������������������������������������������249 Art. L 112-3���������������������������������������������������������������������������������������������������������������242, 250 Art. L 112-10���������������������������������������������������������������������������������������������������������������������249 Art. L 113-2����������������������������������������������������������������������������5, 235, 237, 242, 245, 389, 414 Art. L 113-8�������������������������������������������������������������������������������������236–38, 241–42, 244–48 Art. L 113–9���������������������������������������������������������������������������������������������������������236–37, 241 Art. L 132-5-1������������������������������������������������������������������������������������������������������������� 251–52 Art. L 132-5-2������������������������������������������������������������������������������������������������������������� 251–53 Art. L 141-4���������������������������������������������������������������������������������������������������������������249, 255 Art. L 172-2�����������������������������������������������������������������������������������������������������������������������235 Art. L 520-1���������������������������������������������������������������������������������������������������������249, 255–56 Art R 112–2�����������������������������������������������������������������������������������������������������������������������250 Art R 112-3������������������������������������������������������������������������������������������������������������������������250 Art. R 211-13���������������������������������������������������������������������������������������������������������������������237 Ordonnance de la Marine d’ Août 1681 (Ordonnance of 1681)������������������������������������������234 Germany Allgemeine Deutsche Seeversicherung-Bedingungen 1919 (ADS—German General Rules of Marine Insurance) s 13�������������������������������������������������������������������������������������������������������������������������������������262 Bürgerliches Gesetzbuch (BGB—German Civil Code)������������������������������������������������265, 454 s 13�������������������������������������������������������������������������������������������������������������������������������������280 s 123���������������������������������������������������������������������������������������������������������������������������� 277–78

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 xxxvii

s 126b�����������������������������������������������������������������������������������������������������������������������������265, 281 s 166�����������������������������������������������������������������������������������������������������������������������������������277 s 241(2)����������������������������������������������������������������������������������������������������������������278, 285–86 s 242���������������������������������������������������������������������������������������������������������������������278, 285–86 s 278�����������������������������������������������������������������������������������������������������������������������������������286 s 278(1)������������������������������������������������������������������������������������������������������������������������������282 s 305�����������������������������������������������������������������������������������������������������������������������������������280 ss 307 to 309����������������������������������������������������������������������������������������������������������������������264 s 311(2)����������������������������������������������������������������������������������������������������������������������� 285–86 s 314�����������������������������������������������������������������������������������������������������������������������������������272 General Equal Treatment Act (Allgemeines Gleichbehandlungsgesetz) ������������������������������267 Insurance Distribution Directive 2016/97/EU of 1 February 2016 (IDD)����������387, 405–06 Article 20���������������������������������������������������������������������������������������������������������������������������290 Article 22���������������������������������������������������������������������������������������������������������������������������290 Insurance Mediation Directive 2002/92/EC of 9 December 2002������������������������������290, 387 PEICL�������������������������������������������������������������������������������������������������������� 3, 209, 213, 268, 286, 381–91, 393–94, 396, 398–400, 408–11 Article 2:101����������������������������������������������������������������������������������������������������������������������269 Article 6:101����������������������������������������������������������������������������������������������������������������������277 VVG 1908��������������������������������������������������������������������������������������������������������������263, 274, 285 VVG 2008����������������������������������������������������������������������������������������������������������������������261, 288 s 6�����������������������������������������������������������������������������������������������������������278, 285–87, 289–90 s 6(1)��������������������������������������������������������������������������������������������������������������������������� 285–86 ss 6(1) to 6(4)��������������������������������������������������������������������������������������������������������������������285 s 6(5)��������������������������������������������������������������������������������������������������������������������������286, 289 s 6(6)��������������������������������������������������������������������������������������������������������������������285–86, 290 s 7�������������������������������������������������������������������������������������������������������������������������������� 278–85 ss 7(1) to 7(4)��������������������������������������������������������������������������������������������������������������������279 s 7(5)����������������������������������������������������������������������������������������������������������������������������������279 s 8�������������������������������������������������������������������������������������������������������������������������278, 283–84 s 8(2)����������������������������������������������������������������������������������������������������������������������������������283 s 9(1)��������������������������������������������������������������������������������������������������������������������������� 283–84 s 9(2)����������������������������������������������������������������������������������������������������������������������������������284 s 19�����������������������������������������������������������������������������������������������������������������263–72, 277–78 s 19(1)����������������������������������������������������������������������������������������������������263–67, 270–72, 277 s 19(2)��������������������������������������������������������������������������������������������264–65, 267, 272, 275–77 s 19(3)��������������������������������������������������������������������������������������263–65, 267, 271–72, 275–77 s 19(4)����������������������������������������������������������������������������������������������������263–65, 267, 271–77 s 19(5)���������������������������������������������������������������������������� 263–65, 267, 271–72, 274, 277, 463 s 20������������������������������������������������������������������������������������������������������� 263–65, 267, 272, 277 s 21������������������������������������������������������������������������������������������������������� 263–65, 267, 272, 277 s 21(1)��������������������������������������������������������������������������������������������264–65, 267, 272, 276–77 s 21(2)������������������������������������������������������������������������������������������ 264–65, 267, 272, 274, 277 s 21(3)��������������������������������������������������������������������������������������������264–65, 267, 272, 276–78 s 22���������������������������������������������������������������������������������������������������������264–65, 267, 277–78 ss 24–26�����������������������������������������������������������������������������������������������������������������������������270

xxxviii 

Table of Statutes

s 32(2)��������������������������������������������������������������������������������������������������������������������������������271 s 39(1)��������������������������������������������������������������������������������������������������������������������������������273 s 47���������������������������������������������������������������������������������������������������������������������264, 267, 277 s 47(1)��������������������������������������������������������������������������������������������������������������������������������277 s 49(1)��������������������������������������������������������������������������������������������������������������������������������279 s 56(1)��������������������������������������������������������������������������������������������������������������������������������264 s 59(3)��������������������������������������������������������������������������������������������������������������������������������282 s 61�����������������������������������������������������������������������������������������������������������������������������286, 290 s 63�����������������������������������������������������������������������������������������������������������������������286, 289–90 s 69�����������������������������������������������������������������������������������������������������������������������������275, 289 s 69(1)��������������������������������������������������������������������������������������������������������������������������������271 s 69(3)��������������������������������������������������������������������������������������������������������������������������������272 s 70�����������������������������������������������������������������������������������������������������������������������������271, 275 s 72�����������������������������������������������������������������������������������������������������������������������������271, 275 s 131�����������������������������������������������������������������������������������������������������������������������������������264 s 157���������������������������������������������������������������������������������������������������������������������������264, 272 s 193(2)������������������������������������������������������������������������������������������������������������������������������277 s 194(1)������������������������������������������������������������������������������������������������������������������������������264 s 194(4)������������������������������������������������������������������������������������������������������������������������������272 s 206�����������������������������������������������������������������������������������������������������������������������������������272 s 209�����������������������������������������������������������������������������������������������������������������������������������262 s 210�������������������������������������������������������������������������������������������������������������������264, 266, 291 s 210(2)��������������������������������������������������������������������������������������������������������������264, 279, 286 VVG-Informationspfl ichtenverordnung (VVG-InfoV—Regulation on Duties of Information Relating to Insurance Contracts�����������������������������������������278–79, 284–85 s 2���������������������������������������������������������������������������������������������������������������������������������������280 s 2(4)����������������������������������������������������������������������������������������������������������������������������������280 s 2(5)����������������������������������������������������������������������������������������������������������������������������������280 s 3���������������������������������������������������������������������������������������������������������������������������������������280 s 4���������������������������������������������������������������������������������������������������������������������������������������280 s 4(2)����������������������������������������������������������������������������������������������������������������������������������281 s 4(5)����������������������������������������������������������������������������������������������������������������������������������281 s 5���������������������������������������������������������������������������������������������������������������������������������������280 s 6���������������������������������������������������������������������������������������������������������������������������������������280 Japan Act on Sales, etc of Financial Instruments (Japanese)����������������������������������������312, 314, 316 Art. 3(1)�����������������������������������������������������������������������������������������������������������������������������316 Art. 3(2)�����������������������������������������������������������������������������������������������������������������������������316 Art. 4����������������������������������������������������������������������������������������������������������������������������������316 Art. 5����������������������������������������������������������������������������������������������������������������������������������316 Art. 6����������������������������������������������������������������������������������������������������������������������������������316 Civil Code (Japanese)�����������������������������������������������������������������297–99, 308–09, 315, 317–22 Art. 1(2)���������������������������������������������������������������������������������������������������������������������� 298–99 Art. 95��������������������������������������������������������������������������������������������������������������������������������318 Art. 101(1)�������������������������������������������������������������������������������������������������������������������������308 Art. 709����������������������������������������������������������������������������������������������������������������309, 318–19

Table of Statutes

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Commercial Code 1899 (Japanese)���������������������������� 293, 295–96, 299, 302, 304–07, 309–10 Arts. 644(1), 678(1)����������������������������������������������������������������������������������������������������������307 Arts. 645(2) and 678(2)����������������������������������������������������������������������������������������������������309 Comprehensive Guideline for Supervision of Insurance Companies����������������297, 312, 314 Guideline II-3-3-2(8)��������������������������������������������������������������������������������������������������������312 Guideline IV-1-5���������������������������������������������������������������������������������������������������������������312 Guideline IV-1-7���������������������������������������������������������������������������������������������������������������312 Consumer Contract Act 2000 (Japanese)����������������������������������������������������������������7, 297, 312 Art. 2(1)���������������������������������������������������������������������������������������������������������������������297, 317 Art. 4(1)�����������������������������������������������������������������������������������������������������������������������������317 Art. 4(2)�����������������������������������������������������������������������������������������������������������������������������317 Art. 4(4)�����������������������������������������������������������������������������������������������������������������������������317 Art. 48��������������������������������������������������������������������������������������������������������������������������������317 Insurance Act 2008 (Japanese)�����������������������������������������������������������������������������293–312, 321 Arts. 4, 37 and 55��������������������������������������������������������������������������������������������������������������299 Arts. 7, 41 and 70��������������������������������������������������������������������������������������������������������������300 Arts. 28(2)1, 55(2)1 and 84(2)1���������������������������������������������������������������������������������������307 Arts. 28(2)2, 55(2)2 and 84(2)2���������������������������������������������������������������������������������������307 Arts. 28(2)3, 55(2)3 and 84(2)3���������������������������������������������������������������������������������������307 Arts. 28(3), 37(3) and 55(3)���������������������������������������������������������������������������������������������309 Arts. 28(4), 55(4) and 84(4)���������������������������������������������������������������������������������������������309 Arts. 30, 57 and 86����������������������������������������������������������������������������������������������������305, 310 Arts. 31(2)(i), 59(2)(i) and 88(2)(i).��������������������������������������������������������������������������������309 Art 36���������������������������������������������������������������������������������������������������������������������������������296 Insurance Business Act (‘IBA’)���������������������������������������������������������� 7, 293, 297, 303, 308–09, 311–15, 317, 319, 321–22 Art. 227-2��������������������������������������������������������������������������������������������������������������������������314 Art. 283������������������������������������������������������������������������������������������������������������������������������309 Art. 294������������������������������������������������������������������������������������������������������������������������������315 Art. 294(1)�������������������������������������������������������������������������������������������������������������������������314 Art. 294-2��������������������������������������������������������������������������������������������������������������������������314 Art. 294-3��������������������������������������������������������������������������������������������������������������������������315 Art. 300-2������������������������������������������������������������������������������������������������������������������314, 316 Art. 300(1)(i)�������������������������������������������������������������������������������������������������������������313, 319 Art. 300(1)(ii)������������������������������������������������������������������������������������������������������������311, 313 Art. 300(1)(iii)����������������������������������������������������������������������������������������������������������311, 313 Art. 300(1)(iv)�������������������������������������������������������������������������������������������������������������������313 Art. 300(1)(vi)�������������������������������������������������������������������������������������������������������������������313 Art. 300(1)(vii)������������������������������������������������������������������������������������������������������������������313 Art. 300(1)(viv)�����������������������������������������������������������������������������������������������������������������314 Arts. 300(2)&(3)���������������������������������������������������������������������������������������������������������������308 Art. 307(1)�������������������������������������������������������������������������������������������������������������������������314 Art. 317-2(7)���������������������������������������������������������������������������������������������������������������������314 ER 227-14��������������������������������������������������������������������������������������������������������������������������315 ER 227-2(3-3)�������������������������������������������������������������������������������������������������������������������314 ER 227-2(3-4)�������������������������������������������������������������������������������������������������������������������315 Insurance Business Act Cabinet Ordinance (IBA-CO)�������������������������������������������������������297

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Japanese Insurance Business Act as revised in 2014������������������������������������������������������������������������������������������ 7, 293, 297, 313 Ministerial Regulation on Insurance Business Act (IBA-MR)��������������������������������������������297 Ordinance for Enforcement of Insurance Business Act����������������������������������������������� 313–14 Art. 227-2��������������������������������������������������������������������������������������������������������������������������314 Switzerland Civil Code (CC)������������������������������������������������������������������������������������������������������������� 323–46 Arts. 1–9����������������������������������������������������������������������������������������������������������������������������324 Art. 1 paragraph 2�������������������������������������������������������������������������������������������������������������324 Art. 2 paragraph 1������������������������������������������������������������������������������������������������������ 324–26 Art. 2 paragraph 2�����������������������������������������������������������������������������������������������������339, 344 Art. 3 paragraph 3�������������������������������������������������������������������������������������������������������������324 Art Code of Obligations (CO)���������������������������������������������������������������������������323–24, 336 Arts. 13–15��������������������������������������������������������������������������������������������������329, 332–33, 343 Arts 13 ff������������������������������������������������������������������������������������������������������������329, 332, 342 Collective Investment Schemes Act��������������������������������������������������������������������������������������349 Art. 23��������������������������������������������������������������������������������������������������������������������������������349 Collective Investment Schemes Ordinance��������������������������������������������������������������������������349 Art. 34��������������������������������������������������������������������������������������������������������������������������������349 Federal Insurance Contract Act 1908������������������������������������������������������������������� 2, 7, 327, 337 Insurance Contract Act (1908)������������������������������������������������������������������� 2, 323, 326–29, 332 Arts. 1–47a�������������������������������������������������������������������������������������������������������������������������327 Arts. 3����������������������������������������������������������������������������������������������������������333, 337–48, 350 Art. 3 paragraph 1���������������������������������������������������������������������������������������337–45, 347, 350 Art. 3 paragraph 2������������������������������������������������������������������������������������������������������ 337–45 Art. 3 paragraph 3������������������������������������������������������������������������������������������������������ 337–45 Art. 3a������������������������������������������������������������������������������������������������������������������������� 337–48 Art. 3a paragraph 2���������������������������������������������������������������������������������������������������� 337–45 Arts. 4–8��������������������������������������������������������������������������������������������������������������������327, 329 Arts. 4ff����������������������������������������������������������������������������������������������������������������������336, 350 Art. 4 paragraph 1������������������������������������������������������������������������������������������������������ 328–32 Art. 4 paragraph 2�������������������������������������������������������������������������������������������������������������330 Art. 5 paragraph 1�������������������������������������������������������������������������������������������������������������331 Art. 6 paragraph 1�����������������������������������������������������������������������������������������������328, 332–35 Art. 6 paragraph 2�������������������������������������������������������������������������������������������������������������333 Art. 6 paragraph 3������������������������������������������������������������������������������������������������������ 334–35 Art. 7����������������������������������������������������������������������������������������������������������������������������������334 Art. 8��������������������������������������������������������������������������������������������������������������������327, 335–36 Art. 24 ff����������������������������������������������������������������������������������������������������������������������������336 Art. 24 paragraph 1�����������������������������������������������������������������������������������������������������������334 Art. 27��������������������������������������������������������������������������������������������������������������������������������336 Art. 75��������������������������������������������������������������������������������������������������������������������������������327 Art. 98 paragraph 1�����������������������������������������������������������������������������������������������������������339 Art. 98a������������������������������������������������������������������������������������������������������������������������������339 Art. 100 paragraph 1�������������������������������������������������������������������������������������������������� 323–24 Art. 101������������������������������������������������������������������������������������������������������������������������������326

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Art. 101 paragraph 1�������������������������������������������������������������������������������������������326–27, 338 Insurance Supervision Act����������������������������������������������������������������������������������������������������337 Art. 2 paragraph 2�������������������������������������������������������������������������������������������������������������327 Art. 46 paragraph 1�����������������������������������������������������������������������������������������������������������344 South Africa Constitution of the Republic of South Africa 1996 (the ‘Constitution’)���������������������������360 Chapter 2 Bill of Rights����������������������������������������������������������������������������������������������������362 s 2���������������������������������������������������������������������������������������������������������������������������������������363 s 8(1)����������������������������������������������������������������������������������������������������������������������������������363 s 8(3)����������������������������������������������������������������������������������������������������������������������������������363 s 32�������������������������������������������������������������������������������������������������������������������������������������367 s 34�������������������������������������������������������������������������������������������������������������������������������������362 s 36(1)��������������������������������������������������������������������������������������������������������������������������������362 s 36(2)��������������������������������������������������������������������������������������������������������������������������������362 s 39(1)��������������������������������������������������������������������������������������������������������������������������������365 s 39(2)��������������������������������������������������������������������������������������������������������������������������������363 s 167(3)(c)�������������������������������������������������������������������������������������������������������������������������363 s 173�����������������������������������������������������������������������������������������������������������������������������������363 Consumer Protection Act 68 of 2008���������������������������������������������������������������������356, 365–66 Part D��������������������������������������������������������������������������������������������������������������������������������367 s 3(1)����������������������������������������������������������������������������������������������������������������������������������367 Conventional Penalties Act 15 of 1962��������������������������������������������������������������������������������371 Financial Services Board Act 97 of 1990����������������������������������������������������������������������367, 377 Financial Services Laws General Amendment Act 45 of 2013��������������������������������������������366 Long-term Insurance Act 52 of 1998 (‘LTIA’)������������������������������� 354, 369, 373–74, 377, 379 National Credit Act 34 of 2005 s 64�������������������������������������������������������������������������������������������������������������������������������������367 s 92�������������������������������������������������������������������������������������������������������������������������������������367 Promotion of Access to Information Act 2 of 2000������������������������������������������������������������367 Short-term Insurance Act 53 of 1998 (‘STIA’)���������������������� 354, 368, 371, 373–74, 377, 379 EU Council Directive 93/13/EEC of 5 April 1993 on unfair terms in consumer contracts [1993] OJ L095/29��������������������������������������������������������������������������������������������381 Directive (EU) 2016/97 of the European Parliament and of the Council of 20 January 2016 on insurance distribution (recast) [2016] OJ L26/19 (IDD).������������������������������������������������������������������������������������������������387, 405–08 Art. 20(7)���������������������������������������������������������������������������������������������������������������������������407 Directive 2002/65/EC of the European Parliament and of the Council of 23 September 2002 concerning the distance marketing of consumer financial services and amending Council Directive 90/619/EEC and Directives 97/7/EC and 98/27/EC [2002] OJ L271/16 (Distance Marketing Directive)�������� 284, 381, 384, 405 Art. 2(a)�����������������������������������������������������������������������������������������������������������������������������405 Art. 3(1)�����������������������������������������������������������������������������������������������������������������������������406 Art. 3(1)(1)������������������������������������������������������������������������������������������������������������������������406

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Art. 3(1)(2)������������������������������������������������������������������������������������������������������������������������406 Art. 3(1)(3)������������������������������������������������������������������������������������������������������������������������406 Art. 3(1)(4)������������������������������������������������������������������������������������������������������������������������406 Art. 3(2)�����������������������������������������������������������������������������������������������������������������������������406 Art. 4(2)�����������������������������������������������������������������������������������������������������������������������������406 Directive 2002/92/EC of the European Parliament and of the Council of 9 December 2002 on insurance mediation [2003] OJ L9/3�������������������������������290, 387 Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU (Text with EEA relevance) [2014] OJ L173/349 (MiFID II)�������������������������������������������������������������������������������387, 408 Directive of the European Parliament and of the Council of 16 September 2009 relating to insurance against civil liability in respect of the use of motor vehicles, and the enforcement of the obligation to insure against such liability [2009] OJ L263/11������������������������������������������������������������������������������������������������������������������������381 Finnish Insurance Contract Act (Vakuutussopimuslaki) s 22�������������������������������������������������������������������������������������������������������������������������������������389 French Insurance Contract Act (Codes des assurances: le contrat) Art. L113-2(2)�������������������������������������������������������������������������������������������������������������������389 German Insurance Contract Act����������������������������������������������������������������������������������354, 466 Polish Civil Code (Ustawa z dnia 23 kwietnia 1964 r. Kodeks Cywilny) Art. 815(1)�������������������������������������������������������������������������������������������������������������������������390 Principles of European Insurance Contract Law (PEICL)�������������������������������� 2–3, 5, 7, 209, 269, 381–82, 387, 410–11, 460 Art. 1:101���������������������������������������������������������������������������������������������������������������������������384 Art. 1:102�����������������������������������������������������������������������������������������������������������������������3, 383 Art. 1:103(1)����������������������������������������������������������������������������������������������������������������������385 Art. 1:103(2)��������������������������������������������������������������������������������������������������������������� 384–86 Art. 1:103(3)��������������������������������������������������������������������������������������������������������������386, 390 Art. 1:105�������������������������������������������������������������������������������������������������������������������� 383–85 Art. 1:201(8)��������������������������������������������������������������������������������������������������������������399, 409 Art. 1:201(9)������������������������������������������������������������������������������������������������������399–400, 409 Art. 1:203���������������������������������������������������������������������������������������������������������������������������390 Art. 1:203(2)��������������������������������������������������������������������������������������������������������������268, 391 Art. 1:206���������������������������������������������������������������������������������������������������������������������������391 Art. 1:207(1)����������������������������������������������������������������������������������������������������������������������392 Art. 1:208�������������������������������������������������������������������������������������������������������������������388, 392 Art. 1:208(1)����������������������������������������������������������������������������������������������������������������������392 Arts. 2:101–2:106��������������������������������������������������������������������������������������������������������������388 Art. 2:101(1)������������������������������������������������������������������������������������������������389–93, 400, 432 Art. 2:102����������������������������������������������������������������������������������� 389, 393, 395, 397, 399–400 Art. 2:102(1)������������������������������������������������������������������������������������������������389, 394–95, 397 Art. 2:102(2)������������������������������������������������������������������������������������������������������389, 395, 397 Art. 2:102(4)��������������������������������������������������������������������������������������������������������������389, 395 Art. 2:102(5)��������������������������������������������������������������������������������������������������������������389, 396 Art. 2:103(a)������������������������������������������������������������������������������������������������389, 393–94, 397 Art. 2:103(b)��������������������������������������������������������������������������������������������������������389, 397–98

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Art. 2:103(c)��������������������������������������������������������������������������������������������������������389, 397–98 Art. 2:103(d)��������������������������������������������������������������������������������������������������������������389, 398 Art. 2:104��������������������������������������������������������������������������������������������������� 389, 395, 397, 399 Art. 2:105�������������������������������������������������������������������������������������������������������������������389, 399 Art. 2:106���������������������������������������������������������������������������������������������������������������������������392 Art. 2:201�������������������������������������������������������������������������������������������������������������������� 408–09 Art. 2:201(2)����������������������������������������������������������������������������������������������������������������������409 Art. 2:202(2)(a)�����������������������������������������������������������������������������������������������������������������409 Art. 2:202(2)(b)�����������������������������������������������������������������������������������������������������������������409 Art. 2:203�������������������������������������������������������������������������������������������������������������������286, 409 Arts. 4:201–4:203��������������������������������������������������������������������������������������������������������������389 Art. 4:203(3)����������������������������������������������������������������������������������������������������������������������396 Arts. 14:101ff.��������������������������������������������������������������������������������������������������������������������384 Arts. 17:101ff.��������������������������������������������������������������������������������������������������������������������384 Art. 17:201�����������������������������������������������������������������������������������������������������������������388, 391 Art. 17:201(2)��������������������������������������������������������������������������������������������������������������������399 Art. 17:602(2)��������������������������������������������������������������������������������������������������������������������399 Arts. 18:101–18:303����������������������������������������������������������������������������������������������������������399 Arts. 18:101ff.��������������������������������������������������������������������������������������������������������������������384 Art. 18:301(1)������������������������������������������������������������������������������������������������������������400, 409 Art. 18:301(2)������������������������������������������������������������������������������������������������������������388, 400 Regulation (EU) No 1286/2014 of the European Parliament and of the Council of 26 November 2014 on key information documents for packaged retail and insurance-based investment products (PRIIPs) (Text with EEA relevance) [2014] OJ L352/1 (PRIIPs Regulation).�������������������������������������������������������������387, 406–07 Arts. 4(2), 6(1) and 6(4)�������������������������������������������������������������������������������������������������������407 Arts. 8(1), 8(2) and 8(3)���������������������������������������������������������������������������������������������������407 Rome I Regulation��������������������������������������������������������������������������������������������������������386, 388 Arts. 7(1), 7(2) and 7(3)���������������������������������������������������������������������������������������������������388 Solvency II�����������������������������������������������������������������������������������������������������������������������������407 Art. 13(13)�������������������������������������������������������������������������������������������������������������������������402 Art. 13(14)�������������������������������������������������������������������������������������������������������������������������404 Art. 183����������������������������������������������������������������������������������������������������������������401–02, 406 Art. 183(1)(a)������������������������������������������������������������������������������������������������������������401, 406 Art. 183(1)(b)������������������������������������������������������������������������������������������������������������401, 406 Art. 184����������������������������������������������������������������������������������������������������������������401–02, 406 Art. 184(1)�����������������������������������������������������������������������������������������������������������������402, 406 Art. 185��������������������������������������������������������������������������������������������������������������401, 404, 406 Art. 185(2)�����������������������������������������������������������������������������������������������������������������403, 406 Art. 185(3)�����������������������������������������������������������������������������������������������������������������403, 406 Art. 185(3)–(5)����������������������������������������������������������������������������������������������������������403, 406 Art. 185(4)�����������������������������������������������������������������������������������������������������������������403, 406 Art. 185(5)�����������������������������������������������������������������������������������������������������������403–04, 406 Art. 185(6)���������������������������������������������������������������������������������������������������������402, 404, 406 Art. 309������������������������������������������������������������������������������������������������������������������������������401 Art. 310������������������������������������������������������������������������������������������������������������������������������401 Recital 79���������������������������������������������������������������������������������������������������������������������������404

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Spanish Insurance Contract Act (Ley 50/1980, de 8 de octubre, de Contrato de Seguro) Art. 10��������������������������������������������������������������������������������������������������������������������������������390 Swiss Insurance Contract Act (Versicherungsvertragsgesetz) and Art. 4(1)�����������������������������������������������������������������������������������������������������������������������������390 Reinsurance Bolivia Commercial Code Art. 993������������������������������������������������������������������������������������������������������������������������������421 Brazil Civil Code Art. 422������������������������������������������������������������������������������������������������������������������������������421 Art. 765������������������������������������������������������������������������������������������������������������������������������414 Chinese Insurance Law������������������������������������������������������������������������������������������������ 199–227 Art 5�����������������������������������������������������������������������������������������������������������������������������������421 Columbia Civil Code Art. 1603����������������������������������������������������������������������������������������������������������������������������421 Ecuador Civil Code Art. 1562����������������������������������������������������������������������������������������������������������������������������421 Ontario (Canada) Insurance Act s 18�������������������������������������������������������������������������������������������������������������������������������������421 Principles of European Insurance Contract Law (PEICL)������������������������ 2–3, 5, 7, 209, 269, 381–89, 391, 393–94, 396, 398–400, 408–11, 432, 460 Principles of Reinsurance Contract Law (PRICL)��������������������������������������������3, 411, 426–27 Restatement (Second) of the Law of Contracts s 205�������������������������������������������������������������������������������������������������������������������413, 417, 453 Swiss Civil Code��������������������������������������������������������������������������������������������������������������������323 Art. 2, para 1����������������������������������������������������������������������������������������������������������������������421 Swiss Commercial Code Art. 2, para 1����������������������������������������������������������������������������������������������������������������������414 UK Marine Insurance Act of 1906������������������������������������������������������ 2, 50–53, 137, 139, 144, 149–51, 153, 160, 433, 448, 465, 469 s 18(1)�������������������������������������������������������������������������������������������������� 50, 156, 164, 166, 420 UNIDROIT Principles of International Commercial Contracts (PICC) Art. 1.1�������������������������������������������������������������������������������������������������������������������������������411 Art. 1.7�����������������������������������������������������������������������������������������������������������������417–18, 421 Uniform Commercial Code (UCC)�������������������������������������������������������������������������������������453 Art 1-201(20)������������������������������������������������������������������������������������������������������������413, 417 Art. 1-304��������������������������������������������������������������������������������������������������������������������������413 Brokers Bubble Act 1720��������������������������������������������������������������������������������������������������������������������430 Insurance Law Reform Act 1977 (NZ) s 10�����������������������������������������������������������������������������������������������������������������������������430, 437 s 10(1)��������������������������������������������������������������������������������������������������������������������������������437 s 10(2)������������������������������������������������������������������������������������������������������������������������437, 444 s 10(3)��������������������������������������������������������������������������������������������������������������������������������437

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Marine Insurance Act 1908 (NZ)�����������������������������������������������������������������������������������������444 ss 18–20�����������������������������������������������������������������������������������������������������������������������������433 Marine Insurance Ordinance, cap 329 (HK) ss 18–20�����������������������������������������������������������������������������������������������������������������������������433 Marine Insurance Ordinance, chapter 387 (Singapore) ss 18–20�����������������������������������������������������������������������������������������������������������������������������433 Conclusions Chinese Contract Act 1995 s 42�������������������������������������������������������������������������������������������������������������������������������������454 s 43�������������������������������������������������������������������������������������������������������������������������������������454 Enterprise Act 2016 s 29������������������������������������������������������������������������������������������������������������������������������ 456–57 French Code civil s 1112���������������������������������������������������������������������������������������������������������������������������������454 s 1112-1�����������������������������������������������������������������������������������������������������������������������������454 s 1112-2�����������������������������������������������������������������������������������������������������������������������������454 Insurance Contract Act 1984 (Cth)�������������������������������������������������������������������������������������206 s 13������������������������������������������������������������������������������������������������������������������������������ 454–55 Insurance Contract Act 2015 s 3(5)����������������������������������������������������������������������������������������������������������������������������������463 s 14�������������������������������������������������������������������������������������������������������������������������������������457 ss 16A(2)–(3)������������������������������������������������������������������������������������������������������������� 456–57 Restatement (Second) of Contracts s 205�����������������������������������������������������������������������������������������������������������������������������������453 Uniform Commercial Code (UCC)�����������������������������������������������������������������������������413, 417 s 1-304�������������������������������������������������������������������������������������������������������������������������������453

xlvi 

1 Introduction YONG QIANG HAN AND GREG PYNT This edited book consists of a series of chapters by insurance law experts from ­Australia, China, France, Germany, Japan, South Africa, Switzerland, the United Kingdom and the United States of America. It is the culmination of a Colloquium held on 30 November and 1 December 2016 at the Faculty of Law, National ­University of Singapore for the 250th anniversary of the landmark English insurance law case Carter v Boehm.1 This case is widely regarded as having established the principle or duty of utmost good faith (in Latin, uberrima fides) in insurance law and set early rules on a policyholder’s pre-contractual duty of disclosure. The chapters in this book explore the extent to which the law of pre-contractual ­disclosure duties around the world today reflects or departs from the duties and underlying philosophy described by Lord Mansfield in Carter v Boehm. At the time Carter v Boehm (1766) was decided, insurance was regarded as an important encouragement to business to create, invent and innovate without fear of some of the insurable risks of business. In this context, legislators sought to protect the insurance market, and the judiciary allowed insurers to allocate risk in their insurance contracts as they pleased. The shift in political and economic focus in the last 30 years or so—from business promotion to consumer protection—is reflected by Australia’s Insurance Contracts Act 1984, the world’s first comprehensive consumer-oriented insurance contract legislation. As explained in the Long Title to the Act, it was enacted to: [R]eform and modernise the law relating to certain contracts of insurance so that a fair balance is struck between the interests of insurers, insureds and other members of the public and so that the provisions included in such contracts, and the practices of insurers in relation to such contracts operate fairly …

One of its most significant reforms precludes an insurer, in a wide range of circumstances, from refusing to pay a claim because of a policyholder’s p ­ re-contractual non-disclosure or misrepresentation.

1 

Carter v Boehm (1766) 3 Burr 1905.

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Yong Qiang Han and Greg Pynt

Since then, with the influence of the consumer movement and the introduction of insurance ombudsmen regimes as its backdrop, a number of countries of major insurance markets have reformed their insurance contract law in respect of pre-contractual duties. In Australia, the introduction of a new section 21A to its Insurance Contracts Act 1984 (Cth) in 1998 limited the scope of a policyholder’s pre-contractual duty of disclosure in relation to new insurance business. Soon after (2001), the Corporations Act 2001 (Cth) imposed pre-contractual disclosure obligations on insurers. The Chinese Insurance Act was amended in 2009 to limit a policyholder’s pre-contractual duty of ‘disclosure’ to what is asked of by insurers. In 2008 and 2010, Germany and Japan substantially overhauled their respective insurance contract law to achieve a fairer balance between the interests of insurer and policyholder. In 2006, Switzerland partly revised its Federal Insurance Contract Act 1908 by regulating the sanctions for a breach of a policyholder’s precontractual duty of disclosure. The European Union is in an early stage toward an ‘optimal instrument’ of the Principles of European Insurance Contract Law, the model text of which was finalised in 2016 by insurance law academics across Europe. This global but uncoordinated ‘wave’ of insurance law reform includes the UK Insurance Act 2015, which came into force on 12 August 2016, and the earlier Consumer Insurance (Disclosure and Representations) Act 2012. Part I of this book revisits Carter v Boehm in three significant republications. The first among them is the full judgment in Carter v Boehm, delivered by Lord Mansfield, Chief Justice of the Court of King’s Bench, at the Guildhall in London in the Easter Term of 1766. It is republished here as the focal point for the book and for ready and convenient reference by readers. The circumstances that gave rise to Carter v Boehm were very unusual and the judgment is brief when compared to modern English decisions. These two factors perhaps explain why judges and academics are still discussing its meaning, scope and implications 250 years later, even though the Marine Insurance Act 1906 was an attempt to codify marine insurance law at the time. Dr Stephen Watterson’s chapter is an updated version of his contribution to an edited book on general contract law published almost 10 years ago.2 It is the first comprehensive inquiry into the circumstances that gave rise to Carter v Boehm, the main players and its insurance and broader historical context and includes a careful consideration of the judgment itself. Amongst other things, Dr Watterson’s analysis has been updated having regard to the Consumer Insurance (Disclosure and Representations) Act 2012 and the Insurance Act 2015, which Dr Watterson says has reinforced rather than weakened the ­seminal status of Carter v Boehm in the common insurance law. The third significant republication is a well-known and often referred-to3 examination of the

2  S Watterson, ‘Carter v Boehm (1766)’ in C Mitchell and P Mitchell (eds), Landmark Cases in the Law of Contract (Oxford, Hart Publishing, 2006) 59–118. 3  For example, J Birds, Birds’ Modern Insurance Law 10th edn (London, Sweet & Maxwell, 2016) 123, and 1st edn (London, Sweet & Maxwell, 1982) 82. See also M Clarke, The Law of Insurance Contracts 6th edn (London, Informa, 2009) [23-9B1] and [23-13C].

Introduction

 3

­ octrine of utmost good faith in insurance law by the late Professor Reuben Hasson d (1939–2016).4 According to Professor Hasson, the classical doctrines of policyholder’s pre-­contractual duty of disclosure as stated in the leading case of Carter v Boehm have been misunderstood and misapplied by English courts whereas American courts in the nineteenth century correctly understood and applied the principles of ­pre-contractual disclosure described in Carter v Boehm. These three republications in Part I set the scene for Parts II and III of the book, which discuss the law of pre-contractual disclosure in common law and in civil law jurisdictions respectively. The common law jurisdictions under discussion include Australia, the UK and the USA; the civil law jurisdictions include France, China, Germany, Japan and Switzerland. What is special in the discussions for each country/jurisdiction is that they go beyond pre-contractual duty of policyholders—they extend to insurers’ pre-contractual duty as well. The extended ­discussion is more an add-on to than a small breakaway from the conventional focus on policyholder’s pre-contractual duty with very limited room for patchy discussion of insurers’ pre-contractual duties (this is particularly so in common law). For the colloquium and for this book, presenters and contributors were encouraged to pour more ink—or have more keyboard strokes—to develop ­discussion in this area. Part IV discusses pre-contractual disclosure duties in four different spheres or contexts. Chapter 13 discusses pre-contractual disclosure duties in the law of South Africa, a paradigm of what is known as ‘the mixed legal system’ as opposed to the systems or ‘legal families’ of common law and civil law. Although heavily influenced by English and Roman law, South African insurance law has (in 1984) expressly rejected utmost good faith but retained the law relating to a p ­ olicyholder’s pre-contractual duty of disclosure. Chapter 14 discusses the scholarly Principles of European Insurance Contract Law, intended as an ‘optional i­nstrument’5 for parties to insurance contracts. Chapter 15 discusses pre-­contractual disclosure duties in reinsurance law in the ongoing tentative project ‘Principles of Reinsurance Contract Law’ at a global level. Chapter 16 expounds on the pre-contractual disclosure duties of and concerning insurance brokers who place risks on behalf of policyholders, reinsureds or cedants. All the Part II, III and Part IV chapters (except chapter 16), have a similar structure: an overview of (utmost) good faith, followed by discussion of a p ­ olicyholder’s pre-contractual duty, then by discussion of an insurer’s p ­ re-contractual duty, and lastly a conclusion. In the overview in each chapter, the relevance—or irrelevance in civil law jurisdictions—of Carter v Boehm, whether in positive law or in

4  R Hasson, ‘The Doctrine of Uberrima Fides in Insurance Law—A Critical Evaluation’ (1969) 32 MLR 615. 5  According to the Principles of European Insurance Contract Law (‘’PEICL), it ‘shall apply when the parties, notwithstanding any limitations of choice of law under private international law, have agreed that their contract shall be governed by them.’ See the PEICL Art 1:102.

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Yong Qiang Han and Greg Pynt

c­ omparative law analysis, is discussed or touched upon. Also discussed is whether there exists a principle or conception of utmost good faith in the positive law of ­insurance—and where it does exist what is the difference, if any, between good faith and utmost good faith. In common law jurisdictions, the concept of ‘utmost good faith’ in insurance law seems to have been taken almost for granted as regards its origin, its use or overuse, its being treated as the equivalent of a pre-contractual duty of disclosure, and its being referred to as a ‘duty’, a ‘principle’ or a ‘requirement’. Professor H ­ asson’s paper (chapter 4) offers a critical perspective in this regard. Civil law jurisdictions, at most, recognise ‘utmost good faith’ in insurance law as an academic topic in the context of comparative-law discussion; in positive law their ­over-arching principle of good faith in private law and/or in contract law justifies precontractual disclosure duties of policyholder and insurer. Of particular interest here is the approach to this topic in the ‘mixed legal system’ that is the law of South Africa (chapter 13) which offers an enlightening perception of the meaning of ‘utmost good faith’. ‘While non-disclosure and misrepresentation are distinct defences to a claim, they are frequently treated as one and the same thing by the English courts, no doubt because of the common practice of insurers raising both by way of defence to a claim.’6 ‘The breadth of the duty of disclosure leaves only a minor role for misrepresentation in insurance.’7 Discussions of misrepresentations in insurance law have often been subsumed into that of non-disclosure although they are conceptually different.8 The difference was pointed out by Lord President Normand in Zurich General Accident and Liability Insurance Co v Leven: In general, non-disclosure means that you have failed to disclose something which was not the subject of a question but which was known to you and which you ought to have considered for yourself would be material, whereas a representation is something directly said in answer to a specific question, …9

Simply put, disclosure is voluntary without being asked of and representation is responsive to what is being asked (about). Hence, non-disclosure is a failure to provide or to volunteer (known) information, whereas ­misrepresentation

6  J Lowry, ‘Pre-contractual information duties: the insured’s pre-contractual duty of disclosure— convergence across the jurisdictional divide’ in J Burling and K Lazarus (eds), Research Handbook on International Insurance Law and Regulation (London, Edward Elgar, 2011) 56. 7 J Lowry and P Rawlings, ‘“That wicked rule, that evil doctrine …”: Reforming the Law on ­Disclosure in Insurance Contracts’ (2012) 75 MLR 1099, 1103. 8  Birds, above n 3 (10th edn), 119–20. 9  Zurich General Accident and Liability Insurance Co v Leven: 1940 SC 406, 415. Although this is a Scottish case, the point above holds water also in English insurance law from which the Scottish insurance law is not fundamentally different particularly on the matter of pre-contractual duties. Perhaps that is why the (English) Law Commission and the Scottish Law Commission carried out the insurance law reform together and why this particular point amongst others has been quoted in their joint consultation paper Insurance Contract Law: The Business Insured’s Duty of Disclosure and the Law of Warranties (2012) [2.10].

Introduction

 5

is the provision of false information in response to an insurer’s e­nquiries.10 ‘Nondisclosure is concerned with the insured’s duty to volunteer material facts, while ­ misrepresentation concerns the insured’s duty to answer the insurer’s ­questions (generally contained in proposal forms) accurately and to ensure that any ­statement volunteered is true.’11 The Consumer Insurance (Disclosure and Representations) Act 2012 highlights the distinction, insofar as it has consigned to the dustbin of history a policyholder’s duty of disclosure and provided that a consumer insured/policyholder has ‘the duty … to take reasonable care not to make a misrepresentation to the insurer’.12 Accordingly, now there seems to be more recognition of the distinction among the English insurance law academia. It is commented that unlike the position now applicable to consumer insurance, the duty of disclosure has been retained for business policies, reflecting the established market reliance on disclosure, so that a business assured remains under the dual obligations to disclose and not to misrepresent material circumstances.13

The conceptual difference has turned out to be also important given the global trend in consumer protection which ripples strongly to insurance law: Globally, consumer policyholders are often no longer obliged to voluntarily disclose information to an insurer; instead, they are only obliged to truthfully provide information in response to an insurer’s specific enquiries. For example, in 1989 French insurance law replaced spontaneous disclosure by policyholders with a duty to ‘truthfully answer questions put by the insurer.’14 As mentioned above, similar legal change was made in the UK in 2012 for consumer insurance. Similar shifts have been made in Australia for ‘eligible contracts of insurance’),15 in China (in 2009, for consumer and business insurance), in Germany (in 2008, for consumer and business insurance), in Japan (in 2010, for consumer and business insurance), Switzerland (2006, for consumer and business insurance)—and the insurance law in the US has been consumer/policyholder friendly in this respect. The Principles of European Insurance Contract Law also proposed such a change initially in 2010 and finalised in 2016. In all cases, there has been a shift from a duty of disclosure to a duty not to misrepresent, at least in consumer insurance.

10  J Cartwright, Misrepresentation, Mistake and Non-Disclosure 4th edn (London, Sweet & Maxwell, 2017) [1.04]. 11  Lowry, above n 6, 56. 12  Consumer Insurance (Disclosure and Representations) Act 2012, s 2(2). 13  R Merkin and O Gurses, ‘The Insurance Act 2015: Rebalancing the Interests of Insurer and Assured’ (2015) 78 MLR 1004, 1010. 14  French Insurance Code, Art L. 113-2. 15  Pursuant to the Insurance Contracts Regulations 1985 (Cth) Reg 2B, they are contracts for motor vehicle insurance, home buildings and contents insurance, sickness and accident insurance, consumer credit insurance, and travel insurance. The change was effected by ss 21A and 21B of the Insurance Contracts Act 1984 (Cth).

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Yong Qiang Han and Greg Pynt

Having said that, non-disclosure and misrepresentation do overlap in cases of a policyholder having told a ‘half-truth’ and in circumstances where, like nondisclosure, a misrepresentation might be viewed as failure to provide true information. Hence readers will very occasionally find that in some chapters the duty of disclosure as referred to is not what it was in its traditional sense. As mentioned, at common law, an insurer’s pre-contractual duty of disclosure is relatively under-developed in contrast to civil law jurisdictions. In Australia, the Corporations Act 2001 (Cth) imposes disclosure obligations on insurers by requiring a Financial Services Guide and a Product Disclosure Statement (PDS) incorporating all policy terms to be provided in a clear, concise and effective manner. Following extensive flooding in Queensland in 2011, the Insurance Contracts Act 1984 (Cth) was amended in 2012 to require insurers to provide a Key Facts Sheet (KFS) in respect of all home building and contents insurance ­products.16 The recent de-exemption of the Insurance Contracts Act 1984 (Cth) from the E ­ lectronic Transactions Act 1999 (Cth) has changed the way insurers must convey information to policyholders. In the UK, the clearest imposition of a pre-­contractual duty to inform on insurers is the Insurance Act 2015 section 17 ‘transparency requirements’ whereby before the contract is entered into or the variation agreed the insurer must take sufficient steps to draw to the policyholder’s attention ‘the disadvantageous term’17 which ‘must be clear and unambiguous as to its effect.’18 In the US, many states have created unfair insurance practices acts, which are consumer protection statutes designed specifically to regulate the activities of insurers. Depending on the terms of the statute, an insured may also be able to use the relevant state legislation to complain of an insurer’s pre-contractual failure to disclose. Civil law jurisdictions, in two senses, appear to be more active than their ­common law counterparts in imposing pre-contractual informational duties on insurers: firstly, they did it many years earlier, and secondly the duties so imposed on insurers are more onerous. Readers can find in this book (Chapter 9) that in 1989 the legislator in France required insurers to pre-contractually p ­ rovide information so as to ensure equal information for prospective policyholders and in 2012 this expanded to an additional duty for insurers to highlight to the policyholder the adequacy of the coverage to his personal situation. Since its initial enactment in 1995, the Chinese Insurance Act has required insurers to pre-­ contractually elucidate to policyholders the exclusionary terms and conditions, otherwise they will be invalid. The German insurance contract law reform in 2008 has substantially enlarged insurer’s pre-contractual duty to provide information to prospective policyholders, and has imposed on insurers a duty to advise the

16  Insurance Contracts Act 1984 (Cth), ss 33A, 33B, 33C and 33D. The KFS came into effect in ­September 2014. 17  As described by the Insurance Act 2015 s 16(2). 18  Insurance Act 2015 s 17(3).

Introduction

 7

prospective policyholders where the contracting or negotiation is not mediated by insurance brokers; in addition, where the duty to advise does not apply, there is still a duty—based on the German civil law principle of good faith—for insurers to warn or to correct if it is aware that the policyholder is mistaken despite being advised by the insurance broker. Although Japan’s insurance law as reformed in 2010 does not impose pre-contractual duties on insurers, the Japanese C ­ onsumer Contract Act 2000 and financial regulatory statutes have subjected insurers or their agents or insurance sellers to the pre-contractual duty to explain their ­insurance product to customers. In addition, the Japanese Insurance Business Act, as revised in 2014, provides detailed rules on insurance sellers’ pre-contractual duties, ­including the duty to provide information about the insurance product. The Swiss Federal Insurance Contract Act as partly amended in 2006 obliges insurers to provide every policyholder with a standardised set of information on its identity, the insurance product offered and the handling of the personal data of the policyholder. Other statutes mainly for financial regulation enacted in the 2000s also imposed pre-contractual informational duties on insurers for particular insurance products. The European Union has imposed informational duties on insurers by way of EU Directives for consumer protection and applicable to insurance contracts. In late 2016, the Principles of European Insurance Contract Law, intended as an ‘optional instrument’ for European insurance law, consolidated such duties of insurers albeit without legal binding force. In this book, the editors seek an overarching rationale which underlies or explains what happens to be a ‘global’ trend or what has been said of as the ‘convergence’ in insurance law reform as referred to at the start of this Introduction. Lastly, two points of technical note: first, in each chapter, the words ‘policyholder’, ‘insured’/‘assured’, and ‘(insurance) applicant’ are used interchangeably unless stated otherwise. Second, readers with a wider comparative-law interest in the topic will find it useful to access the current position in relation to Brazilian insurance law reform.19

19  M Baptista and B de Souza, ‘New insurance bill raises concerns’, online uploaded on 27 March 2017: http://www.internationallawoffice.com/Newsletters/Insurance/Brazil/TozziniFreire-Advogados/ New-insurance-bill-raises-concerns.

8 

Part I

Revisiting Carter v Boehm and Pre-contractual Duties in Insurance Law

10 

2 Carter v Boehm (1766) 3 Burr 1905 3 BURR. 1905. … [1905] … CARTER versus BOEHM. 1766. [S.C. 1 Bl. 593.] Concealment will avoid a policy of assurance. [Discussed and approved, Bates v. Hewitt, 1867, L.R. 2 Q.B. 608. Principle applied, Harrower v. Hutchinson, 1870, L.R. 5 Q.B. 590. Observation adopted, Gandy v. Adelaide Assurance Company, 1871, L.R. 6 Q.B. 756. Dictum discussed, D ­ avenport v. Charsley, 1886, 54 L.T. 344. Referred to, Rowley v. London and North Western Railway Company, 1873, L.R. 8 Ex. 231. Dictum adopted, Bristol, &c., ­Aerated Bread Company v. Maggs, 1890, 44 Ch. D. 622. Referred to, Seaton v. Heath [1899], 1Q.B. 790; [1900], A.C. 135. Adopted, Gedge v. Royal Assurance Corporation [1900], 2 Q.B. 222] This was an assurance-cause, upon a policy underwritten by Mr. Charles Boehm, of interest, or no interest: without benefit of salvage. The insurance was made by the plaintiff, for the benefit of his brother, Governor George Carter. [1906] It was tried before Lord Mansfield at Guildhall: and a verdict was found for the plaintiff by a special jury of merchants. On Saturday the 19th of April last, Mr. Recorder (Eyre,) on behalf of the defendant, moved for a new trial. His objection was, “that circumstances were not ­sufficiently disclosed.” A rule was made to shew cause: and copies of letters and depositions were ordered to be left with Lord Mansfield. N.B. Four other clauses depended upon this. The counsel for the plaintiff, viz. Mr. Morton, Mr. Dunning and Mr. Wallace, shewed cause on Thursday the first of this month. But first, Lord Mansfield reported the evidence—That it was an action on a policy of insurance for one year: viz. from 16th of October 1759 to 16th October 1760, for the benefit of the Governor of Fort Marlborough, George Carter, against the loss of Fort Marlborough in the island of Sumatra in the East Indies, by its being taken

12 

Carter v Boehm

by a foreign enemy. The event happened: the fort was taken, by Count D’Estaigne, within the year. The first witness was Cawthorne, the policy-broker, who produced the memorandum given by the governor’s brother (the plaintiff) to him: and the use made of these instructions was to shew that the insurance was made “for the benefit of Governor Carter, and to insure him against the taking of the fort by a foreign enemy.” Both sides has been long in Chancery: and the Chancery-evidence on both sides was read at the trial. It was objected, on behalf of the defendant, to be a fraud, by concealment of ­circumstances which ought to have been disclosed; and particularly, the weakness of the fort, and the probability of its being attacked by the French: which concealment was offered to be proved by two letters. The first was a letter from the governor to his brother Roger Carter, his trustee, the plaintiff in this cause: the second was from the governor to the East India-Company. [1907] The evidence in reply to this objection consisted of three depositions in Chancery, setting forth that the governor had 20,000l. in effects: and only insured 10,000l. and that he was guilty of no fault in defending the fort. The first of these depositions was Captain Tryon’s: which proved that this was not a fort proper or designed to resist European enemies: but only calculated for defence against the natives of the island of Sumatra; and also that the governor’s office is not military, but only mercantile; and that Fort Marlborough is only a subordinate factory to Fort St. George. There was no evidence to the contrary. And a verdict was found for the plaintiff, by a special jury. After his Lordship had made his report,— The counsel for the plaintiff proceeded to shew cause against a new trial. They argued that there was no such concealment of circumstances (as the weakness of the fort, or the probability of the attack,) as would amount to a fraud sufficient to vitiate this contract: all which circumstances were universally known to every merchant upon the exchange of London. And all these circumstances, they said, were fully considered by a special jury of merchants, who are the proper judges of them. And Mr. Dunning laid it down as a rule—“that the insured is only obliged to discover facts; not the ideas or speculations which he may entertain, upon such facts.” They said, this insurance, was in reality, no more than a wager; “whether the French would think it their interest to attack this fort; and if they should, whether they would be able to get a ship of war up the river, or not.” Sir Fletcher Norton and Mr. Recorder (Eyre) argued, contra, for the defendant (the under-writer).

Carter v Boehm

 13

They insisted, that the insurer has a right to know as much as the insured himself knows. They alleged too, that the broker is the sole agent of the insured. [1908] These are general, universal principles, in all insurances. Then they ­proceeded to argue in support of the present objection. The broker had, they said, on being cross-examined, owned that he did not believe that the insurer would have meddled with the insurance, if he had seen these two letters. All the circumstances ought to be disclosed. This wager is not only “whether the fort shall be attacked:” but “whether it shall be attacked and taken.” Whatever really increases the risque ought to be disclosed. Then they entered into the particulars which had been here kept concealed. And they insisted strongly, that the plaintiff ought to have discovered the weakness and absolute indefencibility of the fort. In this case, as against the insurer, he was obliged to make such discovery, though he acted for the governor. Indeed, a ­governor ought not, in point of policy, to be permitted to insure at all: but if he is permitted to insure, or will insure, he ought to disclose all facts. It can not be supposed that the insurer would have insured so low as 4l. per cent. if he had known of these letters. It is begging the question to say, “that a fort is not intended for defence against an enemy.” The supposition is absurd and ridiculous. It must be presumed that it was intended for that purpose: and the presumption was “that the fort, the powder, the guns, &c. were in a good and proper condition.” If they were not, (and it is agreed that in fact they were not, and that the governor knew it,) it ought to have been disclosed. But if he had disclosed this, he could not have got the insurance. Therefore this was a fraudulent concealment: and the under-writer is not liable. It does not follow, that because he did not insure his whole property; therefore it is good for what he has judged proper to insure. He might have his reasons for insuring only a part, and not the whole. Cur. advisare vult. [1909] Lord Mansfield now delivered the resolution of the Court. This is a motion for a new trial. In support of it, the counsel for the defendant contend, “that some circumstances in the knowledge of Governor Carter, not having been mentioned at the time the policy was underwrote, amount to a concealment, which ought, in law, to avoid the policy.” The counsel for the plaintiff insist, “that the not mentioning these particulars, does not amount to a concealment, which ought, in law, to avoid the policy: either as a fraud; or, as varying the contract.”

14 

Carter v Boehm

1st. It may be proper to say something, in general, of concealments which avoid a policy. 2dly. To state particularly the case now under consideration. 3dly. To examine whether the verdict, which finds this policy good although the particulars objected were not mentioned, is well founded. First. Insurance is a contract upon speculation. The special facts, upon which the contingent chance is to be computed, lie most commonly in the knowledge of the insured only: the under-writer trusts to his representation, and proceeds upon confidence that he does not keep back any ­circumstance in his knowledge, to mislead the under-writer into a belief that the circumstance does not exist, and to induce him to estimate the risque, as if it did not exist. The keeping back such circumstance is a fraud, and therefore the policy is void. Although the suppression should happen through mistake, without any fraudulent intention; yet still the under-writer is deceived, and the policy is void; because the risque run is really different from the risque understood and intended to be run, at the time of the agreement. The policy would equally be void, against the under-writer, if he concealed; as, if he insured a ship on her voyage, which he privately knew to be arrived: and an action would lie to recover the premium. [1910] The governing principle is applicable to all contracts and dealings. Good faith forbids either party by concealing what he privately knows, to draw the other into a bargain, from his ignorance of that fact, and his believing the contrary. But either party may be innocently silent, as to grounds open to both, to exercise their judgment upon. Aliud est celare; aliud, tacere; neque enim id est celare quicquid reticeas; sed cum quod tuscias, id ignorare emolumenti tui causa velis eos, quorum intersit id scire. This definition of concealment, restrained to the efficient motives and precise subject of any contract, will generally hold to make it void, in favour of the party misled by his ignorance of the thing concealed. There are many matters, as to which the insured may be innocently silent— he need not mention what the under-writer knows—Scientia utrinque par pares contra hentes facit. An under-writer can not insist that the policy is void, because the insured did not tell him what he actually knew; what way soever he came to the knowledge. The insured need not mention what the under-writer ought to know; what he takes upon himself the knowledge of; or what he waves being informed of. The under-writer needs not be told what lessens the risque agreed and understood to be run by the express terms of the policy. He needs not to be told

Carter v Boehm

 15

general topics of speculation: as for instance—The under-writer is bound to know every cause which may occasion natural perils; as, the difficulty of the ­voyage—the kind of seasons—the probability of lightning, hurricanes, earthquakes, &c. He is bound to know every cause which may occasion political perils; from the ruptures of States from war, and the various operations of it. He is bound to know the probability of safety, from the continuance or return of peace; from the imbecility of the enemy, through the weakness of their counsels, or their want of strength, &c. If an under-writer insures private ships of war, by sea and on shore, from ports to ports, and places to places, any where—he needs not be told the secret e­ nterprizes [1911] they are destined upon; because he knows some expedition must be in view; and, from the nature of his contract, without being told, he waves the information. If he insures for three years, he needs not be told any circumstance to shew it may be over in two: or if he insures a voyage, with liberty of deviation, he needs not be told what tends to shew there will be no deviation. Men argue differently, from natural phenomena, and political appearances: they have different capacities, different degrees of knowledge, and different intelligence. But the means of information and judging are open to both: each professes to act from his own skill and sagacity; and therefore neither needs to communicate to the other. The reason of the rule which obliges parties to disclose, is to prevent fraud, and to encourage good faith. It is adapted to such facts as vary the nature of the contract; which one privately knows, and the other is ignorant of, and has no reason to suspect. The question therefore must always be “whether there was, under all the­­ circumstances at the time the policy was under-written, a fair representation; or a concealment; fraudulent, if designed; or, though not designed, varying materially the object of the policy, and changing the risque understood to be run.” This brings me, in the second place, to state the case now under consideration. The policy is against the loss for Fort Marlborough, from being destroyed by, taken by, or surrendered unto, any European enemy, between the 1st of October 1759, and 1st of October 1760. It was under-written on the 9th of May 1760. The under-writer knew at the time, that the policy was to indemnify, to that amount, Roger Carter the Governor of Fort Marlborough, in case the event insured against should happen. The governor’s instructions for the insurance, bearing date at Fort Marlborough the 22d of September 1759, were laid before the underwriter. Two actions upon this policy were tried before me in the year 1762. The defendants then knew of a letter written to the East India Company, which the Company offered to put into my hands; but would not deliver to the parties, because it contained some matters which they did not think proper to be made public.

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[1912] An objection occurred to me at the trial, “whether a policy against the loss of Fort Marlborough, for the benefit of the governor, was good;” upon the ­principle which does not allow a sailor to insure his wages. But considering that this place, though called a fort, was really but a factory or settlement for trade: and that he, though called a governor, was really but a merchant—considering too, that the law allows the captain of a ship to insure goods which he has on board, or his share in the ship, if he be a part-owner; and the captain of a privateer, if he be a part-owner, to insure his share—­considering too, that the objection did not lie, upon any ground of justice, in the mouth of the under-writer, who knew him to be the governor, at the time he took the premium- and as, with regard to principles of public convenience, the case so seldom happens, (I never saw one before,) any danger from the example is little to be apprehended—I did not think myself warranted, upon that point, to nonsuit the plaintiff especially too, as the objection did not come from the Bar. Though this point was mentioned, it was not insisted upon, at the last trial: nor has it been seriously argued, upon this motion, as sufficient, alone, to vacate the policy: and if it had, we are all of opinion “that we are not warranted to say it is void, upon this account. Upon the plaintiff ’s obtaining these two verdicts, the underwriters went into a Court of Equity; where they have had an opportunity to sift every thing to the ­bottom, to get every discovery from the governor and his brother, and to examine any witnesses who were upon the spot. At last, after the fullest investigation of every kind, the present action came on to be tried at the sittings after last term. The plaintiff proved without contradiction, that the place called Bencoolen or Fort Marlborough is a factory or settlement, but no military fort or fortress. That it was not established for a place of arms or defence against the attacks of an European enemy; but merely for the purpose of trade, and of defence against the natives. That the fort was only intended and built with an intent to keep off the country blacks. That the only security against European ships of war, consisted in the difficulty of the entrance and navigation of the river, for want of proper pilots. That the general state and condition of the said fort, and of the strength thereof, was, in general [1913] well known, by most persons conversant or acquainted with Indian affairs, or the state of the Company’s factories or settlements; and could not be kept secret or concealed from persons who should endeavor by proper inquiry, to inform themselves. That there were no apprehensions or intelligence of any attack by the French, until they attacked Nattal in Feb. 1760. That on the 8th of February 1760, there was no suspicion of any design by the French. That the governor then bought, from the witness, goods to the value of 4000l. and had goods to the value of above 20,000l. and then dealt for 50,000l. and upwards. That on the 1st of April 1760, the fort was attacked by a French man of war of 64 guns and a frigate of twenty guns under the Count D’Estaigne, brought in by Dutch pilots; unavoidably taken; and afterwards delivered to the Dutch; and the prisoners sent to Batavia.

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 17

On the part of the defendant—after all the opportunities of inquiry, no evidence was offered, that the French ever had any design upon Fort Marlborough, before the end of March 1760; or that there was the least intelligence or alarm “that they might make the attempt,” till the taking of Nattal in the year 1760. They did not offer to disprove the evidence, that the governor had acted, as in full security, long after the month of September 1759; and had turned his money into goods, so late as the 8th of February 1760. There was no attempt to shew that he had not lost by the capture very considerably beyond the value of the insurance. But the defendant relied upon a letter, written to the East India Company, ­bearing date the 16th of September 1759, which was sent to England by the “Pitt,” Captain Wilson, who arrived in May 1760, together with the instructions for insuring; and also a letter bearing date the 22d of September 1759, sent to the plaintiff by the same conveyance, and at the same time, (which letters his ­Lordship repeated).* They relied too upon the cross-examination of the broker who negotiated the policy, “that, in his opinion, [1914] these letters ought to have been shewn, or the contents disclosed; and if they had, the policy would not have been underwritten.” The defendant’s counsel contended at the trial, as they have done upon this motion, “that the policy was void.”— 1st. Because the state and condition of the fort, mentioned in the governor’s letter to the East India Company, was not disclosed. 2dly. Because he did not disclose, that the French, not being in a condition to relieve their friends upon the coast, were more likely to make an attack upon this settlement, rather than remain idle. 3dly. That he had not disclosed his having received a letter of the 4th of F ­ ebruary 1759, from which it seemed that the French had a design to take this settlement, by surprize, the year before. They also contended, that the opinion of the broker was almost decisive. The whole was laid before the jury; who found for the plaintiff.

*  The former of them notifies to the East India Company, that the French had the preceding year, a design on foot, to attempt taking that settlement by surprise; and that it was very probable that they might revive that design. It confesses and represents the weakness of the fort: its being badly supplied with stores, arms and ammunition: and the impracticability of maintaining it (in its then state) against an European enemy. The latter letter (to his brother) owns that he is “now more afraid than formerly, that the French should attack and take the settlement; for, as they can not muster a force to relieve their friends at the coast, they may, rather than remain idle, pay us a visit. It seems, that they had such an intention, last year.” And therefore he desires his brother to get an insurance made upon his stock there.

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Thirdly—It remains to consider these objections, and to examine “whether this verdict is well founded.” To this purpose, it is necessary to consider the nature of the contract, at the time it was entered into. The policy was signed in May 1760. The contingency was “whether Fort ­Marlborough was or would be taken, by an European enemy, between October 1759, and October 1760.” The computation of the risque depended upon the chance, “whether any ­European power would attack the place by sea.” If they did, it was incapable of resistance. The under-writer at London, in May 1760, could judge much better of the probability of the contingency, than Governor Carter could at Fort Marlborough, in September 1759. He knew the success of the operations of the war in Europe. He knew what naval force the English and French had sent to the East Indies. He knew, from a comparison of that force, whether the sea was open to any such attempt by the French. He knew, or might know everything which was known at Fort ­Marlborough in September 1759, of the general state of affairs in the [1915] East Indies, or the particular condition of Fort Marlborough, by the ship which brought the orders for the insurance. He knew that ship must have brought many letters to the East India Company; and, particularly, from the governor. He knew what probability there was of the Dutch committing or having committed hostilities. Under these circumstances, and with this knowledge, he insures against the ­general contingency of the place being attacked by an European power. If there had been any design on foot, or any enterprize begun in September, 1759, to the knowledge of the governor, it would have varied the risk understood by the underwriter; because not being told of a particular design or attack then subsisting, he estimated the risk upon the foot of an incertain operation, which might or might not be attempted. But the governor had no notice of any design subsisting in September, 1759. There was no such design in fact: the attempt was made without premeditation, from the sudden opportunity of a favourable occasion, by the connivance and assistance of the Dutch, which tempted Count D’Estaigne to break his parol. These being the circumstances under which the contract was entered into, we shall be better able to judge of the objections upon the foot of concealment. The first concealment is, that he did not disclose the condition of the place. The underwriter knew the insurance was for the governor. He knew the governor must be acquainted with the state of the place. He knew the governor could not disclose it, consistent with his duty. He knew the governor, by insuring, apprehended at least the possibility of an attack. With this knowledge, without asking a question, he underwrote.

Carter v Boehm

 19

By so doing, he took the knowledge of the state of the place upon himself. It was a matter as to which he might be informed various ways: it was not a matter within the private knowledge of the governor only. But, not to rely upon that—The utmost which can be contended is, that the under writer trusted to the fort being in the condition in which it ought to be: in like manner as it is taken for granted, that a ship insured is sea-worthy. What is that condition? All the witnesses agree “that [1916] it was only to resist the natives, and not an European force.” The policy insures against a total loss; taking for granted “that if the place was attacked it would be lost.” The contingency therefore which the under-writer has insured against is, “whether the place would be attacked by an European force; and not whether it would be able to resist such an attack, if the ships could get up the river.” It was particularly left to the jury, to consider, “whether this was the contingency in the contemplation of the parties:” they have found that it was. And we are all of opinion, “that, in this respect, their conclusion is agreeable to the evidence.” In this view, the state and condition of the place was material only in case of a land-attack by the natives. The second concealment is—his not having disclosed, that, from the French not being able to relieve their friends upon the coast, they might make them a visit. This is no part of the fact of the case: it is a mere speculation of the governor’s from the general state of the war. The conjecture was dictated to him from his fears. It is a bold attempt, for the conquered to attack the conqueror in his own dominions. The practicability of it in this case, depended upon the English naval force in those seas; which the underwriter could better judge of at London in May, 1760, than the governor could at Fort Marlborough in September, 1759. The third concealment is—that he did not disclose the letter, from Mr. Winch, of the 4th of February, 1759, mentioning the design of the French, the year before. What that letter was; how he mentioned the design, or upon what authority he mentioned it; or by whom the design was supposed to be imagined, does not appear. The defendant has had every opportunity of discovery; and nothing has come out upon it, as to this letter, which he thinks makes for his purpose. The plaintiff offered to read the account Winch wrote to the East India Company: which was objected to; and therefore not read. [1917] The nature of that intelligence therefore is very doubtful. But taking it in the strongest light, it is a report of a design to surprise, the year before; but then dropt. This is a topic of mere general speculation; which made no part of the fact of the case upon which the insurance was to be made. It was said—If a man insured a ship, knowing that two privateers were lying in her way, without mentioning that circumstance, it would be a fraud—I agree it.

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But if he knew that two privateers had been there the year before, it would be no fraud, not to mention that circumstance: because, it does not follow that they will cruise this year at the same time, in the same place; or that they are in a condition to do it. If the circumstance of “this design laid aside” had been mentioned, it would have tended rather to lessen the risque, than increase it: for, the design of a surprise which has transpired, and been laid aside, is less likely to be taken up again; especially by a vanquished enemy. The jury considered the nature of the governor’s silence, as to these particulars: they thought it innocent: and that the omission to mention them did not vary the contract. And we are all of opinion, “that, in this respect, they judged extremely right.” There is a silence, not objected to at the trial nor upon this motion; which might with as much reason have been objected to, as the two last omissions; rather more. It appears by the governor’s† letter to the plaintiff, “that he was principally apprehensive of a‡ Dutch war.” He certainly had, what he thought, good grounds for his apprehension. Count D’Estaigne being piloted by the Dutch, delivering the fort to the Dutch, and sending the prisoners to Batavia, is a confirmation of those grounds. And probably, the loss of the place was owing to the Dutch. The French could not have got up the river without Dutch pilots: and it is plain, the whole was concerted with them. And yet, at the time of underwriting the policy, there was no intimation about the Dutch. The reason why the counsel have hot objected to his not disclosing the grounds of this apprehension, is, because it must have arisen from political speculation, and [1918] general intelligence; therefore, they agree, it is not necessary to communicate such things to an underwriter. Lastly—Great stress was laid upon the opinion of the broker. But we all think, the jury ought not to pay the least regard to it. It is mere opinion; which is not evidence. It is opinion after an event. It is opinion without the least foundation from any previous precedent or usage. It is an opinion which, if rightly formed, could only be drawn from the same premises from which the Court and jury were to determine the cause: and therefore it is improper and irrelevant in the mouth of a witness. There is no imputation upon the governor, as to any intention of fraud. By the same conveyance, which brought his orders to insure, he wrote to the company everything which he knew or suspected: he desired nothing to be kept a secret, which he wrote either to them or his brother. His subsequent conduct, down to the 8th of February 1760, shewed that he thought the danger very improbable.

† 

‡ 

Dated 22d Sept. 1759. His words are—“And in case of a Dutch war, I would have it (the insurance) done at any rate.”

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 21

The reason of the rule against concealment is, to prevent fraud and encourage good faith. If the defendant’s objections were to prevail, in the present case, the rule would be turned into an instrument of fraud. The underwriter, here, knowing the governor to be acquainted with the state of the place; knowing that he apprehended danger, and must have some ground for his apprehension; being told nothing of either; signed this policy, without asking a question. If the objection “that he was not told” is sufficient to vacate it, he took the premium, knowing the policy to be void; in order to gain, if the alternative turned out one way; and to make no satisfaction, if it turned out the other: he drew the governor into a false confidence, “that, if the worst should happen, he had provided against total ruin;” knowing, at the same time, “that the indemnity to which the governor trusted was void.” There was not a word said to him, of the affairs of India, or the state of the war there, or the condition of Fort Marlborough. If he thought that omission an objection at the time, he ought not to have signed the policy [1919] with a secret reserve in his own mind to make it void; if he dispensed with the information, and did not think this silence an objection then; he cannot take it up now, after the event. What was often been said of the Statute of Frauds may, with more propriety, be applied to every rule of law, drawn from principles of natural equity, to prevent fraud—“That it should never be so turned, construed, or used, as to protect, or be a means of fraud.” After the fullest deliberation, we are all clear that the verdict is well founded: and there ought not to be a new trial: consequently, that the rule for that purpose ought to be discharged. Rule discharged. The end of Easter term, 1766, 6 G. 3. [1920]

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3 The History of a Landmark: Carter v Boehm STEPHEN WATTERSON*

I. Introduction On 9 May 1760, an insurance policy was effected in London on the instructions of Roger Carter, then Deputy Governor of the East India Company’s factory at Fort Marlborough, Bencoolen, Sumatra. These instructions had been dispatched from Bencoolen more than eight months previously, addressed to Roger Carter’s brother and agent in London. The policy ultimately effected covered the risk of a European enemy assault on Fort Marlborough for one year running from October 1759. However, events had already taken a fateful course. On 5 February 1760, a French privateering expedition under the command of the Count D’Estaing arrived off the West Coast of Sumatra. Within 10 days, Natal and Tapanouly, two of the East India Company’s subordinate settlements to the north of Bencoolen, had fallen. Another six weeks later, D’Estaing’s ships appeared in the sea off Fort Marlborough. By 3 April 1760, it too had fallen into French hands, and the Company’s servants there, including Roger Carter, had surrendered and were taken prisoner. Over the ensuing six weeks, the Company’s remaining settlements on the West Coast fell to D’Estaing’s men. Carter’s resulting insurance claim was resisted by the underwriters on the ground of non-disclosure. It was finally upheld only after protracted litigation, which culminated in the reported decision of the Court of King’s Bench in Carter v Boehm.1 Lord Mansfield’s judgment in that case unquestionably ranks as a landmark in the development of law of non-disclosure between parties to insurance *  I am enormously grateful to Rob Merkin, Charles Mitchell and Francis Rose for their valuable comments on earlier drafts of this chapter, and to the staff of the British Library’s Asian and African Studies Reading Room for their patience during my long trawls through the India Office Records. I am also indebted to the Society of Legal Scholars, from whom I received a grant to undertake the archival research on which this paper is substantially based. Any errors are solely my responsibility. 1  Carter v Boehm (1766) 3 Burr 1905, 97 ER 1162; (1766) 1 Black W 593, 96 ER 342. The reported decision is of the Court of King’s Bench, hearing and dismissing the insurer’s motion for re-trial, brought after verdict was given for the insured by a special jury sitting with Lord Mansfield at G ­ uildhall. Lord Mansfield delivered the opinion of the court.

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contracts. Unfortunately, more than two centuries on, and as the case is relegated to footnotes in modern texts, its real significance can be missed. As the leading early authority in an area of the law that has come to be viewed—and often c­ riticised—as dramatically pro-insurer in orientation, it is easy to assume that Carter v Boehm shared that bias. Little could be further from the truth. Lord ­Mansfield began his judgment in Carter v Boehm with an unprecedented statement of common law principle, one purpose of which was to explain the many circumstances in which an insurer could not avoid liability for material ­non-disclosure by a prospective insured. The same orientation is also evident in the robust manner in which Lord Mansfield proceeded to apply those principles to the case at hand. Every ground for resisting liability offered by Charles Boehm, the underwriter named as defendant in the 1766 litigation, was rejected. Some 250 years on, and when this area of the law has recently come under the scrutiny of law reformers, it is timely to remind ourselves of this important ­historical reality. To this end, this chapter proceeds in three stages. It begins by outlining so much general historical background as is required for a proper understanding of the litigation, before looking more closely at the nature of Carter’s insurance policy. It concludes by revisiting Lord Mansfield’s judgment, focusing first on Lord Mansfield’s seminal statement of the law of non-disclosure, and then on the court’s resolution of Boehm’s arguments for avoiding liability.

II.  The General Historical Background A.  Fort Marlborough, Sumatra In the early stages of the English East India Company’s life, the spices of SouthEast Asia were thought to offer some of the richest pickings for European traders. To this end, the Company maintained an important trading presence at B ­ antam, West Java, for much of the seventeenth century. This foothold was lost in the early 1680s, when the local sultan awarded the privilege of exclusive trade in his ­territories to the Company’s main regional trading rival, the Dutch East India Company. Forced to look elsewhere to continue its involvement in the region’s pepper trade, the Company turned to the neighbouring island of Sumatra. Am ­ ission culminated in the establishment of a fortified trading settlement in 1685 at Bencoolen, on the West Coast of Sumatra.2 The fortified settlement was moved two miles to the south of its initial site over the period 1712–16, where ‘Fort Marlborough’ was established.3 2  See eg J Bastin, The British in West Sumatra (1685–1825) (Kuala Lumpur, University of Malaya Press, 1965) xi–xiii. The introductory chapter to this collection of sources contains a brief historical overview of the factory’s history from its foundation until 1824. 3  ibid, xvii.

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By the mid-eighteenth century, the Company’s influence on the West Coast had grown to the point where Fort Marlborough was served by a series of coastal ­out-settlements—including Tapanouly, Natal, Moco Moco, Ippo, Cattown and Laye to the north, and Salooma, Manna, Cawoor and Croce to the south. Nevertheless, as in India, where the European Companies characteristically maintained trading centres in close proximity, the English Company was not alone in this region. The Dutch Company also maintained trading settlements on the West Coast. Furthermore, in very close proximity on Java lay Batavia, the Dutch Company’s headquarters in the East Indies and the hub of a vast Dutch trade network.4 The English Company would maintain its presence on the West Coast, and an uneasy relationship with its Dutch neighbours, until 1824, when all of its ­establishments there were finally ceded to the Dutch.5 As its name might imply, the settlement at Fort Marlborough was fortified and garrisoned by a small private army.6 Nevertheless, this was only for the protection of what was fundamentally a trading community, run by merchants in the Company’s civil service. Up to the time of its loss in 1760, Fort Marlborough was a subordinate Company factory, under the close supervision of the Company’s Presidency at Fort St George, Madras. As such, it was headed by a ‘Deputy Governor’ and Council, comprising the most senior members of the 25–50 covenanted civil servants stationed there from time to time. To understand the insurance claim in Carter v Boehm it must be appreciated that these civil servants led double lives. On the one hand, they were employed to conduct the Company’s commercial affairs on Sumatra. This meant, first and foremost, managing the procurement of pepper from the West Coast’s plantations, and its safe consignment on the East Indiamen that arrived from London each year. On the other hand, these same civil servants were also private merchants. By the terms of their employment with the Company, they had the privilege of private trade within the East Indies. It was from this private ‘country trade’, rather than the Company’s salaries, that fortunes might be made. Roger Carter’s early career path seems typical of the young men who sought their fortunes as covenanted civil servants at Bencoolen in the first half of the eighteenth century. Born in 1723, a younger son of a Lincolnshire landowning family, Roger could have no expectation of inheriting the family’s lands.7 No doubt for this reason, his father, William, petitioned the Court of Directors of

4  See, for a short overview, EM Jacobs, In Pursuit of Pepper and Tea—The Story of the Dutch East India Company (Zutphen, Walburg Pers, 1991) 73–78. 5  Treaty Between His Britannick Majesty and the King of the Netherlands Respecting Territory and Commerce in the East Indies, 17 March 1824, art IX (extracted in Bastin (n 2) 190, document 154). 6  See generally AJ Harfield, Bencoolen—A History of the Honourable East India Company’s Garrison on the West Coast of Sumatra (1685–1825) (Barton-on-Sea, A&J Partnership, 1995). 7  The Redbourne Hall deposit held at the Lincolnshire County Archives contains a substantial deposit of documents relating mainly to the Carter family’s Lincolnshire estates. The Lincolnshire Archives’ Committee, Archivists’ Report No 8 (1956–57) 45–51, usefully summarises the process by which the family acquired and then lost the estates.

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the East India Company in 1741, to have Roger appointed Writer at Bencoolen.8 The petition succeeded, and in the 14 years that followed his arrival on the West Coast in August 1742, Carter rose steadily through the Company’s ranks at Fort Marlborough. After five years as Writer, he rose to Factor;9 by 1753, he had joined the Council;10 and by early 1756, he was fourth in Council, soon to be third.11 By this time, however, he had already made the decision to resign the Company’s service and return to London,12 apparently in a bid to secure his elevation at Fort Marlborough, or some favourable posting elsewhere. The bid succeeded. Arriving in London in late 1756, Carter tendered his services ‘in whatever manner may be conducive to the Service of the Company’.13 The Court of Directors decided that he was the right man to be the new Deputy Governor at Fort Marlborough, at the head of a re-modelled Council of nine.14

B.  The Emerging Threat of a French Attack on Fort Marlborough Roger Carter did not finally set foot again at Fort Marlborough, to take up his new position as Deputy Governor, until May 1758.15 In the two years since his departure, events had taken a momentous change of course. The Seven Years’ War had begun in Europe; by May 1756, England and France were at war once again; and within a short space of time, direct Anglo-French conflict had spread to India. Fort Marlborough itself was not to remain untouched for long. In mid-August 1759, reliable intelligence reached Deputy Governor Carter that the French had had definite plans to send a substantial force to surprise Fort Marlborough in the previous year. Within six months, in February 1760, these rumours became reality,

8  India Office Records (‘IOR’) IOR/B/66, Minutes of Meeting of Court of Directors, 6 January 1741, 489. The records show that he was joined by his youngest brother, Lumley, two years later, but that Lumley died in a smallpox outbreak after just over five years. 9  IOR/G/35/9, List of Covenanted Servants on the West Coast, 1747–48, folio 176 (recording Roger Carter’s arrival as Writer on 27 August 1742). 10 IOR/G/35/9, List of Covenanted Servants on the West Coast, end 1753, folio 426 (sixth in Council). Cf IOR/G/35/9, List of Covenanted Servants on the West Coast, end 1752, folio 390 (not yet on Council). 11  IOR/G/35/69, Diary and Public Consultations—Fort Marlborough, folio 74v, Account of salary due to Company’s servants, 25 December 1755–25 March 1756. 12  IOR/G/35/68, Diary and Public Consultations—Fort Marlborough, 4 September 1755, folios 138, 138v, 139, and 139v. 13  IOR/B/74, Minutes of Meeting of Court of Directors, 1 December 1756, 207. 14  IOR/B/74, Minutes of Meeting of Court of Directors, 17 December 1756, 224. Carter would probably have reached this position in any event, had he remained. By their general letter of 3 ­December 1755, which did not arrive at Fort Marlborough until after Carter departed, the Court of Directors provided for a remodelled Council, effective from the letter’s receipt, which would have seen Carter leap to second in Council behind a man who had made a similar decision to return to Europe shortly before Carter’s own: see IOR/G/35/31, Rough Drafts of Dispatches to Fort Marlborough, Letter from the Court of Directors to Fort Marlborough, 3 December 1755, folio 20 ff, para 67. 15  IOR/G/35/70, Diary and Public Consultations—Fort Marlborough, 15 May 1758, folio 63v (diary entry).

The History of a Landmark: Carter v Boehm

 27

when the Count D’Estaing’s privateering expedition arrived on the West Coast. It is to these developments that our attention must now turn.

i.  Anglo-French Commercial Rivalry and War in the East Indies To explain the reasons for the French assault on the West Coast in 1760, and the extent to which this attack could have been anticipated in the preceding months, something must be said about the wider political and economic context. The assault ultimately had its origins in the long-standing commercial rivalry between the English and French East India Companies in India, and the global war into which England and France were drawn in 1756. The English and French Companies16 had both maintained a significant trading presence in India for much of the eighteenth century. By the mid-century, the English Company’s interests centred on the three Presidencies at Bombay, Fort William (Calcutta) in Bengal, and Fort St George (Madras) on the Coromandel Coast. The French Company’s East Indies headquarters lay south of Madras, at Pondicherry; but like the English Company, it also had a number of lesser settlements, particularly on the ­Coromandel Coast and in the rich province of Bengal. Also in French possession were the islands of Mauritius (Ile de France) and Réunion (Bourbon), important bases for the provisioning and shelter of French shipping. The two Companies had intermittently come into direct armed conflict in India during the War of Austrian Succession. Less than a decade later, when England and France were drawn into the Seven Years’ War in May 1756, a renewal of such hostilities, supported by the Companies’ respective governments, was virtually inevitable.17 Almost immediately, the French Government and Company began to prepare a massive combined armament at Brest and Port Lorient, destined for the East Indies, under the command of Lally, the new French Governor-General. The three divisions left Europe in December 1756 and May 1757. Observing these preparations, the English Government also dispatched a small squadron to India in March 1757, to reinforce the Company and royal forces already in the region. Further reinforcements followed in subsequent years.18 Direct Anglo-French conflict in India re-ignited first in Bengal, and then on the Coromandel Coast, where the French forces finally arrived from Europe in

16  A recent readable English language introduction to the history and trade of the French East India Companies is DC Wellington, French East India Companies—A Historical Account (Lanham, ­Hamilton Books, 2006). A classic English language account, dedicated to French interests in India from the earliest times until Pondicherry’s fall in 1761, is GB Malleson, History of the French in India 2nd edn (­London, WH Allen & Co Ltd, 1893). 17  This war was a truly global conflict. England was brought into conflict in Europe on the side of Prussia against an alliance of France, Austria and Russia; and in North America, the West Indies and India, against France. Spain entered the conflict belatedly in 1761. 18  For these developments, see eg Malleson (n 16) 507 ff; JS Corbett, England in the Seven Years’ War (London, Longmans Green & Co, 1907) vol 1, ch 14, 336 ff; JR Dull, The French Navy and the Seven Years War (Lincoln, University of Nebraska Press, 2005) 62–63, 83, 116–17.

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S­ eptember 1757 and April 1758.19 They initially secured important successes in that region. Cuddalore rapidly fell in May 1758, followed by Fort St David in June 1758. A delay of several months then followed before the next great military effort began. On 12 December 1758, Lally’s forces laid siege to Fort St George. ­Nevertheless, Fort St George did not fall, and on 16 February 1759, the siege was raised. Thereafter, the tide of the conflict in India increasingly favoured the ­English forces to the point where, by the summer/autumn of 1760, the last French stronghold at Pondicherry was encircled by land and blockaded by sea. In January 1761, after several difficult months, Pondicherry capitulated. One factor in this outcome, important to understanding Carter v Boehm, was the disposition of the French fleet under D’Aché’s command, at critical moments in the conflict.20 The spring/summer of 1758, which had brought direct conflict between the English and French land forces on the Coromandel Coast, had also brought two inconclusive engagements between the naval squadrons of D’Aché and Pocock in April and August. Not long after the latter, D’Aché insisted on returning with his ships to Mauritius, where his forces were reinforced by several more ships, and troops, from Europe. These new arrivals exacerbated an already chronic shortage of resources at Mauritius, and D’Aché was thus forced to send 12 of his ships to the Dutch colony at the Cape of Good Hope for the winter of 1758–59. In the absence of D’Aché’s fleet on the Coast during those months, ­English ships were able to relieve the besieged Fort St George, and the besiegers, at the end of their own supplies, were forced to abandon the siege. It was not until some time in August 1759 that D’Aché’s fleet finally reappeared off the ­Coromandel Coast. After another inconclusive engagement on 10 September 1759 with Pocock’s squadron, D’Aché’s ships were able to land reinforcements and supplies at Pondicherry, but then immediately left for Mauritius once again. That was the end of the fleet’s effective involvement in the conflict: it remained there throughout 1760. In early 1760, a terrible storm devastated D’Aché’s fleet at Mauritius. Before it could depart again, D’Aché received strict orders from France, ordering the fleet to remain at Mauritius, in anticipation of a rumoured English assault on the Mascarene islands. Lally’s forces, besieged at Pondicherry, awaited the fleet’s arrival in vain.

ii.  Contemplation of a French Attack on Fort Marlborough From as early as 1755, the Court of Directors in London, and the West Coast servants, realised that the renewal of Anglo-French war in Europe meant that the Company’s interests on the West Coast of Sumatra might be possible objects of French attack. Beginning in 1755, the Court of Directors’ general dispatches to the

19  For the course of the ensuing conflict, see eg Malleson (n 16) ch 12; Corbett (n 18) vol 1, ch 14 and vol 2, ch 4. 20  For these developments, see eg Malleson (n 16) ch 12, esp 516–19, 523–25, 531–32, 553–56, 574–75; Corbett (n 18) vol 1, 346–50 and vol 2, ch 4; Dull (n 18) 116–17, 141, 172–73.

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Council at Fort Marlborough related the developing conflict in Europe, and what intelligence the Company had of the strength of the forces anticipated for the East Indies. These same letters repeatedly warned the Council to be on their guard, and ordered them to prepare as best they could.21 The urgency of those warnings measurably increased as the massive French armament was being prepared and dispatched from Brest and Port Lorient for the East Indies.22 Nevertheless, at this stage, the risk to Fort Marlborough was apparently perceived to be small. The primary target of the French forces was imagined to be India, where Anglo-French rivalry was long-standing, and the commercial stakes were highest. The accuracy of this prediction would have been confirmed when news finally arrived at Fort Marlborough and in London of the arrival of Lally’s forces at Pondicherry in April 1758, and the ensuing engagements on the Coromandel Coast. During this time, Roger Carter and his Council at Fort Marlborough appear to have existed in a low-level state of alert. Intelligence slowly arrived of the turbulent events in India, usually via John Herbert, the Company’s agent at ­Batavia. However, none of this intelligence gave the Council reason to think that Fort ­Marlborough was directly at threat. The Council’s principal concern was different: viz, that the conflict in India might disrupt its usual supply routes with the Company’s Presidencies there, and leave it critically short of important supplies. This low-level state of alert changed dramatically in August 1759. The events that brought this change can be traced through the deliberations and correspondence of the Fort Marlborough Secret Committee. This Committee was first established in June 1758, on the basis that there might be circumstances which it might be desirable to avoid being made public ‘in the present state of affairs’.23 Nevertheless, for almost a year afterwards, nothing of that nature emerged,24 and the ­Committee did not meet for the first time until May 1759.25 First came a false alarm. On 18 May 1759, the Anna Catherina arrived at Fort Marlborough from Batavia.26 The sloop had been specially hired there by

21 IOR/G/35/31, Rough Drafts of Dispatches to Fort Marlborough, Letter from the Court of ­ irectors to Fort Marlborough, 3 December 1755, folio 20 ff, para 75; ibid 29 December 1756, folio 48 D ff, para 5; ibid 8 February 1758, folio 79 ff, paras 4–5; ibid 8 November 1758, folio 101 ff, paras 5–7; ibid 13 February 1759, folio 111 ff, paras 5–8. 22 IOR/G/35/31, Rough Drafts of Dispatches to Fort Marlborough, Letter from the Court of ­Directors to Fort Marlborough, 8 February 1758, folio 79 ff, paras 4–5. Cf subsequently, ibid Letter 13 F ­ ebruary 1759, paras 5–8, which is more optimistic in tone. 23 IOR/G/35/70, Diary and Public Consultations—Fort Marlborough, 30 June 1758, folio 83v (decision to create committee); IOR/G/35/12, Letter from Fort Marlborough to the Court of Directors, 10 March 1759, folio 35 ff, para 75 (reporting this decision). 24  IOR/G/35/12, Letter from Fort Marlborough to the Court of Directors, 10 March 1759, folio 35 ff, para 75 (nothing yet under secret heading); IOR/G/35/12, Letter from Roger Carter and Richard ­Preston, Fort Marlborough, to the Secret Committee of the Court of Directors, 16 September 1759, folio 287 ff, para 1 (reporting that several matters had occurred of a nature not proper to be immediately made public). 25  IOR/G/35/12, Minutes of the Secret Committee, Fort Marlborough, 18 May 1759, folios 266–67. 26  IOR/G/35/70, Diary and Public Consultations—Fort Marlborough, 18 May 1759, 148 (diary entry).

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John Herbert, to provide speedy delivery of an important packet of secret correspondence. Two letters conveyed important news about the conflict in India— in particular, the commencement and progress of the siege at Fort St George.27 A third, dated 5 April 1759, was of more immediate significance. In it, Herbert related third-hand reports of what were said to be nine French ships bound for Bencoolen, and of a French ship and sloop, waiting in the Straits of Sunda28 to intercept English shipping. Herbert doubted the first report, but had thought the second sufficiently credible to require special precautions for the security of the Anna Catherina’s packet of correspondence. By the time Herbert’s letter reached the Secret Committee at Fort Marlborough, however, it was apparent that neither sighting was accurate. His letter was read at the Secret Committee’s first meeting on 18 May 1759, but no action was taken.29 Three months later, in August 1759, the Secret Committee reacted very differently. On 14 August, a new bundle of correspondence arrived from Batavia, again from John Herbert. One letter brought good news: Herbert reported that the siege of Fort St George had been raised on 16 February 1759.30 The other news was more ominous. Herbert reported a major Dutch armament at Batavia, ostensibly bound for the Coromandel Coast to protect the Dutch settlements there, but believed to be destined for an offensive in Bengal.31 Even more crucially, Herbert also forwarded a letter to Roger Carter from Alexander Wynch, dated 4 February 1759 at the Cape of Good Hope.32 It is impossible to over-estimate the significance of Wynch’s letter to an understanding of Carter v Boehm.

iii.  Alexander Wynch’s Letter Wynch was a man known to Roger Carter. He had been an East India Company employee in India for over 20 years, and latterly a Council member at

27  IOR/G/35/12, Letter from John Herbert, Batavia, to the Secret Committee, Fort Marlborough, 15 March 1759, folios 258–59v (commencement of siege on 12 December 1758); IOR/G/35/12, ­Letter from John Herbert, Batavia, to the Secret Committee, Fort Marlborough, 18 March 1759, folios 259v–260 (progress of siege up to 16 January); IOR/G/35/12, Minutes of the Secret Committee, Fort Marlborough, 18 May 1759, folios 266–67. These communications were pre-empted by news brought by the Welcome private trader, which arrived from Bengal on 30 April 1759: IOR/G/35/70, Diary and Public Consultations—Fort Marlborough, 30 April 1759, 134 (diary entry); ibid 4 May 1759, 137–38 (news reported). 28  These are the straits separating Sumatra and (to its south) Java. 29  IOR/G/35/12, Letter from John Herbert, Batavia, to the Secret Committee, Fort Marlborough, 5 April 1759, folios 260–61v; IOR/G/35/12, Minutes of the Secret Committee, Fort Marlborough, 18 May 1759, folios 266–67. 30 IOR/G/35/70, Diary and Public Consultations—Fort Marlborough, 15 August 1759, 254 (­reporting the contents of a letter from John Herbert, Batavia, of 5 July 1759). 31 The news was conveyed by duplicates of letters sent directly to Fort St George, which John ­Herbert had dispatched to Fort Marlborough: see IOR/G/35/12, Letter from John Herbert, Batavia, to Fort St George, 16 June 1759, folios 280–81; ibid 5 July 1759, folios 281–82. 32  IOR/G/35/12, Letter from Alexander Wynch, Cape of Good Hope, to Roger Carter, 4 February 1759, folios 262v–264.

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Fort St George, the Presidency to which Fort Marlborough was subordinate.33 In ­mid-1756, Wynch was appointed acting Deputy Governor at Fort St David, where he remained until 2 June 1758, when the place surrendered to Lally’s forces following a short siege.34 Wynch was released by the French in October 1758, whereupon he resigned from the Company’s service on the grounds of failing health, and took his passage for Europe,35 apparently on a Danish ship.36 It is likely that the vessel on which Wynch departed stopped at the Dutch colony at the Cape of Good Hope for the purposes of provisioning or repair.37 In any event, there is no doubt that Wynch’s stay at the Cape coincided with the substantial gathering of French ships which D’Aché had dispatched there for the winter of 1758–59.38 Wynch’s purpose in writing was to transmit intelligence of the strength of the French forces gathered at the Cape, so that the Company’s servants and the ­English forces on the Coromandel Coast might know the extent of the French forces that might be expected to arrive there in mid-1759. To this end, letters were dispatched to Batavia, for transmission to Fort St George and Admiral Pocock,39 and to Fort Marlborough;40 the same news was communicated to the Company in London by letters received via Copenhagen.41 All of these letters also conveyed the further piece of intelligence which was of critical significance to Carter: viz, the news of French plans to attack Fort Marlborough. The letter sent to Roger Carter at Fort Marlborough, dated 4 February 1759, related: From a Conversation I had with some French Gentlemen I find your Place attracts their Notice, and that there was a scheme last Year of sending a Ship with about 400 Military

33 For early biographical information, see H Davison Love, Vestiges of Old Madras 1640–1800 (­London, John Murray Ltd, 1913) vol 2, esp 318–19, 390, 394, 401, 437, 477, 481–82 and vol 3, esp 3–5. 34  ibid vol 2, 482. Details of the capitulation, including the articles of capitulation signed by Wynch et al, can be found in IOR/H/95, 145–47, 212–13. 35  Davison Love (n 33) vol 2, 482. 36  See eg IOR/H/95, Letter from Capt Martin to Rt Hon William Pitt, undated, folio 171 ff. 37  For a description of the Dutch colony, the so-called ‘tavern of the two seas’, see CR Boxer, The Dutch Seaborne Empire 1600–1800 (London, Penguin Books, 1965) ch 9. In the eighteenth century, there were more often foreign sails anchored there than Dutch; there were profits to be made from selling local produce and service to foreign Indiamen: ibid 276. 38  See 28 above. 39  IOR/P/D/41, Military and Secret Consultations—Madras, 26 June 1759, 298–99, recording the receipt of two letters from Wynch of 4 and 23 February 1759, from Batavia via a Dutch ship. 40 IOR/G/35/12, Minutes of the Secret Committee, Fort Marlborough, 22 August 1759, folios 267–69, considering Wynch’s letter of 4 February 1759, received from Batavia on 14 August 1759, with a request to forward a copy of the same intelligence to Madras. The Fort Marlborough Secret Committee correctly concluded that it was then too late in the season for any purpose to be served by that precaution. 41  IOR/B/75, Minutes of Meeting of Court of Directors, 27 June 1759, 386, recording correspondence from Wynch at the Cape of Good Hope, of February 1759, received by way of Copenhagen. Wynch apparently dispatched this correspondence in advance of his own departure, on two Europe-bound Danish ships that sailed on 21 February 1759. See IOR/P/D/41, Military and Secret Consultations— Madras, 26 June 1759, 300ff (entering a copy of a letter of 23 February 1759 from Wynch at the Cape of Good Hope, in which this is reported).

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to surprize your Settlements, this I judged proper to mention to you that you might be upon your Guard, should they hereafter put [it] in practice.42

The corresponding letter sent to Fort St George, of the same date, elaborated: I learnt from some French Gentlemen, that there was an Intention the last Year of sending the Ship they took from the Dutch, with about 400 Military to Bencoolen in order to ­surprize that Settlement; this then mentioned to Mr Carter, that he may be upon his Guard, should they at any time hereafter put a Scheme of that kind into Execution. (emphasis added)43

Viewed in context, Wynch’s intelligence has an important degree of plausibility. Although Wynch might have learned of the French plans during his imprisonment after the capitulation of Fort St David, the best analysis is that this was new intelligence, subsequently obtained from conversations with Frenchmen who landed at the Cape colony from the French ships whose movements Wynch was witnessing and reporting. The Dutch ship in question is almost certainly the ship captured by D’Aché near Pondicherry in early August 1758, in retaliation for the Dutch action at Negapatam, in allowing a French ship there to be seized by the English squadron.44 The ship’s use in an opportunistic raid on the West Coast’s settlements has particular plausibility, in light of the financial difficulties which hindered the progress of Lally’s forces from their arrival on the C ­ oromandel Coast in late April 1758, and which left Lally unable to pay or properly provision his troops. These difficulties had led Lally, shortly after Fort St David’s capitulation on 2 June 1758, to postpone immediate plans for a further assault on the English Company’s settlements, to enable him to divert a substantial number of his troops on a two-month expedition against Tanjore, in search of money and supplies.45

iv.  The Response at Fort Marlborough to Wynch’s Letter Roger Carter and the Secret Committee at Fort Marlborough knew only what Wynch’s letter on its face disclosed. Even so, its brief terms were sufficient to provoke an instant response. Captain Frith, commander of the Fort M ­ arlborough ­garrison, was immediately ordered to recommend a plan of defence, in case

42  IOR/G/35/12, Letter from Alexander Wynch, Cape of Good Hope, to Roger Carter, 4 February 1759, folios 262v–264. 43  IOR/P/D/41, Military and Secret Consultations—Madras, 26 June 1759, 299, entering a copy of the letter. 44 The capture is noted in Malleson (n 16) 531–32. For contemporary confirmation, see IOR/ P/C/52, Select Committee Consultations—Madras, 10 August 1758, 308–09 (reports of capture by English squadron of French vessel after August engagement); ibid 22 August 1758, 349 (reports of retaliatory capture of a ‘large Dutch ship’); ibid 28 August 1758, 358 (reports of the arming of the ship with 50 guns). See similarly, eg IOR/H/95, Letter from Robert Palk to Rt Hon William Pitt, 3 July 1759, folios 179, 185 (naming the ship as the Harlem). 45  Malleson (n 16) esp 525–31, and generally on these difficulties, ch 12.

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of French attack.46 A week or so later, on 22 August 1759, the Secret Committee ­convened to consider what should be done. The surviving minutes record its ­initial reaction: It appearing from Mr Wynch’s Letter that the French have entertain’d a design of surprizing this place and as it is probable that they may not have entirely dropt their Scheme, the Committee now take into Consideration what are the best measures to be pursued to prevent such a design’s proving effectual, shou’d they hereafter attempt it, as well as what is necessary to be done for the security of our expected shipping.47

In the ensuing meeting, a paper of instructions was drawn up and approved containing signals etc for shipping, to be strictly observed by all commanders during their stay on the West Coast; a survey was ordered of the entrance to Bencoolen Bay, to ensure the safety of ships which in an emergency might need to approach close to shore; and secret instructions were drafted to the Company’s residents at Fort Marlborough’s out-settlements. Next, Captain Frith’s preliminary plans for defence were scrutinised, and the Committee resolved to write to him, informing him of those parts that were considered necessary and practicable to be implemented. Finally, the Committee ordered the military officers to report on Fort Marlborough’s military resources and the state of its fortifications, and to make recommendations for their improvement. Two weeks later, on 7 September 1759, the Committee reconvened to consider these reports, and what further action was required.48 The officers’ recommendations for the construction of batteries were accepted; however, any more ambitious plans for the building of a wall and ditch around Fort Marlborough were rejected on grounds of cost and the absence of the necessary skilled persons to conduct the work. These steps having been taken for the security of Fort Marlborough, the Secret Committee’s next priority was to communicate these and other recent developments to the Court of Directors, and to seek assistance with their plight. In this they were in luck. On 2 September, the Earl of Holderness and the Pitt had arrived in company at Bencoolen.49 They were the first Europe-bound ships to arrive, and to offer a direct means of communication with the Company in L ­ ondon, since the departure of the London and the Egmont six months earlier.50 The Earl of ­Holderness, one of the annual pepper boats, had to be detained for several months

46  IOR/G/35/12, ‘A Plan for defending Fort Marlborough if attack’d by the French’, 22 August 1759, folios 269v–270v. 47  IOR/G/35/12, Minutes of the Secret Committee, Fort Marlborough, 22 August 1759, folio 268. 48  IOR/G/35/12, Minutes of the Secret Committee, Fort Marlborough, 7 September 1759, folios 271–72. The letter from the officers at Fort Marlborough, dated 6 September 1759, follows the minutes: ibid folios 274–76v. 49  IOR/G/35/70, Diary and Public Consultations—Fort Marlborough, 2 September 1759, 273 (diary entry). 50  IOR/G/35/70, Diary and Public Consultations—Fort Marlborough, 23 March 1759, 103 (diary entry).

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to gather its pepper cargo.51 However, the Pitt was then Europe-bound, on its return from a path-breaking journey to China.52 When the Pitt left Bencoolen for Europe on 24 September 1759, it had two important packets of correspondence on board. Roger Carter’s instructions to the Pitt’s commander, Captain Wilson, betrayed their contents.53 Packet A was to be forwarded by a trusty officer, with all possible dispatch, immediately on the ship’s arrival at any port of Great Britain and Ireland. Packet B was meanwhile to remain on board, until the arrival of the Pitt in the Thames, and be delivered as soon afterwards as convenient.54 Both packets were always to be kept on hand, and slung with proper weights, so that in case of enemy attack during the voyage, and no probability of an escape, they might in the last extremity be thrown overboard. The Pitt finally arrived safely at Kinsale, Ireland, on 23 February 1760.55 From there, Packet A seems to have been immediately dispatched by express means to East India House in London, where it appears to have arrived on 1 March 1760.56 There can be no doubt about its contents. One inclusion was a general letter, dated 21 September 1759, which was read at the Court of Directors’ next meeting on 4 March 1760.57 Arranged under the conventional headings, no one reading it in London would imagine that there was anything seriously awry. However, the same packet also contained a further, substantial body of material not intended to be made public, addressed only to the Secret Committee of the Court of Directors.58 In the ordinary course, this secret material would not have been disclosed at the general meeting of the Court.59 And it would have told a very different story. The ‘secret’ material sent by the Pitt included copies of all correspondence to and from the Secret Committee up to the time of the Pitt’s departure, and minutes

51 IOR/G/35/70, Diary and Public Consultations—Fort Marlborough, 2 September 1759, 273 (arrival of the Earl of Holderness); ibid 4 October 1759, 306 (departure for the north); ibid 18 ­December 1759, 471 (arrival from the north); IOR/G/35/12, Letter from Fort Marlborough to the Court of ­Directors, 5 February 1760, folio 481 ff, para 1 (sailing for Europe on 7 February 1760). 52  See n 188 below. 53  IOR/G/35/12, Directions from Roger Carter and Richard Preston to Captain William Wilson, Commander of the Pitt, 22 September 1759, folio 334. 54  Packet B contained standard items of information relating to the commercial activities at Fort Marlborough (eg journals, ledgers, letters sent and received, accounts): see IOR/G/35/12, List of ­contents of Packet B sent via the Pitt, 21 September 1759, folio 332. 55  IOR/L/MAR/B/525, index to the marine records for the Pitt. 56  See eg the contemporary press reports that on 1 March 1760, the Company received an account of the Pitt’s arrival at Kinsale: eg London Chronicle (1–4 March 1760) 219, col 1; London Evening Post (1–4 March 1760) 1, cols 1–2. The same can be inferred from the minutes, noted in n 57 below. 57  IOR/B/75, Minutes of Meeting of Court of Directors, 4 March 1760, 637, recording the reading of a general letter from Fort Marlborough of 21 September 1759. There is no record of Carter and Preston’s letter to the Secret Committee of the Court of Directors of 16 September 1759 having been at this or subsequent meetings. 58  The contents of the secret packet dispatched on the Pitt are confirmed by the list of contents of the duplicate secret packet subsequently dispatched on the Earl of Holderness to the Secret Committee of the Court of Directors, dated 31 December 1759: IOR/G/35/12, folio 409. 59  See further n 191 below.

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of the Secret Committee’s meetings during the same period. It therefore included a copy of Wynch’s letter of 4 February 1759, and records of all of the secret deliberations that had followed its receipt on 14 August 1759. Even more critical, however, was a secret letter from Roger Carter and Richard Preston at Fort Marlborough, dated 16 September 1759. This letter assumed fundamental importance in the litigation in Carter v Boehm, and for good reason. No reader could doubt how seriously Wynch’s letter was being treated by Roger Carter and the other Secret Committee members in September 1759, and how ill-prepared Fort Marlborough was for a French attack. Carter and Preston’s secret letter of 16 September 1759 related: It is with much concern We are to acquaint your Honors, that by a Letter from Alexander Wynch Esq, dated at the Cape of Good Hope the 4th February last to the Deputy Governor, We are informed that your Settlements on this Coast have attracted the notice of the French, who last year, had actually a Design on foot, to attempt taking this settlement by surprize, which they purported to do with one Ship, and about Four hundred Troops. As it is very probable that the Enemy may hereafter revive their intention, though for the present We may suppose they have dropt it, We have taken the necessary precautions, as well for the Security of such Shipping as may be on the Coast at the time, as for the defence of the Settlement.60

There followed an exhaustive account of the steps that had been taken, to ­counter any French threat. Carter and Preston painted a bleak picture. Steps had been taken which would ‘at least render it a very difficult matter to surprize [the place]’. Thus, look-out houses and guards had been established at suitable sites on the coast, with instructions for signals to be made on sighting shipping; and entrenchments were being made at the places where there was any likelihood of the e­ nemy’s attempting to land.61 However, should the enemy land, and be too strong in the field, there would be no option but to retreat into the country, which it was hoped would prove too dangerous for any French force to follow.62 To retire to Fort ­Marlborough, and attempt to defend the place, would mean the ‘absolute loss of everything’.63 The military stores were too poor, and the Fort itself too weak, to make any such defence practicable. The gunpowder was largely bad, stocks of small arms were low, and there were no large guns to place on the entrenchments raised to defend the approaches to Fort Marlborough.64 Furthermore, whilst the military officers had recommended ways of making the defences at Fort ­Marlborough ­tenable against a European enemy, no steps could sensibly be taken in that direction.65 There were no skilled persons at Fort Marlborough capable of 60  IOR/G/35/12, Letter from Roger Carter and Richard Preston, Fort Marlborough, to the Secret Committee of the Court of Directors, 16 September 1759, folio 287 ff, paras 10–11. 61  ibid, para 12. 62  ibid, para 18. 63  ibid, para 18. 64  ibid, para 13. 65  ibid, para 17.

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properly directing and completing the works, and it was thought better to wait for the long-awaited arrival of expert assistance from Fort St George or Bombay than to spend a very considerable sum on works that might be found wanting.66 Carter and Preston concluded with a final, uncertain plea for assistance: We must leave to your Honors consideration, how far the present increase of your ­Investment, & the favourable prospect which your Settlements on this Coast in general bear, may render it worthy of your attention to increase our Works & Means of Defence; at least, so as to make our Enemies not think us so very easy a Conquest, as by the force they purposed to send against us, We may at present suppose they do.67

Other correspondence no doubt remained onboard the Pitt, consistently with Captain Wilson’s instructions, until the Pitt’s arrival in the Thames in mid-April. Amongst that correspondence was one final, crucial letter. This was a private letter from Roger Carter to his brother, dated 22 September 1759, in which he gave his brother instructions to take out insurance for his benefit in London, against the risk of a European enemy attack on Fort Marlborough. Acting on these instructions, on 9 May 1760, his brother effected the policy that was to trigger the litigation in Carter v Boehm.

C. The Origins of the Attack on Fort Marlborough: D’Estaing’s Expedition It is clear that in September 1759, when Roger Carter’s insurance instructions were dispatched to London, there was a substantially heightened fear of a French attack on Fort Marlborough. It is similarly clear that the direct cause of this heightened fear, and the origin of Carter’s insurance instructions, was the letter which arrived from Wynch in the middle of the previous month. Just over six months later, the feared attack came. However, it did not come from the source that Wynch’s letter had given Carter cause to fear: viz, the French fleet gathered at the Cape over the winter of 1758/1759.68 Rather, it was the product of the opportunism of one man: the Count D’Estaing.69 D’Estaing, a career soldier, had arrived in India in April 1758, at the head of the battalion of the Lorraine regiment that left France with Lally in May 1757.70 He was immediately involved in all of the major early actions,71 but that 66 

ibid, para 17. ibid, para 19. 68  On this, see further Part VII below. 69  The most substantial modern biography of D’Estaing is the French language work of J Michel, La vie aventureuse et mouvementée de Charles-Henri comte d’Estaing (Verdun, Michel, 1976). The only sustained English language discussion of D’Estaing’s privateering expedition appears to be P C ­ rowhurst, The Defence of British Trade (Folkestone, Dawson, 1977) 237–40 and ‘D’Estaing’s Cruise in the Indian Ocean: A Landmark in Privateering Voyages’ (1972) 35 Studia 53. 70  Michel (n 69) 27–33. 71  ibid, 35–40. 67 

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i­nvolvement was to be short-lived. On 13 December 1758, one day into the siege of Fort St George, D’Estaing was taken prisoner in Madras’s Black Town.72 Over the ensuing weeks, and particularly once the siege ended, the two sides negotiated for his release by some suitable exchange for English prisoners in India.73 No mutually acceptable terms were found. By early May 1759, Governor Pigot and co at Fort St George had determined that the best course was for D’Estaing to proceed to Europe, on his parole of honour, to be exchanged there.74 D’Estaing left Pondicherry for Mauritius in May 1759, ostensibly Europebound. However, D’Estaing was a man of action, and it seems unlikely that he ever had any real intention of returning to Europe, as his English captors, and his parole, required. Whilst at Pondicherry, he had presented Lally with plans for a sea expedition to Bengal, and for a further expedition against the kingdom of Cochinchine, and in the Philippines.75 The demands of the conflict in India ultimately prevented these being put into effect, but D’Estaing’s efforts continued on his arrival at Mauritius. He immediately approached the French Governor there, Monsieur de Magon, with plans for an ambitious privateering expedition to the China Seas.76 Magon eventually agreed. D’Estaing was given the use of two armed Company vessels, the Condé, and the Expedition.77 D’Estaing’s expedition left Mauritius on 1 September 1759, before the return of the French fleet from the Coromandel Coast. Their subsequent course appears to have been determined more by opportunism, than careful planning.78 They spent the autumn months in the Persian Gulf, where they captured two significant prizes, as well as the East India Company’s factory at Gambroon, now Basra. Thereafter, in November, the ships began their journey eastwards for the Straits that provided the doors into the China Seas. This journey proved unexpectedly difficult, and on 4 February 1760, when D’Estaing’s expedition reached Ayer Bungis, a small Dutch settlement to the north of the West Coast of Sumatra, his men were in no state to undertake an ambitious sea expedition into the China Seas.79 D’Estaing’s attention therefore turned to more immediate targets: the English Company’s interests on the West Coast. The Company’s northern-most out-settlements of Natal and Tapanouly fell in quick succession. Thereafter, after a short stay at the Dutch ­settlement at Padang in March, preparing for its future movements, D’Estaing’s

72  ibid, 39–40. It is suggested that D’Estaing had approached a group of soldiers in Madras’s Black Town, but discovered too late that they were English troops. Turning his horse to flee, he fell and was captured: Malleson (n 16) 537–38; Davison Love (n 33) vol 2, 555–56. 73  The negotiations emerge from the deliberations of the Madras Military and Secret Committee: IOR/P/D/41, Military and Secret Consultations—Madras, 23 February 1759, 16; ibid 29 March 1759, 95–97; ibid 16 April 1759, 118–20; ibid 3 May 1759, 155–56. 74  IOR/P/D/41, Military and Secret Consultations—Madras, 3 May 1759, 155. 75  Michel (n 69) 43–44. 76  ibid, 44. 77  ibid, 45–46, 48. 78  ibid, 46–51. 79  ibid, 46–51.

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expedition then set sail southwards for Fort Marlborough. On 31 March 1760, the French ships were sighted off Bencoolen. By 3 April, the inevitable had happened. Roger Carter and the Company’s servants at Fort Marlborough had surrendered. The Company’s remaining out-settlements on the West Coast fell into French hands over the ensuing weeks. At Fort Marlborough, Roger Carter and the rest had had no hint of this impending storm until 20 February 1760, when a letter arrived from Richard Wyatt, the Resident at the northern out-settlement of Natal, reporting the arrival of the two French ships on 6 February 1760. I wrote you this morning (by a Boat which sailed immediately) that I had advice by Noquedah Lebbee, that two large French ships were at Ayer Bungy, and had sailed from thence for this Place, and were then in sight from the Hill … They are now both come in sight, but show no Colours, and are in cha[s]e of the Sloop Resolution, which was dispatched this morning, and they seem to gain on her, but night coming on may favour her escape … I have this morning sent an Express to Tapanooly, to put Mr Nairne on his Guard.80

It was a very rude awakening. News of D’Estaing’s earlier raids in the Persian Gulf had certainly reached the Company’s servants at Bombay in late October 1759,81 and at Madras by January 1760.82 However, no one at those places appears to have suspected that D’Estaing’s next stop might be Sumatra. Unaware of these developing events further afield, public and private business at Fort Marlborough appears to have resumed its normal pattern after the Pitt’s departure in late September 1759. Indeed, by early 1760 at least, Roger Carter might have been forgiven for feeling secure. 12 months after Wynch’s letter arrived from the Cape, no French force had appeared; news, such as Carter had, was of English successes in India; and the most recent intelligence of the French fleet suggested that it was out of harm’s way, sheltering at Mauritius for the winter months.83

III.  Carter’s Insurance Policy Having set Carter v Boehm in its wider historical context, we are better placed to understand Boehm’s allegations of non-disclosure, and the court’s response 80  IOR/G/35/12, Letter from Richard Wyatt, Natal, to the Secret Committee, Fort Marlborough, 6 February 1760, 6pm, folio 492. 81  IOR/P/D/43, Military and Secret Consultations—Madras, 11 February 1760, 155–57, where a ­letter from Bombay, dated 26 December 1759, is entered, reporting receipt of the first intelligence around the end of October. 82  IOR/P/D/43, Military and Secret Consultations—Madras, 14 January 1760, 62; ibid 11 February 1760, 157–61. 83  IOR/G/35/12, Letter from the Secret Committee, Fort St George to the Secret Committee, Fort Marlborough, 7 November 1759, folio 353; IOR/G/35/12, Minutes of the Secret Committee, Fort Marlborough, 20 December 1759, folio 399 (considering the letter).

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 39

to them. Before turning to this, however, more must first be said about Carter’s insurance policy. The origin of Carter’s instructions should now be clear. Less easy to perceive clearly today, and relatively easy to misperceive, are the purpose and form of the policy that was effected in London on 9 May 1760.

A.  The Purpose of Carter’s Policy If Fort Marlborough was to fall to a European enemy, then Deputy Governor Carter no doubt stood to lose his position at Fort Marlborough and his associated salary.84 However, that consideration cannot explain the policy effected on his instructions in May 1760. The £10,000 sum insured85 was over 30 times Carter’s annual wage as Deputy Governor.86 The four per cent premium87 alone was equal to more than one year’s salary, and there is evidence that he was prepared to pay very substantially more.88 In September 1759, Carter remitted £600 to his brother Thomas in London, via certificates drawn on the Company, sent on board the Pitt.89 A further £1,750 was remitted in early February 1760, via certificates sent on board the Earl of Holderness.90 Carter’s policy is ultimately comprehensible only in light of his double life as a Company-covenanted servant. What he principally feared was the loss of the merchandise and/or treasure at Fort Marlborough that formed the subject-matter of his private trading activities within the East Indies.91 A contemporary later described Carter as a man ‘conspicuous for his abilities

84  In fact, after Fort Marlborough’s fall in April 1760, Roger Carter made his way with the other West Coast prisoners to Madras, in accordance with the terms of their paroles of honour. During his stay there, and until he finally resumed his position at Fort Marlborough in September 1762, he and the other West Coast servants were paid their usual salary by the Company’s government at the Presidency of Fort St George, Madras: see esp IOR/P/240/19, Public Consultations—Madras, 30 September 1760, 453. In the interim, Fort Marlborough had been elevated to the status of an independent Company Presidency, headed by a ‘Governor’, rather than a ‘Deputy Governor’. 85  Carter (n 1) 3 Burr 1905, 1907; 97 ER 1162, 1163. 86  The annual salary for the Deputy Governor had been £200 for many years, but Carter appears to have been allowed an extra £100: see eg IOR/G/35/12, Letter from Roger Carter to the Court of Directors, 10 March 1759, folios 65, 70. 87  Carter (n 1) 1 Black W 593, 593; 96 ER 342, 343. 88  See too the further passage from the insurance instructions, noted by Lord Mansfield, indicating that in the event of a Dutch War, Carter would wish to have insurance at any rate: Carter (n 1) 3 Burr 1905, 1908n; 97 ER 1162, 1168n. 89 IOR/G/35/12, Letter from Fort Marlborough to the Court of Directors, 21 September 1759, folios 302–31, with certificates listed at folio 331. 90  IOR/G/35/12, Letter from Fort Marlborough to the Court of Directors, 31 December 1759, folios 411–29, with certificates listed at folio 429. The records show that remittances on this scale were wholly unprecedented for Roger Carter. They were also unusual for Company servants generally, except as a way of remitting their fortunes to England in advance of their impending departure from the East Indies. 91  On the double lives of East India Company covenanted servants, see 25 above.

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in trade, & in the ­management of [the West Coast] Government’;92 and in the period that i­mmediately followed his return to the West Coast as Deputy Governor in May 1758, Carter’s private trading activities seem to have been extensive. Indeed, by late 1759, some junior Company servants were complaining that Carter was monopolising the country-trade at their expense. To quote one: ‘[o]ur Governour Mr Carter will carry all the trade at Marlbro, and nobody can do anything ­worthwhile’.93 Similar accusations embittered Carter’s eventual resignation from the Governorship at Fort Marlborough in 1767.94 Whether or not these accusations were justified, the substantial scale of Carter’s trading activities immediately prior to the French assault on Fort Marlborough is indicated by the uncontradicted evidence of a ­witness in the litigation in Carter v Boehm that on 8 February 1760, ‘[Carter] bought … goods to the value of 4000 l, and had goods to the value of above 20,000 l and then dealt for 50,000 l and upwards.’95 Against this background, it is reasonable to assume that when Carter sent his insurance instructions to his brother by the Pitt in September 1759, the policy he sought was to be a bona fide hedge against the inevitable injury to his private trading interests if the feared French attack on Fort Marlborough should come. This seems to be put beyond doubt by a note to Burrows’ report, which records that Carter wrote to his brother that he was ‘now more afraid than formerly, that the French should attack and take the settlement … And therefore he desire[d] to get an insurance made upon his stock there.’96

B.  The Form of Carter’s Policy As Carter’s policy has not been found, what can be known about its form must be inferred from the details revealed in the case-reports. Whilst incomplete, and susceptible to varying interpretations, they are sufficient to suggest a disjunction between Carter’s purpose and the policy’s form, which warrants exploration.97

92 British Library, Private Papers, MS Eur D737/1, Letter from Hew Steuart to his sister, 10 February 1766. 93 Nottinghamshire Archives, Private Papers, DD/N/203c/21, Letter from Stokeham Donstan to George Donstan, 12 December 1759; see too DD/N/203c/20, Letter from Stokeham Donstan to George Donstan, 15 March 1759. 94 IOR/G/35/75, Diary and Public Consultations—Fort Marlborough, 80 ff (letter from Roger Carter of 31 January 1767 entered); IOR/G/35/75, Diary and Public Consultations—Fort ­Marlborough, 159 ff (letter from Roger Carter of 25 May 1767 entered, giving an account of his private trading activities from 1762–65, in his defence against such accusations). 95 See Carter (n 1) 3 Burr 1905, 1913; 97 ER 1162, 1164. See too private correspondence between Roger Carter and the Company, in which he claimed to have had a private cargo worth £3,000 on board the Denham East Indiaman, which was deliberately sunk in the waters off Bencoolen shortly before D’Estaing’s assault on Fort Marlborough: IOR/G/35/12, Letter from Roger Carter, Fort St George, to the Court of Directors, 28 October 1760, folio 559 ff, paras 3–5. 96  Carter (n 1) 3 Burr 1905, 1913n; 97 ER 1162, 1166n. 97  See also the discussion of this issue in R Pearson, ‘Carter v Boehm: Facts and Context’ (2016) 27 Insurance LJ 113, 120–21.

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As reported, Carter’s policy was not obviously an ordinary indemnity insurance policy. There is no hint in the reports that the policy was expressed to be a policy on goods. Nor, more specifically, did it entitle Carter to an indemnity only in so far as his stock-in-trade at Fort Marlborough was shown to have been lost in a European enemy assault. By its express terms, the policy may have embodied a different bargain, whereby the whole insured sum of £10,00098 would be payable if Fort Marlborough was lost to a European enemy99 within 12 months of October 1759,100 without inquiry into whether or to what extent Carter had any interest at stake. Central to this analysis are the terms ‘interest or no interest’101 and ‘without the benefit of salvage’.102 In the mid-eighteenth century, a policy expressed in such terms would have been familiar, within the underwriting community involved in insuring marine risks,103 as a form of wagering policy. At that time, wagers were prima facie valid and enforceable at common law. So too were wagers in the form of insurance policies on marine risks.104 Difficulties could, however, arise if such instruments were used by wagering parties, because the courts tended to construe insurance policies on vessels as contracts of indemnity. This brought a series of inconvenient corollaries for wagering parties, who meant to play only for the whole insured sum, irrespective of the existence and extent of any interest in, and real loss to, the party ‘insured’. To avoid this construction and its unwanted corollaries, various forms of words came to be inserted into policies of this nature, which reaffirmed their character as wagers. Typical in wagering policies insuring property against marine risks were the terms found in Carter’s policy: ‘interest or no interest’, ‘free from average’, and ‘without benefit of salvage’.105 Marshall explained their role as follows: [A wagering policy] is usually conceived in the terms, ‘interest or no interest’, or ‘­without further proof of interest than the policy,’ to preclude all enquiry into the interest of the 98 

Carter (n 1) 3 Burr 1905, 1907; 97 ER 1162, 1163. Carter (n 1) 1 Black W 593, 594; 96 ER 342, 343; and 3 Burr 1905, 1907, 1908, 1911, 1912, 1915–16; 97 ER 1162, 1163, 1165, 1167–68. The precise definition of the insured-against event is considered at 58–60 below. 100  The commencement date is inconsistently reported as either 1 or 16 October: Carter (n 1) 3 Burr 1905, 1906, 1911; 97 ER 1162, 1163, 1165; and 1 Black W 593, 594; 96 ER 342, 343. 101  Carter (n 1) 3 Burr 1905, 97 ER 1162; and 1 Black W 593, 96 ER 342, 343 (where these terms are noted). 102  Carter (n 1) 3 Burr 1905, 97 ER 1162 (where these terms are noted). 103  At the time there was no standard marine policy wording, although most policies were written on what came to be adopted formally in 1789 as the Lloyd’s SG Form; and it was certainly not unknown for underwriters to use the SG wording as the basis of cover, but to amend it to meet the unusual nature of the risk. Striking examples from later decades were the insurances taken out on the transatlantic undersea cables laid in 1858 and 1866: eg in Wilson v Jones (1866-67) LR 2 Ex 139. 104  See the early discussions of wagering policies in eg JA Park, A System of the Law of Marine ­Insurance 4th edn (London, J Butterworth, 1800) ch 14; S Marshall, A Treatise on the Law of ­Insurance 2nd edn (London, J Butterworth, 1808) vol 1, 119–42; J Arnould, A Treatise on the Law of Marine Insurance and Average (London, W Benning & Co, 1848) vol 1, § 116. This issue is also dealt with in modern historical accounts, including P Rawlings, ‘Bubbles, Taxes, and Interests: Another History of Insurance Law, 1720–1825’ (2016) 36 OJLS 799, 806 ff; W Cornish et al, The Oxford History of the Laws of England—Vol XII 1820–1914: Private Law (Oxford, Oxford University Press, 2010) 679 ff. 105  Marshall, ibid, vol 1, 119–21, 122–23; similarly, Arnould, ibid, vol 1, §§ 16 and 116. 99 

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insured. And, as a consequence of the insured’s having no interest in the pretended ­subject of the policy, it follows that the insurer cannot be liable for any partial loss. A ­partial loss is not an event sufficiently defined and precise to be the criterion of a wager; and nothing but that sort of misfortune which is considered as amounting to a total loss can decide it. The parties mean to play for the whole stake; and when the underwriter pays a loss, he cannot, as in the case of an insurance upon interest, claim any benefit from what may have been saved; and to preclude all claim of that sort, the words, ‘free of average, and without benefit of salvage,’106 are always introduced into wager policies.107

In 1746, Parliament intervened to tackle the mischiefs presented by policies of this nature in a limited sphere.108 Policies on British vessels and cargoes, expressed in these terms, were declared void.109 Beyond this, the common law was left unaffected for another three decades.110 Carter’s policy—although expressed as an ‘interest or no interest’ policy—was not, by nature, a policy that fell within the 1746 Act’s prohibitions.111 As such, its efficacy should have turned on what the common law had to say, as to the necessity for an insurable interest in non-marine policies, and how far such a requirement could be dispensed with via the policy’s express terms. Contemporary authority on these questions is scanty. Nevertheless, in the one case that squarely addressed the point, The Sadlers Company v Badcock,112 Lord Hardwicke LC did indicate that the benevolence shown by the courts towards marine policies would not be extended to non-marine policies.113

106  The phrase ‘without benefit of salvage’ would now be understood as precluding what modern marine insurance lawyers would understand as two separate rights: the insurer’s right, on indemnifying his insured for an actual or constructive total loss, to acquire whatever remains of the insured subjectmatter (the ‘salvage’) under the doctrine of abandonment; and the insurer’s right, on indemnifying his insured, to acquire his insured’s subsisting rights of action against third parties by subrogation, under the doctrine of subrogation. Both rights can be understood as necessary incidents of an indemnity insurance contract, operating to prevent the insured from profiting by obtaining more than a full indemnity for the insured-against losses. The latter right originated as an incident of the former during the eighteenth century, and the two doctrines remained imperfectly distinguished until ­Simpson & Co v Thomson (1877) 3 App Cas 279. See for discussion, C Mitchell and S Watterson, Subrogation: Law and Practice (Oxford, Oxford University Press, 2007) ch 10(B). 107  Marshall (n 104) vol 1, 121; similarly, Arnould (n 104) vol 1, § 116. 108  19 Geo II c 37. For contemporary discussion, see Park (n 104) ch 14; Marshall (n 104) vol 1, 126–29. 109  19 Geo II c 37, s 1. 110  A further legislative attempt to tackle speculation in the form of insurance policies on lives ‘or other events’, came with the Gambling Act 1774—also known as the Life Assurance Act 1774—which expressly excluded insurance on ‘ships, goods and merchandises’. Ordinary wagers were subsequently addressed by the Gaming Act 1845. See further W Swain, ‘Da Costa v Jones (1778)’ in C Mitchell and P Mitchell (eds), Landmark Cases in the Law of Contract (Oxford, Hart Publishing, 2008) ch 4. 111  At the time it was assumed that the 1746 Act had no application to policies on profits. In the landmark insurable interest case, Lucena v Craufurd (1806) 2 Bos & Pul NR 269; 127 ER 630, that view was confirmed, but it was subsequently rejected 50 years later in Smith v Reynolds (1856) 1 H & N 221, 156 ER 1184. 112  The Sadlers Company v Badcock (1743) 2 Atk 554, 26 ER 733; see previously, Lynch v Dalzell (1729) 4 Brown 431, 2 ER 431. 113  Sadlers Company (n 112) 2 Atk 554, 555–57; 26 ER 733, 733–34. This was merely a dictum. The policyholder was a tenant whose lease had expired at the date of the fire that destroyed the

The History of a Landmark: Carter v Boehm

 43

In Carter v Boehm, the underwriters did not raise the objection that this was a wager, or that there was no insurable interest—liability on the policy was only resisted on the basis of alleged non-disclosure. Once Carter’s policy is set within its wider context, however, it is easy to see why such objections would have seemed unmeritorious. Carter was not, in truth, a wagering party. He had a very real and substantial economic interest in the fate of Fort Marlborough: as the court knew from the correspondence before it, Carter had sought the policy as a bona fide hedge against the risk of the loss of his valuable stock-in-trade at Fort M ­ arlborough in a European enemy assault. Furthermore, as the witness evidence produced in the proceedings showed, it was not a policy that in practice would have been likely to result in his over-indemnification: the £10,000 insured sum was substantially less than the £20,000-worth of goods which witnesses reported that Carter had lost in D’Estaing’s attack. This wider context suggests that even if Carter’s policy was not expressed to be an indemnity policy on goods, it was a policy that was designed to serve that purpose in substance. It was substantially equivalent to a ‘valued policy’ on goods—at an agreed valuation of £10,000. ‘Valued policies’ were indeed the typical method for insuring a vessel or cargo, and removed disputes as the measure of indemnity in the event of a loss. Ascribing a market value to a unique vessel or a cargo with fluctuating value was, in any event, all but impossible. There was never a suggestion that such valued policies were wagers, and they were fully enforceable even if the valuation exceeded a quantification of actual worth.114 The only exception was where the overvaluation was so excessive as to be fraudulent.115 Viewing Carter’s policy in this way, it had the further distinctive feature that it did not allow for any concept of a ‘partial’ loss—the whole £10,000 sum was payable, without more, on the insured against contingency occurring.116 But even this could be explained—it was realistic to assume, given the nature of Fort Marlborough, that if the place was attacked, it would be captured, and if captured, that all would be lost.117 Accepting this, it remains necessary to explain why Carter’s policy took the form it did—of a policy on ‘interest or no interest’ etc terms—and why this might not have been objectionable. Since the parties were not truly wagering parties, and Carter had intended a bona fide hedge, the best explanation seems practical. Above all, Carter would have faced great difficulty in proving, to the satisfaction of an underwriter and/or a court in London, that he had stock at Fort Marlborough

insured property, and it was clear that no loss had been suffered. The case can thus be explained as one based on the indemnity principle, and the same may be said of Lynch v Dalzell (n 112) 4 Brown 431, 2 ER 431. There was no case involving non-marine property up to the Gaming Act 1845 in which there was held to be a requirement of insurable interest at the date of the policy. 114 

See, in the marine context, Lewis v Rucker (1761) 2 Burr 116, 97 ER 769. Sadlers Company (n 112) 2 Atk 554, 555–57; 26 ER 733, 733–34. Total loss only policies (ie, ‘warranted free from particular average’) were common in wartime, as they reduced the premium. However, they were also a hallmark of wagering. 117  See 59–60 below. 115 

116 

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at the time of the enemy’s attack, its value, and the extent to which it was lost.118 It is sometimes said that such probative difficulties lay behind the introduction of ‘interest or no interest’ terms into what were originally bona fide marine ­policies,119 and that the courts might initially have ‘winked’120 at such policies, on the basis that the parties intended only to dispense with the need to prove evidence of interest etc—which might be difficult in distant marine ­ventures—rather than to insure irrespective of its existence.121 To similar effect, Lord M ­ ansfield himself also subsequently said that the difficulty of bringing witnesses from abroad to prove an insured’s interest was the reason for the exclusion of foreign ships and cargoes from the 1746 Act,122 which rendered void marine policies on ‘interest or no interest’ terms.123 The policy in Carter v Boehm was not, of course, a marine policy, and this has recently led Philip Rawlings to suggest that the decision is ‘curious’ in light of the view expressed by Lord Hardwicke LC in The ­Sadlers Company v Badcock,124 that the court’s benevolence was limited: only marine policies could be ‘interest or no interest’.125 There might, however, be an answer— even if the point had been raised. Lord Hardwicke LC was dealing with a policy on property in England. Carter’s policy was a policy designed, in substance, to cover property owned by a British subject resident in a small and remote trading ­settlement, the opposite side of the world; Carter would have faced practical difficulties not d ­ issimilar to those which might have been thought to justify the inclusion of ‘interest or no interest’ terms in marine policies.

IV.  Lord Mansfield’s Judgment Having clarified the historical background to Carter’s insurance claim, we are ­better placed to re-consider Lord Mansfield’s judgment in Carter v Boehm.126 118 Other subsidiary considerations, supporting the same conclusion, might be suggested. One might have been a desire not to publicise the character of Carter’s stock-in-trade. Cf the preamble to 19 Geo II c 37, indicating that one concern underlying the legislation was that ‘interest or no interest’ policies provided a cloak beneath which parties could undertake prohibited trade. Another might have been uncertainty about the legal position if some of the stock was held by Carter for sale on commission rather than on his own account. For evidence of such activity, see Lincolnshire Archives, Redbourne Hall deposit, Ledger, 2 Red 4/4/10, loose item (f) (counsel’s opinion on a claim by a party for whom Roger Carter was commission agent at the time of the French attack). 119  See eg Marshall (n 104) vol 1, 122–23. 120  This is the language of Lord Hardwicke LC in Sadlers Company (n 112) 2 Atk 554, 26 ER 733. 121  See Rawlings (n 104) 807, and the authorities cited there. 122  19 Geo II c 37, s 1. 123  Thellusson v Fletcher (1780) 1 Doug 315, 316; 99 ER 203. This explanation has not gone unchallenged. Others have preferred the explanation that Parliament was not concerned to remove incentives to put foreign ships at risk: cf Arnould (n 104) vol 1, § 116, 279 (preferring the view that Parliament was not concerned about incentives to destroy foreign ships etc); and Rawlings (n 104) 807. 124  Sadlers Company (n 112) 2 Atk 554, 555–57; 26 ER 733, 733–34. 125  Rawlings (n 104) 808, n 46. 126  Burrows’ report indicates that Carter’s insurance policy came before Lord Mansfield on more than one occasion: see Carter (n 1) 3 Burr 1905, 1906–07, 1911–13; 97 ER 1162, 1163, 1165–66.

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Three aspects of this require examination:127 Lord Mansfield’s seminal statement of the disclosure obligations of parties to insurance contracts, with which he began his judgment; his subsequent findings regarding the context in which the policy was effected, and the policy’s true construction; and finally, Lord Mansfield’s treatment of Boehm’s defences to liability. The theme that consistently emerges is that Carter v Boehm was absolutely not a ‘pro-insurer’ decision. Every argument advanced by Boehm failed. This might perhaps be explained by the inherent weakness of his case, exacerbated by the court’s indisposition to find for a man suspected of misconduct.128 But this would be to miss the decision’s real significance. Lord Mansfield’s seminal statement of the law was primarily important for its emphatic recognition that there were limits to an insurer’s ability to avoid liability for non-disclosure by his insured. Boehm’s case was a weak case only because of those limits, and because of the court’s inclination to apply them robustly to the case at hand.

A.  The Law of Non-disclosure Whatever might be the case today, Carter v Boehm’s landmark status in 1766, and in the decades that immediately followed, stemmed from Lord Mansfield’s preliminary exposition of the Common law principles governing disclosure between insured and insurer. Prior to Lord Mansfield’s rise to the King’s Bench in 1756, there was a remarkable dearth of reported cases on the law of insurance, and the few reports that did exist were of very poor quality. Thus, Carter v Boehm was significant primarily for Lord Mansfield’s unprecedented attempt to set out the Common law rules, more or less comprehensively, and in a manner that provided unequivocal guidance to insureds, insurers and their counsel.129 It is nevertheless important to be clear about what it was about the substance of Lord Mansfield’s exposition that was truly noteworthy in 1766. His exposition

Two common law actions on the policy came before Lord Mansfield and a special jury at Guildhall in 1762, concluding in a verdict for the insured. There was then a protracted period of litigation in equity, in which the underwriters sought to obtain further evidence to assist their case: see Carter (n 1) 3 Burr 1905, 1912; 97 ER 1162, 1166. This finally led to a further trial before Lord Mansfield and a special jury at Guildhall, again concluding in a jury verdict for the insured. The reported 1766 decision of the Court of King’s Bench was a decision on a motion for a retrial: see n 1 above. There are clear hints that Lord Mansfield was influenced by the fact that the underwriters’ protracted inquiries had produced very little in support of their case. 127  These substantially correspond to the three stages in which Lord Mansfield himself progressed through the issues, as indicated in Carter (n 1) 3 Burr 1905, 1909; 97 ER 1162, 1164. 128  See Part IX below. 129  See esp the preliminary exposition in JA Park, A System of the Law of Marine Insurances (­London, J Butterworth, 1787) for a useful account of the development of the law (including the reasons for its underdevelopment prior to Lord Mansfield’s rise to the King’s Bench). See too the summary account, relying heavily on Park, in J Oldham, English Common Law in the Age of Mansfield (Chapel Hill, ­University of North Carolina Press, 2004) 124–30.

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had three essential elements. The first was his emphatic statement that an insurance policy might be avoided where the insurer was induced to underwrite the policy by the insured’s failure to disclose a material fact, even where the insured had no fraudulent intention.130 However important, it is reasonably clear that Carter v Boehm was not the origin of this principle. Both the argument in the case, and the handful of earlier cases found in the reports and contemporary ­treatises,131 suggest that it was already an accepted proposition, in Equity132 and at ­Common law.133 Properly understood, it is the other two essential elements of Lord ­Mansfield’s statements that must be regarded as remarkable: viz, his explanation of the law’s normative basis, and of the circumstances in which an insurer could not avoid liability for non-disclosure by his insured. Lord Mansfield’s account of the law’s normative basis will probably be familiar even to modern insurance lawyers. In simple terms, an insured’s obligations were the product of a mutual requirement of pre-contractual good faith, applied to the special character of insurance contracts. The ‘governing principle’ ‘applicable to all contracts and dealings’, Lord Mansfield explained, was that ‘[g]ood faith forbids either party by concealing what he privately knows, to draw the other into a bargain, from his ignorance of that fact, and his believing the contrary.’134 This principle had particular resonance in the field of insurance contracts, ‘contract[s] upon speculation’, for the responsibilities of insureds. It was characteristic of such transactions that many facts necessary to a proper calculation of the risk being undertaken by the insurer lay peculiarly in the insured’s private knowledge.135 An insurer characteristically relied, and must be entitled to rely, on the insured’s having disclosed and fairly represented such matters.136 If the insured did not disclose them, whether by accident, negligence or fraud, and the insurer was induced by his ignorance to contract under a misapprehension as to the nature of the risk being run, the insurer could deny liability.137 130 

Carter (n 1) 3 Burr 1905, 1909–10; 97 ER 1162, 1164–65. A number of otherwise unreported cases are summarised in J Weskett, A Complete Digest of the Theory, Laws and Practice of Insurance (London, Frys Couchman & Collier, 1781); and Park (n 129). A useful overview of the law’s sources, and of the sparse seventeenth and eighteenth century English literature, is found in Marshall (n 104) ch 1. 132  De Costa v Scandret (1723) 2 P Wms 169, 24 ER 686. 133  Anonymous (c 1693) Skin 327, 90 ER 146; Seaman v Fonnereau (c 1740) 2 Strange 1183, 93 ER 1115; Roberts v Fonereau (1742) (noted in Park (n 129) 176); Rookes v Thurmond (1743) (noted in ­Weskett (n 131) 114–15); Green v Bowden (1759) (noted in Weskett (n 131) 115–18); Williams v ­Touchet (1759) (noted in Weskett (n 131) 118); Ross v Bradshaw (1761) 1 Black W 312, 96 ER 175; Wilson v Ducket (1762) 3 Burr 1361, 97 ER 874; Hodgson v Richardson (1764) 1 Black W 463, 96 ER 268. The brief reports, coupled with the ambiguity of the language of ‘fraud’ in this context, can make the court’s exact conclusions regarding the insured’s state of mind difficult to discern with certainty. 134  Carter (n 1) 3 Burr 1905, 1910; 97 ER 1162, 1164. There are earlier traces of this assumption in Hodgson v Richardson (1764) 1 Black W 463, 465; 96 ER 268, 269 (Yates J): ‘The concealment of material circumstances vitiates all contracts, upon the principles of natural law. A man, if kept ignorant of any material ingredient, may safely say that it is not his contract’. 135  Carter (n 1) 3 Burr 1905, 1909; 97 ER 1162, 1164. 136 ibid. 137 ibid. 131 

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The full significance of this explanation will be missed unless it is viewed within the entire framework of principle that Lord Mansfield articulates, and in light of the actual decision in Carter v Boehm. It is strongly arguable that Lord Mansfield was concerned to explain why an insurance contract might be avoided for material non-disclosure principally in order to show how, and why, there had to be limits to an insurer’s entitlement to avoid liability. What Lord Mansfield had identified was ultimately a limited rationale, turning on the existence of an inequality of accessible information bearing on the contract’s subject-matter, the risk undertaken, which rendered the insurer dependent on disclosure by his prospective insured. In the ensuing paragraphs of his judgment, Lord Mansfield proceeded to offer an unprecedented list of the circumstances in which an insurer could not legitimately complain of non-disclosure,138 almost all of which can be deduced from that limited rationale. It was the emphatic recognition and application of those limits in Carter v Boehm that really marked the case out in 1766, and provides the primary reason why the case deserves to be remembered today. One such limit was explicit in Lord Mansfield’s initial formulation of the insured’s obligations. In the absence of proof of fraudulent intention, an insurer could only avoid liability if the non-disclosure was shown to be ‘material’ to the risk undertaken. For many years after Carter v Boehm, English law’s standard of ‘materiality’ remained remarkably under-analysed. An objective standard, involving an inquiry into the influence the circumstances concealed would have on a prudent or reasonable underwriter, was not authoritatively confirmed until late in the nineteenth century;139 and it was more than another century before the House of Lords authoritatively clarified the required standard of influence.140 However, a close reading of Lord Mansfield’s express words, together with the actual decision in Carter v Boehm, suggests that Lord Mansfield may have contemplated a relatively demanding objective ‘different risk’ standard. Any non-disclosure would have to vary the risk undertaken, in the mind of a reasonable underwriter.141 The greater part of Lord Mansfield’s statement of principle was concerned to elaborate a number of additional circumstances in which an insurer could make no complaint of non-disclosure by his insured. Reported by Burrows in somewhat 138  None of the cases cited in n 133 provide any hints as to these limits, and subsequent textbook treatments, noted at 48–50 below, indicate that Carter v Boehm offered the first reported statements in this regard. 139 See Ionides v Pender (1874) LR 9 QB 531; Rivaz v Gerussi (1880) 6 QBD 222. There are traces of an objective approach of this character in very much earlier cases: eg Durrell v Bederley (1815) Holt 283, 286; 171 ER 244, 245 (Gibb CJ) (direction to jury); Reid & Co v Harvey (1816) 4 Dow PC 97, 106; 3 ER 1102, 1105 (counsel’s argument). 140 See Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co Ltd [1995] 1 AC 501 (HL). 141  See esp Lord Mansfield’s language in Carter (n 1) 3 Burr 1905, 1909, 1911; 97 ER 1162, 1164, 1165 (which is most consistent with a ‘different risk’ analysis) and his treatment of the materiality of Wynch’s letter, discussed at 68–71 below (which manifests an objective judgement regarding its significance). Cf too Lord Mansfield’s robust rejection of the relevance of the broker’s evidence regarding how the actual insurer would have responded to the facts not disclosed (which could not be strong evidence, given the uniqueness of the case, of reasonable market practice): Carter (n 1) 3 Burr 1905, 1918; 97 ER 1162, 1168–69.

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tortuous terms,142 the passages can be distilled into the following major propositions. An insurer could not complain of non-disclosure of any matter he knew, by whatever means, nor ought to have known; nor of any matter in relation to which he had waived disclosure, or had assumed the burden of inquiry. He could not complain of non-disclosure of matters of general public notoriety; nor of matters that an underwriter in the ordinary conduct of his business, could be expected to know or inform himself of. He was required to make his own independent assessment of the risk undertaken, and so could not expect to be informed of the insured’s own apprehensions or speculations. And he could not complain of the insured’s failure to disclose matters that would lessen the risk undertaken. Neither the reports of Carter v Boehm, nor contemporary treatises, provide any insights into the origins of these important passages. In particular, it is unclear whether they reflected what would have been matters of general agreement in the mercantile world, in England or elsewhere, or whether they reflected a true creative leap on Lord Mansfield’s part. Whatever the correct explanation may be, Lord Mansfield’s statements in Carter v Boehm were to have a remarkably enduring status.143 In the decades that immediately followed, they were to provide the backbone of the accounts in leading treatises. When Park’s A System of the Law of Marine Insurance first appeared in 1787,144 Lord Mansfield’s entire judgment was copied, in laudatory terms: To have given this very elaborate and learned argument in the state in which it was delivered, certainly requires no apology; because from it may be collected all the general principles, upon which the doctrine of concealments, in matters of insurance, is founded, as well as all the exceptions, which can be made to the generality of those principles. To have abridged such an argument, would have very much lessened the pleasure of the reader, and would have been an injury to the venerable judge, who in that form delivered the opinion of the court.145

Carter v Boehm subsequently received more critical treatment in Marshall’s leading treatise, A Treatise on the Law of Insurance,146 which first appeared in 1802. Quoting Lord Mansfield’s judgment in full at the end of his chapter on ‘­Concealment’,147 142 See

Carter (n 1) 3 Burr 1905, 1910–11; 97 ER 1162, 1164–65. For subsequent Lord Mansfield decisions that appear to involve the limits articulated in Carter v Boehm, see Planche v Fletcher (1779) 1 Doug 251, 99 ER 164 (matters of common notoriety); Court v Martineau (1782) 3 Doug 161, 99 ER 591 (waiver of disclosure); Mayne v Walter (1782) noted in Park (n 129) 195–96 (waiver of disclosure). These tend to suggest a general disposition, consistent with the resolution of Carter v Boehm, to interpret and apply the limits in a robust manner, in favour of honest insureds. 144  Park (n 129) ch 10, esp 183–93. 145  ibid, 193. Carter v Boehm is the earliest authority cited for the proposition that there may be cases where a policy will not be avoided by non-disclosure. Park continues by citing a handful of later cases, remarking that ‘[t]he rules, then advanced and illustrated, have since been confirmed by the opinion of the judges upon similar questions’: ibid 193. This text’s manner of presentation continued into the 8th edition: F Hildyard (ed), Park—A System of the Law of Marine Insurances 8th edn (London, ­Saunders & Benning, 1842) vol 1, ch 10. 146  Marshall (n 104). 147  ibid, ch 11. 143 

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Marshall expressed strong reservations about the decision.148 He was nevertheless forced to admit that the principles stated by Lord Mansfield were ‘in general, abstract propositions of indisputable truth, and [were] laid down with admirable clearness and precision’.149 Consistently with this, Marshall’s discussion of ‘what things need not be disclosed’ was substantially a verbatim copy of the exceptions articulated by Lord Mansfield in Carter v Boehm, with the addition of a further exception, reflected in other decisions of Lord Mansfield, for matters falling within an express or implied warranty.150 When Marshall first wrote, he was able to quote no more than a handful of decisions, apart from Carter v Boehm, in exemplification of ‘what things need not be disclosed’.151 Over the nineteenth century, a growing number of reported cases developed under this head, but really did little more than explore the implications of the principles stated by Lord Mansfield in Carter v Boehm, on particular facts. Unsurprisingly, there are few reported cases in which an insurer failed because he knew the fact allegedly concealed.152 Equally unsurprisingly, rather more cases clustered around the principles that an insurer cannot complain of non-disclosure of matters of common notoriety, or of what he can reasonably be expected to know or inform himself, in the ordinary course of his business. Many of these were relatively uncontroversial cases involving trade usages or similar matters of general commercial knowledge.153 However, nineteenth century courts were also inevitably forced to confront the rather more difficult question whether an insurer could complain of non-disclosure of facts that might be directly disclosed by, or inferred from, the growing number of information sources developed for the underwriting community at Lloyd’s.154 Beyond these, a number of cases 148  ibid, 483–84, considering that the result was not ‘warranted even by the principles which his lordship lays down as the basis of it’. Marshall’s quotation of Lord Mansfield’s judgment is annotated with footnotes, expressing doubts about a number of its factual assumptions/findings, and about Lord Mansfield’s application of the principles he had stated. Marshall also thought that the policy should have been void on public policy grounds, because it necessarily placed the insured in a position of conflicting duties: ibid 484, and see 64 below. 149  Marshall (n 104) 484n. 150  Haywood v Rodgers (1804) 4 East 590, 102 ER 957 (foreshadowed by Lord Mansfield’s decision in Shoolbred v Nutt (1782), noted in Park (n 129) 229a). Only two other cases are noted in the 2nd ­edition’s (14 page) section: ibid 473–86. 151 Marshall (n 104) ch 11, 473–84. This text’s manner of presentation continued into the 5th e­ dition: see W Shee (ed), Marshall—A Treatise on the Law of Marine Insurance 5th edn (London, Shaw & Sons, 1865) ch 11. 152 Cf Planche v Fletcher (1779) 1 Doug 251, 99 ER 164. 153  Cf eg Vallance v Dewar (1808) 1 Camp 503, 170 ER 1036; Tennant v Henderson (1813) 1 Dow PC 324, 3 ER 716; Tate & Sons v Hyslop (1885) 15 QBD 368; The Bedouin [1894] P 1; Mercantile Steamship Co Ltd v Tyser (1880) LR 7 QBD 73; Asfar & Co v Blundell [1896] 1 QB 123. Cf more generally, Planche v Fletcher (1779) 1 Doug 251, 99 ER 164; Thomson v Buchanan (1782) 4 Brown PC 482, 2 ER 329. 154  See esp Friere v Woodhouse (1815-1817) Holt 572, 171 ER 345; Elton v Larkins (1831) 5 Car & P 86, 172 ER 888, (1832) 8 Bing 196, 131 ER 376, (1832) 5 Car & P 385, 172 ER 1019; Mackintosh v Marshall (1843) 11 M & W 116, 152 ER 739; Foley v Tabor (1861) 2 F & F 663, 175 ER 1231; Gandy v Adelaide Marine Insurance Co (1871) LR 6 QB 746; Morrison v Universal Marine Insurance Co (1872) LR 8 Ex 40, rvd on a different point, (1873) LR 8 ER 197. Cases also raised the more general question, how far an insurer could complain of non-disclosure of facts that could or might be inferred from

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illustrated, ­without significantly illuminating, the potentially important principle that ‘waiver of disclosure’ will preclude complaint;155 whilst very few raised the uncontroversial principles that an insured need not disclose his speculations or apprehensions,156 or what lessens the risk.157 Overall, this jurisprudence seems remarkable for the relative absence of sustained doctrinal argument and discussion; the rarity with which Carter v Boehm is expressly mentioned; and the absence of critical comment on Lord Mansfield’s statements. The inference that might be drawn, of their enduring tacit acceptance, is suggested by Mellor J’s observations in Bates v Hewitt in 1867: So far as I know, the judgment of Lord Mansfield has never been qualified or questioned. The only part of it upon which any doubt has been raised is, as to the admissibility in evidence of the opinions of brokers … as to the materiality of the facts not c­ ommunicated.158 That judgment rests on a sound principle, and has always been ­considered as laying down the true rules which govern the law of insurance.159

Even clearer evidence of the enduring status of Lord Mansfield’s statements came 40 years further on, with the codification of the Common law governing marine insurance in the Marine Insurance Act 1906. As enacted, that Act’s basic structure, in sections 17 and 18, bore an unmistakable resemblance to Lord Mansfield’s account. Section 17 stated the mutual obligations of good faith of insurer and insured. Section 18 then stated the basic obligation on an insured to disclose every material circumstance known to him,160 the applicable standard of materiality,161 and then, finally, and crucially, the exceptions: (3) In the absence of inquiry the following circumstances need not be disclosed, namely: (a) Any circumstance which diminishes the risk; (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 knowledge that he had or ought to have had: esp Bates v Hewitt (1867) LR 2 QB 595; Gandy v Adelaide Marine Insurance Co (1871) LR 6 QB 746. 155  Cf eg Beckwith v Sydebotham (1807) 1 Camp 116, 170 ER 897; Fort v Lee (1811) 3 Taunt 381, 128 ER 151; Hull v Cooper (1811) 14 East 479, 104 ER 685; Boyd v Dubois (1811) 3 Camp 138, 170 ER 1331; Freeland v Glover (1806) 7 East 457, 103 ER 177, all of which were cited in later works, not always easily, under this head. See eg EL de Hart and RI Simey (eds), Arnould on the Law of Marine Insurance 7th edn (Andover, Stevens & Sons, 1901) §§ 618–22. 156 Cf Thomson v Buchanan (1782) 4 Brown PC 482, 2 ER 329; Bell v Bell (1810) 2 Camp 475, 170 ER 1223. 157 Cf Westbury v Aberdein (1837) 2 M & W 267, 150 ER 756. 158  For discussion of this early debate, see eg Arnould (n 104) § 212; JW Smith, A Selection of Leading Cases on Various Branches of the Law 2nd edn (London, A Maxwell, 1841) vol 1, 283–86, a discussion continued in later editions. In Carter (n 1) 3 Burr 1905, 1918; 97 ER 1162, 1168–69, Lord Mansfield refused to admit the actual broker’s opinion that Boehm would not have underwritten the policy, if the matters not disclosed had been revealed. In later cases, Lord Mansfield was assumed, perhaps wrongly, to be laying down a general principle regarding the admissibility of the evidence of brokers and/or underwriters. 159  (1867) LR 2 QB 595, 610. 160  Marine Insurance Act 1906, s 18(1). 161  ibid, s 18(2).

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­ atters which an insurer in the ordinary course of his business, as such, ought to m know. (c) Any circumstance as to which information is waived by the insurer; (d) Any circumstance which it is superfluous to disclose by reason of any express or implied warranty.162

In Chalmers’ Marine Insurance Act,163 Carter v Boehm was the earliest, and in one case, the only authority, cited in the notes to paragraphs (a), (b) and (c). Even paragraph (d) was reflected in other decisions of Lord Mansfield.164 It is an important question, beyond the scope of this chapter, whether beneath this coincidence of general principles, the balance of the law in fact altered. It is conceivable that it could and did, without fatally undermining Carter v Boehm’s authority. Several of the exceptions formulated by Lord Mansfield are inherently susceptible to very different interpretations, reflecting very different conceptions of where the line should properly be drawn between what insureds should tell their insurers without inquiry, and what insurers should know or seek to inform themselves of, by inquiry of the insured or otherwise.165 Advocates of narrowlydefined exceptions could emphasise Lord Mansfield’s initial emphatic statement of the insured’s obligation, and the importance of preserving the strongest incentives for full disclosure.166 Conversely, advocates of more widely-defined exceptions could emphasise Lord Mansfield’s limited rationalisation of the insured’s obligation as a corrective for an inequality of accessible information, the mutuality of the requirement of good faith that arguably Lord Mansfield assumes, and the actual manner in which Lord Mansfield resolved the case at hand.167 Experts in the field will know that UK insurance law has recently been ­transformed—belatedly—by legislation. Comprehensive analysis of these changes must be left to others. Nevertheless, it seems legitimate to ask here what these developments mean for Carter v Boehm’s status. One thing is very clear: we must now draw a distinction, which certainly was not present to Lord Mansfield’s mind in 1766, between ‘consumer’ and ‘nonconsumer’ insurance contracts. It has long been recognised that the Common law’s historic regime is inapt for the modern mass consumer insurance market.

162 

ibid, s 18(3). Hardy Ivamy, Chalmers’ Marine Insurance Act 1906 10th rvd edn (Haywards Heath, Tottel Publishing, 1993). 164 See Shoolbred v Nutt (1782) noted in Park (n 129) 229a. See subsequently, Haywood v Rodgers (1804) East 590, 102 ER 957. Cf too Ross v Bradshaw (1761) 1 Black W 312, 96 ER 175 (life insurance). 165  Cf analogously, the opposing conclusions reached in the Pan Atlantic litigation, regarding the standard of materiality assumed in Carter v Boehm: see Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co Ltd [1995] 1 AC 501. Steyn LJ in the Court of Appeal, and Lord Lloyd (dissenting) in the House of Lords took Lord Mansfield to be articulating a relatively demanding standard of materiality. Lord Mustill (giving the leading judgment for the majority in the House of Lords) reached an opposite conclusion. 166  See esp the reasoning of the court in Bates v Hewitt (n 154). 167  See esp the arguments reflected in the ‘waiver of disclosure’ cases noted at nn 291–93 below. 163  ER

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Five years ago, the Consumer Insurance (Disclosure and Representations) Act 2012 finally replaced the duty of pre-contractual disclosure previously owed by ‘consumers’, as well as any wider liability for merely innocent (non-negligent) misrepresentations, with a limited statutory duty to take reasonable care not to make misrepresentations during pre-contractual negotiations; the same Act also introduced a more proportionate remedial regime applicable where that new duty has been breached.168 The Insurance Act 2015 has since taken the law governing non-consumer insurance contracts along a different path.169 The relevant provisions of the Marine Insurance Act 1906—and equivalent Common law principles applicable outside the field of marine insurance—have been replaced by a new statutory ‘duty of fair presentation’,170 together with a new system of proportionate remedies where that new duty has been breached.171 Unlike the 2012 Act, the 2015 Act represents an evolutionary step, rather than a revolution—a step which reinforces, rather than undermines, Carter v Boehm’s landmark status, and indeed, which confirms its enduring significance. Whilst the nuanced new remedial regime is certainly a very major development, there is little that Lord Mansfield would find to disagree with in the 2015 Act’s presentation of the insured’s basic duty. In particular, the new ‘duty of fair presentation’ includes a duty on the insured to disclose ‘material’ circumstances to the insurer, of which the insured ‘knows or ought to know’;172 and this new duty is subject to a list of exceptions which substantially replicate those found in the Marine Insurance Act 1906173—exceptions which themselves mirror the exceptions enumerated in Carter v Boehm. Of even greater interest, though, is the Act’s refined reformulation of the insured’s duty of disclosure. Under section 3(4) of the 2015 Act, insureds can discharge their ‘duty of fair representation’ by two alternative routes: (a) disclosure of every material circumstance which the insured knows or ought to know, or (b) failing that, disclosure which gives the insurer sufficient information to put a prudent insurer on notice that it needs to make further enquiries for the purpose of revealing those material circumstances.

168  Consumer Insurance (Disclosure and Representations) Act 2012, esp ss 2–5. The Act gives effect, with minor modifications, to the recommendations set out in the joint report of the Law Commission of England and Wales and the Scottish Law Commission, Consumer Insurance Law: Pre-Contract ­Disclosure and Misrepresentation (Law Com No 319, 2009). The approach adopted in the Act is not strictly new: it reflects, in particular, the approach already taken in disputes resolved by the Financial Ombudsman Service, and generally accepted good practice within the insurance industry. 169  The Insurance Act 2015 gives effect, with some modifications, to the recommendations set out in the joint report of the Law Commission of England and Wales and the Scottish Law Commission, Insurance Contract Law: Business Disclosure; Warranties; Insurers’ Remedies for Fraudulent Claims; and Late Payment (Law Com No 353, 2014). 170  Insurance Act 2015, Part 2, esp ss 3–7; and see s 21(1)–(3). 171  ibid, s 8 and sch 1. 172  ibid, s 3(3)(a), (b), and (4). 173  ibid, s 3(5) (to be read with s 6). Cf the discussion in Law Com No 353 (n 169) ch 10, and the preceding consultation paper, Insurance Contract Law: The Business Insured’s Duty of Disclosure and the Law of Warranties (LCCP No 204, 2012) esp Part 8.

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The explicit addition of the latter option represents a deliberate re-balancing of the position between insured and insurer—a re-balancing born of an instinct that, whilst there should still be an onus on insureds to disclose, insurers should not be wholly passive, and should be required to play a more active role, in making ­further inquiries where appropriate.174 As the Law Commission explained: The current words of section 18 [of the Marine Insurance Act 1906] suggest that an insurer may simply sit back and wait for the policyholder to disclose every material ­circumstance … [But] [g]ood disclosure requires co-operation from both sides. The policyholder knows the facts; the insurer knows which facts are relevant. To provide an effective and efficient process, … insurers should see their role as assessing what they are told and asking further questions as appropriate.175

This is an important development, but it would be a mistake to regard it as a very radical shift in the law. As the Law Commission recognised,176 a line of modern cases has previously achieved a broadly equivalent balance via a particular interpretation of the ‘waiver of disclosure’ exception—in general terms, if a prospective insured gave the insurer sufficient information to put a prudent insurer on notice that it needed to make further inquiries, the insurer would be expected to make such inquiries; and if the insurer failed to do so, it would be prevented from seeking a remedy for the insured’s failure to disclose material circumstances which those inquiries would have revealed. The insurer would have ‘waived’ disclosure of those circumstances. As explained in a later section, a good argument can also be made that Lord Mansfield subscribed to a similar view in Carter v Boehm. ­However the Common law’s rules might have been interpreted following his landmark d ­ ecision, Lord Mansfield’s resolution of the legal issues in the case before him reveals that he, at least, did not think that insurers could be wholly passive—they should not be permitted to avoid a policy for an insured’s innocent non-disclosure where they should reasonably have appreciated that they had not been fully informed, and they had failed to take advantage of means of inquiry available to them.177

B.  The Context and Construction of the Policy Lord Mansfield’s statement of law in Carter v Boehm placed important obstacles in the way of Boehm’s success, which Boehm’s counsel may not have predicted when proceedings first commenced. Two further factors combined to make ­Boehm’s task even more difficult: Lord Mansfield’s findings regarding the context in which Carter’s insurance policy was effected in London; and his findings

174 

Law Com No 353 (n 169) esp paras 6.6–6.8. ibid, paras 6.6, 6.7. 176  Law Com No 353 (n 169) para 6.6; see further LCCP No 204 (n 173) Part 5, discussing inter alia WISE Underwriting Agency Ltd v Grupo Nacional Provincial SA [2004] EWCA Civ 962, [2004] 2 Lloyd’s Rep 483. 177  See 79–82 below. 175 

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regarding the proper construction of the policy, and in particular, the insuredagainst contingency.

i.  The Circumstances in which Carter’s Insurance Policy was Effected Lord Mansfield prefaced his consideration of Boehm’s particular allegations of material non-disclosure with the following account of the circumstances in which Carter’s policy was effected in London in May 1760: The policy was signed in May 1760. The contingency was ‘whether Fort Marlborough was or would be taken, by an European enemy, between October 1759, and October 1760.’ The computation of the risque depended upon the chance, ‘whether any European power would attack the place by sea,’ If they did, it was incapable of resistance. The under-writer at London, in May 1760, could judge much better of the probability of the contingency, than Governor Carter could at Fort Marlborough, in September 1759. He knew the success of the operations of the war in Europe. He knew what naval force the English and French had sent to the East Indies. He knew, from a comparison of that force, whether the sea was open to any such attempt by the French. He knew, or might know, every thing which was known at Fort Marlborough in September 1759, of the general state of affairs in the East Indies, or the particular condition of Fort Marlborough, by the ship which brought the orders for the insurance. He knew that ship must have brought many letters to the East India Company; and, particularly, from the governor. He knew what probability there was of the Dutch committing or having committed hostilities. Under these circumstances, and with this knowledge, he insures against the general ­contingency of the place being attacked by an European power.178

Set against Lord Mansfield’s preceding exposition of the law, the purpose of this account seems clear: viz, to emphasise the prima facie obstacles to Boehm’s successfully resisting liability for non-disclosure. Lord Mansfield’s premise was that the context in which Carter’s policy was underwritten by Boehm lacked the substantial inequality of accessible information, and resulting necessary dependence of the insurer on disclosure by his prospective insured, that provided the ­normative basis for the law’s allowing an insurer to avoid liability for ­ non-disclosure. An understanding of the historical context of Carter v Boehm enables us to see quite how robustly adverse to Boehm’s interest that analysis was. Lord Mansfield’s principal proposition was that Boehm, in London in May 1760, was substantially better placed accurately to estimate the likelihood of the insured-against contingency’s occurring than Carter was in September 1759. This is difficult to dispute. If the contingency was the loss of Fort Marlborough to a European enemy,179 an insurer would be concerned to estimate the likelihood

178 

Carter (n 1) 3 Burr 1905, 1914–15; 97 ER 1162, 1167. This is the assumption most favourable to Boehm, which Lord Mansfield makes in the quoted passage, though it does not reflect the construction of the policy that Lord Mansfield ultimately prefers: see 58–60 below. 179 

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of a European enemy attempting an assault, and of any assault succeeding. By May 1760, there was no substantial inequality of accessible information as regards either. The likelihood of a European enemy attempting an assault on Fort Marlborough would principally be a function of events in Europe and the course of the Anglo-French conflict in the East Indies. By nature, these were not events falling peculiarly within Carter’s knowledge. Indeed, by May 1760, the state of general intelligence in London regarding them was unquestionably in advance of the state of intelligence of Carter and co in Sumatra in September 1759. This was obviously true of European events, but it was also true of the Anglo-French conflict. C ­ arter’s most recent intelligence concerning events in India probably did not extend beyond the early spring of 1759.180 In contrast, by May 1760, news had certainly reached London of events from the summer and autumn of that year.181 The likelihood of any attempted assault by a European enemy succeeding would principally be a function of the strength of Fort Marlborough’s defences, relative to strength of any enemy force. The effect of Lord Mansfield’s findings earlier in his judgment was that there was also no substantial inequality of accessible information in relation to this. It was notorious amongst those in London who interested themselves in East Indies affairs that Fort Marlborough was fundamentally a trading community, and not a military establishment; that it was only intended and constructed to withstand a native attack; and that if attacked by a European enemy, it would fall.182 Assuming such knowledge, any calculation of the insured risk would depend only on a calculation of a European enemy attempting an attack.183 There is no doubt that this absence of any substantial inequality of accessible information regarding the circumstances likely to influence an insurer’s

180  This would have been apparent to Lord Mansfield from the secret letter of Carter and ­Preston which was in evidence before the court. See IOR/G/35/12, Letter from Roger Carter and ­Richard Preston, Fort Marlborough, to the Secret Committee, Court of Directors, 16 September 1759, ­ folio 287 ff, para 2, in which Carter and Preston related what they knew of events in India, and in particular, related that they had received reports from Batavia in August of the raising of the siege of Fort St George on 16 February 1759, but that their last direct communication from that Presidency was from the autumn of 1758. See further nn 258–59 below. 181  See the London press reports of March/April 1760, noted at n 263 below. Carter and co probably did not receive intelligence about the same events until late December 1759, as noted in the text to n 259 below. 182 See Carter (n 1) 3 Burr 1905, 1912–13; 97 ER 1162, 1166, where Lord Mansfield’s findings regarding the general condition of Fort Marlborough are followed by the findings that ‘the general state and condition of the said fort, and of the strength thereof, was, in general well known, by most persons conversant or acquainted with Indian affairs, or the state of the Company’s factories or settlements; and could not be kept secret or concealed from persons who should endeavour by proper inquiry, to inform themselves’. It is clear that Fort Marlborough’s defensive weaknesses were long-standing, and a recurring topic in the general dispatches between Fort Marlborough and the Court of Directors: see generally Harfield (n 6). 183 See Carter (n 1) 3 Burr 1905, 1914; 97 ER 1162, 1167: ‘The computation of the risque depended upon the chance, “whether any European power would attack the place by sea,” If they did, it was incapable of resistance’.

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­calculation

greatly complicated Boehm’s task. It inevitably made it difficult for Boehm to satisfy a court that, in view of what he knew or could reasonably have known, any information not disclosed had actually affected his risk assessment, and/or would have affected a reasonable insurer’s risk assessment. It also inevitably made it difficult for Boehm to identify any fact not disclosed by Carter, about which he was not precluded from complaining on the basis that it fell within one of the exceptions articulated by Lord Mansfield. Most were readily classifiable as matters of ‘general intelligence’ or ‘common notoriety’. The absence of any substantial inequality of accessible information did not mean, however, that Carter and Boehm had equal information. There were at least two matters, known to Carter in September 1759, and potentially influencing an insurer’s estimate of the risk, that could not be assumed to be matters of general intelligence in London by May 1760. They formed the basis of Boehm’s strongest allegations of non-disclosure, examined below. One was the existence and contents of Wynch’s letter to Carter.184 Another was the particular state of Fort ­Marlborough’s fortifications in September 1759.185 Lord Mansfield’s second major proposition in his account of the London context of Carter’s policy may have been designed to pre-empt the success of these arguments. His account concluded with the observation that, whatever might otherwise be known in London, Boehm knew or might have known everything known at Fort Marlborough in September 1759 regarding events in the East Indies, and the particular state of Fort Marlborough’s fortifications, via the Pitt, which brought Carter’s insurance instructions to England.186 On the face of it, this comes dangerously close to the proposition that everything material known to Carter was known to, or knowable by, Boehm by May 1760. The basis for this remarkable second proposition is an important fact, known to Lord Mansfield but not revealed by the case reports. Every fact that Carter knew in September 1759, and had allegedly concealed, was communicated by Carter via the packet of secret correspondence dispatched on the Pitt for the attention of the Secret Committee of the Court of Directors.187 It obviously followed that on the Pitt’s arrival in Europe, none of the facts allegedly concealed were exclusively within Carter’s private knowledge, and further, that they were known in London, in some quarters. However, on one reading of Burrows’ report, Lord Mansfield went rather further than this. Boehm must have known that the Company would have received correspondence from Carter via the Pitt, and might at least have

184 

See 30–32 above, and 66–71 below. See 35–36 above, and 61–66 below. Carter (n 1) 3 Burr 1905, 1914–15; 97 ER 1162, 1167. 187  See 34–36 above, where the contents of this secret packet are discussed. It included Carter and Preston’s secret letter of 16 September 1759, which reported (inter alia) the poor state of Fort Marlborough’s fortifications (paras 12–19), Wynch’s letter (paras 10–11), and the Dutch armament at Batavia (para 7): IOR/G/35/12, Letter from Roger Carter and Richard Preston, Fort Marlborough, to the Secret Committee of the Court of Directors, 16 September 1759, folios 287 ff. It also included a copy of Wynch’s letter to Roger Carter. Lord Mansfield had Carter and Preston’s letter before him. 185  186 

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discovered its contents by means of inquiry open to him. This is a very difficult assumption to sustain. The arrival of an East Indiaman like the Pitt would certainly have been keenly awaited in London, as the primary source of news from the East Indies. A snapshot of the contemporary press suggests that the Pitt’s arrival may have attracted particular attention, because of a path-breaking journey to China.188 It also suggests that the Pitt was a means by which news of recent events in the East Indies became matters of general intelligence in London,189 and that this included news of some events, known to Carter in September 1759 and potentially bearing on the risk insured-against: viz, news of the Dutch armament at nearby Batavia, which reports suggest came from the Pitt’s crew.190 Nevertheless, there is no evidence that the contents of Carter’s correspondence addressed to the Secret Committee of the Court of Directors similarly became public. Indeed, it is inherently unlikely that it would: such secret correspondence would ordinarily have had a very limited circulation, even within the Company’s Directorship.191 For the same reason, the lesser claim that Boehm might have discovered the contents of the correspondence by inquiry of the Company,192 seems questionable. It may depend on some bold but unarticulated assumptions about Boehm’s personal connections and influence.193

188  London papers noted its arrival, reporting that on 1 March 1760, the Company received an account of the Pitt’s arrival at Kinsale (where it had arrived on 23 February 1759: IOR/L/MAR/B/525, index to marine records): eg London Chronicle (1–4 March 1760) 219, cols 1; London Evening Post (1–4 March 1760) 1, cols 1–2. The Pitt’s remarkable China voyage is reported in the same papers, following the Pitt’s subsequent arrival in the Thames in mid-April: eg London Chronicle (15–17 April 1760) 370, col 2; similarly, London Evening Post (15–17 April 1760) 1, col 2. For discussion of the voyage, see P Crowhurst, The Defence of British Trade (Folkestone, Dawson, 1977) ch 7, esp 229–33. 189  See esp London Chronicle (1–4 March 1760) 219, cols 1–2 (advices received via the Pitt regarding Colonel Clive’s exploits); similarly, London Evening Post (1–4 March 1760) 1, col 1. The Pitt arrived in Company with the Warren, which brought more recent intelligence from Fort St George of events on the Coromandel Coast after the raising of the siege of Fort St George. 190  London Evening Post (11–13 March 1760) 1, col 2. See further 75–77 below. The final sentence of Lord Mansfield’s description of the context of the policy, in which he refers to Boehm’s knowledge of the likelihood of Dutch aggression, suggests that he may have recognised this: Carter (n 1) 3 Burr 1905, 1915; 97 ER 1162, 1167. 191  The Secret Committee comprised a small number of the full body of Directors. The Court Books show that letters addressed to the Secret Committee might be read to the full Court of Directors, but that this was not routinely the case. Instead, the minutes and proceedings of the Secret Committee, to the extent that they were no longer sensitive, would periodically be read at the meetings of the full Court of Directors. Unlike the general letter from Fort Marlborough of 21 September 1759, there is no record of Carter and Preston’s secret letter of 16 September 1759 having been read to the full Court of Directors (see n 57), but the Court Books do indicate that they subsequently received a summary of the Secret Committee’s deliberations during this period. See IOR/B/75, Minutes of Meeting of Court of Directors, 1 April 1760, 672 (reading of minutes and proceedings of the ‘Committee of Secrecy’ from 5 December 1759 to 31 March 1760). 192  Cf similarly, Marshall (n 104) 482n: ‘What he wrote to the company was not likely to be made public, and therefore not likely to come to the knowledge of the underwriter!’. Lord Mansfield’s assumption is also difficult to square with the Company’s resistance to disclosing Carter and Preston’s secret letter during the litigation: see 62 below. 193  Boehm undoubtedly occupied prominent positions in some of the City’s key institutions at this time, including a directorship of the Bank of England: see R Roberts and D Kynaston, The Bank of

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ii.  The Construction of the Policy: The Insured-against Contingency The fate of Boehm’s allegations in Carter v Boehm was not just vitally shaped by the court’s findings regarding the context in which the policy was effected. It was also vitally shaped by the court’s findings regarding the proper construction of the policy, and in particular, the insured-against contingency. This was a matter fiercely disputed by the parties in argument.194 At first sight, this may seem surprising: on any analysis, the insured-against contingency had occurred, and Boehm was prima facie liable to pay the insured sum. On closer examination, however, the reason is obvious. The parties saw that the construction preferred might vitally affect the success of Boehm’s superficially strongest defence, that Carter was guilty of material non-disclosure in failing to disclose Fort Marlborough’s weak defensive state in September 1759. Lord Mansfield’s firm conclusion was that the contingency in the parties’ contemplation was an attack on Fort Marlborough by a European enemy. It was not, as Boehm’s counsel had contended, the loss of Fort Marlborough, so as to require Fort Marlborough to be attacked and taken.195 There are two reasons why this conclusion is striking. First, it was a notably pro-insured construction of the policy: it greatly facilitated the court’s rejection of Boehm’s allegation that Fort ­Marlborough’s weak defensive state in September 1759 was a ‘material’ m ­ atter, which Carter was obliged to disclose.196 Second, that construction probably required an important implication into Carter’s policy, varying its express terms. Although this point can be obscured by poor reporting of the case, the best account of the policy’s express terms suggests that the insurer’s liability in terms depended upon the loss of Fort Marlborough to a European enemy, and not merely an attack on the place. That is, the policy’s express terms were more consistent with Boehm’s analysis of the insured-against contingency than that which the court eventually preferred. In Lord Mansfield’s words: The policy is against the loss [of] Fort Marlborough, from being destroyed by, taken by, or surrendered unto, any European enemy, between 1st of October 1759, and 1st of October 1760.197

England—Money, Power & Influence 1694–1994 (Oxford, Oxford University Press, 1995) appendix 2. The thesis of JG Parker, ‘The Directors of the East India Company 1754–1790’ (PhD thesis, University of Edinburgh, 1977) is a starting-point for further inquiry into the nature and extent of Boehm’s family or other connections to the East India Company’s directorship. I am grateful to Professor Huw Bowen, Swansea University, for directing my attention to this. 194 See Carter (n 1) 3 Burr 1905, 1908; 97 ER 1162, 1163–64, where counsel’s arguments are summarised. Counsel for the insured: ‘[T]his insurance, was in reality, no more than a wager; “whether the French would think it their interest to attack this fort; and if they should, whether they would be able to get a ship of war up the river, or not”’. Counsel for the insurer: ‘This wager is not only “whether the fort shall be attacked:” but “whether it shall be attacked and taken”’. 195  Carter (n 1) 3 Burr 1905, 1916–17; 97 ER 1162, 1167–68. 196  See 65–66 below. 197  Carter (n 1) 3 Burr 1905, 1911; 97 ER 1162, 1165. Different descriptions of the contingency elsewhere in the report are unreliable, in that they do not seem to state the express terms of the policy,

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Pointing in the same direction was the ‘all or nothing’ nature of the insurer’s liability. If the insured-against contingency occurred, the insurer was liable to pay the insured sum of £10,000, in full and without further inquiry.198 There is obvious room for disagreement about the process by which Lord Mansfield felt able to conclude, in the face of the policy’s express terms, that the insured-against contingency was a European enemy attack. It would certainly be consistent with the general orientation of his judgment if his conclusion was ­simply the result of a strong inclination to find against Boehm. However, a preferable alternative analysis is that it reflected a bona fide attempt to make commercial sense of the policy’s unusual terms, in view of the policy’s known purpose.199 Central to understanding this is the apparent disjunction between the form and purpose of the policy, previously explained.200 Had Carter been a true wagering party, without any substantial interest in Fort Marlborough’s fate, there would be no pressing reason for the court to take the policy otherwise than at face value. It would not be irrational for the parties to wager ‘all or nothing’ on whether Fort Marlborough might be lost to a European enemy. The problem confronting the court, however, was that Carter was not a true wagering party.201 To the knowledge of the insurer and the court, he sought to insure his stock-in-trade at Fort Marlborough against loss in the event of a European enemy assault on the place.202 The policy’s express terms were less obviously well-tuned to that different purpose. On the one hand, the insurer was only liable in the most extreme event of an assault culminating in the fall of Fort Marlborough. On the other hand, if that event occurred, the insurer would be liable for the full insured sum, without further inquiry. On examination, Lord Mansfield’s reconciliation appears to have been as ­follows.203 The insured-against contingency was a European enemy attack on Fort Marlborough, and not its loss. Though at first sight inconsistent with the policy’s express terms, this analysis could be reconciled with them and with the policy’s purpose, via the assumption that the parties knew that Fort Marlborough was only designed to withstand native attack, and so anticipated that it would fall if subject

but instead express the outcome of Lord Mansfield’s exercise in construction: viz, his implied reading down of the policy’s express words. See too the reported terms of Carter’s counsel’s argument, quoted in n 171, the sense of which is that even if the form of the policy suggested the contrary, its substance was a policy against a European enemy attack only. 198  See 41 above. Properly understood, this was what Lord Mansfield meant when he said that the policy ‘insures against a total loss’: Carter (n 1) 3 Burr 1905, 1916; 97 ER 1162, 1167. 199  See 39–44 above. 200  See 39–44 above. 201  See 39–44 above. 202  See 39–40 above. 203  See esp Carter (n 1) 3 Burr 1905, 1915–16; 97 ER 1162, 1167–68. Identical assumptions about the policy’s purpose, and what the parties knew about its subject-matter, could have supported a ­construction which took the policy at face value, taking the insured-against contingency as the loss of Fort Marlborough; but even on this basis, Carter’s non-disclosure would not have been ‘material’, for reasons explained at 65–66 below.

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to an attack by a European enemy. Assuming such knowledge, it was not commercial nonsense for the parties to bargain that the insured sum should be payable in full, and without further inquiry, in the event of a European enemy attack. The parties would anticipate that any European enemy attack on Fort Marlborough would result in a total loss of Carter’s stock-in-trade there, the value of which exceeded the sum insured.204 This analysis is the best way of making sense of the following passage in Burrows’ report, where Lord Mansfield explains his analysis of the insured-against contingency: The utmost which can be contended is, that the underwriter trusted to the fort being in the condition in which it ought to be … What is that condition? All the witnesses agree ‘that it was only to resist the natives, and not an European force.’ The policy insures against a total loss; taking for granted ‘that if the place was attacked it would be lost.’ The contingency therefore which the under-writer has insured against is, ‘whether the place would be attacked by an European force; and not whether it would be able to resist such an attack, if the ships could get up the river.’205

Lord Mansfield never made any clear finding whether Boehm actually knew that Fort Marlborough was only designed to withstand native attack.206 ­However, he had previously found that this was generally known, amongst those who concerned themselves with East Indies’ affairs. On that basis, it seems that Lord Mansfield was adopting an objective interpretative approach, construing the parties’ express/implied intentions in light of the knowledge that they could reasonably be expected to have about the policy’s subject-matter. Consistently with this approach, Boehm could not have demanded that the policy be construed in accordance with his own, ex hypothesi unreasonable state of ignorance regarding Fort Marlborough’s true condition.

C.  Boehm’s Defences to Liability With Lord Mansfield’s statement of law, and his findings regarding the context and construction of Carter’s policy in view, we can turn to the court’s treatment of Boehm’s defences to liability. In the absence of any finding of fraudulent intention on Carter’s part, Boehm’s case depended on establishing material non-disclosure. This required Boehm to identify some matter, known to Carter or his agent but not disclosed, that varied the risk which Boehm undertook in May 1760 when he underwrote Carter’s policy—viz, the risk of a European enemy attack on Fort Marlborough within one year from October 1759. The strongest allegation, that Carter knew of a subsisting French scheme to attack Fort Marlborough, was not available to Boehm. There was no such 204 

See eg Carter (n 1) 3 Burr 1905, 1907, 1913; 97 ER 1162, 1163, 1166. Carter (n 1) 3 Burr 1905, 1915–16; 97 ER 1162, 1167. 206  See 55–56 above. 205 

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scheme, to Carter’s knowledge, in September 1759, when the insurance instructions were dispatched. And whilst D’Estaing’s expedition certainly did come to Carter’s knowledge in Sumatra by late February 1760, it was impossible to convey this knowledge to London before the policy was effected. Counsel quite rightly refrained from arguing that this non-disclosure would vitiate Carter’s policy.207 In those circumstances, Boehm was left to allege non-disclosure of three other matters, to which Lord Mansfield added a fourth. They were: the poor defensive state of Fort Marlborough in September 1759; Alexander Wynch’s letter to Roger Carter of February 1759, in which he reported the unimplemented French plans of 1758; Carter’s apprehension that the French were more likely than before to attack, expressed in his letter to his brother of 22 September 1759; and finally, Carter’s grounds for fearing the outbreak of a Dutch war. These allegations, and the court’s treatment of them, are examined in the sections that follow.

V.  Material Non-disclosure (I): The Defensive Condition of Fort Marlborough A. Background Boehm’s first objection to liability under the policy relied on Fort Marlborough’s weak defensive condition. It was probably the objection most strongly pressed, at least on the motion for re-trial.208 As formulated by counsel, the argument was that Carter was guilty of material non-disclosure in failing to disclose Fort ­Marlborough’s defensive state in September 1759. An alternative formulation, reflected in some reports of Lord Mansfield’s discussion of the allegation, was that there was an implied warranty in Carter’s policy that Fort Marlborough was in a good defensive state, which had been breached.209 207  See the Marine Insurance Act 1906, s 19(2), which contained an exception for exactly this sort of case, where policies are effected by agents: the policy would be vitiated by non-disclosure of every material circumstance ‘which the assured is bound to disclose, unless it comes to his knowledge too late to communicate it to the agent’. 208  Carter (n 1) 3 Burr 1905, 1908; 97 ER 1162, 1164: ‘It is begging the question to say, “that a fort is not intended for defence against an enemy.” The supposition is absurd and ridiculous. It must be presumed that it was intended for that purpose: and the presumption was “that the fort, the powder, the guns, &c were in a good and proper condition.” If they were not, (and it is agreed that in fact they were not, and that the governor knew it,) it ought to have been disclosed. But if he had disclosed this, he could not have got the insurance’. 209  In Burrows’ report, the implied condition argument is interwoven with an argument about material non-disclosure: Carter (n 1) 3 Burr 1905, 1915–16; 97 ER 1162, 1167. In Blackstone’s briefer report, the reasoning is arguably in implied conditions terms only: Carter (n 1) 1 Black W 593, 595; 96 ER 342. The argument was founded on an analogy with the warranty of seaworthiness implied into marine insurance policies. Later cases were to confirm that these arguments were alternatives: an insured was not obliged to disclose matters falling within the scope of an express or implied warranty. See n 150 above.

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Viewed in its historical context, the force of Boehm’s argument is obvious. On 24 September 1759, when the Pitt left Sumatra for London with Deputy ­Governor Carter’s insurance instructions on board, Carter unquestionably knew that Fort Marlborough was unlikely to be able to withstand a concerted European attack. Its vulnerability had been a constant cause for concern for the Company’s West Coast servants in the preceding years. It was also unequivocally confirmed by the inquiries conducted by the military officers, on the orders of Carter and the Secret ­Committee in August–September 1759, immediately following the arrival of Wynch’s letter.210 What made this first allegation particularly attractive for Boehm was that the available evidence incontrovertibly showed that Carter knew of, but had failed to disclose, Fort Marlborough’s weak defensive state. By their secret letter of 16 September 1759, described above, Carter and Preston comprehensively reported Fort Marlborough’s dire position to the Secret Committee of the Court of Directors.211 At the time of the 1762 actions on Carter’s policy, the Company had apparently refused to deliver this letter to the parties, ‘because it contained some matters which they did not think proper to be made public’.212 However, Boehm was able to obtain possession of the letter for the purposes of the 1766 trial/motion for re-trial.213 Lord Mansfield’s statement of the law in Carter v Boehm, and his subsequent findings of fact, were nevertheless to expose important vulnerabilities in Boehm’s case. First, Boehm’s allegation that Fort Marlborough’s weak defensive state was material to the risk undertaken depended heavily on a construction of the insuredagainst contingency which Lord Mansfield ultimately rejected: viz, that the contingency was the loss of Fort Marlborough to a European enemy.214 Second, Lord Mansfield’s statement of the law in any event made the parties’ relative states of knowledge regarding Fort Marlborough’s defensive state critical. Lord Mansfield

210 IOR/G/35/12, Minutes of the Secret Committee, Fort Marlborough, 22 August 1759, folios 267–69 (discussed at 32–33); ibid 7 September 1759, folios 271–72 (discussed at 33). 211  IOR/G/35/12, Letter from Roger Carter and Richard Preston, Fort Marlborough, to the Secret Committee of the Court of Directors, 16 September 1759, folio 287, paras 10–18 (discussed at 35–36). 212 See Carter (n 1) 3 Burr 1905, 1911; 97 ER 1162, 1165. It can be inferred that Lord Mansfield is referring to Carter and Preston’s letter. The request for copies of the Company’s ‘late Advices’ from Bencoolen for the 1762 trial is recorded in IOR/B/77, Minutes of Meeting of Court of Directors, 10 February 1762, 292. Carter and Preston’s letter would have revealed the intelligence-gathering activities of John Herbert, the Company’s agent at Batavia. But on balance, the Company’s sensitivities are most likely to have stemmed from a desire to keep concealed their efforts to obtain Chinese slaves via the supracargoes at Canton: IOR/G/35/12, Letter from Roger Carter and Richard Preston to the Secret Committee of the Court of Directors, 16 September 1759, folio 287 ff, paras 3–6. 213 See Carter (n 1) 3 Burr 1905, 1913, 1913n; 97 ER 1162, 1166, 1166n. The Company’s records put beyond doubt that the secret letter of 16 September 1759 was the letter brought to court: see the resolutions that the ‘Proper Officer’ on being subpoenaed should attend, with the letter, the insurance cause being tried between ‘William Black and Charles Boehm Esqrs’ and Roger Carter: IOR/B/81, Minutes of Meeting of Court of Directors, 4 December 1765, 272; ibid 19 February 1766, 363. 214  See 58–60 above.

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made a number of findings in this regard which—directly or indirectly—were to prove fatal to Boehm’s argument.215 These findings have already been considered. Their relationship to Boehm’s first allegation needs to be clearly perceived. The allegation is best understood as an allegation that Carter had not disclosed the particulars of Fort Marlborough’s defensive state in September 1759, which Carter and Preston related in their secret letter of 16 September 1759. Some passages in Lord Mansfield’s judgment suggest an assumption that Boehm could have discovered these particulars, by means of inquiry open to him, in May 1760. This is a very questionable assumption, as previously explained,216 and it was not necessary for Lord Mansfield’s decision. Even if the particulars of Fort Marlborough’s defensive state in September 1759 were not known to, or reasonably discoverable by, members of the London underwriting community in May 1760, Boehm knew or could reasonably be expected to know the ‘general state’ of the place, or could have discovered the ‘general state’ of the place by reasonable inquiry. As such, he knew or could have known that it was a trading settlement, fortified and garrisoned to resist native attack only, and ex hypothesi unable to withstand an attempt by a European enemy.

B.  The Court’s Rejection of the Argument i.  ‘Waiver of Disclosure’ Lord Mansfield’s first response was that Boehm had waived disclosure of Fort ­Marlborough’s defensive state by Carter, and taken the burden of inquiry upon himself. Lying behind this response was a dilemma that Carter necessarily faced as a consequence of his position as Company servant and Deputy Governor. It was quite conceivable that Carter could not disclose the particulars of Fort ­Marlborough’s defensive state in September 1759, except at the cost of breaching his obligations of confidentiality to his employer.217 Carter’s own perception of the sensitivity of this information in September 1759 is certainly suggested by his chosen means of communication via the Pitt. The matter was not mentioned in the Fort Marlborough Council’s general letter of 21 September 1759, addressed to the Court of Directors;218 nor in Carter’s private letter to his brother of 22 ­September 1759.219 It was mentioned only in Carter and Preston’s secret

215 

See 55 above. See 56–57 above. For an example of the covenant typically signed by covenanted servants of the Company, which included an express confidentiality clause, see IOR/O/1/1. 218  IOR/G/35/12, Letter from Fort Marlborough to the Court of Directors, 21 September 1759, folios 302–31. See 34 above. 219  This is implicit in Boehm’s counsel’s argument, that ‘the plaintiff ’ (that is, Carter’s brother) ought in any event to have inquired about Fort Marlborough’s state: see Carter (n 1) 3 Burr 1905, 1908; 97 ER 1162, 1164. 216 

217 

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letter of 16 ­September 1759, addressed to the Secret Committee of the Court of Directors.220 This was a mode of communication that would have ensured that it had a very limited readership even within the Company’s Directorship in London. Against this background, Lord Mansfield might have answered that the dilemma was for the insured to resolve, and that he bore the risk of his failure to disclose.221 However, Lord Mansfield’s actual response offered a very different reconciliation of the competing interests of insurer and insured. He was willing to find that Boehm had accepted the burden of inquiry into Fort Marlborough’s defensive state.222 This conclusion followed from Boehm’s having underwritten the policy, without inquiry, in the following circumstances. First, Boehm knew that he could not reasonably depend on the insured’s h­aving disclosed all circumstances that might bear adversely on his calculations, because he knew that Carter was duty-bound to his employer not to disclose Fort ­Marlborough’s defensive state. In Lord Mansfield’s words: The underwriter knew the insurance was for the governor. He knew the governor must be acquainted with the state of the place. He knew the governor could not disclose it, consistent with his duty.223

Second, Boehm was not exclusively dependent on disclosure by Carter in practice, because Fort Marlborough’s defensive state was not exclusively within Carter’s private knowledge, and could be ascertained by other means. In Lord Mansfield’s words: ‘It was a matter as to which he might be informed various ways: it was not a matter within the private knowledge of the governor only.’224 By themselves, these central premises can be regarded as rather unfavourable to Boehm, the insurer. Thus, it seems particularly difficult to sustain the assumption that Boehm might have readily obtained information regarding Fort ­Marlborough’s particular condition in September 1759, rather than merely its general condition, for reasons already explained.225 However, if read in conjunction with other passages of Lord Mansfield’s judgment, his analysis in these passages may not have been as robust as the reports prima facie suggest. It is probable that Lord Mansfield’s conclusions also depended on a third unstated circumstance: viz, that Boehm had reasons to undertake his own burdensome inquiries, because he had reasons to suspect that Carter was withholding adverse knowledge regarding Fort Marlborough’s defensive state.226 Such reasons, if required, could easily be found.227 220  IOR/G/35/12, Letter from Roger Carter and Richard Preston, Fort Marlborough, to the Secret Committee of the Court of Directors, 16 September 1759, folios 287 ff. See 35–36 above. 221  Cf Marshall’s even more extreme response, writing 50 years later, which was that a policy that placed an insured in such a dilemma should be void on public policy grounds: Marshall (n 104) 484. 222 See Carter (n 1) 3 Burr 1905, 1915; 97 ER 1162, 1167. 223 ibid. 224 ibid. 225  For discussion of this assumption, 55–57 above. 226  For discussion of the passages manifesting this assumption, see 77–82 below. 227  For discussion, see 81–82 below.

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ii.  ‘Immateriality’ of the Poor State of the Fortifications Burrows’ report indicates that Lord Mansfield ultimately did not seek to rely on the ‘waiver of disclosure’ argument.228 An alternative answer was available in any event: viz, the particulars of Fort Marlborough’s defensive state in September 1759 were not material to the risk undertaken. Lord Mansfield’s conclusion that Carter’s non-disclosure was ‘immaterial’ emerges only very obliquely from Burrows’ report. Its basis should nevertheless be obvious. Lord Mansfield’s preferred construction of the insured-against contingency meant that Carter’s policy rendered the full insured sum payable, without further inquiry, in the event of an attack on Fort Marlborough by a European enemy.229 It followed that the existence and extent of Boehm’s liability as insurer depended only on whether a European enemy attacked Fort Marlborough, and not upon how far any attack was successful. It further followed that a reasonable insurer’s risk assessment would only depend on factors influencing the likelihood of an attack being attempted by a European enemy. Hence, and subject to one caveat, the state of Fort Marlborough’s defences was immaterial to the risk undertaken. The caveat is that the state of Fort Marlborough’s defences certainly did affect the likelihood of a European enemy attack, in that its notorious weakness made it a substantially more tempting target for small-scale, opportunistic raids of the type planned by the French in 1758, and ultimately carried into effect by D’Estaing in 1760. Carter and Preston clearly appreciated this in September 1759, when they wrote their secret letter to the Court of Directors.230 However, whilst Lord Mansfield did not expressly address this point, he could easily have dismissed it. Lord Mansfield unquestionably considered that a London underwriter could reasonably be expected to know that Fort Marlborough was only designed to withstand native attack. Assuming that knowledge, he would know enough to indicate that Fort Marlborough would be a tempting target for a raid by a European enemy. That risk assessment would not be adversely affected by additional knowledge of the precise particulars of Fort Marlborough’s weak defensive state in September 1759. A distant European enemy, planning a raid on the place, could not reasonably be expected to be aware of such details. For very similar reasons, Boehm’s first allegation would almost certainly have failed even if Lord Mansfield had preferred the construction of the insured-against contingency suggested by Boehm’s counsel: viz, the loss of Fort Marlborough to a European enemy, and not merely an attack on the place. A reasonable underwriter,

228  Carter (n 1) 3 Burr 1905, 1915; 97 ER 1162, 1167 (‘But, not to rely on that’, viz, the waiver of disclosure/assumption of the burden of inquiry argument). 229  See the discussion of the construction of the insured-against contingency at 58–60 above. 230  See IOR/G/35/12, Letter from Roger Carter and Richard Preston, Fort Marlborough, to the Secret Committee of the Court of Directors, 16 September 1759, folios 287 ff, para 19, quoted at 36 above.

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knowing that Fort Marlborough was only designed to withstand native attack, would contemplate that any attack on Fort Marlborough by a European enemy would result in its loss, and thus render him liable for the full insured sum.231 The understanding of the risk being undertaken would not be adversely affected by additional knowledge of the precise particulars of Fort Marlborough’s weak defensive state in September 1759. The only factors influencing his assessment of the risk would be those influencing the likelihood of an attack being attempted. This alternative route to the same conclusion is suggested by a preliminary passage in Lord Mansfield’s judgment, discussed earlier,232 in which he sets out the nature of Carter’s policy: The policy was signed in May 1760. The contingency was ‘whether Fort Marlborough was or would be taken, by an European enemy, between October 1759, and October 1760.’ The computation of the risque depended upon the chance, ‘whether any European power would attack the place by sea,’ If they did, it was incapable of resistance.233

VI.  Material Non-disclosure (II): Alexander Wynch’s Letter from the Cape of Good Hope A. Background Boehm’s other arguments of non-disclosure focused directly on Carter’s failure to disclose matters that might have affected the insurer’s assessment of the risk of a European enemy attack on Fort Marlborough. The strongest of these was the allegation that Carter had not disclosed the existence and contents of the letter which he had received from Alexander Wynch, dated 4 February 1759 at the Cape of Good Hope. This was the letter which reported French plans of 1758 to send a ship and 400 men to surprise the Company’s West Coast settlements. This allegation required serious consideration by the Court. Wynch’s intelligence increased

231  On examination, it seems that the breach of implied waranty argument was rejected on a similar assumption: viz, it was not necessary or reasonable to imply a warranty that Fort Marlborough was in a good defensive state to withstand a European enemy attack, in light of the knowledge that the parties had or could reasonably be expected to have that Fort Marlborough was only designed to withstand a native attack. See Carter (n 1) 1 Black W 593, 595; 96 ER 342, 343: ‘[T]he fort, it is said, was not in the condition it ought to be. That condition ought only to be to resist an Indian force: it was notorious that it could not resist an European attack’. Similarly, Carter (n 1) 3 Burr 1905, 1915–16; 97 ER 1162, 1167: ‘The utmost which can be contended is, that the underwriter trusted to the fort being in the condition in which it ought to be: in like manner as it is taken for granted, that the ship insured is seaworthy. What is that condition? All the witnesses agree “that it was only to resist the natives, and not an European force”’. 232  See 54–57 above. 233  Carter (n 1) 3 Burr 1905, 1914; 97 ER 1162, 1167.

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the perception of the risk of a French attack of both Carter in Sumatra and the Company in London, to an extent sufficient to prompt special precautions even as late as February 1760. The heightened state of alert which Wynch’s letter produced at Fort Marlborough, and the fundamental impact which it had on Carter’s conduct, ­official and private, has already been considered.234 Surviving contemporary sources indicate that an equivalent change in perception also occurred at East India House in ­London. By late June 1759, the Court of Directors had received a similar letter directly from Wynch, via Copenhagen.235 The Directors’ words and acts at the time of their next general dispatches to Fort Marlborough suggest that Wynch’s letter had also increased their concerns for their West Coast servants, even though it was by then many months since the French plans were to have taken effect. The letter in question, dated 4 February 1760,236 expressly referred to Wynch’s reports: You will long before receipt hereof have been advised of the several French Ships … which had been at the Cape of Good Hope in the beginning of last year as also of some others which the Gentlemen who were passengers on the Grantham and Ilchester had got information of during their stay at that place and whereof Mr Wynch took care to give our Deputy Governour an account by the way of Batavia, this it cannot be doubted had its due effect in your taking every possible precaution to be guarded from a Surprize or Sudden Attack from any part of the Enemy’s force which you might have reason to judge would be directed against the West Coast.237

The Court of Directors evidently considered that Wynch’s letter to Carter would have justifiably provoked a heightened state of alert, and special measures, at Fort Marlborough. The remainder of the letter also shows the Court of Directors itself adopting or recommending a quite unprecedented combination of measures for Fort Marlborough’s security.238 Perhaps the most compelling single measure is the Directors’ promise of 200 military recruits.239 During the Seven Years’ War, the general demands for manpower made it extremely difficult for the Company to raise troops;240 and 200 European recruits represented a substantial addition 234 

See 30–36 above. See n 41 above. 236  IOR/G/35/31, Rough Drafts of Dispatches to Fort Marlborough, Letter from Court of Directors to Fort Marlborough, 6 February 1760, folio 135 ff. 237  IOR/G/35/31 (n 236) para 19. 238  IOR/G/35/31 (n 236) paras 37 (indent for military stores fully complied with; additional guns not requested to be sent); para 42 (60 barrels of gunpowder sent to make up for those not received by earlier ships); para 71 (Fort Marlborough to be placed in a respectable condition not only to resist the ‘Country Powers’ but also to make a good defence against a European enemy); para 71 (Company’s Presidencies in India to be directed to forward such military stores as they could spare); para 71 (­special, secret committee to be established at Fort Marlborough); paras 55, 88 ff (regulations prescribed for the governance of Fort Marlborough in times of military emergency, recently laid down for the Company’s Presidencies in India and ‘especially absolutely necessary in time of war’); para 92 (200 military recruits to be sent); para 93 (four infantry companies of 100 men to be formed in future). 239  IOR/G/35/31 (n 236) para 92. 240  See IOR/G/35/31 (n 236) para 4, where these difficulties are expressly mentioned. 235 

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to the garrison’s existing strength.241 In the Directors’ own words: ‘The Military Stores now consigned to you together with the Officers and Soldiers upon these ships will show our Care of the West Coast.’242

B.  The Court’s Rejection of the Argument In light of the response of Carter and the Company to Wynch’s intelligence, Lord Mansfield’s response to Boehm’s second allegation initially looks surprising. He did not hesitate in endorsing the jury’s conclusion that Wynch’s intelligence was not material. In simple terms, no underwriter in London in May 1760 could ­reasonably consider that this intelligence increased the risk being undertaken. Indeed, if anything, the intelligence would have suggested that the risk of French attack on Fort Marlborough was reduced. Lord Mansfield’s reasoning emerges from the following passage in Burrows’ report: It was said—If a man insured a ship, knowing that two privateers were lying in her way, without mentioning that circumstance, it would be a fraud—I agree with it. But if he knew that two privateers had been there the year before, it would be no fraud, not to mention that circumstance: because, it does not follow that they will cruise this year at the same time, in the same place; or that they are in a condition to do it. If the circumstance of ‘this design laid aside’ had been mentioned, it would have tended rather to lessen the risque than increase it: for, the design of a surprize which has transpired, and been laid aside, is less likely to be taken up again; especially by a vanquished enemy.243

The first available explanation for this robust conclusion is simply that the court did not have before it the material required to appreciate fully the significance of Wynch’s letter. The credibility of Wynch’s intelligence stemmed from its having come from the French forces gathered at the Cape of Good Hope over the winter of 1758–59, which Wynch was witnessing and reporting. Although this would have been apparent from the terms of Wynch’s letter, it would not have been apparent from the material actually before the court: Boehm’s counsel did not provide any further information regarding the authorship, content and context of Wynch’s letter, beyond what was incidentally revealed by Carter and P ­ reston’s secret ­letter of 16 September 1759.244 This is immediately surprising, because means of further illumination certainly did exist. Thus, copies of Wynch’s letter were dispatched from Bencoolen in the same secret packets as Carter and Preston’s

241  On the garrison’s history, see generally Harfield (n 6). Sickness, deaths and desertions would reduce the effective numbers significantly below full strength, and had done so in the preceding period. 242  IOR/G/35/31 (n 236) para 71. 243  Carter (n 1) 3 Burr 1905, 1917; 97 ER 1162, 1168. The preceding sentence, ‘This is a topic of mere general speculation; which made no part of the fact of the case upon which the insurance was to be made’, is difficult to make sense of. 244  IOR/G/35/12, Letter from Roger Carter and Richard Preston, Fort Marlborough, to the Secret Committee of the Court of Directors, 16 September 1759, folio 287 ff, para 10, quoted at 35 above.

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letter,245 which Boehm had brought before the court, and survived in the Company’s possession.246 Similarly, at the trial, Carter’s counsel had offered to read the letter which the Court of Directors had received from Wynch,247 but this was objected to by Boehm’s counsel, and the account was not read.248 The inference that Lord Mansfield drew from this failure to provide or permit further illumination regarding Wynch’s intelligence was that it must have been ‘very doubtful’.249 As Burrows reports: [w]hat that letter was; how [Wynch] mentioned the design, or upon what authority he mentioned it; or by whom the design was supposed to be imagined, does not appear. The defendant has had every opportunity of discovery; and nothing has come out upon it, as to this letter, which he thinks makes for his purpose. The plaintiff offered to read the account [Wynch] wrote to the East India Company: which was objected to; and therefore not read. The nature of that intelligence therefore is very doubtful.250

Although this first explanation needs careful consideration, it ultimately seems inadequate. The thrust of Lord Mansfield’s ensuing reasoning is that, even if Wynch’s intelligence was wholly credible, taking it in its ‘strongest light’, the intelligence was still only a ‘report of a design to surprise, the year before; but then dropt’;251 and that such a report could not be ‘material’. On examination, Lord Mansfield’s robust conclusion is much more satisfactorily explained on a second basis. Adopting an objective ‘different risk’ standard of materiality, Boehm needed to show that Wynch’s intelligence would have adversely affected the risk perception of a reasonable London underwriter in May 1760, who was asked to insure Fort Marlborough against the risk of a European enemy attack for one year from October 1759. Lord Mansfield clearly assumed that in May 1760, a London underwriter could reasonably be expected to know of the recent state-supported conflict between the English and French East India Companies in India. He also clearly assumed that that knowledge would be sufficient to

245  The Company received two copies, one in the original secret packet sent via the Pitt in September 1759, and a second in the duplicate of this packet sent via the Earl of Holderness, which eventually sailed for London in early February 1760. See IOR/G/35/12, List of contents of a duplicate secret packet, duplicating that sent via the Pitt, sent on the Earl of Holderness, folio 409. 246  See today, IOR/G/35/12, Letter from Alexander Wynch, Cape of Good Hope, to Roger Carter, 4 February 1759, folios 262v–264. Annotations to this letter indicate that it is the copy sent in the duplicate secret packet sent on the Earl of Holderness: see n 245 above. The first paragraph of Carter and Preston’s letter would probably have been sufficient to indicate that a copy of Wynch’s letter was being enclosed with it. 247  This was almost certainly the letter which the Court of Directors received directly from Wynch by way of Copenhagen sometime in June 1759: see IOR/B/75, Minutes of Meeting of Court of ­Directors, 27 June 1759, 386, recording the reading of correspondence from Wynch at the Cape of Good Hope of February 1759, received by way of Copenhagen. 248  Carter (n 1) 3 Burr 1905, 1917; 97 ER 1162, 1168. 249 ibid. 250  ibid, 3 Burr 1905, 1916–17; 97 ER 1162, 1168. 251  ibid, 3 Burr 1905, 1917; 97 ER 1162, 1168.

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suggest to a London underwriter that there was some risk of an attack by French forces on the English Company’s interests in Sumatra. If disclosed in May 1760, Wynch’s ­letter would have confirmed the correctness of that risk assessment, to the extent that it would have shown that Fort Marlborough, previously merely a possible target, had definitely been in the enemy’s contemplation. However, it would not follow that in May 1760, the knowledge of the definite but unimplemented plans of 1758 would adversely affect a London underwriter’s perception of the risk of a French attack during the policy’s term. Whether the underwriter’s perception would be affected in this way would fundamentally depend on the underwriter’s assessment of the likelihood of the 1758 plans being revived during that period. This, in turn, would fundamentally depend on what in May 1760 the underwriter could reasonably be expected to know about the recent course of the Anglo-French conflict in the East Indies. The key to unlocking Lord Mansfield’s reasoning is the fact that the state of knowledge of Carter regarding this conflict in September 1759, and the likely state of knowledge of a London underwriter in May 1760, were materially different. This difference can explain how Lord Mansfield could justifiably reject Wynch’s letter as immaterial, despite clear evidence that its receipt had had a fundamental impact on Carter’s conduct in August–September 1759. Carter and Preston’s secret letter of 16 September 1759 would have incidentally revealed that Carter’s reaction rested on incomplete information about the Anglo-French conflict in India, which did not extend substantially beyond the ending of the siege of Madras.252 An underwriter in May 1760 could reasonably be expected to have substantially more recent and complete information. Even more critically, that information could also reasonably be expected to result in a very different assessment of the likelihood of the French plans of 1758 being revived. Those plans were conceived in the first few months of the conflict on the Coromandel Coast, after the French forces had scored some important successes. Beginning, however, with the raising of the siege of Madras on 16 February 1759, the tide of the Anglo-French conflict had increasingly turned against the French. Armed with knowledge of that altered background, a London underwriter might reasonably conclude that the French plans of 1758 could not be, or would not be, revived during the policy’s term: any available sea and land forces would be consumed by the conflict in India.253 On that basis, Wynch’s letter would have no adverse effect on the underwriter’s risk assessment.

252  IOR/G/35/12, Letter from Roger Carter and Richard Preston, Fort Marlborough, to the Secret Committee of the Court of Directors, 16 September 1759, folio 287 ff, para 2, in which they related to the Court of Directors what they had learned from letters directly from Fort St George, or indirectly via letters from John Herbert. See further n 260 below. 253  It is of some interest to note that most recent reports of the Company to its General Court, at which ‘all the Directors’ and ‘a large Appearance of the Generality’ (the shareholders) were present, struck a remarkably positive tone at this time, based on accounts from Fort St George up to mid-August 1759, received by the Warren, which had arrived at Kinsale in company with the Pitt: see IOR/B/75, Minutes of Meeting of General Court of East India Company, 19 March 1760, 658 ff.

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That this was what Lord Mansfield intended is suggested by the final, crucial clause of Burrows’ report of his reasoning: ‘the design of a surprize which has transpired, and been laid aside, is less likely to be taken up again; especially by a vanquished enemy.’254 A contemporary of Lord Mansfield would have recognised this as a reference to ailing French fortunes in India. Looking back, one might have niggling concerns that Lord Mansfield was assuming knowledge that only hindsight could afford:255 whatever the actual state of the conflict in India in May 1760, it is not obvious that what could then have been known in London would have warranted the assumption that the French were a ‘vanquished enemy’. Nevertheless, Lord Mansfield’s basic point is clear: viz, that what a London underwriter in May 1760 could know about the Anglo-French conflict would have justified the conclusion that the unimplemented plans of 1758 would not be revived during the policy’s term.

VII.  Material Non-disclosure (III): Carter’s Anticipation of a French Attack A. Background Boehm’s third allegation of material non-disclosure also bore on the likelihood of a French attack. On its face, it was the substantially weaker argument that Carter had failed to disclose to his insurer his anticipation of a French attack. Its evidential basis was the letter sent by Carter to his brother of 22 September 1759, in which he gave his brother his instructions to insure. Carter confessed that he was: [N]ow more afraid than formerly, that the French should attack and take the settlement; for, as they cannot muster a force to relieve their friends at the coast, they may, rather than remain idle, pay us a visit. It seems, that they had such an intention, last year.256

It was this speculation about a possible French attack which, according to Boehm, should have been disclosed. The meaning of Carter’s words only becomes clear in light of Carter’s limited knowledge of the course of the Anglo-French conflict in India on 22 September 1759, when he wrote to his brother. By Wynch’s letter received on 14 August 1759 254  Carter (n 1) 3 Burr 1905, 1917; 97 ER 1162, 1168. This is perhaps even clearer from Blackstone’s abbreviated report of Lord Mansfield’s reasoning in Carter (n 1) 1 Black W 593, 595; 96 ER 342, 344: ‘It is said, that, if the insured knows of a design by a privateer to attack a ship, the concealment would be fraudulent. I agree it; but not if designed a year before, and dropped. A design, which had transpired and was dropt, was not likely to be renewed by a vanquished enemy’. 255  This problem is repeated elsewhere in Lord Mansfield’s judgment. See esp Carter (n 1) 3 Burr 1906, 1916; 97 ER 1162, 1168, dealing with the third allegation of non-disclosure: ‘It is a bold attempt, for the conquered to attack the conquerer in his own dominions’. 256  Carter (n 1) 3 Burr 1905, 1913n; 97 ER 1162, 1166.

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via Batavia, Carter knew about the French ships gathered at the Cape of Good Hope over the winter 1758–59.257 He also had second-hand reports that the siege of Fort St George had ended on 16 February 1759, by which time the French ships and reinforcements had not reappeared off the Coromandel Coast, to relieve the besieging French forces.258 However, the Fort Marlborough records suggest that that was all. Intelligence of subsequent events—the delayed return of D’Aché’s ships to the Coromandel Coast in August 1759, the sea battle between the French and English squadrons on 10 September, and the departure of D’Aché’s ships for Mauritius in early October—did not arrive at Fort Marlborough until late December.259 Viewed against that background, it is clear that Carter’s observations are speculations about the likely movements of the French fleet. In short, his meaning is that: as [the French fleet] cannot … relieve [the French forces on the Coromandel Coast], they may, rather than remain idle, pay us a visit. It seems, that they had such an intention last year.

Carter had evidently inferred from Wynch’s letter of 4 February 1759 that the news of French plans to attack Fort Marlborough had come from the French forces at the Cape over the winter 1758–59, and thus that the threat to Sumatra was likely to come from the forces then gathered there. He knew that those ships could not lend early assistance to the French forces on the Coromandel Coast, because of the distance between the Cape and that region. He may also have been assuming that the presence of the English squadron off the Coast might prevent their landing in subsequent months. Whether or not that is right, Carter certainly knew that the arrival of the monsoon season would make it dangerous for either fleet to remain on the Coast much beyond September 1759. On that basis, he appears to have

257 

See 28, 30–32 above. the secret letter sent contemporaneously on the Pitt: IOR/G/35/12, Letter from Roger Carter and Richard Preston, Fort Marlborough, to the Secret Committee of the Court of Directors, 16 ­September 1759, folio 287, para 2. This letter reports that they had no more recent news from Fort St George than that conveyed by the Duke, which arrived on 9 February 1759, with letters of 31 ­October 1758: IOR/G/35/70, Diary and Public Consultations—Fort Marlborough, 9 February 1759, 40 (diary entry) Their intelligence regarding events on the Coromandel Coast came via John ­Herbert on 14 August 1759: IOR/G/35/70, Diary and Public Consultations—Fort Marlborough, 14 August 1759, 249 (diary entry recording receipt of correspondence from Batavia); ibid 15 August 1759, 254 (­consultation considering a letter from John Herbert of 5 July 1759, bringing news of raising of siege of Madras). 259  The next significant intelligence probably came via the Fort Marlborough, which arrived on 20 December 1759, with a letter from Fort St George of 7 November 1759: IOR/G/35/70, Diary and Public Consultations—Fort Marlborough, 20 December 1759, 480 (diary entry recording arrival of the Fort Marlborough); IOR/G/35/12, Letter from the Secret Committee, Fort St George to the Secret Committee, Fort Marlborough, 7 November 1759, folio 353; IOR/G/35/12, Minutes of the Secret Committee, Fort Marlborough, 20 December 1759, folio 399 (considering the letter). The letter reported an engagement between the English and French ships on 10 September 1759; the disembarcation of land forces by the French at Pondicherry; the departure of the French ships for—it was believed—Mauritius on 2 October 1759; and the departure of the English ships for Bombay on 17 October 1759. 258 See

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made the further deduction that the French fleet might choose to occupy itself over the summer or autumn months in some other way. Thus understood, the weakness of Boehm’s third allegation should be obvious. The observations allegedly concealed were simply Carter’s own speculations about the likely movements of the French fleet, based on dated and incomplete intelligence about the general state of the Anglo-French conflict in the East Indies. By May 1760, when Carter’s policy was underwritten, a London insurer could hope to exercise his judgement on the basis of substantially more up-to-date and complete intelligence regarding the circumstances that would bear on the likelihood of the French fleet diverting itself from the conflict on the Coromandel Coast, to surprise the Company’s West Coast settlements. This would include: the general course of the Anglo-French conflict; the movements of the French ships that had been at the Cape over the winter of 1758–59, during the summer–autumn of 1759; and the strength of the forces recently dispatched for the East Indies from England and France.

B.  The Court’s Rejection of the Argument It cannot be a surprise that Boehm’s third allegation failed. Burrows records Lord Mansfield’s response as follows: This is no part of the fact of the case: it is a mere speculation of the governor’s from the general state of the war. The conjecture was dictated to him from his fears. It is a bold attempt, for the conquered to attack the conqueror in his own dominions. The practicability of it in this case, depended upon the English naval forces in those seas; which the underwriter could better judge of at London in May, 1760, than the governor could at Fort Marlborough in September, 1759.260

According to Blackstone’s abbreviated report, Lord Mansfield’s answer was that: ‘This was a mere speculation of the governor, and not a matter of fact’.261 A number of answers can be extracted from these passages, when read in conjunction with the rest of Lord Mansfield’s judgment. The first is that C ­ arter’s observation was not material to the risk assumed by Boehm. Adopting an objective, ‘different risk’ standard of materiality, it would be easy to conclude that the risk assessment of a reasonable underwriter, asked to underwrite a policy in ­London in May 1760, would not be adversely affected by Carter’s manifestly unreliable speculations of September 1759. This conclusion would follow a fortiori if what could reasonably be known about the Anglo-French conflict in the London underwriting community by May 1760 would have indicated that there was little or no likelihood of French ships and forces being diverted to surprise the West

260  261 

Carter (n 1) 3 Burr 1905, 1916; 97 ER 1162, 1168. ibid, 1 Black W 593, 595; 96 ER 342, 343.

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Coast ­settlements, as Carter feared.262 Whether or not this was so, a snapshot of the ­London papers of the time at least suggests that some of the most recent intelligence would have falsified the premises on which Carter’s apprehensions were based. By March 1760, the papers carried reports from French sources of D’Aché’s belated return to the Coromandel Coast, the engagement between the English and French squadrons, the landing of troops and supplies at Pondicherry, and the return of D’Aché’s damaged ships to Mauritius.263 The legal principles stated by Lord Mansfield presented two other insuperable objections to Boehm’s third allegation. One was that an insured is not obliged to disclose his own speculations; an insurer is expected to exercise an independent judgement.264 Another was that an insured is not obliged to disclose matters of ‘political speculation’ or ‘general intelligence’, about which an insurer is expected to inform himself.265 Here, what Carter had allegedly concealed was unquestionably his own speculation, and with one exception, none of the facts on which that exercise of judgement depended were facts of which an underwriter in ­London in May 1760 could expect to be informed by the insured. They were all facts relating to the general course of the Anglo-French conflict in the East Indies: viz, ­matters that Lord Mansfield describes as matters of ‘political speculation’ or ‘general intelligence’. The one exception was the letter received by Carter from Wynch on 14 August 1759, reporting the French plans of 1758. On its face, Carter’s speculation relied heavily on this letter. Nevertheless, this could not render that speculation a matter that ought to have been disclosed to Boehm. Instead, Carter’s failure to disclose the existence and contents of the letter could and did provide the basis for the independent allegation of non-disclosure, already considered.

262  See the similar assumptions, on which Lord Mansfield appears to reject Boehm’s allegation regarding Wynch’s letter, discussed at 69–71 above. 263  See eg London Chronicle (27–29 March 1760) 309, col 2 (carrying reports of these events from Paris, based on letters of October 1759 brought by a French frigate); see too London Chronicle (8–10 April 1760) 349, col 2. Cf London Chronicle (13–15 March 1760) 262, cols 2–3 (extracts of letters from English officers in Pocock’s fleet, of 12 and 13 August 1759, still then waiting for D’Aché’s arrival). Reliable reports from English sources of these events may not have arrived in London before the end of May: see London Chronicle (27–29 May 1760) 518, col 3 (reporting the arrival of the Diligence Packet from Madras after a passage of seven months); London Chronicle (29–31 May 1760) 521, cols 1–2 (letter from Fort St George of 5 November 1759); London Chronicle (31 May–3 June 1760) 529, cols 1–3, 530, cols 1–3 (letter from Vice Admiral Pocock, Madras Road, 12 October 1759); London Chronicle (7–10 June 1760) 553, cols 1–2, 554, cols 1–2 (letter from Fort St George of 2 November 1759). 264  This is reported in different terms. According to Burrows’ report, at 3 Burr 1905, 1910, 1911; 97 ER 1162, 1165: ‘[t]he under-writer … needs not be told general topics of speculation’; further ‘[m]en argue differently, from natural phenomena, and political appearances: they have different capacities, different degrees of knowledge, and different intelligence. But the means of information and judgment are open to both: each professes to act from his own skill and sagacity; and therefore neither needs to communicate to the other’. According to Blackstone’s report, at 1 Black W 593, 594; 96 ER 342, 343: ‘as men reason differently from the same facts, he need not be told another’s conclusion from known facts’. 265  See further 77 below.

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VIII.  Material Non-disclosure (IV): Carter’s Grounds for Apprehending a Dutch War A. Background A fourth allegation of non-disclosure was raised by Lord Mansfield, rather than by Boehm’s counsel.266 It principally rested upon an inference drawn from Roger Carter’s letter to his brother of 22 September 1759, by which the request for insurance was made. Carter reportedly commented that ‘in case of a Dutch war, I would have it (the insurance) done at any rate’.267 This showed, Lord Mansfield concluded, that Roger Carter was then ‘principally apprehensive of a Dutch war’,268 and yet he had neither disclosed that apprehension, nor the grounds on which it rested, to the insurer. Lord Mansfield was unable to identify the specific grounds for Carter’s apprehension, in the absence of argument on the point. However, surviving contemporary sources offer important insights into what they might have been. The Dutch Company had long been the English Company’s major commercial rival in this region,269 and the Company’s surviving records reveal that relations between the West Coast servants and their Dutch neighbours were often strained. Indeed, they indicate that from the outset of Carter’s period as Deputy Governor, the Company’s servants at Fort Marlborough were complaining bitterly of local Dutch interference with their shipping and trade.270 Properly understood, however, Carter’s fear of a ‘Dutch war’ in September 1759 had a different basis. It was not the long-standing local commercial rivalry, but rather, the very recent intelligence of a substantial Dutch armament being prepared at Batavia, the Dutch Company’s headquarters in the East Indies. This intelligence came via two letters from John Herbert, the Company’s agent there, which arrived at Fort Marlborough on 14 August 1759.271 Their contents were summarised by Carter and Preston, in their secret letter of 16 September 1759. [The letters conveyed] intelligence of an Armament the Dutch were sending from ­Batavia, to consist, when reinforced at Ceylon, of 600 Europeans & 1600 Bugganeese,

266 

Carter (n 1) 3 Burr 1905, 1917; 97 ER 1162, 1168. ibid, 3 Burr 1905, 1917n; 97 ER 1162, 1168n. 268  ibid, 3 Burr 1905, 1917; 92 ER 1162, 1168. 269  See 24–25 above. 270  See eg IOR/G/35/11, Letter from Fort Marlborough to Fort St George, 14 June 1758, folio 345 ff, para 6; ibid Letter from Roger Carter to Fort St George, 14 June 1758, folio 362 ff, para 3; ibid Letter from Fort Marlborough to the Court of Directors, 31 December 1758, folio 408 ff. See too the continuing complaints evident at the time of the Pitt’s departure: IOR/G/35/12, Letter from Fort Marlborough to the Court of Directors, 21 September 1759, folio 302 ff. 271  IOR/G/35/12, Letter from John Herbert to Fort St George, 16 June 1759, folios 280–81; ibid 5 July 1759, folios 281–83. 267 

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given out to act as Auxiliaries on the Coast of Coromondel, & protect their Settlements from the injuries of the French; but generally believed, to be real[l]y intended for Bengal, to reestablish their trade there, or possibly to create troubles, which may prove prejudicial to your Honors Concerns in that Kingdom.272

The report of the Dutch scheme was broadly accurate. In the wake of Clive’s ­victory at Plassey in 1757, the English Company’s influence in the rich province of Bengal had greatly increased. In 1759, the Dutch Company did indeed dispatch a substantial force to Bengal, in an effort to resurrect its commercial fortunes there. The expedition was nevertheless short-lived. It ended in catastrophic failure.273 However reliable, John Herbert’s letters did not suggest any imminent Dutch threat to Fort Marlborough from the armament. Nor, more importantly, were they taken to imply such a threat, when they came to be considered by the Fort ­Marlborough Secret Committee at its meeting of 22 August 1759.274 The direct threat was perceived to be in Bengal, and on the basis that John Herbert had already taken steps to ensure that the Company’s servants there were apprised of the armament, the Committee resolved that no further action was necessary.275 Properly understood, the heightened state of alert at Fort Marlborough first ­signalled in the August meeting, and the special precautions immediately taken against enemy attack, had the different basis already noted.276 They were the result of Wynch’s letter, and its forewarnings of a French attack, which Roger Carter had received by the same secret packet from Batavia on 14 August 1759.277 Lord ­Mansfield’s summary of the contents of Carter’s letter to his brother in Carter v Boehm indicates that Carter’s insurance instructions were primarily the result of the same apprehension.278

272  IOR/G/35/12, Letter from Roger Carter and Richard Preston, Fort Marlborough, to the Secret Committee of the Court of Directors, 16 September 1759, folio 287 ff, para 7. 273  The Dutch scheme is noted in, eg F Gaastra, ‘War, Competition and Collaboration: Relations between the English and Dutch East India Companies in the Seventeenth and Eighteenth Centuries’ in HV Bowen et al (eds), The Worlds of the East India Company (Woodbridge, The Boydell Press, 2002) 59. 274  IOR/G/35/12, Minutes of the Secret Committee, Fort Marlborough, 22 August 1759, folio 267v (reciting the reading of John Herbert’s letters of 16 June and 5 July 1759). 275  Confirmed by IOR/G/35/12, Letter from Roger Carter and Richard Preston, Fort Marlborough, to the Secret Committee of the Court of Directors, 16 September 1759, folio 287 ff, para 8. 276  See 28–36 above. 277  See IOR/G/35/12, Minutes of the Secret Committee, Fort Marlborough, 22 August 1759, folios 267–69; IOR/G/35/12, Letter from Roger Carter and Richard Preston, Fort Marlborough, to the Secret Committee of the Court of Directors, 16 September 1759, folio 287 ff, paras 7–9 (dealing with the news of the Dutch armament), paras 10–19 (reporting the letter from Wynch, and the special measures which had been taken to prepare Fort Marlborough for the possibility of a French attack). 278 See Carter (n 1) 3 Burr 1905, 1913n; 97 ER 1162, 1166: ‘The latter letter (to his brother) owns that he is “now more afraid than formerly, that the French should attack and take the settlement; for, as they cannot muster a force to relieve their friends at the coast, they may, rather than remain idle, pay us a visit. It seems, that they had such an intention, last year.” And therefore he desires his brother to get an insurance made upon his stock there’.

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B.  The Court’s Rejection of the Argument The fourth allegation of material non-disclosure was superficially the strongest, as Lord Mansfield acknowledged. In September 1759, Carter unquestionably had grounds for fearing a Dutch war which were not disclosed to the insurer, and it would be difficult to dispute their materiality to the risk undertaken. Lord ­Mansfield nevertheless had no doubts that the allegation should be rejected. ­Unaware of the source of Carter’s fears, he speculated that the grounds must have comprised ‘political speculation’ and ‘general intelligence’,279 which both sides agreed did not have to be disclosed to an insurer.280 The surviving contemporary sources indicate that this was an inspired speculation. The Dutch armament at Batavia which provided the undisclosed grounds for Carter’s apprehension could not have been public knowledge in London in late September 1759, when the Pitt set sail from Fort Marlborough with ­Carter’s insurance instructions. However, it could be and was public knowledge in ­London when the insurance policy was effected, eight months later, in May 1760. In early March 1760, London papers contained reports of the armament, from a source which should not come as a surprise: the Pitt, which had arrived at ­Kinsale in Ireland on 23 February 1760.281 The reports indicate that the Pitt’s crew learned of the armament when she put into Batavia on her return journey from China in late August 1759,282 shortly before her arrival at Fort Marlborough on 2 September 1759.

IX.  Fraudulent Avoidance by the Insurer Having rejected the four particular allegations of material non-disclosure, and acquitted Carter of any fraudulent intention, Lord Mansfield raised one final, overriding objection to Boehm’s attempt to resist liability. If he could avoid liability for Carter’s material non-disclosure, Lord Mansfield said, a rule designed to encourage good faith and prevent fraud would become an instrument of fraud. Burrows’ report records Lord Mansfield’s reasoning in the following terms: The reason of the rule against concealment is, to prevent fraud and encourage good faith. If the defendant’s objections were to prevail, in the present case, the rule would be turned into an instrument of fraud.

279 

Carter (n 1) 3 Burr 1905, 1917–18; 97 ER 1162, 1168. ibid, 3 Burr 1905, 1918; 97 ER 1162, 1168. 281  IOR/L/MAR/B/525, index to the marine records for the Pitt. 282  See esp London Evening Post (11–13 March 1760) 1, col 2. 280 

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The underwriter, here, knowing the governor to be acquainted with the state of the place; knowing that he apprehended danger, and must have some ground for his apprehension; being told nothing of either; signed this policy, without asking a question. If the objection ‘that he was not told’ is sufficient to vacate it, he took the premium, knowing the policy to be void; in order to gain, if the alternative turned out one way; and to make no satisfaction, if it turned out the other: he drew the governor into a false confidence, ‘that, if the worst should happen, he had provided against total ruin;’ knowing, at the same time, ‘that the indemnity to which the governor trusted was void.’ There was not a word said to him, of the affairs of India, or the state of the war there, or the condition of Fort Marlborough. If he thought that omission an objection at the time, he ought not to have signed the policy with a secret reserve in his own mind to make it void; if he dispensed with the information, and did not think this silence an objection he cannot take it up now, after the event. What has often been said of the Statute of Frauds may, with more propriety, be applied to every rule of law, drawn from principles of natural equity, to prevent fraud— ‘That it should never be so turned, construed, or used, as to protect, or be a means of fraud.’283

These passages are difficult to interpret, yet a great deal potentially turns on them. Lord Mansfield was clearly assuming that an insurer’s failure to inquire may debar him from avoiding liability for material non-disclosure vis-à-vis an honest insured. Less clear is when Lord Mansfield envisaged that being the case. Three very different analyses are available, with dramatically different consequences for the ­balance of the law between insured and insurer. Any conclusion regarding Carter v Boehm’s ultimate orientation depends heavily on which is preferred. The first analysis, lying at one extreme, is that Lord Mansfield meant that an insurer cannot avoid liability, where he failed to inquire of his insured, knowing that the insured might have knowledge on a particular subject and yet had disclosed nothing.284 In practice, if accepted, this analysis would always or almost always compel an insurer to make inquiry of his insured. It thus comes dangerously close to reversing what has consistently been assumed to be the law’s startingpoint, implicit in Lord Mansfield’s statement of the law: viz, that a prospective

283 

Carter (n 1) 3 Burr 1905, 1918–19; 97 ER 1162, 1169. This was apparently Marshall’s reading: Marshall (n 104) 483nn, where a succession of criticisms of Lord Mansfield’s final words are offered in the notes: ‘It is here assumed that the underwriter knew that the policy was void.—How could he know that it was void by reason of a concealment, without knowing what was concealed? Upon whom does the obligation lie; the insured to disclose what he knows, or the underwriter to fish it out by questioning the broker or agent? The argument goes to prove, that if the underwriter ask no questions, the insured is obliged to disclose nothing; which is true only with respect to matters of public notoriety—… How could he judge of the omission, without knowing what was omitted?—… How could he be supposed to dispense with information when the silence of the insured was, according to all practice, a proof that he had none to communicate?’. 284 

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insured is obliged to disclose material facts known to him, and that this means obliged without inquiry.285 Marshall, writing 200 years ago, saw this: Upon whom does the obligation lie; the insured to disclose what he knows, or the underwriter to fish it out by questioning the broker or agent? The argument goes to prove, that if the underwriter ask no questions, the insured is obliged to disclose nothing; which is true only with respect to matters of public notoriety …286

For this reason alone, this radical first interpretation seems impossible to accept. A second analysis, lying at the opposite extreme, is that Lord Mansfield meant only that an insurer cannot avoid liability where his failure to inquire is shown to be fraudulent. No one would dispute that an insured’s obligation to disclose material facts should not be a cloak for dishonest conduct by insurers. The difficulty with this second analysis is different: viz, its application in Carter v Boehm required some controversial factual assumptions, remarkably adverse to the insurer. In his judgment, Lord Mansfield unquestionably emphasises circumstances that should have afforded Boehm reasons to suspect that the insured had failed to disclose some material matter. However, it is a large leap from there to the conclusion that Boehm fraudulently failed to inquire: viz, that Boehm knew that the insured had not disclosed some material matter, and that that non-disclosure would entitle him to avoid liability, and yet he had deliberately failed to inquire with the dishonest intention of profiting in all events. A third analysis, lying between these extremes, is that an insurer cannot avoid liability vis-à-vis an honest insured where he consciously failed to inquire of the insured, in circumstances where he had reasons to suspect that a material ­matter had not been disclosed.287 Support for this analysis can be found from passages indicating that Boehm’s failure to inquire would have the same consequence, whether or not he had any fraudulent intention: If he thought [the omission to disclose] an objection at the time, he ought not to have signed the policy with a secret reserve in his own mind to make it void; if he dispensed with the information, and did not think this silence an objection; he cannot take it up now, after the event.288

Consistently with Lord Mansfield’s express words, this third analysis can be understood as a principle designed to prevent ‘fraud’ in two senses. First, a principle depending only on proof of a failure to inquire, despite reasons to suspect non-disclosure, might be warranted to avoid any risk that the law might 285  See, for a clear early statement of an insurer’s legitimate position of passivity, Bridges v Hunter (1813) 1 M&S 15, 18; 105 ER 6, 7 (Lord Ellenborough CJ). 286  Marshall (n 104) 483n. 287  This limitation is implicit in Lord Mansfield’s earlier statement of principle: see Carter (n 1) 3 Burr 1905, 1911; 97 ER 1162, 1165. Good faith, he said, prevented an insured holding an insurer to a contract, where he had failed to disclose material facts which he knew, but of which the insurer was ignorant, and had no reason to suspect. 288  Carter (n 1) 3 Burr 1905, 1911, 1918–19; 97 ER 1162, 1169.

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be exploited by insurers who were in fact guilty of fraudulent non-inquiry. Arguably, Lord Mansfield’s earlier statements, in which he appears to accuse Boehm of dishonesty, were only intended to present a hypothetical: viz, that if insurers in Boehm’s position could avoid liability by pleading ‘I was not told’, the law might become a tool for the dishonest to achieve their ends. Second, the same principle might be warranted to prevent ‘fraud’ in a broader sense. It is evident that Lord Mansfield was concerned that an honest insured, of whom inquiry might be made but is not, will afterwards conduct his affairs on the assumption that his policy is valid, and that he has effectively hedged his risks. Thus Lord Mansfield observes in the passage quoted that Boehm, by his failure to inquire, ‘drew the governor into a false confidence, “that if the worst should happen, he had provided against total ruin”’.289 It might be inferred from this that Lord Mansfield was at least partly concerned to avoid the injustice arising if an insurer could rely on his insured’s honest failure to disclose material facts to avoid liability and compel the insured to bear the risk of loss, where the insurer’s failure to inquire (despite reasons to suspect non-disclosure) had denied the insured the opportunity of correcting his omission and ensuring the policy’s validity. The wider interest of this intermediate analysis of Lord Mansfield’s words lies in its relationship with the modern law. Cases decided before the enactment of the Insurance Act 2015290 held that an insurer’s failure to inquire of a prospective insured could prevent the insurer from avoiding liability, via the objection that the insurer has waived disclosure of the relevant matters. Understandably, however, this exception has been carefully policed by the courts: over-ready findings of ‘waiver of disclosure’ from an insurer’s failure to inquire would threaten fatally to undermine the primacy of the insured’s obligation to disclose.291 Unfortunately, the courts have not found it entirely easy to identify exactly where the dividing line should be drawn. The prevailing approach appears to entail an inquiry as to whether the insured’s presentation of the risk, on its own or in conjunction with such other facts as the insurer knows or is presumed to know, should have raised a suspicion in the mind of a reasonable insurer that some material fact had not been disclosed. Where this is so, and the insurer fails to make such inquiry of the insured as a reasonably careful insurer would make, he will be held to have waived disclosure of any material fact that such inquiry would reveal.292 Thus formulated, the ‘waiver of disclosure’ exception can initially appear broad, but in practice, its application is very much restricted by the primacy of the insured’s obligation to

289 

See ibid, 3 Burr 1905, 1918; 97 ER 1162, 1169. See 51–53 above. 291  See classically Greenhill v Federal Insurance Co Ltd [1927] 1 KB 65 (CA) 72 (Lord Hansworth), 85–87 (Scrutton LJ), 89 (Sargant LJ). 292 See Container Transport International Inc v Oceanus Mutual Underwriting Association (­Bermuda) Ltd (No 1) [1984] 1 Lloyd’s Rep 476 (CA) (esp Parker and Stephenson LJJ); Marc Rich & Co AG v ­Portman [1996] 1 Lloyd’s Rep 430, [1997] 1 Lloyd’s Rep 225 (CA); WISE Underwriting Agency Ltd v Grupo Nacional Provincial SA [2004] EWCA Civ 962, [2004] 2 Lloyd’s Rep 483. 290 

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disclose. Other things being equal, an insurer can assume that the insured has performed his obligation, and fairly represented the risk. And other things being equal therefore, he can assume that no information has been withheld that would materially affect the risk as represented. Additional circumstances must suggest that that assumption is illegitimate. In modern litigation, Lord Mansfield’s closing remarks in Carter v Boehm have sometimes been resurrected in support of a very expansive interpretation of the exception for waiver of disclosure.293 Such arguments failed. One response was that Carter v Boehm was a decision turning on its own facts. Another was that the law has moved on since 1766. The apparent implication is that modern courts, being more inclined to emphasise the primacy of an insured’s obligation to disclose, and more sensitive to the insurance practices that may have been shaped by it, are now less willing than Lord Mansfield may have been to allow a failure to inquire to defeat an insurer’s allegation of non-disclosure. That certainly cannot be ruled out, and if it is indeed correct, it would reinforce Carter v Boehm’s status as a very ‘progressive’ decision: it would suggest that Lord Mansfield understood the law in a manner that bears important similarities to the law now embodied the UK’s new Insurance Act 2015.294 As explained in an earlier section,295 the new ‘duty of fair representation’ applicable to ‘non-consumer’ insurance contracts allows insureds to discharge their duty of disclosure, even if they do not disclose every material circumstance, if their (partial) disclosure ‘gives the insurer sufficient information to put a prudent insurer on notice that it needs to make further enquiries for the purpose of revealing those material circumstances’.296 Whether or not it is correct to read Lord Mansfield in this ‘progressive’ way, re-examination of Carter v Boehm in its context, and of Lord Mansfield’s judgment as a whole, certainly suggests that any gap between the modern law and that reflected in Lord Mansfield’s judgment, is rather narrower than it might immediately appear. Under the modern law, as under the old, Boehm’s claim to resist liability would, quite properly, have failed. If the question is asked, whether a prudent or reasonably careful insurer would have inquired about the state of Fort Marlborough’s fortifications, a combination of several circumstances might strongly suggest an affirmative answer. First, Lord Mansfield assumed that Boehm knew that Carter might be duty-bound not to disclose Fort Marlborough’s defensive state in September 1759. No insurer having this knowledge could have safely proceeded on the assumption that if Carter had any adverse knowledge, he would have volunteered it. Second, Lord Mansfield also assumed that Boehm knew or might reasonably be expected to know of the character of the Company’s establishments in the East Indies, and more particularly,

293  See esp the treatment of counsel’s arguments in Marc Rich & Co AG v Portman [1996] 1 Lloyd’s Rep 430, [1997] 1 Lloyd’s Rep 225, and again in WISE Underwriting Agency Ltd v Grupo Nacional ­Provincial SA [2004] EWCA Civ 962, [2004] 2 Lloyd’s Rep 483. 294  See 52–53 above. 295  See 52–53 above. 296  Insurance Act 2015, s 3(4)(b).

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that Fort Marlborough was only designed to withstand native attack. No insurer having this knowledge could reasonably assume that Fort Marlborough was in a state to withstand a European attack, without further inquiry. Third, even without such knowledge, the nature of the insurance request, taken together with the form of the policy underwritten, might be sufficient to raise a similar suspicion. As we have seen, Carter’s request was for a policy covering his stock-in-trade at Fort Marlborough against loss in a European enemy assault. It might be inferred from this that the place was thought indefensible. This inference might be reinforced by the circumstance that the policy underwritten rendered the insured sum payable in full and without further inquiry in the event of such an assault. If the similar question is asked, whether a prudent or reasonably careful insurer would have inquired whether Carter knew facts bearing on the likelihood of a European enemy attack, which he had not disclosed, an affirmative answer might also be reached. Once again, the nature and timing of the insurance request seems fundamentally important. The policy was not such as would be effected in the ordinary course of business, against ordinary perils. It appears to have been a policy insuring only against European enemy attack, for a premium that represented a very substantial sum of money. Lord Mansfield certainly regarded the policy as exceptional, even unique.297 Once this is appreciated, it is easier to accept that the insurer ought to have suspected that circumstances known to Carter, but not disclosed, gave him special cause to fear that such attack might occur. Other circumstances might suggest the same, or would at least suggest that a London underwriter could not reasonably assume, from Carter’s silence, that he had no particular reasons for fearing a European enemy attack. Prime amongst these would be the circumstance that the request came against the background of direct conflict in the East Indies between England and France, a conflict about which the insured, resident in the East Indies, might initially be better placed to know than a London underwriter.

X.  The Public Policy Objection It is unlikely to be noticed today that Lord Mansfield also raised a preliminary objection to Carter’s claim that was not an argument of non-disclosure at all. It was that the policy might be void on grounds of public policy: [a]n objection occurred to me at the trial, ‘whether a policy against the loss of Fort ­Marlborough, for the benefit of the governor, was good;’ upon the principle which does not allow a sailor to insure his wages.298 297  See esp Carter (n 1) 3 Burr 1905, 1912; 97 ER 1162, 1165, where in the context of the dealing with the public policy objection to the policy’s validity, Lord Mansfield observes that insurance of this nature ‘so seldom happens, (I never saw one before)’. See also Carter (n 1) 3 Burr 1905, 1918; 97 ER 1162, 1168, where Lord Mansfield rejects the broker’s evidence as to how the underwriters would have reacted to disclosure, on the basis that it was an opinion ‘without the least foundation from any previous precedent or usage’. 298  Carter (n 1) 3 Burr 1905, 1912; 97 ER 1162, 1165; and 1 Black W 593, 594; 96 ER 342, 343.

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At first sight puzzling, Lord Mansfield’s meaning here is revealed by the analogy he draws with the law’s treatment of sailors’ wages. When Carter v Boehm was decided, merchant sailors’ wages were structured in a manner that incentivised their doing their utmost for the security of the ship and cargo.299 Governed by the maxim that ‘freight is the mother of wages’, no wages might follow in the event of loss of the ship by wreck or capture,300 a harsh conclusion sometimes expressly rationalised on the basis that ‘if the mariners shall have their wages in these cases, they will not use their best endeavours to hazard their lives to preserve the ship.’301 This risk was considered so significant that a statute then in force actually prohibited the payment of more than half of the wages due to seamen on a merchant ship, before the ship’s safe return to Great Britain or Ireland.302 On the same basis, and as Lord Mansfield must have been aware, it was a common feature of maritime laws at this time that a sailor could not insure his wages,303 on the basis that an insurance ‘safety-net’ might produce the same undesirable disincentives. Lord Mansfield rightly recognised that this analogy suggested that Deputy Governor Carter should not be permitted to insure against the loss of Fort Marlborough to a European enemy, for his own benefit. The ‘safety-net’ of insurance might similarly reduce the incentive of persons occupying his position to take resolute steps for the defence of the place. Lord Mansfield ultimately resisted this analogy, and dismissed the objection.304 Unpacked, his conclusion rested on the following substantial considerations. First, it was unlikely that the safety of Fort Marlborough would be significantly affected by Carter’s acts or omissions. By implication, the case was therefore unlike that of a ship, whose safety inevitably depends on its crew’s resolute conduct.305 Second, the law did not consistently reflect the policy that dictated that insurance policies insuring sailors’ wages should be invalid. A ship’s captain could insure his cargo on-board, or if part-owner of the vessel, could insure his share; similarly, the captain of a privateering vessel could insure his share in the profits of the venture.

299  See eg P Earle, Sailors—English Merchant Seamen 1650–1775 (London, Methuen, 2007) ch 3, esp 31–38 (but note the custom in certain trades of paying a proportion of the pay in advance). 300  In effect, it seems to have been an implied condition of the seaman’s contract with the shipowner that wages were dependent on the earning of freight: eg Arnould on the Law of Marine Insurance (n 155) § 244. 301  Earle (n 299) 36–37 (quoting a contemporary source). 302  8 Geo I c 24, s 7. 303  See earlier, esp N Magens, An Essay on Insurances (London, Haberkorn, 1755) vol 1, § 19 (where the effect of maritime ordinances of Amsterdam, Rotterdam and Stockholm, collected in vol 2, is summarised). For later accounts of English law, eg Park (n 104) 11–12; Marshall (n 104) vol 1, 89–91. Cf too BM Emerigon, (trans) S Meredith, A Treatise on Insurances (London, J Butterworth, 1850) 191–92 (describing the effect of French ordinances, and noting their coincidence with rules of Antwerp and Amsterdam). 304  Carter (n 1) 3 Burr 1905, 1912; 97 ER 1162, 1165. 305  Though Lord Mansfield does not say this in express terms, it is the interpretation that may make most sense of the observation that ‘this place, though called a fort, was really but a factory or settlement for trade … and he, though called a governor, was really but a merchant’: Carter (n 1) 3 Burr 1905, 1912; 97 ER 1162, 1165.

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Third, as a policy of this type was extremely rare, it was unlikely that any mischief would follow by example as a result of its being allowed to stand. Finally, it would not be just to allow the insurer, who took the premium knowing of the insured’s status, subsequently to overturn the policy on the basis that that status precluded him from insuring.

XI. Conclusion There can be no questioning Carter v Boehm’s landmark status in the development of the law of non-disclosure between parties to an insurance contract. The detailed historical re-analysis undertaken in this chapter enables us to see more clearly why it warrants that status, and why, 250 years later, it still deserves to be remembered. It was absolutely not a pro-insurer decision, and we are now better placed to see why. Any contemporary law reformer, concerned for the modern law’s shape and balance, might usefully reflect on three particular aspects of the judgment. First, pervading Lord Mansfield’s judgment is the overriding necessity for an inequality of accessible information between insurer and insured, which leads the insurer to depend on disclosure by his prospective insured. This necessity is clear from Lord Mansfield’s preliminary exposition of the normative basis for requiring a prospective insured to disclose material facts, and for allowing his insurer to avoid liability where he does not. It underpins Lord Mansfield’s unprecedented account of the circumstances in which an insurer cannot complain of nondisclosure, most of which can be derived from those normative underpinnings. It underpins Lord Mansfield’s general account of the context in which Carter’s policy was effected, the clear purpose of which was to emphasise that there was no significant inequality of accessible information in the case at hand. Finally, and perhaps most importantly, it was the absence of any significant inequality of accessible information that ultimately lay at the heart of the failure of Boehm’s particular allegations of material non-disclosure. Thus, we can now see that one reason why Boehm’s allegations failed was that, in light of what the insurer knew or ought to have known when the policy was effected, the facts allegedly concealed would not have adversely affected a reasonable insurer’s risk assessment. In another instance, the answer was that the facts allegedly concealed were matters of general public notoriety, no less accessible to the insurer than to the insured. In yet another instance, the answer was that what was allegedly concealed was the insured’s own speculation, and that the law’s role was properly limited to correcting inequalities of information on which an insurer’s judgement is to be exercised; it did not extend to correcting disparities in the parties’ skill and judgement. A final, overriding objection was that the insurer had failed to take advantage of means of information available to him, in the form of inquiry of the insured or of some other source, when what he knew or ought

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to have known should have compelled the conclusion that he had not been fully informed, and that such inquiries were required. Second, pervading Lord Mansfield’s judgment is also the premise that standards of good conduct apply, in some form or other, to both parties to an insurance contract. Lord Mansfield expressly recognised that an insurer owed his insured a corresponding obligation to disclose material facts. Even more significantly in practice, the law regulating the insured’s obligation and its consequences would not allowed to become a cover or excuse for fraud, nor even for negligence. Insurers could not expect to be wholly passive recipients of all information necessary to estimate the risk being undertaken. They would be expected to know, or inform themselves of, certain types of information not peculiarly in the insured’s knowledge, in the ordinary proper conduct of their business. And even in the case of information not of this type, any insurer who failed to take advantage of means of information available to him, where the circumstances ought to have suggested that he could not assume that he had been fully informed, did so at his peril. In both of these respects, Lord Mansfield’s judgment reflects some very robust findings, adverse to Boehm, the insurer. The resulting signals to the underwriting community ought to have been unmistakable. Finally, also pervading Lord Mansfield’s judgment is the premise that courts must be sensitive to the law’s impact on honest insureds. It is very clear that Lord Mansfield regarded Carter as an honest man, who did not appreciate that the facts not disclosed were significant and/or who considered himself duty-bound not to disclose them. It would be inconsistent with Lord Mansfield’s initial statements of the law to claim that he thought that either of these circumstances alone would excuse the insured’s failure to disclose material facts: he expressly held that even accidental non-disclosure would entitle the insurer to avoid liability. Nevertheless, Lord Mansfield’s judgment does disclose a sensitivity to the unfortunate consequences that would follow, if insurers were allowed too readily to avoid liability vis-à-vis honest insureds, who have arranged their affairs on the assumption that their risks have been hedged. At the most general level, this sensitivity is evident in the close scrutiny to which Lord Mansfield subjected each of the insurer’s allegations of non-disclosure, and his apparent readiness to make factual findings or assumptions adverse to the insurer’s interest. At a more specific level, it is also evident in Lord Mansfield’s assumption that an insurer could not be permitted to avoid liability vis-à-vis an insured who had honestly failed to disclose, where the insurer could not reasonably assume that he had been fully informed, and where his failure to inquire had deprived the insured of all opportunity of correcting the omission. It is evident in Lord Mansfield’s subtle discussion of whether Carter’s policy should be void on public policy grounds. And it is no less evident in Lord Mansfield’s readiness to conclude that Boehm had assumed the burden of inquiry into Fort Marlborough’s condition, in light of his knowledge that Carter might be duty-bound to keep it secret.

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4 The Doctrine of Uberrima Fides in Insurance Law—A Critical Evaluation* REUBEN A HASSON

To give a legal rule a certain rubric is of course a very important way of ­determining the fate in the future of that particular rule. Few of us are against an ‘equitable’ rule, for example, just as there are bound to be few supporters of a rule which is against ‘public policy.’ If we go further and translate our rule into a foreign l­anguage, its ‘goodness’ (or ‘badness’ as the case may be) is heavily underlined. Thus a rule requiring ‘uberrima fides’ from a contracting party is more impressive sounding than one merely requiring the exercise of ‘the utmost good faith.’ Conversely, to say that something is ‘contra bonos mores’ seems to be more damning than to say that the same thing is against ‘public policy.’ Whether it is the above factor or some other, it is surely remarkable that the insured’s duty to disclose material facts to the insurer on his own initiative—the so-called uberrima fides principle—has been subjected to virtually no critical assessment by either English courts or commentators. In this paper, an attempt will be made to suggest that the current English principle is thoroughly unsatisfactory in that it does not reflect the ‘reasonable expectations’ of insurer and insured and in that it is a rule that works against ‘fairness’ in the insurance contract.1 An attempt will also be made to show that the classical doctrine on this subject as stated in the leading case of Carter v. Boehm2 has been misunderstood and

*  First published in The Modern Law Review, 32(1): 615–637 (1969). Reproduced with permission from The Modern Law Review Ltd and Wiley. 1  An attempt will be made to give content to these rather amorphous notions of ‘good faith’ during the course of this paper. For an excellent discussion of these and related notions in the law of insurance, see Kessler, Forces Sharing the Life Insurance Contract in University of Chicago Law School Conference on Insurance (Conference Series No.14, 1954) 3. I am greatly indebted to Professor Friedrich Kessler for his considerable assistance in helping me to think about, and to give weight to, these considerations. He does not, of course, bear any responsibility for such conclusions as I have reached in the present paper. 2  (1766) 3 Burr. 1905.

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misapplied by English courts. By way of sharp contrast American courts in the nineteenth century correctly understood and interpreted the case.3 [615]

I.  Carter v Boehm and After In Rozanes v. Bowen4 Scrutton L.J. said that, ‘It has been for centuries in England the law in connection with insurance of all sorts … [that] it is the duty of the assured … to make a full disclosure to the underwriters without being asked of all the material circumstances …’5 Since the above passage reflects a very widely held assumption among both English judges and commentators, it would be well to examine its accuracy. It is submitted that the statement quoted above reflects only very recent judicial doctrine and not a rule of great antiquity. Indeed, the alleged principle, so far from being a correct statement of the law in all types of insurance, does not even accurately describe the law with regard to marine insurance in the eighteenth century. All this leads us to Carter v. Boehm;6 in that celebrated decision, it will be recalled, the insurer set up, as a defence against the insured, the argument that the insured had not disclosed (in a marine policy) a highly material fact, namely, the weakness of Fort Marlborough on the island of Sumatra and the probability that the Fort would be attacked by the French. In the course of his judgment Lord Mansfield C.J. laid down as follows: The special facts, upon which the contingent chance is to be computed, lie most commonly in the knowledge of the insured only; the under-writer trusts to his representation, and proceeds upon confidence, that he does not keep back any circumstance within his knowledge, to mislead the under-writer into a belief that the circumstance does not exist, and to induce him to estimate the risque, as if it did not exist.7

This passage has been repeatedly cited to the point where the rest of the Chief Justice’s opinion has been ignored. The effect of this lop-sided reading of the judgment has been to make it appear that it is the insured’s duty to supply information while the insurer’s role in this process is an entirely passive one. A reasonably careful reading of the opinion, however, makes it clear that Lord Mansfield placed the responsibility for obtaining the relevant material

3  An analogy can be made here with regard to the problem of ‘insurable interest’ in marine insurance law; here also, the ‘liberal tradition’ of Lord Mansfield has prevailed in the United States after being rejected in England. See Lord Chorley, ‘Liberal Trends in Present-Day Commercial Law’ (1940) 3 M.L.R. 272 at 278–279. 4  (1928) 32 Ll. L.R. 98. 5  Ibid. 6  (1766) 3 Burr. 1905. 7  Ibid. at p. 1909.

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information on the insurer. After all, it was the insured, and not, as someone familiar only with the quoted passage might have assumed, the insurer, who was the successful party in the litigation. The most important concealment alleged by the insurer was with regard to the ‘condition of the place.’ On this point, Lord Mansfield said: The underwriter knew the insurance was for the governor. He knew the governor must be acquainted with the state of the place. He knew the governor could not disclose it, consistently with his duty. He knew the governor, by insuring, [616] apprehended at least, the possibility of an attack. With this knowledge, without asking a question, he underwrote. By so doing, he took the knowledge of the state of the place upon himself. It was a matter, as to which he might be informed in various ways: it was not a matter, within the private knowledge of the governor only.8

This passage would seem to indicate beyond any doubt that Lord Mansfield conceived of the insured’s duty as being a very narrow one.9 It is difficult to believe that an English insurer in 1766 would have found it particularly easy to obtain extra-official information on the security of Fort Marlborough from foreign capture but this is precisely what Mansfield required of an underwriter, once such an underwriter had been put ‘on guard’ by the application from the governor for insurance. In short, the insured’s duty to disclose arises only with regard to facts that the insured ‘privately knows, and the [insurer] is ignorant of, and has no ­reason to suspect.’10 Perhaps the next most significant case in which Lord Mansfield expressed his views on the subject of the insured’s duty to disclose is Mayne v. Walter (1787).11 In this case, the insured (plaintiff) sought to recover against the insurer in respect of the loss of supercargo, which was lost when the ship carrying it was captured by a French privateer. The insurer resisted payment arguing that the insured should have disclosed that there was in force at the relevant time a French ordinance providing that no Dutch ship could carry the super-cargo of a country at war with France on pain of such cargo being seized as prize. Mansfield decided in favour of the plaintiff; the core of his brief judgment is worth quoting in some detail: If both parties were ignorant of it [the ordinance], the underwriter must run all risks: and if the defendant knew of such an edict it was his duty to enquire, if such a supercargo were on board.12

8 

Ibid. at p. 1915. It is submitted that the fact that Lord Mansfield regarded the principle of disclosure he was stating in the present case as ‘applicable to all contracts and dealings,’ (Ibid. at p. 1910) tends to support the argument that he thought of the duty of disclosure in narrow terms. Certainly one would not expect so practical a judge to decree something as obviously impractical as a broad duty of disclosure applicable throughout the whole range of contractual dealings. 10  Ibid. at p. 1911. 11  See the report in Park, The Law of Marine Insurances (1787) at p. 220. 12  Ibid. 9 

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Then, in the next sentence follows the statement of principle which underlies this case as well as Carter v. Boehm,13 ‘It must be a fraudulent concealment of circumstances, that will vitiate a policy.’14 [617] The position which Lord Mansfield took up in these and other cases was followed in Friere v. Woodhouse (1817).15 In that case, the insurers argued, unsuccessfully, that the insured (plaintiff) should have disclosed the fact of the arrival of the Victorioso, a ship which had sailed in company with the insured’s ship. Burrough J. held that the times of arrival of vessels must be presumed to be within the knowledge of the underwriters, since they could easily learn of it by consulting Lloyd’s printed lists, where such information could be easily obtained. ­Without speaking of the need to show ‘fraud,’ the opinion, in effect, seems to require precisely this before avoiding the policy because of concealment.16 In the judge’s words: What is exclusively known to the assured ought to be communicated; but what the underwriter, by fair inquiry and due diligence, may learn from ordinary sources of information need not be disclosed.17

Again, it seems abundantly clear that (even) in cases of marine insurance the insured’s duty of disclosure at the end of the eighteenth century was a narrow one. The duty did not arise in respect of facts which the insurer might discover by ‘fair inquiry’ pursued with ‘due diligence’. (We have seen, through the decision in Carter v. Boehm,18 that these requirements might be very onerous ones for the insurer, in a particular situation.) Unfortunately, developments in the nineteenth century began to undercut the simple and entirely rational body of principle, whose outline we have traced. It is relevant now to examine some of these developments.

II.  Developments in the Nineteenth Century In 1828 there was decided the case of Lindenau v. Desborough,19 whose facts are so peculiar that it is difficult to appreciate its having any general importance for the

13 

See note 2, supra. Park (note 11, supra) at p. 221. The decisions in Carter v. Boehm and Mayne v. Walter are cited only as examples of Mansfield’s approach; the views he states in them are echoed in a number of other significant decisions. See, e.g., Nobel v. Kennoway (1780) 2 Doug. 510; held underwriter under an ­obligation to inform himself with respect to the practice of the trade he insures, regardless of whether such practice is established or not; and also Court v. Martineau (1782) 2 Doug. 161, where Lord ­Mansfield held that an insurer’s decision to waive certain information could be inferred from the payment by the insured of a very large premium. 15  1 Holt N.P. 572. 16  See, e.g., Mackintosh v. Marshall (1843) 11 M. & W. 116; Foley v. Tabor (1861) 2 F. & F. 662 for similar holdings. 17  See note 15, supra, at p. 573. 18  See note 2, supra. 19  (1826) 8 B. & C. 586. 14  See

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subject under discussion. However, largely because of some unnecessary dicta by two judges, the case has acquired a greater importance. The Duke of Saxe Gotha had placed his insurance with the insurer’s agents in Germany and the present action was brought to recover money payable on the policy after the Duke’s death. The insurer set up as a defence the fact that the Duke’s doctors in Germany had mentioned that the Duke was hindered in his speech but they had not made any mention of the Duke’s ‘mental faculties’ a highly relevant omission since [618] the Duke eventually died as the result of a large tumour on the brain which he had had for a number of years and which might well have been the source of his speech and mental difficulties. Lord Tenterden C.J. found for the defendant (insurer); his opinion does not appear to attempt any broad statement of principle. He seemed to attach great importance to the fact that: ‘In the present case, the insurance was upon the life of a foreigner.’20 On this very narrow basis, the outcome is defensible and rational. The insurer in the circumstances was bound to rely on the assessment of the Duke’s doctors; to have required the Duke to come to England for an independent medical examination, one might well assume, was not a practical alternative at the time the case was decided. In their concurring judgments, however, Bayley J. and Littledale J. made general statements of principle, which are remarkable for their breadth. Bayley J. stated: I think that in all cases of insurance, whether on ships, houses, or lives, the underwriter should be informed of every material circumstance within the knowledge of the assured; and that the proper question is, whether any particular circumstance was in fact material and not whether the party believed it to be so. The contrary doctrine would lead to frequent suppression of information, and it would often be extremely difficult to show that the party neglecting to give the information thought it material.21

In a similar vein, Littledale J., after pointing out that in cases of life insurance ‘­certain specific questions are proposed as to points affecting in general all mankind,’ noted in addition: ‘but there may also be circumstances affecting particular individuals which are not likely to be known to the assurers.’22 The insured was, in his Lordship’s view, under a duty to disclose any material facts in this area (regardless of whether the insured believed the fact to be material or not).23 In Bates v. Hewitt (1867),24 a landmark marine insurance case, there was handed down not only very broad dicta such as we have seen in Lindenau, but also a very significant decision which demonstrates clearly the change in legal doctrine from the principles evolved in the eighteenth century. In Bates, a policy had been effected in 1864 on the Georgia, a vessel which had been used as a Confederate cruiser in 1863 and 1864 and which was afterwards dismantled and sold to the plaintiff. The name of the Georgia had been well known

20 

Ibid. at p. 591. Ibid. at p. 592. Ibid. at p. 593. 23 Ibid. 24  (1867) L.R. 2 Q.B. 595. 21  22 

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to the British public at the time she was cruising, and after she had been laid up in Liverpool had been the subject of considerable public interest in the [619] London Press and in the House of Commons. The defendant, one of Lloyd’s underwriters, had been aware of all the ship’s notoriety earlier; but at the time the risk was proposed, nothing jogged his memory and he remained unaware that this might be the Confederate cruiser. While the jury found the defendant ignorant with regard to the latter point, they also found that at the time of insuring the cruiser, he had abundant means from the particulars to be found in the slip of identifying the ship. Despite the fact that the insurer therefore had the means available to provide himself with the correct information, a unanimous court held that this did not, nevertheless, release the plaintiff from the duty of disclosure. All three of the judges who delivered opinions made gallant attempts at trying to show that the principles they were formulating were of considerable antiquity. Thus Lord Cockburn C.J. stated: No proposition of insurance law can be better established than this, viz., that the party proposing the insurance is bound to communicate to the insurer all matters which will enable him to determine the extent of the risk against which he undertakes to guarantee the assured.25

It is perhaps significant that no authority is cited in the entire opinion. Mellor J., after making an heroic attempt to reconcile the present decision with what Lord Mansfield said in Carter v. Boehm,26 stated the true basis underlying his opinion in the following brief passage: I cannot help thinking that to enable a person proposing an insurance to speculate upon the maximum or minimum of information he is bound to communicate, would be introducing a most dangerous principle into the law of insurance.27

Finally, Shee J. after conceding that the underwriter in the present case might ‘if he had instituted inquiries’ have discovered the material fact in question, nevertheless added: ‘but that he is not obliged to do.’28 It will be remembered that Lord ­Mansfield saw this matter from a radically different angle in Carter v. Boehm.29 Despite the fact that the approach exemplified by Lindenau v. Desborough30 and by Bates v. Hewitt31 had become the dominant one by the end of the nineteenth century, it is important to point out that it rested on rather slender authority. Thus in London Assurance v. Mansel,32 in the course of prescribing a broad duty of disclosure for an assured who had taken out a life insurance policy, Sir George Jessel M.R. relied on three cases, two of which did not [620] deal with an insurance situation of any kind. The first authority relied on was a dictum of Lord 25 

Ibid. at pp. 604–605. See note 2, supra. 27  See note 24, supra, at p. 608. 28 Ibid. at p. 611. 29  See note 2, supra. 30  See note 19, supra. 31  See note 24, supra. 32  (1879) 11 Ch.D. 363. 26 

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­Cranworth’s in Dalglish v. Jarvie,33 a case, ‘which had nothing to do with insurance, but which referred to the principles on which a special injunction ought to be granted ex parte.’34 The second authority relied on is a dictum of Baron Parke’s in Moens v. ­Heyworth,35 which was ‘a case of an ordinary mercantile contract, not of an insurance contract.’36 The last case relied on is Lindenau v. Desborough,37 whose freakish character has been sufficiently indicated above. The fact that the broad duty of disclosure had not completely triumphed by the end of the nineteenth century is borne out, not only by the reliance placed in cases such as London Assurance v. Mansel38 on authorities of doubtful weight, but also by the fact that on a few occasions, the older and more restricted view of disclosure received judicial support. Thus as late as 1895, Lopes L.J. expressed the view in a case decided by the Court of Appeal that mere silence on the part of the insured with regard to a material fact did not avoid a policy, in the absence of fraud.39

III.  Twentieth-century Fundamentalism The conflict between the ‘broad’ and the ‘narrow’ duty of disclosure may fairly be said to have been finally resolved in favour of the former theory by the decision of the Court of Appeal in Joel v. Law Union and Crown Insurance (1908).40 Since the date of that decision the only question has been as to the breadth of the duty to disclose. In Joel itself the Court of Appeal drew a distinction: the assured was under no duty to disclose facts he did not know of, since, as Fletcher Moulton L.J. put it, ‘you cannot disclose what you do not know.’41 On the other hand, if the assured knew of a fact, his duty to disclose was not affected by the fact that he (the assured) thought the fact was not a material one.42 In Australia and New Zealand Bank Ltd. v. Colonial and Eagle Wharves Ltd.,43 McNair J. remarked obiter that the ‘trend of opinion’ supported the view that the assured was under a duty to disclose not only known facts but also such facts, which in the ordinary course of business he the assured might reasonably be

33 

(1850) 2 Mac. & G. 231, 243. See note 32, supra, at p. 368. 35  (1842) 10 M. & W. 147, 157. 36  See note 32, supra, at p. 368. 37  See note 19, supra. 38  See note 32, supra. 39 See Hambrough v. Mutual Life Insurance Company of N.Y. (1895) 72 L.T. 140 at 141 (C.A.). See also e.g., the statement by Lord Campbell C.J. in Wheelton v. Hardisty (1852) 2 El. & Bl. 232 at p. 273: ‘In the present case the plaintiffs were neither guilty of misrepresentation nor of fraudulent concealment.’’ 40  [1908] 2 K.B. 863 (C.A.), affirming [1908) 2 K.B. 431. 41  Ibid. at p. 884. 42 Ibid. 43  [1960] 2 Lloyd’s Rep. 241. 34 

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expected to discover.44 In line with this view, Professor Ivamy [621] has argued that an insured is guilty of a breach of duty towards the insurers if he does not disclose facts which he might have discovered if he had made reasonably careful inquiries; the determination of whether or not the insured has complied with this duty will (we are told) ‘in each case depend on the circumstances.’45 It is not essential, for present purposes, to decide whether the law on this point is as laid down in Joel v. Law Union and Crown Insurance, or whether a doctrine of ‘constructive knowledge’ applies to all classes of insurance. It is very unlikely that an insurer will need to rely on the insured’s ‘constructive knowledge’ with the possible exception of a marine insurance case. In any event, the argument of this paper is that even the ‘knowledge-but-not-necessarily-appreciation’ standard required of the insured in Joel is an excessively high one and should be rejected. It is now proposed to examine some of the case-law with regard to the duty to disclose four allegedly material facts. These particular facts have been chosen both for their importance in practice and also because they demonstrate very clearly the results that are liable to occur when it is sought to apply an unsatisfactory rule.

A. The Claims History of the Insured—Including Notice of Rejection The law in this area shows a remarkable cleavage between marine insurance ­situations (where the duty to disclose is extremely narrow) and the situation prevailing in other fields of insurance law where an unfairly broad duty of disclosure applies. Thus, although it would be fatal to the assured’s claim in a marine insurance situation to represent untruthfully that previous underwriters have taken the proposed risk at the same or at a lower premium,46 yet the insured is not bound to disclose the f act that the other underwriters have previously declined to accept the same risk.47 Similarly, the insured is under no duty to report any apprehensions that may have been expressed about the subject-matter of the insurance by other underwriters,48 or by foreign correspondents.49 By way of sharp contrast it is now settled by the decision of the Court of Appeal in Locker Woolf Ltd. v. W. Australian Insurance Co.50 that an insured must report

44 

Ibid. at p. 252. General Principles of Insurance Law (1966) at p. 78. 46  Sibbald v. Hill (1814) 2 Dow. 963. 47  Glasgow Assurance Corp. v. Symondson (1911) 16 Com.Cas. 109, especially at p. 119. 48  Lebon v. Straits Insurance Co. (1894) 10 T.L.R. 517 (C.A.). 49  Cantiere Meccanico Brindisino v. Janson [1912] 3 K.B. 452. 50  [1936) 1 K.B. 408 (C.A.); cf. also the decision in London Assurance v. Mansel (1879) 11 Ch.D. 363, which penalised an insured for failing to disclose the fact of previous rejections by other companies, despite the fact that the applicant had been accepted by the company to which be bad submitted his most recent application. 45 See

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a rejection with regard to an [622] entirely different type of insurance (e.g., fire insurance) from the type he has now applied for (e.g., motor insurance). The Court of Appeal in Locker seems to have been so impressed by the incantation of the phrase uberrima fides that it did not bother to deal with the highly relevant argument advanced by counsel for the insured: ‘if the insurance companies desire to have information as to other insurances, they should make this clear. …’51 Further, the insurer may avail himself of the principle of uberrima fides, even though he (the insurer) has put his question to the insured with regard to previous rejections in an ambiguous form. This is the teaching of the decision in Glicksman v. Lancashire and General Assurance Co.,52 a case whose facts seem to be derived from a short story or a novel. In Glicksman, the insured, whose natural language was Yiddish to the exclusion of English which he could neither read nor write,53 sought to take out an insurance policy for a business in which he was a co-partner. The insured answered ‘No’ in reply to the question ‘Have you ever been refused insurance before?’ This answer was correct if ‘you’ were to be read in the plural, but it was not true if ‘you’ referred to the singular as the appellant had been refused insurance when carrying on business alone. Their Lordships held that even if ‘you’ were to be read in the plural, the insurance company could still avoid the policy on the ground that the insured had failed to disclose a material fact, i.e., that he had once personally been refused insurance. The principal issue in question in this case is best brought out in the brief concurring opinion of Lord Atkinson. His Lordship described as ‘lamentable’ the ­continued failure of insurance companies to put questions such as the present one ‘in clear and unambiguous language.’54 Thus, in the present case, the question should have read: ‘Have you (or either one of you) ever been refused insurance before?’ It is respectfully submitted that the House of Lords erred in this case by allowing the insurer to have the best of both worlds; this should not have been permitted even if the insured had been a person of greater sophistication than the illiterate tailor in Glicksman v. Lancashire and General Insurance Co. The law with regard to the insured’s duty to give details of previous losses seems, unlike the apparently unqualified duty to give details of previous refusals of the insured by an insurer, to be limited, but the extent of these limits is not clear. In Becker v. Marshall (1922),55 Scrutton L.J. in the Court of Appeal expressed the view obiter that the duty of the insured to give details of [623] previous losses was qualified in various ways. In his Lordship’s words: ‘The question of date must arise, amount must arise, and the circumstances of the loss must arise.’56

51 

Ibid. at p. 42. [1927] A.C. 139, affirming the decision of the Court of Appeal at [1925] 2 K.B. 593. 53  Ibid. at p. 142 (per Viscount Dunedin). 54  Ibid. at p. 144; note also the remarks of Scrutton L.J. on the same subject when the same case was before the Court of Appeal, [1925] 2 K.B. 593 at pp. 606–608. 55  (1922) 12 Ll.L.R. 413 (C.A.). 56  Ibid. at p. 414. 52 

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Despite these dicta, Becker v. Marshall was put forward in the subsequent case of Ewer v. National Employers’ Mutual General Insurance Assn. Ltd.,57 as an authority supporting an unlimited duty of disclosure by the insured with regard to the details of his (the insured’s) previous losses. Happily, in Ewer, Mackinnon J. refused to hold that the decision in Becker stood for such a ‘very wide and ­disastrously ­general proposition.’58 Unfortunately, the learned judge having satisfactorily explained the decision in Becker v. Marshall, then proceeded to distinguish it59 on the basis that in Becker v. Marshall there was involved a ‘basis of the contract clause.’60 This essay in distinguishing cases unhappily makes it appear that the limitations with regard to the details of a loss which Scrutton L.J. spelt out in Becker v. Marshall61 may be sidestepped by the simple expedient of making the insured guarantee the accuracy of every answer. Finally, with regard to the duty to give information relating to previous losses, mention should be made of the decision in Roberts v. Avon Ins. Co.62 because the factual situation is one that may recur with some frequency in insurance law generally. In Roberts v. Avon Ins. Co. the insured left a blank in response to the ­following statement on his proposal form: I have never sustained a loss in respect of any of the contingencies specified in this ­proposal … NOTE.—Give date, amount and name of insurers in respect of each loss.

On these facts, Barry J. held that the insurer was entitled to avoid the policy because of the failure of the insured to give details of a previous loss. The learned judge accepted the statement in Macgillivray quoted by the counsel for the insured that a simple failure by the insured to answer a question without more constituted a waiver of such information by the insurer.63 This, [624] however, according to his Lordship was not the situation in the present case; in this case the insured’s blank implied a negative answer to the question. It is submitted, with respect, that the above distinction is absurd. Leaving a blank to a simple question ‘Have you suffered any loss?’ (at present treated as a waiver situation) would appear to both a reasonable layman or a professional to be as negative a response as was

57 

[1937] 2 All E.R. 193. Ibid. at p. 200. 59  His Lordship distinguished the decision in a subsequent case, Arthrude Press, Ltd. v. Eagle Star & British Dominions Insurance Co. (1924) 18 Ll.L.R. 382 on the same ground. 60  An extended discussion of this type of clause is not possible within the scope of the present paper but, as will be apparent from the examination of subsequent cases, the device whereby the insurer compels the insured to guarantee, regardless of materiality, the accuracy of his (the insured’s) answers to questions in the proposal form, is used as an additional weapon (together with the uberrima fides doctrine). The leading cases on this subject are the decisions of the House of Lords in Thomson v. Weems (1884) 9 App.Cas. 671 and in Dawsons Ltd. v. Bonnir [1922] 2 A.C. 413. 61  See text at note 56, supra. 62  [1956] 2 Lloyd’s Rep. 240. 63  The relevant passage from McGillivray appears in the 3rd ed. at p. 503 and is quoted at [1956] 2 Lloyd’s Rep. 240 at p. 249. 58 

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the ­leaving of a blank in response to the relevant statement in Roberts v. Avon Ins. Co. In this case, as in so many other situations, the courts have allowed insurers to effect a radical change in the balance of power in an insurance relationship by the mere addition to, or change in, the standard wording of the policy. Given the fair number of people who must (for one or other reason) fail to reply to answers in proposal forms and given also the ease with which in most eases the insurance company can obtain the information withheld, it is extremely difficult to see why insurers should enjoy the freedom to manipulate the rules of the game in their favour in this area. Rational and equitable rules can, it is submitted, be fashioned for the chaotic and unjust wilderness described above. In the first place, a distinction should be drawn between on the one hand the insured’s duty to give details of previous refusals to insure him (or his property), and on the other the insured’s duty to give details of previous losses suffered by him (the insured). With regard to the first duty, it is submitted that the marine insurance rule, which does not recognise this duty,64 should be applied across the entire field of insurance law. This is so because information with regard to a refusal only tells the insurer to investigate his risk with great care. But this, one should have thought, only describes the insurer’s duty at the present time with regard to the investigation of all risks. In short, if an applicant for insurance has been rejected by a previous insurer for arbitrary or capricious reasons, it is monstrous to penalise such a person further by holding that his subsequent insurance is void because of his (the applicant’s) failure to disclose an earlier capricious refusal! On the other hand, if the applicant was rejected by an earlier insurer for good and sufficient reasons, it is presumably open to the subsequent insurer to ascertain by intelligent and searching questions what those reasons were. It does not require much argument to establish that an insured’s accident ­history will often be of greatest importance to an insurer. This fact, however, does not argue for a broad duty of disclosure; on the contrary, it is submitted that the duty of disclosure should be a very narrow one. In the first place, the information allegedly withheld must be closely related to the circumstances of the present loss in the manner described by Scrutton L.J. in Becker v. Marshall.65 Second, an insurer’s failure to ask questions with regard to losses should be regarded as a waiver of this information, as [625] should the insurer’s acceptance of blank replies to questions in the proposal form (regardless of the form of the question). Further, an insurer should not be allowed to take advantage of ambiguous questions in the proposal form.66 Finally, the insurer should not be able to render immaterial information material by the simple expedient of using a ‘basis of the contract clause.’ This alternative, unhappily, appears to be open to an insurer. 64 

See cases cited in notes 47–49, supra. See text at note 56. supra. 66  Cf. Glicksman v. Lancashire and General Assurance Co.[1927] A.C. 139 (for discussion see text at notes 52–54, supra). 65 

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B.  Criminal Convictions The small body of case-law requiring the insured to disclose previous criminal convictions is worthy of note, principally because it illustrates the ludicrously unjust results that are liable to occur from the application of an unsound rule. By way of example, consider the decision of the Court of Appeal in Schoolman v. Hall.67 In that case, the insured suffered a burglary loss which the company admitted to be genuine. The company, nonetheless, raised in defence the fact that the insured had failed to disclose his criminal record. Despite the fact that the insured’s record related, in Asquith L.J.’s words ‘to a dim and remote past,’68— the most recent of the insured’s convictions had taken place fifteen years before the taking out of the policy, the court upheld the company’s defence. In addition to rejecting the insured’s ‘materiality’ argument, the court in ­Schoolman v. Hall also gave short shrift to the insured’s second line of argument. This was that since the insured had been asked fifteen questions, the truth and accuracy of which he (the insured) guaranteed, the information given in answer to these questions represented all the information that the insurance company wished to have. All other information, the insurance company must be taken to have waived. Despite its summary rejection by the court, it is submitted that insured’s argument is one of very great force and is one which (it is respectfully submitted) should have prevailed. In Regina Fur Co. v. Bossom,69 Pearson J. accepted as material a single conviction for receiving stolen property in 1933, more than twenty years earlier (a ‘dimmer and remoter past’ than was involved in Schoolman v. Hall).70 His Lordship’s initial reluctance to find that the conviction was material was dispelled, in the first place, by the argument that the delinquent director had occupied a predominant position in the company sought to be insured and second by the evidence of two expert witnesses (both underwriters [626] from Lloyd’s) who stated that they regarded the conviction as a material fact.71 Happily, in the most recent decision on the subject, Roselodge Ltd. v. Castle,72 some limit seems to have been set to the duty to disclose in this area. In this case, the insurer refused to indemnify the plaintiffs, diamond merchants, who had insured diamonds against all risks on the ground that these facts had not been disclosed: (i) that R, the principal director of the company seeking to effect the

67 

[1951] 1 Lloyd’s Rep. 139 (C.A.). Ibid. at p. 143. 69  [1957] 2 Lloyd’s Rep. 466. 70  The Court of Appeal affirmed Pearson J.’s judgment, without, however, any discussion of the question under consideration here; see [1958] 2 Lloyd’s Rep. 425. 71  [1957] 2 Lloyd’s Rep. 466 at p. 484. 72  [1966] 2 Lloyd’s Rep. 113. 68 

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insurance, had been convicted of bribing a police officer in 1946 and (ii) that M, the plaintiffs’ sales manager, had been convicted of smuggling diamonds into the United States in 1956. Two of the three underwriters called by the insurer stated their view of the duty to disclose previous convictions in terms that can fairly be described as being outrageously broad. Thus, according to Mr. Archer, one of the experts in question, a man who had stolen apples when he was seventeen, after which time he lived a blameless life for fifty years, was more likely to steal diamonds at the age of sixtyseven than someone who had not committed this youthful indiscretion.73 Essaying his own evaluation of the materiality of the two convictions, McNair J. decided that R’s conviction in 1946 was not material since it had ‘no direct relation to trading as a diamond merchant.’74 His Lordship held that in the case of M’s conviction, there was such a ‘direct relationship’ and it must be regarded as material. Although this holding obviously represents a more enlightened approach than that demonstrated in the two earlier cases discussed in this section, it is submitted that on the facts in Roselodge Ltd. v. Castle that the insurer should have been held to have waived the information relating to M’s previous conviction. Remarkably enough (given the type of insurance involved in this case), the insurer in Roselodge Ltd. v. Castle did not ask M. any questions relating to moral hazard. To require the court to step into the breach, as it were, means that in the first place, the court may have to make an extremely difficult decision with regard to the materiality of a particular fact when it lacks both the requisite knowledge to make this determination, as well as adequate means for obtaining such knowledge.75 Secondly, and perhaps even more seriously, permitting a judge to ‘second guess’ an insurer tends to dilute the well-established and essential duty of the insurer to make the relevant inquiries of the insured. [627]

C. Illness The body of case-law on the insured’s duty to disclose illnesses is not a large one, but the traps which may lie ahead for the insured in this area seem to be sufficiently serious for this subject to receive brief separate treatment. As a preliminary matter, note should be taken of McCardie J.’s important decision in Yorke v. Yorkshire Insurance Co.76 In this case, the learned judge severely

73 

Ibid. at p. 132. Ibid. 75  Dean Spencer L. Kimball of the Wisconsin Law School has written, in another connection, of the general tendency of American judges in insurance law ‘to intervene in, complex matters about which they know very little’; see his Essays in Insurance Regulation (Ann Arbor, 1966) at p. 130. As regards knowledge of insurance practice, it is extremely doubtful if English judges are in a better position than their American brethren. 76  [1918] 1 KB. 662. 74 

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restricted the class of persons who might give expert evidence on questions of health to include only those persons who had expert medical knowledge. In these cases, his Lordship stated: … the matters at issue are usually physiological, medical, or neuropathic. The directors of insurance companies are but rarely medical men. Seldom, if at all, do they personally see the proposer.77

However, nine years before the decision in Yorke, the Court of Appeal in Joel v. Law Union and Crown Insurance78 allowed insurers to avail themselves of both ‘the basis of the contract clause,’79 as well as the insured’s duty of disclosure. Fletcher Moulton L.J. had this to say of the insurance companies’ attempt to pile Pelion on Ossa: Insurers are thus in the highly favourable position that they are entitled not only to bona fides on the part of the applicant, but also to full disclosure of all knowledge possessed by the applicant that is material to the risk. And in my opinion they would have been wise if they had contented themselves with this. Unfortunately the desire to make themselves doubly secure has made them depart widely from this position by requiring the assured to agree that the accuracy, as well as the bona fides, of his answers to various questions put to him by them or on their behalf shall be a condition of the validity of the policy. I wish I could adequately warn the public against such practices on the part of insurance offices.80

In Mutual Insurance Company of New York v. Ontario Metal Products Co.,81 the insured escaped from the above trap only because he (the insured) was able to avail himself of the protection of the Ontario Insurance Act, which, in effect, ­provided that only a material misrepresentation of fact could void the policy.82 That the insured’s duty is unreasonably broad in this area, without regard to a ‘basis of the contract’ clause in the policy, is indicated by consideration of a recent decision. In Godfrey v. Britannic Assurance Co.,83 the facts were that the insured after [628] losing weight underwent a hospital examination in 1959; he was told that he might have minor kidney trouble and that he should take care, although the insured need not consider himself in any sense an invalid. In May 1959 the insured again consulted his doctor and underwent, a second examination; as a result of this visit, he was informed that he had a mild chest infection which would clear up if he took the antibiotic tablets which were prescribed. In June 1961, the insured submitted an application for insurance to the insurers, who accepted it a month later. In January 1962, the insured died of common nephritis.

77 

Ibid. [1908] 2 K.B. 863 (C.A.). 79  See note 60, supra. 80  [1908] 2 K.B. 863 at p. 885 (emphasis added). 81  [1925] A.C. 344 (P.C.). 82  See sub-ss. (3) and (4) of s. 156 of the Ontario Insurance Act (R.S.Ont., 1914, c. 183), quoted in the advice of the Board at p. 350. 83  [1963] 2 Lloyd’s Rep. 515. 78 

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In an action on the policy, Roskill J. upheld the insurer’s argument that the insured’s failure to disclose the circumstances of the medical examinations (as well as the fact that between 1959 and mid-1961, he had suffered recurrent attacks of sore throat, cough and mild fever) ‘avoided the policy, despite the fact that the insured had not appreciated the materiality of the withheld information.84 This result is certainly an arguable one, especially given the fact that the deceased had answered ‘No’ in reply to the following question in his policy application: ‘Question 5 (a): Have you suffered from any illness or accident or received medical advice or treatment, with or without an operation?’ On the other hand, given the insured’s lack of expertise in medical matters (illustrated in this case by the fact that the insured did not apparently appreciate the materiality of the withheld information) it is submitted that the phrase ‘medical advice or treatment’ in the above question should have been read as referring back to ‘illness or accident’ instead of being regarded as creating a new head of information. Reading the question in this way would have relieved the insured from giving the information withheld.85 As it is, it is difficult to agree with Roskill J.’s contentions that the present case represented a proper application of the contra proferentem doctrine,86 and that, in the present case, he had avoided ‘attributing to the assured anything which could fairly only be said to be within the knowledge of a lawyer, a doctor or a man with long experience in a life office.’87

D.  Nationality (of Insured)88 The bizarre decision of Lush J. in Horne v. Poland89 merits attention even although it may no longer represent good law. This [629] is so for a number of reasons; in the first place, it is by no means clear that the decision can be relegated to the limbo of legal history.90 Second, if the decision does represent good law, its effect can only be described as catastrophic. Finally, the decision is worthy of note because it represents, in all possibility, the high water mark in terms of injustice

84  The principal case relied on by his Lordship in this regard is the decision in Life Association of Scotland v. Foster and Others (1873) 11 Macph. 351. In that case, the assured failed to tell the insurer of a small swelling in her groin which, unknown to her, was a symptom of a rupture from which she died. The Inner House of the Court of Session denied recovery on the ground that there had been a failure to disclose a material fact. 85  This, in effect, was the argument advanced on behalf of the insured: see [1963] 2 Lloyd’s Rep. 515 at p. 527. 86  Ibid. 87  Ibid. at p. 532. 88  There is a small body of case-law on the ‘nationality’ of a ship. Since these cases are almost invariably the product of wartime conditions, they do not warrant discussion here. 89  [1922) 2 K.B. 364. 90  Not only has any doubt been cast on the correctness of the basic principle stated in the case (see text at notes 95–97, infra), but the case seems to be cited with remarkable frequency as a general illustration of the duty to disclose in non-nationality cases.

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and a­ bsurdity that a doctrine purporting to apply conduct in conformity with ‘absolute good faith’ has yet achieved. In Horne v. Poland, the insured was an alien who had been born in Roumania and had come to England at the age of twelve; twenty-two years later he took out an insurance policy against burglary. When he claimed in respect of an alleged loss, the insurer pleaded that the insured had failed to disclose the fact of his alien birth and childhood and that this failure to disclose a material fact avoided the policy. Lush J. upheld this defence and found for the insurer. Alien birth was not inevitably fatal to recovery; this’ would not be the case where: ‘[T]he assured [came] from a state where the business and social habits, the training and education that a child receives and the views taken as the observance of legal and other obligations are notoriously exactly as those prevailing here.’91 Seemingly quite independently of the expert evidence tendered in this case (the admissibility of which his Lordship doubted)92 the learned judge decided that Roumania was not such a state. Despite this gross essay in xenophobia, rand despite Lush J.’s statement toward the end of his opinion that ‘[I]t would seem more just that underwriters should inquire as to the nationality of proposed insure[d]s93 if they attach importance to it’ no subsequent decision seems to have challenged the fundamental premise of Horne v. Poland.94 Rather, the correctness of the decision seems to have been taken for granted, with attempts being made only to limit the scope of the decision. Thus, in Becker v. Marshall,95 for example, Scrutton L.J. remarked obiter that the presence of a foreign name might put ‘the underwriter on inquiry as to foreign nationality, if he thought it important …’96 Similarly, in Lyons v. J. W. Bentley Ltd.,97 Lewis J. applied what may be termed a de minimis [630] exception to the duty holding that the duty to disclose foreign birth did not arise in the case of the insured who had been born in Russia but had come to England at the age of five, where he had spent the next sixty years of his life. The danger in the Horne v. Poland doctrine becomes particularly acute when that case is considered against the background of apparently very widespread ­discrimination practised on national (and racial) grounds in at least one field of insurance-namely, that of motor-vehicle insurance-revealed by the PEP

91 

[1922] 2 K.B. 364 at pp. 365–366. Ibid. at p. 365. 93  Ibid. at pp. 367–368. 94  In this connection, contrast the decision of the Court of Appeals for the Seventh Circuit in ­Roberto et al. v. Hartford Fire Insurance Co., 177 F. 2nd 811 (7th Cir. 1949) where the insured was not only an alien but had been incarcerated for perjury committed on an application form for citizenship and was liable to deportation for this offence. The Court of Appeals held that, in the absence of inquiry, the insurer had to show that the insured had fraudulently concealed the above information. The court proceeded to hold that the insurer had failed to show that the insured had acted fraudulently. 95  (1922) 12 Ll. L.R. 413 (C.A.); see also Carlton v. Park (1922) 10 Ll. L.R. 98. 96  Ibid. at p. 414. 97  (1944) 77 Ll. L.R. 335. 92 

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study on racial discrimination in 1967.98 Given the widespread extent of such ­discrimination, together with the wooden and sterile manner in which the doctrine of uberrima fides has generally been applied, it is, unfortunately, not impossible that an English court will follow ‘industry practice,’ and hold that a failure on the part of an insured to reveal his nationality (and possibly also his race) voids the policy. An underwriting of the doctrine of Horne v. Poland in this manner (even if the xenophobic content of the latter opinion were to be omitted) would represent nothing less than a disastrous development.99

IV.  Expert Evidence Before attempting to note a brief overall critique of the doctrine, together with some suggestions for its reform, it is necessary to consider briefly the important subject of expert evidence in this area. Once again, the starting point of wisdom is to be found in Lord Mansfield’s opinion in Carter v. Boehm.100 In that case, the following remarks were made with regard to the evidence given by the brokers: ‘It is mere opinion; which is not evidence. It is opinion without the least foundation from any previous precedent or usage.’101 It is not unreasonable to suggest that one of the factors which explains this sceptical attitude to expert evidence lay in the judge’s realization that the respective parties did not enjoy equality in terms of access to expert evidence. Remarkably enough, this inequality does not appear to have been made the subject of any [631] comment by an English court.102 This inequality assumes great importance when the limited judicial knowledge of the insurance industry is taken into account; such ignorance would seem to render even more powerful the ­testimony of ‘experts.’ A non-English case which yet affords an excellent example of presentday ­English practice in this area is to be found in the majority opinion of the 98 See PEP Report on Racial Discrimination in England (April 1967) at p. 100; W.W. Daniel, Racial Discrimination in England (Penguin Special, 1966) at pp. 200–203 (a study based on and amplifying the PEP survey) which inform us that a West Indian applicant who was carefully matched as regards relevant criteria such as motoring history and occupation with a white Englishman and an immigrant of Hungarian origin, suffered discrimination at the hands of 17–20 insurers, as compared with his two co-applicants. On six occasions cover was refused altogether and on 11 other occasions, the West Indian applicant was quoted a higher premium than was demanded of the other two applicants. 99  It is unlikely that English law gives relief against this kind of discrimination through some­ variant of the doctrine of ‘public policy.’ For a good discussion of the limited protection afforded by the common law in this regard see Hepple, Race Jobs and the Law in Britain (Penguin, 1968) p. 91 et seq. 100  (1766) 3 Burr. 1905. 101  Ibid. at p. 1918. 102  Cf., however. the remarks of a Scottish judge-Lord Robertson in Zurich General Accident, & ­Liability Insurance Co. v. Leven, 1940 S.C. 406. In the course of his opinion in that case, his Lordship remarked: ‘I recognise that in a case of this kind it may be difficult for litigants in the position of defenders to procure suitable evidence.’ Ibid. at p. 411.

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Supreme Court of Canada in Henwood v. Prudential Insurance Co.103 In Henwood, the insured under a life insurance policy failed to disclose the fact that she had paid several recent visits to a psychiatrist (as well as to other physicians) despite ­having been asked in the proposal form to list the names of all physicians she had consulted, including those who had treated her ‘for any nervous disorder.’ Subsequently the insured died in an automobile accident in circumstances wholly unconnected with nervous and mental disorder. At the trial the insurer called its own medical and underwriting, experts who testified that if the company had had knowledge of the information withheld from it, it would have issued a policy only after a subsequent medical examination and then at a higher premium. Acting largely on the basis of this uncontradicted evidence, a majority of the court held that the materiality of the withheld information had been established. Spence J. however dissented and it is submitted that his dissenting opinion is greatly to be preferred as against the majority opinion. The learned judge pointed out that the insurer’s two expert witnesses not only limited their remarks to the policy of their own company, but they had also expressly confessed they were ignorant of the policies of other insurers with regard to the issue before the court104 His Lordship counselled that the adoption of such an approach would result ultimately in the replacement of the ‘prudent insurer’ test by a test which instead made decisive the idiosyncrasy of individual insurers.105

V. Critique It is now possible to summarise briefly the various defects of the uberrima fides as it exists today. In the first place, current doctrine, so far from representing a restatement of classical doctrine as set out in decisions such as Carter v. Boehm,106 sets out an entirely different principle, one largely fashioned during the present century. It is respectfully submitted that Carter v. Boehm was correctly read [632] by a number of American courts in the nineteenth century who read the case as stating a ‘narrow’ rule of disclosure.107

103  (1967) 64 D.L.R. (2d) 715 (Sup. Ct. Can). (I am grateful to Professor Bradley E. Crawford of the University of Toronto Law Faculty for a reference to this case.) 104  Ibid. at p. 731. 105  Ibid. 106  (1766) 3 Burr. 1905. 107 See e.g., the citation of Carter v. Boehm (together with other authorities, both English and ­American) in support of a ‘narrow’ duty of disclosure. See Gates and Downer v. Madison County Mutual Ins. Co. 1 Selden (N.Y.) 469 at p. 475 (1851). There are a number of other opinions in the same vein but it is possible here to mention only the classic opinion of Judge (later Chief Justice) Taft in Penn Mutual Life Insurance Co. v. Mechanics Savings Bank & Trust Co., 72 Fed. 413 (C.C.A. 6th 1896).

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More seriously, it is clear (in the words of the Law Reform Committee Report on Conditions and Exceptions in Insurance Policies)108 that ‘… a fact may be material to insurers … which would not necessarily appear to a proposer for insurance, however honest and careful, to be one which he ought to disclose.’109 Further, the doctrine seems to work harder against laymen than against professionals. The ‘marine’ professional is in the strongest position: in the first place, he does not, as we have seen previously,110 have to disclose information that has to be disclosed by other classes of applicants. Secondly, it would appear that the courts are more ready to infer a waiver of information by the insurer in a marine insurance situation than in other insurance situations.111 The landbased professional does not occupy as privileged a position as his marine cousin but he would still appear to be in a stronger position with regard to the working of the doctrine than is the layman who applies for, e.g., life insurance. In the first place, the professional is more likely to know that a duty to disclose exists and to know also what information the insurer needs to know, than is likely in the case with a lay applicant for life insurance. Secondly, it is likely that an applicant for life insurance will be asked more questions (some of them relating to his health, a matter in which he has no expertise) than will be true in the case of a businessman taking out a policy against fire or burglary. Thirdly, the doctrine is in error in assessing the strength of the parties with regard to knowledge. The doctrine assumes that the insured is in a stronger position than the insurer because he (the insured) has more knowledge than the insurer. But the possession of greater knowledge, it is submitted, puts the insured in a weaker position, since he (the insured) does not know which parts of that information the insurer wishes to have. It is submitted, however, that it is the insurer who should be seen as the stronger party, since [633] he (the insurer), is aware of what information he seeks to have.112 As against this, the insured, even under the limited formulation of the doctrine, requiring him to disclose only facts within his knowledge,113 may well be in the position of either not knowing, or else being uncertain as to the materiality of a particular fact. In short, current doctrine as applied seems to assume that the purchase of insurance is some kind of emptio spei. Despite the various gambling analogies

108  Cmnd; 62 of 1957. The Committee’s remarks on the subject of the uberrima fides doctrine do not warrant any detailed discussion. The analysis of the doctrine is extremely superficial and the proposals for its reform timid and confusing. 109  Ibid. p. 4, para. 4. This conclusion is, of course, directly supported by the findings in a number of decided cases. 110  See cases cited at notes 47–49, supra. 111 Compare, e.g., the decision of the Court of Appeal in Mann, MacNeal & Steeves Ltd. v. Capital Counties Insurance Co. [1921] 2 K.B. 300 (Insurer’s failure to make any inquiry with regard to insured’s cargo held to constitute a waiver with regard to such information) with the decision of the same court in, e.g., Schoolman v. Hall (see text at notes 67–68, supra). 112  I am indebted to my friend Professor Arthur A. Leff, Yale Law School, for this suggestion. 113  Cf. the wider duty of disclosure, requiring the insured to make ‘reasonably careful inquiries’ stated in Harrdy Ivamy, General Principles of Insurance Law (1966) at p. 78.

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which invariably suggest themselves in any discussion of an insurance contract, it is submitted that such a contract is not analogous to, say, the entering of a football pool coupon.114 Even without the detailed regulation by both legislative and administrative agencies of the terms and conditions of an insurance policy such as exist in the United States, and every European country (with the exception of ­Holland),115 it would appear to be necessary to emphasise the fact that the ­purchase of i­nsurance, whether by layman or by professional, represents a ‘purchase’ of the greatest importance. The failure of this ‘purchase’ will in most cases involve far more serious results for the ‘purchaser’ than is likely to be true in the event of any other defective goods or commodity the insured acquires.

VI.  Notes on Reform It is not within the scope of this paper to offer detailed statutory provisions but some general-if disconnected-remarks on the shape such reforming provisions might take would appear to be in order. In the first place it is submitted that any reform of uberrima fides should take place only as a reform of, at least, the main body of insurance law. Thus, apart from uberrima fides itself there should (as a minimum) have to be undertaken a reform of the law relating to conditions and warranties (including the ‘basis of the contract clause’116) and the problems involved in the responsibility of insurance companies for the acts of their ‘agents.’117 Second, [634] it is submitted that any reforming provisions on this subject should not cover the law relating to marine insurance. Both the law and practice in this area, as we have had occasion to note briefly above, appear to work satisfactorily and there would appear to be every argument for leaving well alone in this area. Turning more specifically to the form revised disclosure provisions might take, it is submitted that, while foreign legislation should obviously be consulted, great care be taken in borrowing statutory provisions. The statutory provisions of many American states, to take but one example, are too brief for English conditions.

114 See, e.g., Appleson v. H. Littlewood Ltd. [1939] 1 AH E.R. 464 (C.A.) (no enforcement of contract because of absence of intent to create legal relations). 115  See, e.g., the excellent surveys by Kimball and Pfenningstorf, ‘Legislative and Judicia1 Control of the Terms of Insurance Contracts: A Comparative Study’ 39 Indiana L.J. 675 (1964); ‘Administrative Control of the Terms of Insurance Contracts: A Comparative Study’ 40 Indiana L.J. 143 (1965). Both essays appear, in slightly abridged form, in Kimball, Essays in Insurance Regulation (Ann Arbor, 1966). 116  See note 60, supra. Unless the ‘basis of the contract’ problem is satisfactorily dealt with, any attempted reform of the law relating to the insured’s duty of disclosure would appear to be futile, since it would seem to continue to be possible to make what is ‘immaterial’ material by the mere addition of a provision in a policy. 117  See, in particular, the disturbing implications of the Court of Appeal in Newsholme v. Road Transport Insurance Co. Ltd. [1929] 2 K.B. 356.

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The brevity of these statutory provisions is to be explained by reference to two very closely connected factors. In the first place, very often the statutory provision will represent no more than codification of the pre-existing common law position. But even where this is not the case, a brief statutory provision will be interpreted in the light of a general judicial solicitude for the position of the insured. The fact that these circumstances are not present in England makes it advisable that, any statutory provisions go into far greater detail than any potential foreign model appears to do. Without being exhaustive, a model disclosure statute might well provide for the following. In the first place, it might be desirable to provide that an insured is under no obligation to provide information with regard to certain matters. As examples of such ‘classified’ information could be included an applicant’s race or nationality; further, the insured should be deemed to be under no obligation to reveal that he has previously been refused insurance. The key provision in the statute should state in the clearest possible language that any failure by an insurer to ask of an insured information customarily sought by insurers in the type of policy in question should be deemed a waiver of such information. The burden of proof to show that a particular piece of information was so esoteric as not to have been ascertainable by ordinary inquiry should again clearly be placed on the insurer. The adoption of the above-described waiver principle should reduce the insured’s duty of disclosure to (justly) narrow limits. With regard to the disclosure of this ‘unascertainable’ information, the insured should be penalised only if he acted in ‘bad faith,’ i.e., if he knew, or had very good cause to believe that a particular piece of information would in fact be material to the insurer. The burden of showing ‘bad faith’ should again be placed on the insurer. The insured’s duty of disclosure should, also be recognised in another situation, namely, when the insured comes into possession of material information between the time of the application for a policy and the time the policy is issued. If ­American case-law is any guide,118 disputes arise more frequently over the duty to [635] disclose in this situation than is true of the insured’s duty to disclose ‘unascertainable’ information. The duty to disclose such information should be recognised (as it is in American law), except that the policy should be made to spell out clearly that such an obligation exists. It is, it is submitted, all too easy for an insurance applicant to think that a contract has been concluded at the time the policy was applied for.119

118 See, e.g., the cases collected by Patterson, ‘Insurance Law During the War Years’ 46 Colum. L. Rev. 345 at p. 372 (nn.137 and 138) (1946). The insured’s obligation to make disclosure of information in such circumstances seems to have been clearly settled by the decision of the United States Supreme Court in Stipcich v. Metropolitan Life Insurance Co., 277 U.S. 311 (1928). 119  It is perhaps this circumstance that explains Professor Patterson’s opposition to the doctrine, stating that it placed ‘a severer burden on the insured [to volunteer information] after the application is signed than before.’ See his article (previous note) at p. 372.

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Again, it might be desirable to expressly provide for the contra proferentem principle in a separate provision. Perhaps more valuable than such a provision would be one stating that the insurer is responsible for any ambiguities in questions asked in the application. Indeed, the situation in Glicksman v. Lancashire and General Insurance Co.,120 could be set out, with, of course, a different outcome indicated.121 Finally, even with a much limited duty of disclosure, it is still desirable to provide that an insurer prove clearly the materiality of some particular piece of information that has been withheld. In particular, serious consideration should be given to reforming the manner in which expert evidence is given, so that the responsibility for ascertaining insurance practice becomes the responsibility of the court, instead of being left, as at present, to the unequal struggle between the ­parties.122 Such a system would not attain complete objectivity since obviously most expert testimony will continue to be given by underwriters, but it will at least make it impossible for an insurer to hand-pick his experts or to call ‘experts’ from the insurer’s own company.123 Would-be reformers frequently make the claim that the changes they propose in any given area of the law are conservative rather than radical in nature. That claim can, it is submitted, be made with special force in the present area. Changes of the kind indicated [636] above would do no more than to bring present-day English doctrine in line both with its ‘classical’ eighteenth-century antecedents as well as the present-day law in the United States and the various countries on the European continent. R. A. HASSON* [637]

* B.A. (Cape Town), LL.B. (Lond), LL.M. (Yale) Research Associate, Yale Law School.

120 

[1927) A.C. 139 (see text at notes 52–54, supra.). case which might be used as an illustration in this connection is the decision in ­Brewtnall v. Cornhill Motor Insurance Co. Ltd. (1930) 40 L.J.L.R. 166. In that case, the insured was asked the cost price of her car; she put down £145 but did not disclose that part of this price was made up by part exchange of another car. Charles J. held (correctly, it is submitted) that there had been no failure to disclose a material fact, as the insurance company could have obtained a complete breakdown of the price by framing their question more carefully. 122  See generally, the discussion of the problem of expert evidence in this area at p. 631, supra. 123 See, e.g., Henwood v. Prudential Insurance Co. (discussed at p. 632. See notes 4–6). 121 Another

Part II

Pre-contractual Duties in Insurance Law: Common Law Jurisdictions

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5 Pre-contractual Duties in Australia PETER MANN, GREG PYNT AND SAMANTHA TRAVES

I.  Pre-contractual Duties in Australia: An Overview Each Australian colony1 inherited the English common law and every English statute in force on the day it was colonised (to the extent it could reasonably be applied to the conditions of the colony at the time). This included the common law as decided by Lord Mansfield in Carter v Boehm2 22 years before the establishment of the colony of New South Wales. In 1901, the Australian colonies became States when they joined together to form the Commonwealth of Australia. Australia is a federal system, but unlike the United States of America there is only one common law of Australia.3 By the end of the twentieth century, there was a need to simplify and modernise insurance contract law. At the time, the law of insurance was scattered throughout Commonwealth, State and Imperial legislation, as well as being based in the common law. The Australian Law Reform Commission (ALRC) in its Report No 20, Insurance Contracts (1982) (ALRC Report No 20) observed that insurance contracts: [A]re subject to a bewildering variety of laws. First, there are principles and rules developed by the judges. Superimposed on these rules are statutes of the Imperial, State and Commonwealth parliaments. The Imperial Acts are expressed in archaic and obscure language. Many of the problems they were designed to remedy were different from those of today. State intervention has generally been piecemeal and sporadic. … A national Insurance Contracts Act is needed to remedy the defects in the existing law and to provide a uniform and fair set of rules for an industry now organized on a national basis.4

On 1 January 1986, the ALRC and the Commonwealth legislature, to a large extent, achieved a single point of reference for insurance contract law with the 1 

New South Wales, Queensland, South Australia, Tasmania, Victoria and Western Australia. Carter v Boehm (1766) 3 Burr 1905; 97 ER 1162. 3  Lange v Australian Broadcasting Corporation [1997] HCA 25; (1997) 189 CLR 520. 4  ibid at [16]. 2 

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enactment of the Insurance Contracts Act 1984 (Cth) (ICA). It is almost identical to the Bill recommended by the ALRC in its Report No 20. As explained in its Long Title, the ICA was enacted to: [R]eform and modernise the law relating to certain contracts of insurance so that a fair balance is struck between the interests of insurers, insureds and other members of the public and so that the provisions included in such contracts, and the practices of insurers in relation to such contracts operate fairly …

The ICA applies to insurance contracts the proper law of which is or would be the law of an Australian State or Territory (section 8), but not to the type of contracts listed in section 9, such as reinsurance contracts, contracts governed by the Marine Insurance Act 1909 (Cth) (MIA 1909) and compulsory insurance contracts relating to workers’ compensation and motor vehicle third party personal injury. The parties to an insurance contract cannot contract out of the ICA where this would prejudice someone other than the insurer: section 52.

A.  Utmost Good Faith Under the ICA Principal amongst the ICA’s pre-contractual disclosure reforms was the changed perspective from which the issue of disclosure was to be assessed. Under the common law, the insured had a duty to disclose all facts which they knew and which would reasonably affect the mind of a prudent insurer.5 The duty under the ICA is assessed from the perspective of the insured and requires an insured to disclose what the insured knew and what the insured knew or what a reasonable person in the insured’s circumstances would have known, to be relevant to the assessment of the risk.6 The ICA abolished an insurer’s right to avoid a contract from its inception for innocent non-disclosure. An insurer wishing to rely on innocent non-disclosure needs to have clearly informed the insured in writing of the nature and effect of the duty of disclosure before the contract is entered into.7 This includes that the duty applies up until the insured enters into the contract.8 An insurer of a contract of general insurance is entitled to deduct from a claim an amount that fairly represents the loss it has suffered as a consequence of the insured’s innocent breach of the duty of disclosure. That amount is assessed as the amount that would place the insurer in the position in which it would have been if the breach of the duty of disclosure had not occurred.9

5 See Mayne Nickless Ltd v Pegler [1974] 1 NSWLR 228 at 239 where Samuels J applied the ‘test of materiality’ in determining what a prudent insurer would want to know. 6  s 21(1). 7  s 22 ICA. 8  s 22(1)(d). 9  s 28(3).

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In the case of fraudulent non-disclosure, the ICA has given the courts the power to adjust the rights of the parties where the loss the insured would suffer if part of the claim was not paid would be seriously disproportionate to the harm the fraud caused the insurer.10 By section 13, utmost good faith is an implied term of an insurance contract. It applies to the policyholder and third party beneficiaries in the post contractual period only: sections 12 and 13. Section 14 prevents a party to an insurance contract from relying on a provision of the contract if to do so would be to fail to act with the utmost good faith.

II.  The Policyholder’s Pre-contractual Duty A.  The Common Law The current Australian common law of utmost good faith in the insurance law context is almost identical to the English common law as it stood before the enactment of the Consumer Insurance (Disclosure and Representations) Act 2012 (UK) and the Insurance Act 2015 (UK). Accordingly, at common law an insurance ­contract is based on utmost good faith. Utmost good faith requires pre-contractual disclosure of material facts by the prospective policyholder and the insurer to each other. A prospective policyholder does not have to disclose to an insurer various matters, including that which an insurer ought to know. An insurer cannot avoid an insurance contract for an insured’s pre-contractual non-disclosure of a material fact unless it was ‘induced’ to enter into the contract by the non-disclosure.11 In England, a fact is material if a prudent underwriter would have taken it into account in deciding whether to write the risk and if so on what terms.12 The test of materiality in Australia is slightly different. In Akedian Co Ltd v Royal Insurance Australia Ltd,13 Byrne J agreed with Samuels J in Mayne Nickless v Pegler14 that a fact is material: ‘if it would have reasonably affected the mind of the prudent insurer in determining whether he will accept the insurance, and if so, at what premium and on what conditions’ (emphasis added). Avoidance of an insurance contract is the only remedy available to an innocent party for another party’s failure to discharge its pre-contractual duty of disclosure. 10 

s 31. Pan Atlantic Insurance Co Ltd v Pinetop Insurance Co Ltd [1995] 1 AC 501 at [549] (Lord Mustill); St Paul Fire and Marine Co (UK) Ltd v McConnell Dowell Constructors Ltd [1995] 2 Lloyd’s Rep 116. Followed in Australia by Byrne J in Akedian Co Ltd v Royal Insurance Australia Ltd (1997) 148 ALR 480. 12  Pan Atlantic Insurance Co Ltd v Pinetop Insurance Co Ltd [1995] 1 AC 501; Garnat Trading & Shipping (Singapore) PTE Ltd v Baominh Insurance Corp [2011] 1 Lloyd’s Rep 589, at [135] (Clarke J). 13  Akedian Co Ltd v Royal Insurance Australia Ltd (1997) 148 ALR 480. 14  Mayne Nickless v Pegler [1974] 1 NSWLR 228. 11 

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Utmost good faith also requires that policyholder and insurer deal with each other openly, honestly and fairly in their performance of the insurance contract, with due regard for their own interests and for the legitimate interests of the other.15

B.  Introduction to the ICA Part IV The ICA, ‘Part IV—Disclosures and misrepresentations’, reformed and modernised the law relating to a policyholder’s pre-contractual duty of disclosure so as to strike a fair balance between the interests of insurer and insured. In striking a fair balance, Part IV created its own complexities. For example, there are arguably three policyholder pre-contractual disclosure regimes for insurance contracts subject to the ICA: insurance contracts governed by section 21 of the ICA; insurance contracts governed by sections 21A and 21B of the ICA; and certain life insurance contracts. There is also a policyholder pre-contractual disclosure regime for contracts not governed by the ICA. In light of the ICA’s Long Title, the intent of Part IV is to fairly balance the extent to which a policyholder is obliged to voluntarily disclose information against the consequences for a policyholder of not meeting that obligation, the cost to an insurer of getting the risk wrong because of a lack of voluntarily disclosed information about it and the investigation costs insurers might incur to make up for any limitation on that obligation, with the consequent effect on premiums and policy terms that would entail. Part IV of the ICA divides a policyholder’s pre-contractual disclosure and ­misrepresentation regime into four Divisions. Division 1 concerns the duty of disclosure (sections 21, 21A, 21B and 22); Division 2 misrepresentations (sections 23 to 27); Division 3 the remedies for non-disclosure and misrepresentation (sections 27A to 33); Division 4 Key Facts Sheets (33A, 33B, 33C and 33D). The ICA’s Part IV is a statutory code insofar as it applies to pre-contractual non-disclosure and misrepresentation by insureds.16 It replaced the common law, which has some historical interest and gives some context to the provisions of Part IV, but will rarely assist in the construction of them.17 Remedially the codification is supported by section 33 which states that an insurer cannot, by contract, have a greater range of remedies in relation to non-disclosure than those conferred by Division 3.18

15  CGU Insurance Ltd v AMP Financial Planning Pty Ltd [2007] HCA 36; (2007) 235 CLR 1 at [15] (Gleeson CJ and Crennan J); O’Neill v Phillips [1999] UKHL 24; 1 WLR 1092, in which Lord Hoffmann discussed the concept of fairness in the context of a claim by a shareholder that a company’s affairs were being conducted in a manner unfairly prejudicial to his interests. 16  Advance (NSW) Insurance Agencies Pty Ltd v Matthews [1989] HCA 22; (1989) 166 CLR 606, at [22]. 17 ibid. 18  s 33 does not affect an insurer’s right to cancel the contract under Part VII.

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The duty of utmost good faith (ICA Part II) does not affect a policyholder’s duty of disclosure: section 12.

C.  The ICA Part IV, Division 1 (sections 21, 21A, 21B and 22) Division 1 (sections 21, 21A, 21B and 22) concerns the scope of a policyholder’s pre-contractual duty of disclosure. It retains the common law duty of disclosure in a modified form, with a greatly modified test of materiality. It replaced the prudent insurer test of materiality with a ‘prudent insured/proponent’ test.

i.  Section 21(1): An Overview Section 21 deals with the duty of disclosure in two parts. Section 21(1) deals with the matters to be disclosed by a policyholder. Sub-sections 21(2) and (3) deal with those matters which a policyholder is not required to disclose. Sub-section 21(1) deals with a policyholder’s duty of disclosure in relation to insurance contracts not governed by sections 21A and 21B (see below). It does not limit an insured’s duty of disclosure to answering insurer’s specific questions as described in sections 21A and 21B. It requires much broader disclosure as follows: (1) Subject to this Act, an insured has a duty to disclose to the insurer, before the relevant contract of insurance is entered into, every matter that is known to the insured, being a matter that: a) b)

the insured knows to be a matter relevant to the decision of the insurer whether to accept the risk and, if so, on what terms; or a reasonable person in the circumstances could be expected to know to be a matter so relevant, having regard to factors including, but not limited to: (i) the nature and extent of the insurance cover to be provided under the relevant contract of insurance; and (ii) the class of persons who would ordinarily be expected to apply for insurance cover of that kind.

The scope of the duty of disclosure required by section 21(1) is delineated by the answer to the following question: Before the insurance contract was made, did the intending insured know of a matter that it knew was relevant, or a reasonable person in the circumstances would be expected to know was relevant, to the insurer’s decision whether to accept the risk and if so, on what terms? If so, it ought to be disclosed. Even if an intending insured does not discharge its duty of disclosure, the insurer has no remedy unless it would not have entered into the contract for the same premium and on the same terms and conditions if the intending insured had discharged its duty of disclosure.19

19 

s 28(1).

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The scope of the duty of disclosure introduced by section 21(1)(a) and (b) is not the same as the pre-contractual duty of disclosure at common law. Amongst other things, it relies on the notion of ‘relevant matters’ rather than ‘material facts’ and is dependent on what an insured knows, or a reasonable person in the circumstances could be expected to know, to be relevant to a particular insurer, not on what a prudent insurer would regard as relevant to the risk.20 The reference to an insurance contract being ‘entered into’ includes a renewal, extension or variation of an existing insurance contract or reinstatement of a previous insurance contract.21 The references in section 21(1) to ‘insured’ are references to an insured who is a party to the contract.22 They are also references to each co-insured who is a party to the contract, so that the duty of disclosure is not limited to what is known to all of the co-insureds.23

ii.  Section 21(1): Disclosure of What is ‘Known to the Insured’ For there to be a duty of disclosure a matter must be ‘known to the insured’ under section 21(1). This follows the common law. The insured’s knowledge of a particular matter is a threshold question, in the sense that if an insurer cannot prove a particular matter is known to the insured, all other aspects of section 21 fall away. If an insurer proves a particular matter is known to the insured, it must also prove that the insured knows it to be a matter relevant to the insurer in accordance with section 21(1)(a) (being another aspect of the insured’s knowledge) or that a reasonable person in the circumstances could be expected to know of its relevance to the insurer (section 21(1)(b)). What an insured ‘knows’ of a ‘matter’ is a question of fact.24 An insured ‘knows’ a ‘matter’ if they actually ‘know’ the ‘matter’. Having said that, it would be wrong to import the word ‘actually’ into section 2125 and, an opinion that is held may be a matter that is ‘known’.26 Constructive knowledge (what the insured ought to know) is insufficient.27 In QBE Mercantile Mutual Ltd v Hammer Waste Pty Ltd,28 Sheller JA quoted Palmer J at first instance who said: The obligation to disclose something ‘known’ can attach only to something which, at the time for disclosure, a person actually has in his or her consciousness or else something 20  Permanent Trustee Australia Co Ltd v FAI General Insurance Co Ltd (in liq) [2003] HCA 25; (2003) 214 CLR 514 at [70] (Gummow and Hayne JJ); Permanent Trustee Australia Co Ltd v FAI General ­Insurance Co Ltd [2001] NSWCA 20; (2001) 50 NSWLR 679 at [32] (Handley JA). 21  s 11(9). 22  CE Heath Casualty & General Insurance Ltd v Grey (1993) 32 NSWLR 25, at 36 (Mahoney JA), at 46 (Clarke JA); 7 ANZ Ins Cas 61-199. 23  Advance (NSW) Insurance Agencies Pty Ltd v Matthews [1989] HCA 22; (1989) 166 CLR 606 at [25] and [28] (Mason, Dawson, Toohey and Gaudron JJ). 24  Commercial Union v Beard [1999] NSWCA 422; [2000] 11 ANZ Ins Cas 61-458 at [37] (Davies AJA). 25  Commercial Union Assurance Co of Australia Ltd v Beard (1999) 47 NSWLR 735; (2000) 11 ANZ Ins Cas 61-458; [1999] NSWCA 422. 26  Prepaid Services Pty Ltd v Atradius Credit Insurance NV (2013) 302 ALR 732; 17 ANZ Ins Cas 61-981; [2013] NSWCA 252. 27  QBE Mercantile Mutual Ltd v Hammer Waste Pty Ltd [2003] NSWCA 356 at [56] (Sheller JA). 28  [2003] NSWCA 356 at [28] (Sheller JA) quoting Palmer J in Hammer Waste Pty Ltd v QBE ­Mercantile Mutual Ltd (2002) 12 ANZ Ins Cas 61-553 at [56].

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which exists in some record or other source of information which the person actually knows about and to which the person has access. So, for example, I ‘know’ my driving licence number for the purposes of s21(1) ICA even though I cannot recite it offhand because I actually know that it is to be found in the plastic card in my wallet.

Similarly, just because an insured does not remember the dates of his traffic infringements does not mean he does not ‘know’ them and therefore does not have to disclose them.29 A company ‘knows’ a ‘matter’ if it is contained in current official records. A newspaper extract in a company’s possession ‘does not amount to [the company’s] knowledge, it is merely a source from which knowledge can be gained. Access to a means of knowledge is not sufficient’.30 A company also ‘knows’ a ‘matter’ if it is actually known to a person ‘with the authority of the company or is so closely connected with the company that his acts can be said to be its acts’,31 or to a director, officer or employee of the company responsible for or involved in arranging the insurance.32 It is a moot point whether the knowledge of an insured’s agent should be attributed or imputed to the insured for the purpose of section 21(1).33 Pending resolution of the issue by an appellate court, Gyles J has sensibly suggested that trial judges should proceed on the basis that an insured knows what its agent knows.34 A policyholder does not ‘know’ a ‘matter’ just because they ought to know35 or that they should infer from other matters known them.36 Nor do they ‘know’ a ‘matter’ if they only ‘believe’ or ‘strongly suspect’ it.37

iii. Section 21(1): Disclosure of What a Prudent Insured Would Know is Relevant to the Insurer’ The requirement that an intending insured disclose matters known to him that he knows are relevant, or that a reasonable person would know are relevant,

29 

Allen v QBE Syndicate 1886 at Lloyds [2010] QDC 4 at [25] (Clare SC DCJ). Commercial Union Assurance Company of Australia Pty Ltd v Beard [1999] NSWCA 422 (2000) 11 ANZ Ins Cas 61-458 at [63] (Davies AJA). 31  Entwell Pty Ltd v National and General Insurance Co Ltd (1991) 6 WAR 68; 6 ANZ Ins Cas 61-059 (Ipp J). 32  Commercial Union Assurance Company of Australia Pty Ltd v Beard [1999] NSWCA 422 (2000) 11 ANZ Ins Cas 61-458 at [62]-[63] (Davies AJA); Entwell Pty Ltd v National and General ­Insurance Co Ltd (1991) 6 WAR 68; 6 ANZ Ins Cas 61-059 (Ipp J). 33  Permanent Trustee Australia Co Ltd v FAI General Insurance Co Ltd (in liq), [2003] HCA 25; (2003) 214 CLR 514. 34  Tosich v Tasman Investment Management Ltd (2008) 250 ALR 274; [2008] FCA 377. 35  A & D Douglas Pty Ltd ACN 008 404 180 v Lawyers Private Mortgages Pty Ltd ACN 010 556 751 (see fn 9) at [725] (Dowsett J); Advance (NSW) Insurance Agencies Pty Ltd v Matthews (1987) 4 ANZ Ins Cas 60-813 at [74,998] (Young J). 36  Midaz Pty Ltd v Peter McCarthy Insurance Brokers Pty Ltd (1998) 10 ANZ Ins Cas 61-394; [1999] 1 Qd R 279 at 283-4 (Pincus JA); A & D Douglas Pty Ltd ACN 008 404 180 v Lawyers Private Mortgages Pty Ltd ACN 010 556 751 [2006] FCA 520 at [724] (Dowsett J). 37  Permanent Trustee Australia Co Ltd v FAI General Insurance Co Ltd (in liq) [2003] HCA 25; (2003) 214 CLR 514 at [30] (McHugh, Kirby and Callinan JJ). 30 

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to the insurer’s decision whether to accept the risk and, if so, on what terms, protects the insurer ‘against claims where the insured’s disclosure is inadequate because the insured is unreasonable, idiosyncratic or obtuse’. It protects the insured ‘from exclusion from cover, provided he or she does not fall below the standard of a ­reasonable person in the same position’.38 Whether or not an insured knows a matter is relevant to the insurer under ­section 21(1)(a) is a question of fact. The alternative to actual knowledge of relevance in section 21(1)(a) is the objective test in section 21(1)(b) as to whether a reasonable person in the circumstances could be expected to know the matter to be relevant to the insurer. What ‘a reasonable person in the circumstances could be expected to know’ is concerned with a reasonable person’s state of mind, not the insured’s state of mind.39 A ‘matter relevant’ to the decision of an insurer whether to accept the risk and, if so, on what terms will not include matters relating to an insurer’s commercial willingness to accept the risk, or emotional decisions by an insurer.40 Nor will it necessarily extend to matters related to ‘moral hazard’.41 The questions an insurer asks a prospective insured in the lead up to the making of an insurance contract are important in assessing what ‘a reasonable person in the circumstances could be expected to know to be a matter so relevant’ to that insurer. They are a guide to an insured (and a reasonable person) as to those matters in which the insurer is likely to be interested when making its decision, they do not necessarily set the boundaries of what a reasonable person would know to be relevant to the insurer’s decision.42

The particular insurer’s underwriting guidelines and procedure manual and its practice at the time the risk was written (for example, how it dealt with proposals for similar risks) will usually be a good guide to what might be ‘relevant to the decision of the [particular] insurer whether to accept the risk and, if so, on what terms’.43 From the insurer’s point of view, evidence of the underwriter that accepted the risk would usually be critical to the outcome.

iv. Sections 21(2) and 21(3): Exceptions to a Policyholder’s Duty of Disclosure Section 21(2) lists the matters an insured need not disclose, being matters that diminish the risk, that are of common knowledge or that an insurer knows, in 38 

CGU Insurance Ltd v Porthouse [2008] HCA 30; (2008) 235 CLR 103 at [52]. GIO General Ltd v Wallace [2001] NSWCA 299; (2001) 11 ANZ Ins Cas 61-506 at [23] (Heydon JA). 40  Permanent Trustee Australia Co Ltd v FAI General Insurance Co Ltd (in liq) [2003] HCA 25; (2003) 214 CLR 514 at [32] (McHugh, Kirby and Callinan JJ). 41  Permanent Trustee Australia Co Ltd v FAI General Insurance Co Ltd (in liq) [2003] HCA 25; (2003) 214 CLR 514 at [32] and [36] (McHugh, Kirby and Callinan JJ). 42  Leading Synthetics Pty Ltd v Adroit Insurance Group Pty Ltd [2011] VSC 467 at [79] (MacAuley J). 43  Bauer Tonkin Insurance Brokers v CIC (1996) 9 ANZ Ins Cas 61-298. 39 

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the ordinary course of its business as an insurer ought to know, or as to which the insurer waives disclosure. An insurer waives disclosure in relation to a particular matter if, for example, a prospective insured does not answer, or gives an obviously incomplete or irrelevant answer to, a question in a proposal form about the matter:44 section 21(3). An obviously incomplete or irrelevant answer in a proposal form ‘puts the insurer on inquiry and, if it omits to inquire, it has waived its right to rely upon the insured’s failure to disclose or misrepresentation’.45 A proposal form is ‘a document containing questions to which a person is asked to give answers … where the answers are intended … to be used in connection with a proposed contract of insurance’: ICA, section 11. It probably includes an on-line proposal.46 What an insurer ‘knows’ means what the insurer actually knows. It may include information contained in a newspaper extract if it is part of the insurer’s formal records or is filed in a place where the insurer’s relevant employees have seen it or could be expected to see it in the performance of their duties.47 What the insurer knows ordinarily, but not necessarily, includes what its agent knows.48

v.  Sections 21A and 21B: Disclosure in Relation to Eligible Contracts Section 21A describes an insured’s pre-contractual duty of disclosure in relation to new insurance business in relation to an eligible contract of insurance49 and any other insurance contracts in respect of which the insurer has given a prescribed notice.50 Section 21B applies to renewal of an ‘eligible’ contract (not to an extension, variation or reinstatement of an insurance contract, unless that amounts to renewal). In broad terms and in perhaps unnecessarily complex ways, sections 21A and 21B effectively remove a policyholder’s open-ended duty of disclosure for eligible contracts of insurance. Under section 21A, the duty of disclosure is restricted to answering specific questions asked prior to the original entering into of an ‘eligible’ contract of insurance. By section 21B an insurer may, prior to renewal, ask the insured either specific questions or for disclosure by way of an update of any changes to matters previously disclosed by the insured, a copy of which is to be provided to the insured. 44  The section is not an exhaustive description of the circumstances in which an insurer will be held to have waived compliance with an insured’s pre-contractual duty of disclosure: ABN AMRO Bank NV v Bathurst Regional Council [2014] FCAFC 65 at [1710]. 45  Orb Holdings Pty Ltd v Lombard Insurance Company (Australia) Ltd [1995] 2 Qd R 51 at 53 (Fitzgerald P). 46  Celik v NRMA [2000] NSWC 380 at [10] and [29]-[33] (James J). 47  Commercial Union v Beard [1999] NSWCA 422; [2000] 11 ANZ Ins Cas 61-458 at [63] (Davies AJA). 48  Herbohn v NZI Life Ltd [1998] QSC 122; (1998) 10 ANZ Ins Cas at [61-410] (Lee J). What the insurer knew did not extend to confidential medical information known to its agent, a medical practitioner. 49  Namely, motor vehicle, home buildings, home contents, sickness and accident, consumer credit and travel insurance: Insurance Contracts Regulations 1985 (Cth) Reg 2B. 50  Insurance Contracts Regulations 1985 (Cth) Reg 2B.

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If the insurer does neither of these things, it is taken to have waived compliance with the duty of disclosure on renewal. Asking ‘catch all’ questions covering other matters in addition to specific questions or an update of previous disclosures will result in a waiver of compliance with the duty of disclosure with respect to the other matters. Section 21B is particularly complex. One is left wondering whether it could be done much more simply.

vi.  Section 22 An insurer cannot rely on an insured’s innocent pre-contractual non-disclosure for the purpose of exercising any of the remedies available in section 28 unless the insurer, before the insurance contract is made, clearly informs the insured in writing of the general nature and effect of the duty of disclosure: section 22. An insurer can give the information orally if it is not ‘reasonably practicable’ for it to be given in writing before the contract is made, as long as the information is given in writing within 14 days of the making of the contract.51 An insured cannot ‘waive or otherwise dilute’ the requirements of section 22.52 It is not necessary for an insurer to provide an insured with the information described in section 22 at or before ‘any subsequent renewal, extension or reinstatement of ’ an insurance contract if it gave that information before the original contract was made,53 or ‘a variation of the relevant contract of insurance except where the variation is involved in a renewal, extension or reinstatement of the contract’.54 If an insurer accepts an insured’s offer to insure or makes a counter offer to insure more than two months after the insured’s most recent disclosure, the insurer will not be able to rely on any non-disclosure after the last disclosure unless the non-disclosure of the new matter is fraudulent,55 or it reminds the insured at the time of the acceptance or counter offer that the insured’s duty of disclosure applies until the insured contract is entered into.56 The New South Wales Court of Appeal considered the meaning of ‘clearly inform’ in Suncorp General Insurance Ltd v Cheihk.57 In this case Suncorp was held to have failed to ‘clearly inform’ insureds of their duty of disclosure because the insurer had placed the notice which explained those obligations on the back of the insurance certificate and had not informed the insured the information was there. The Court of Appeal noted that clarity was required not only in the contents of the documents but also in the manner in which the contents of the documents

51 

s 69. Shepherd v National Mutual Life Association of Australasia Ltd (1995) 8 ANZ Ins Cas 61-233 (Hedigan J). 53  s 11(10)(a). 54  s 11(10)(b). 55  s 22(6). 56  s 22(3). 57  [1999] NSWCA 238; (1999) 10 ANZ Ins Cas 61-442. 52 

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was made known. A note in the documents, the Court said, ‘without attention appropriately drawn to it would not suffice, even if the contents of the note were adequate to state the general nature and effect of the duty of disclosure’.58 In arriving at its conclusion, the Court held that the insurer bears the onus of proving it ‘clearly informed’: the insured in writing of the nature and effect of the duty of disclosure. … I also accept that ‘inform’ means ‘to make known’ … The general nature and effect of the duty of disclosure must be ‘clearly’ made known to the insured in writing. The adverb ‘clearly’ is a plain English word and its ordinary meaning would convey the need for some precision in the making known of the relevant duty.59

In obiter in GIO General Ltd v Wallace60 it was observed that it is a commonplace of business for documents to have writing on both sides and that a failure to have words on the front of a renewal form directing the reader to the back (in order to see the section 22 disclosure notice) is not fatal in the sense that no rule of law requires this.

D. The ICA’s Part IV, Division 3: Restrictions on an Insurer’s Remedy By section 28(1), an insurer has no remedy for a policyholder’s pre-contractual non-disclosure (innocent or fraudulent) under a general insurance contract if it would have entered into the contract on the same terms if the non-disclosure had not occurred.61 The available remedies depend on whether the policyholder’s non-disclosure was innocent or fraudulent. An insurer cannot avoid a contract for an insured’s innocent non-disclosure.62 However, in this case and subject to section 28(1), the insurer’s liability for a claim is reduced to an amount that would put the insurer in the position it would have been in if the non-disclosure had not occurred. The insurer bears the onus of proving the position it would have been in if the non-disclosure had not occurred.63 For example, if an insurer can prove it would have charged a higher premium if non-disclosure had not occurred, the insurer’s liability will be reduced by the amount of the proved notional increase in premium. Subject to section 28(1), an insurer is entitled to avoid an insurance contract for fraudulent non-disclosure: section 28(2). The ICA does not define fraudulent non-disclosure. Accordingly, its meaning is derived from the common law.64 If an

58 

ibid, at [38]. ibid, at [14] per Stein JA with whom Meagher JA agreed. 60  [2001] NSWCA 299; (2001) 11 ANZ Ins Cas 61-506 at [55]. 61  Hendry Rae & Court v FAI General Insurance Co Ltd (1991) 5 WAR 376. 62  s 28(3). 63  Prepaid Services Pty Ltd v Atradius Credit Insurance NV [2013] NSWCA 252 at [71] (Meagher JA). 64  NRG Victory Australia Ltd v Hudson [2003] WASCA 291 at [23] (Parker J). 59 

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insurer is entitled to avoid for fraud but elects not to do so, its remedy is limited to the remedy it has under section 28(3) for innocent non-disclosure; namely, to reduce ‘its liability to an amount that would put the insurer in the position it would have been if the non-disclosure had not occurred’. A court can disregard an insurer’s decision to avoid for fraudulent non-­ disclosure if avoidance would be harsh and unfair.65 A court will only do so if the non-disclosure has not prejudiced the insurer or if it has, the prejudice ‘is minimal or insignificant’.66 If the avoidance is disregarded, the court will allow the insured ‘to recover the whole, or such part as the court thinks just and equitable in the circumstances, of the amount that would have been payable if the contract had not been avoided’.67 The words ‘just and equitable’ allow a wide discretion, to be ‘exercised judicially in the light of the whole of the circumstances surrounding the relevant subject matter’.68 In determining how much an insured can recover the court, amongst other things, will have regard to the need to deter fraudulent conduct in relation to insurance and will weigh the extent of the culpability of the insured in the fraudulent conduct against the magnitude of the loss that would be suffered by the insured if the avoidance were not disregarded: section 31(1). An insurer may cancel a contract, among other reasons, for an insured’s pre-contractual non-disclosure: section 60(1)(b).

III.  Insurer’s Pre-contractual Duties69 A. Introduction At common law, an insurer will discharge its pre-contractual duty of disclosure if it discloses facts known to it: which are material either to the nature of the risk sought to be covered or the recoverability of a claim under the policy which a prudent insured would take into account in deciding whether or not to place the risk for which he seeks cover with that insurer.70

65 

s 31. Disregarding an avoidance does not reinstate the contract: s 31(4). s 31(2). 67  s 31(3). 68  Amaca Pty Ltd v McGrath as liquidators of HIH Underwriting and Insurance (Australia) Pty Ltd [2011] NSWSC 90 at [67] (Barrett J); Talga v MBC International Ltd (1976) 133 CLR 622 at [634] (Stephen, Mason and Jacobs JJ); Cominos v Cominos (1972) 127 CLR 588 at [599] (Gibbs J); Eddy Lau Constructions Pty Ltd v Transdevelopment Enterprise Pty Ltd [2004] NSWSC 273 at [45]–[47] (Barrett J). See also: Stephenson v State Bank of New South Wales (1996) 39 NSWLR 101 at [113] (Sheller JA). 69  This section of the Chapter draws in part on an article by Samantha Traves, Utmost good faith, reliance upon and notification of terms; The obligations of insurers and the rights of insureds (2012) 23 ILJ 3. 70  La Banque Financière de la Cite SA v Westgate Insurance Co Ltd [1990] 1 QB 665 at 772 (Slade LJ). 66 

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An insurer’s common law pre-contractual duty of disclosure is not affected by the ICA, as there is nothing in the ICA about it. However, there are sections in the ICA that prevent an insurer from taking advantage of various rights, benefits or entitlements unless it informs an intending insured of certain matters prior to the making of the insurance contract. Most of these are mentioned below. Generally speaking, providing the required information to an insurance broker acting for an intending insured will be sufficient notice to the intending insured in all of the following cases except the statutory policy described in section 58.71 An insurer cannot rely on: —— an insured’s innocent pre-contractual non-disclosure for the purpose of exercising any of the remedies available to it under section 28 unless, before the insurance contract is made, it clearly informs the insured in writing of the general nature and effect of the duty of disclosure described in whichever of sections 21, 21A, 21B and 31A applies to the contract: section 22; —— ‘a provision … in [a contract that is not a prescribed contract] … of a kind that is not usually included in contracts of insurance that provide similar insurance cover unless, before the contract was entered into the insurer clearly informed the insured in writing of the effect of the provision’: section 37; —— ‘an average provision … in a contract of general insurance unless, before the contract was entered into, the insurer clearly informed the insured in writing of the nature and effect of the provision including whether the provision is based on indemnity or on replacement value of the property that is the subject-matter of the contract’: section 44(1); —— a provision of an insurance contract ‘that has the effect of excluding or limiting the insurer’s liability in respect of a loss by reason that the insured is a party to an agreement that excludes or limits a right of the insured to recover damages from a person other than the insurer in respect of the loss … unless the insurer clearly informed the insured in writing, before the contract of insurance was entered into, of the effect of the provision’: section 68(1). A ‘prescribed contract’ must provide the minimum cover described in the Insurance Contracts Regulations 1985 unless, before the contract is made, the insurer brings the difference in cover to the insured’s attention, or the insured knew, or a reasonable person in the circumstances could be expected to have known, about the difference in cover: section 35. An insurer is obliged under a first party property policy to cover an interest in the property ‘that is not the insured’s interest’, unless ‘before the contract was entered into, the insurer clearly informed the insured in writing that the insurance cover provided by the contract would not extend to such an interest’: section 49(1).

71 

s 71.

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An insured is automatically covered by a statutory policy commencing upon the expiry of a general insurance contract with ‘renewable insurance cover’ if the insurer does not inform the insured at least 14 days before the expiry of the contract ‘of the day on which and the time at which the cover will expire and whether the insurer is prepared to negotiate to renew or extend the cover’: section 58. Following extensive flooding in Queensland in 2011, the ICA was amended to require insurers to provide a Key Facts Sheet (KFS) in respect of all home building and contents insurance products: sections 33A, 33B, 33C and 333D.72 A KFS is intended to make key information about an insurance policy more accessible and more readily permit comparison of products. It is a one page (double-sided) document that lists prescribed events such as flood and storm and the cover provided in respect of each.73 An insurer commits an offence if it does not provide a KFS: section 33C(5). Chapter 7 of the Corporations Act 2001 (Cth) imposes disclosure obligations on insurers by requiring a Financial Services Guide and a Product Disclosure Statement (PDS) incorporating all policy terms to be provided in a ‘clear, concise and effective’ manner. The recent application of the Electronic Transactions Act 1999 (Cth) to the ICA has changed the way information must be conveyed to insureds. Some aspects of these obligations, in particular where insurers derogate from standard cover or include unusual terms in a non-standard cover contract are ­discussed below.

B.  Overview of the Standard Cover Regime Instead of incorporating readability formulae and comprehensibility standards into legislation governing insurance contracts,74 the ICA requires standard form insurance cover for ‘prescribed contracts’, namely, motor vehicle (property damage), home buildings insurance, home contents insurance, sickness and accident, consumer credit and travel insurance. The terms of the ‘prescribed contracts’ are set out in Regulations to the ICA.75 Standard cover is designed to address the difficulties insureds encountered due to the expertise of insurers in drafting policies and carefully defining risks and the inexperience and inability of the vast majority of insureds to understand the policy and its precise legal effect. In broad terms, standard cover achieves 72  Insurance Contracts Amendment Act 2012. The obligation to provide a KFS came into effect on September 2014. 73  See generally ICA, ss 37C and 37D. 74  See, for example, the Insurance Code (Massachusetts) and the Insurance Law (NY) where the Flesch Readability Formula, devised almost 40 years ago, is prescribed. The Formula involves the application of a test made of samples taken from the text of the relevant document and takes into account various factors including the average number of words per sentence and the average number of ­syllables per word: see Insurance Contracts (ALRC Report No 20, 1982) pp 23 and 27. 75  Insurance Contracts Regulations 1985 (Cth) Regs 5–28.

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this by matching the community’s understanding of fundamental risks with the minimum cover required by the policy. Thus, by the expertise of the legislators, removing the inequality of expertise between insured and insurer.76 The effect of the standard cover provisions is, by the adoption of standard contracts, to improve the ability of lay insureds to seek and understand the required cover and to reduce the complexity of policies. To further the objectives of the standard cover regime, section 35 was enacted. Section 35 applies where an insurer wants to derogate in some way from the terms of standard cover.

C. Derogation from Standard Cover and the Application of Section 35 Section 35 requires insurers who offer ‘prescribed contracts’ to ‘clearly inform’ an insured if the policy they are about to purchase departs from the terms of the standard cover for those types of contract as dictated by the Insurance Contracts Regulations. Section 35, together with the Regulations, applies so that if an insured makes a claim under a ‘prescribed contract’ and that claim is in respect of loss arising from an event prescribed in the Regulations, the insurer must pay the insured the minimum amount specified in the Regulations. The insurer cannot rely on the terms of the contract to deny liability or reduce the amount of liability below a certain prescribed minimum unless the insurer proves that before the contract was entered into, the insured was clearly informed in writing (whether by providing the insured with a document containing the provisions, or the relevant provisions, of the proposed contract or otherwise) or, alternatively, that the insured knew, or that a reasonable person in the circumstances could be expected to have known, that the insurer was liable only for the lesser amount or that the particular risk was not covered by the contract of insurance. To take an example relevant to those involved in the 2011 Queensland floods, Home Buildings and Contents policies are one of the classes of insurance regulated by section 35. The relevant standard cover provision for this type of policy, Regulation 14(a)(xi), covers destruction of, or damage occurring to, the contents of a residential building caused by or that results from a storm, tempest, flood, the action of the sea, high water, tsunami, erosion or landslide or subsidence. These are all prescribed events. Most policies of this type, as many flood victims discovered, did not cover flood. This constitutes a major departure from the terms of the standard cover and an insurer would therefore be obliged under the terms of section 35(2) to

76  See also J-A Tarr, ‘Disclosure under the Prescribed Insurance Contracts Regime: Section 35 of the Insurance Contracts Act 1984 and Consumer Protection Revisited’ (2001) 29 ABLR 198 at 199.

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have ‘clearly informed’ the insured in writing that flood was excluded prior to entering the insurance contract. If the insurer could not prove that the insured had been so informed or that the insured or a reasonable person in the c­ ircumstances would have known of the relevant limitation, the insured would be entitled to the statutory minimum cover which includes cover for ‘flood’. As the Regulations themselves did not define flood,77 it meant what an ordinary member of the community would understand it to mean and the insurer would have to pay an amount sufficient to indemnify the person making the claim.

D. What Does ‘Clearly Inform’ Mean for the Purpose of Section 35(2)? An important issue is to determine what ‘clearly inform’ in section 35(2) entails. It may be that insurers can satisfy this requirement by showing the insured a copy of the policy or a PDS that ‘clearly, concisely and effectively’ summarises the relevant terms, but only if the documents are plain and unambiguous in this regard and are drawn to an insured’s attention, before he or she buys the policy. If this is the way it is to be done, the insurer should ensure the insured has enough time to read and understand the information before committing to the contract, or that a cooling off period applied during which the insured could change their mind upon realising flood was not covered, and shop elsewhere for one that did. Insurers’ documents and processes differ. There may well be cases where, for example, a flood exclusion is ambiguous and confusing or where it is embedded somewhere at the back of a lengthy policy, or where a shorter summary of that document does not refer to the exclusion or, if it does, fails to properly explain it. In Lockwood & Lockwood v Insurance Australia Ltd,78 the Supreme Court of South Australia held that because the policy was not clear, providing a copy of it did not clearly inform an insured of the derogation from standard cover for motor vehicle insurance. The insured’s vehicle was damaged while being driven by the insured’s son without their consent. At the time, their son was a minor and not licensed to drive. The issue was whether the damage was covered under the ‘theft’ cover provided by the policy. The indemnity provided for theft in the insuring part of the policy read: ‘If your vehicle is stolen and not found We will [replace or pay the value of your vehicle] However [we will not cover personal items; an excess may apply].’ The relevant exclusion appeared in the ‘claims’ part of the policy under the heading ‘Things that may put your insurance cover at risk’ and provided: We may refuse a claim, cancel this policy or do both if at the time of the incident: —— your vehicle was being driven or was attached to a vehicle being driven by a person who was under the influence of any alcohol or drug 77  78 

They do now: Regulation 29D. Lockwood & Lockwood v Insurance Australia Ltd [2010] SASC 140; (2010) 107 SASR 299.

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—— your vehicle was being driven or was attached to a vehicle being driven by a person who was not licensed or permitted to drive it —— your vehicle was being driven or was attached to a vehicle being driven by a person who, in the last five years —— has had any driver’s licence cancelled, suspended or special conditions imposed —— has been convicted of a criminal offence relating to fraud, theft or burglary, arson, criminal or wilful damage, unless we have been advised of the relevant circumstances and we have specifically agreed to cover that person under your Policy.

Kourakis J concluded that the policy was ambiguous, not due to the wording of a particular clause, but due to the juxtaposition of the clause with the balance of the policy. Given the ambiguity it was held that were it necessary to apply section 35, that the insurers had failed to clearly inform the insureds in writing that the contract would not provide cover in the event their car was stolen, or at least driven without their permission, by an unlicensed person.79 His Honour said a reasonable person would have been surprised to learn that the policy did not cover the circumstances in which the Lockwood’s vehicle was damaged. A reasonable person would expect a motor vehicle insurance policy to meet the circumstances of this case. The scope of the policy set out in the Regulations reflects that view and for that reason imposes a duty on an insurer who excludes that cover to clearly inform the insured of the exclusion. The terms of the policy, far from being calculated to alert an insured to the unlicensed exclusion clause, hid it in a ‘multiplicity [and] generality of words’.80

In Hams v CGU Insurance Ltd,81 farm buildings were insured against loss or damage under a policy that derogated from standard cover by excluding liability for loss or damage by flood. Damage to an aircraft hangar was caused partly by rainwater and run-off surface water and partly by floodwaters resulting from heavy rain. As a result there were two proximate causes, one of which was excluded under the policy, and, in accordance with the Wayne Tank principle, the insurer was not liable for the loss subject to section 35(2). It was held that the nature of the exclusion meant that the insurer could rely on it only if it had ‘clearly informed the insured in writing’ of its effect. The court held that the wording of section 35(2) meant that it was likely in most circumstances that the provision of a document would satisfy the requirement. However, there may be special circumstances where the complexity of or confusion within the document could be such that the mere supply would not effectively inform the insured of relevant limitations.82 ­Einstein J said the words in parenthesis in section 35(2): [m]ean that providing a document containing the provisions is one of a number of mechanisms by which an insurer may clearly inform the insured. In each case the

79 

ibid, at [33]. ibid, at [34]–[35]. 81  Hams v CGU Insurance Ltd [2002] NSWSC 273; (2002) 12 ANZ Ins Cas 61-525. 82  ibid, at [242]. 80 

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content of the document and all of the circumstances of its provision would need to be considered in order to determine if the insurer had effectively informed the insured of the limitation.83

His Honour did not think it was necessary to go so far as to provide the insured with an annotated policy explaining either the general principles of insurance law or the proper approach to the construction of the policy’s provisions. Nor did his Honour think that section 35 required the insurer to clearly inform the insured of the operation and effect of the Wayne Tank principle. As his Honour said: The fact is that the principles which underpin the law of insurance are often complex in the extreme and it could not be the case, as it seems to me, that a condition precedent to an insurer establishing that it had clearly informed the insured in writing of the relevant limitation, required the insurer to annotate the Policy by reference to principles of insurance law.84

Instead, it was held that the mere provision by the insurer of a copy of the policy sufficiently informed the insured of the nature and extent of the flood exclusion. A similar issue was considered in Marsh v CGU Insurance Ltd.85 Here the insured suffered loss due to the Katherine River floods in January 1998. Flood was excluded under her policy and the issue was whether she had been clearly informed of the flood exclusion prior to entry into the policy. The insured said she did not recall receiving a policy document from the insurer. The insurer led ­evidence as to the nature of the insurer’s system ensuring regular dispatch of ­policy documents including evidence from a senior underwriter as to the relevant processes employed. Angel J was satisfied the insured had received the policy documentation and that the provision of the policy satisfied the insurer’s obligation to clearly inform the insured of the derogation from cover.86 This decision was upheld on appeal.87 Although there have been cases where the provision of the policy or PDS was held sufficient, more may be required from insurers in certain circumstances. This would be consistent with the law relating to notification by the insurer of the insured’s duty to disclose as required by section 22 (discussed in relation to the policyholder’s pre-contractual duty of disclosure). Section 22 uses identical wording to section 35(2), in that it provides that the insurer shall, before a contract of insurance is entered into, clearly inform the insured in writing of the general nature and effect of the duty of disclosure. Bearing in mind the meaning of ‘clearly informed’ in the context of section 22 and considering the purpose of the standard cover regime, it would seem prudent that derogation from standard cover should be notified to the insured in a separate 83 

ibid, at [243]. ibid, at [244]. 85  Marsh v CGU Insurance Ltd [2003] NTSC 71; (2003) 12 ANZ Ins Cas 61-569. 86  ibid, at [13]–[15]. 87  Marsh v CGU Insurance Ltd [2004] NTCA 1 at [8] (Mildren J) and [11], [62] (Bailey J) cf Thomas J. 84 

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document that is clearly worded and conveyed. The document should be brought to the attention of the insured and ideally the fact of its receipt and a statement to the effect that the insured has understood the effect of the limitation on cover should be obtained from the insured. This should ensure the insured is properly informed as to the extent of the cover provided and also provide protection to the insurer from claims by the insured to the effect that the policy or other document was not received. More generally, the proposed measures, while increasing costs to insurers in the short term, should provide benefits in reducing the substantial consumer disputes and accompanying ill will arising in this area. An insurer only needs to give the derogation from cover information once. The same for the duty of disclosure notice. This is due to section 11(10)(a) of the ICA, which provides that where ‘the insurer has given information to the insured as required by sections 22, 35, 37 …’ at or before the original entering into, or the renewal, extension or reinstatement, of a contract of insurance, ‘the requirement by that section to give information to the insured shall be deemed to be satisfied at or before any subsequent renewal, extension or reinstatement of the contract’. This section is sometimes overlooked. For example the judgment of the South Australian Supreme Court in Alexander Stenhouse Ltd v Austcan Investments Pty Ltd88 was based on a belief that the insurer was required to provide a duty of disclosure notice upon each renewal. It appears that section 11(10)(a) had not been taken into account.

E. Section 37 and the Insurer’s Obligation to Clearly Inform the Insured of Unusual Terms The Explanatory Memorandum for the Insurance Contracts Bill 1984 listed as one its main reforms the ‘notification of unusual terms of the contract and certain terms limiting the insurer’s liability’ and that the main purposes of the Bill in this respect are: to improve the flow of information from the insurer to the insured so that the insured can make an informed choice as to the contract of insurance he enters into and is fully aware of the terms and limitations of the policy.

Section 37 provides: Notification of unusual terms An insurer may not rely on a provision included in a contract of insurance (not being a prescribed contract) of a kind that is not usually included in contracts of insurance that provide similar insurance cover unless, before the contract was entered into the insurer

88  Alexander Stenhouse Ltd v Austcan Investments Pty Ltd (1992) 57 SASR 343; (1992) 7 ANZ Ins Cas 61-116, overruled by the High Court at [1993] HCA 22; (1993) 7 ANZ Ins Cas 61-166.

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clearly informed the insured in writing of the effect of the provision (whether by providing the insured with a document containing the provisions, or the relevant provisions, of the proposed contract or otherwise).

Applying usual principles of construction, one would think that the insured bears the onus of proving that the provision was of a nature not usually included in contracts of insurance that provide similar insurance cover and the insurer bears the onus of proving that it clearly informed the insured in writing of the effect of the provision.

i.  Was it an ‘Unusual Term’? Whether the provision was of a nature not usually included in contracts of insurance that provide similar insurance cover would be a matter of evidence. A suitably qualified witness might be a broker familiar with the nature of the relevant insurance. Expert evidence would need to be called to establish that the particular term was, from an industry point of view, unusual. It would ordinarily not be appropriate nor sufficient, for example, to invite the court to peruse authorities and compare terms to arrive at the conclusion that the term in question was unusual. Establishing that a term like the one in question appears infrequently in the decided cases will not establish it is unusual but only that there has been limited reported litigation with respect to such clauses.89 In discussing the concept of standard cover, the ALRC listed by way of example some limitations contained in different types of cover which they considered to be ‘unexpected’, for example: —— In a houseowner’s policy an exclusion of liability for damage caused by housebreaking. —— In a motor vehicle policy an exclusion of liability for loss caused by the malicious act of a third party. —— In a personal accident policy an exclusion of liability for accident or sickness resulting directly or indirectly from, venereal disease. These are all reasonable examples.90 In Dumitrov v SC Johnson & Son Superannuation Pty Ltd91 the court was asked to consider whether a definition of total and permanent disablement in an accident and sickness policy entered into by a superannuation trustee for its scheme members was an unusual term within section 37. It was argued that the term was unusual because it required an opinion that an insured person was unable ever to engage in work, as opposed to a less harsh test which required an opinion that an insured person was unlikely ever to engage in work. It was held that the mere

89 

Dumitrov v SC Johnson & Son Superannuation Pty Ltd [2006] NSWSC 1372 at [13]. See also Suncorp Metway Insurance Limited v Mason Place Pty Ltd [2011] QDC 209 at [11] where a ‘burning cost adjustment clause’ was held to be an unusual term within the meaning of s 37. 91  Dumitrov v SC Johnson & Son Superannuation Pty Ltd [2006] NSWSC 1372. 90 

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fact the provision created a harsher definition of total and permanent disablement did not mean the definition was necessarily unusual within the meaning of ­section  37.92 As similar definitions had been included in insurance policies without them being classified as unusual for the purposes of section 37 and the insured did not call evidence to establish that the definition was unusual the court concluded that the insured had failed to establish that the definition was unusual.93 The argument that a particular exclusion clause in a Directors and officers (liability) (D and O) policy was an unusual term and therefore required notification under section 37 was raised in Porter v GIO Aust Ltd.94 The exclusion there provided that the policy did not insure loss arising out of any claim: ‘10(iv) arising from any litigation or Inquiry that was either in progress or pending prior to the Period of Insurance …’ The insured argued the clause was ‘unusual’ because the exclusion operated irrespective of whether it knew the inquiry had commenced before the inception of the policy.95 The insured tendered a number of D&O insurance policies with similar exclusions but which were in each case different from it. The insurer responded that various of the clauses tendered operated by reference to the date a matter occurred irrespective of whether the insured knew of the occurrence. McClellan J observed in relation to these arguments: Each policy had its own commercial advantages and disadvantages. The GIO Mark II policy provided cover for criminal costs, not available under the previous policy, the price being that it came subject to the exclusion in cl 10(iv).96

His Honour did not find that the clause was ‘unusual’ within the meaning of ­section 37 and that in any event the insured’s agent had been supplied with the relevant notification in accordance with section 71, obviating the need to c­ omply with section 37.97 In relation to the alternative argument based on section 14 and the insurer’s lack of good faith in relying on the clause, it was held that it was ‘hardly the case’ in circumstances where the insured in fact knew that ASIC’s ­processes were in train, although perhaps not that a formal inquiry had been ­commenced prior to the policy.98 In Messagemate (Aust) Pty Ltd v National Credit Insurance (Brokers) Pty Ltd99 the definition of ‘delivered’ in a trade credit insurance policy was classified as ‘unusual’ for the purposes of section 37. In that case ‘delivered’ was defined so as to require

92 

ibid, at [12]. ibid, at [14]. 94  Porter v GIO Aust Ltd [2003] NSWSC 668; (2003) 12 ANZ Ins Cas 61-573. 95  ibid, at [893]. 96  ibid, at [899]. 97  See also Rocco Pezzano Pty Ltd v Unity Insurance Brokers (1995) 8 ANZ Ins Cas 61-288 at 27; Bede Polding College v Limit (No 3) Ltd [2008] NSWSC 887 at [8]. 98  Porter v GIO Australia Ltd & Anor [2003] NSWSC 668; (2003) 12 ANZ Ins Cas 61-573 at [900]. 99  Messagemate (Aust) Pty Ltd v National Credit Insurance (Brokers) Pty Ltd [2002] SASC 327; (2003) 12 ANZ Ins Cas 61-546. 93 

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legal title to have transferred from the insured to the buyer. The insured’s distribution agreement with its buyers contained a retention of title (ROT) clause under which title was not to pass to the buyer until payment was made. The insurer argued that because the insured had not been paid, that pursuant to the definition of ‘delivered’ coupled with the ROT clause there had been no sale and therefore that there was no obligation to indemnify under the policy. The definition of ‘delivered’ had recently been amended and had not previously required a transfer of title. The previous version of the policy, the court noted, had operated satisfactorily in a claims sense. Moreover there was nothing to suggest to the broker that the definition of ‘delivered’ required special attention.100 Applying the new policy definitions the cover was effectively worthless to the insured in light of its trading terms. Williams J held relevantly that there had been departures from standards required by sections 13 and 14 of the ICA and, independently of that conclusion, section 37 also applied so as to treat the meaning attributed by FAI to the definition of ‘delivered’ (if it be correct) as an unusual term requiring prior notice in writing by the insurer.101 There is a distinction between reliance on a term not of a kind usually included in a particular type of insurance cover and an argument that contends for the existence of a term that never existed.102 Sections 37 and 14(3) can only be applied in favour of the insured.103

ii.  Did the Insurer Clearly Inform the Insured in Writing of the Provision? The issue for the insurer is whether, if a term is regarded as unusual, it can show it clearly informed the insured in writing of the term before the insurance contract was entered into. At common law, the rationale for the special treatment of the inclusion of unusual terms in contracts, at least where they are unsigned, is to be able to show that a contracting party can reasonably be taken to have assented to that term, not whether the contracting party should be subject to an unreasonable term.104 There is an argument that if the terms of the policy have been provided that is sufficient. Such an argument would contend that the words in parenthesis in section 37, ‘whether by providing the insured with a document containing the provisions, or the relevant provisions, of the proposed contract or otherwise’ provide options each intended to be sufficient. The better view is that the words in parenthesis provide examples of how notice might be given, but whether in any given circumstance the notice is sufficient remains a question at large.

100 

ibid, at [61]. ibid, at [70]. 102  ACN 074971109 (As Trustee for the Argot Unit Trust) v National Mutual Life Association of ­Australasia Ltd (ACN 004 020 437) [2008] VSCA 247; (2008) 21 VR 351 at [128]. 103  The Victorian Managed Insurance Authority v Dura (Australia) Constructions Pty Ltd (ACN 004 284 191) (Domestic Building) [2011] VCAT 113 at [97]. 104  Maxitherm Boilers Pty Ltd v Pacific Dunlop Ltd [1998] 4 VR 559 at 569; (1997) 10 ANZ Ins Cas 61-393, cited in Hartley v James Turner Contracting Pty Ltd [2000] WADC 215 at [32], [33]. 101 

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The concept of reasonable notice of uncommon or unusual conditions is not unknown to the common law, particularly in circumstances where it is contended that terms have been incorporated by reference, or by notice (as distinct, for example, to terms in a written and signed contract).105 Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd106 is an example. In that case the appellant, an advertising agency, needed photographs for a client presentation. The respondent ran a photographic transparency library. The appellant had not used the library before. Following an enquiry from the appellant as to whether the library held any photographs that might be suitable for the presentation, the respondent forwarded to the appellant 47 transparencies, packed in a bag, together with a delivery note containing nine printed conditions. Condition 2 stated that all transparencies had to be returned within 14 days of delivery otherwise a holding fee of £5 a day and tax would be charged for each transparency. The appellant put the transparencies aside and forgot to return them until some four weeks later. To their horror the appellants then received an invoice for £3,783.50. The appellants refused to pay. Judgment was given in favour of the respondents. The appellants successfully appealed. The Court of Appeal held that where clauses incorporated into a contract contained a particularly onerous or unusual condition, the party seeking to enforce it had to show it had been brought fairly and reasonably to the attention of the other party; that since the respondents had done nothing to draw their attention to condition 2, the condition never became a part of the contract. It is important to emphasise that the case was won not because the appellants failed to read the conditions, but because the respondent failed to do what was necessary to bring the unreasonable and extortionate clause to the attention of the appellants.107 In contract law the following relevant principles have been developed, mostly in cases involving whether occupiers could rely on clauses exempting them from ­liability which had been included, for example, in fine print on the back of car parking tickets. It is noted that different principles apply where a contract is signed, where the law will assume from the fact of the signature that the parties know the terms. The principles are as follows: 1. Reasonable steps are required to be taken to draw the other parties’ attention to printed conditions or they will not form part of the contract. 2. If the conditions to apply to a contract are usual it may not be necessary to prove more than the intention to attach some conditions has been fairly brought to the notice of the other party.

105  Ange v First East Auction Holdings Pty Ltd (ACN 083 112 505) [2011] VSCA 335; (2011) 284 ALR 638; Maxitherm Boilers Pty Ltd v Pacific Dunlop Ltd [1998] 4 VR 559; (1997) 10 ANZ Ins Cas 61-393. The law governing the incorporation of terms into a signed contract is set out in Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; (2004) 219 CLR 165. 106  Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd [1989] QB 433; [1988] 2 WLR 615. 107  See further S Kapnoullas and B Clarke, ‘Incorporation of Unusual or Unreasonable Terms into contracts: the Red Hand Rule and Signed Documents’ (2006) 11 Deakin Law Review 95.

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3. If one condition in a set of printed conditions is particularly onerous or ­unusual then the party seeking to enforce it must show that that particular condition was fairly brought to the notice of the other party. 4. How much is required as being reasonably sufficient to give the plaintiff notice of the condition depends upon the nature of the restrictive condition: Thornton v Shoe Land Parking Ltd.108 The nature of the notice needs to be considered. There is a line of authority at common law that the more unusual the term, the greater the notice must be.109 Is it sufficient to put the term in bold letters within the policy; must its existence be identified in a letter of explanation—these are matters of debate, but remain relevant. If an approach consistent with other provisions is applied then the terms should be explained to insureds in a separate, clearly worded, document.

F. Circumstances in Which Sections 35 and 37 May Not Apply: Sections 71 and 14 The operation of sections 35 and 37 is qualified by section 71, in that provisions which require a notice, statement, document or other information to be given to the insured before the contract will not apply where a broker arranged the insurance. It is arguable section 14 could still apply notwithstanding the involvement of a broker as it is not a provision for or with respect to the giving of a notice, document, statement or information by an insurer. Further, under section 71(2), where a person who is not an insurance intermediary acted as agent of the insured in arranging the insurance contract and the insurer gave that person a notice, statement, document or any other information it will be deemed to have been given to the insured. The effect of section 71 on the operation of section 37 and of the interaction between sections 37 and 14 was considered by McClellan J in Porter v GIO ­Australia Ltd.110 In His Honour’s view, section 71 had the effect that an insured who arranged the relevant insurance cover through a broker could not rely on ­section 37.111 Moreover, as McClellan J observed, it was ‘unlikely’ if section 37 did

108 

Thornton v Shoe Land Parking Ltd [1971] 2 QB 163; [1971] 1 Lloyd’s Rep 289. Kapnoullas and Clarke, above n 105, citing Spurling v Bradshaw Ltd [1956] 1 WLR 461 at 466, where Lord Denning said: ‘The more unreasonable a clause is, the greater the notice which must be given of it. Some clauses would need to be printed in red ink with a red hand pointing to it before the notice could be held to be sufficient.’ 110  Porter v GIO Australia Ltd [2003] NSWSC 668; (2003) 12 ANZ Ins Cas 61-573. 111  This did not appear to preclude a s 37 argument in Messagemate v (Aust) Pty Ltd v National Credit Insurance (Brokers) Pty Ltd [2002] SASC 327; (2003) 12 ANZ Ins Cas 61-546 where a specialist trade credit insurance broker arranged the relevant insurance. 109 

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not apply due to the operation of section 71, that section 14 could then be applied. His Honour held in this respect: [I]t would be unlikely that any failure to draw attention to an exclusion clause in the manner contemplated by s 37, the effect of which is expressly qualified by s 71, could give rise to incapacity in the insurer as contemplated by s 14. The legislative scheme imposes obligations on the insured’s agent to act to protect the insured which in turn relieves the insurer of burdens which would otherwise apply.

Arguably, sections 14 and 37 are not mutually exclusive. There is scope, for example, for notification to have been provided under section 37 and yet, for an insurer to be prevented from relying on the particular clause because to do so would be to fail to act with the utmost good faith, as required by section 14. This is contemplated by section 14 itself, where it says that in deciding whether reliance by an insurer on a provision in the insurance contract would be to fail to act with the utmost good faith, the court shall have regard to any notification of the provision given to the insured, whether notification of the kind provided under section 37 or otherwise. In other words, notification of the kind required by section 37, if provided to the insured, is one aspect of the circumstances the court will consider in its determination regarding the insurer’s conduct. If the notification obligations imposed by section 37 are complied with, it will not necessarily mean the insurer cannot be prevented from relying on the term in accordance with section 14.

G. The Impact of the Electronic Transactions Act 1999 (Cth) on Disclosure Until relatively recently, the ICA was exempt from the Electronic Transactions Act. The impact of the Electronic Transactions Act in the context of disclosure, is to provide when a communication will be deemed to have been dispatched or received and if a statutory obligation exists to give something in writing, as it does under the ICA, how that should be done. The application of the Electronic Transactions Act to insurance presents particular issues. There is a risk that online insurance, or insurance arranged through electronic communications, will lead to unfairness in insurance contracts. There is a significant information imbalance between consumers and insurers. Insureds are generally unfamiliar with the intricacies of insurance, while insurers are experts. Online insurance decreases the role of insurance intermediaries, who often acted to lessen the information imbalance. Second, the absence of intermediaries, and the speed of commercial interaction online, increases the risk of an invalid contract due to the absence of consent by the consumer, or a lack of understanding of the product by the insured. Third, in a commercial sense, there are risks of over insurance, inappropriate insurance, insurance which is too expensive for the consumer’s needs, a failure to buy relevant insurance and failure to communicate material changes to insurers.

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The Electronic Transactions Act provides that if a Commonwealth law requires a notice to be provided in writing, it may also be given by means of electronic communication if the relevant recipient consents: section 9(1)(d). The issues that may arise in considering the application of the Electronic Transactions Act in the context of disclosure by the insurer include: —— what constitutes the consent of the insured to a communication by electronic communication; —— what is an ‘electronic communication’; —— what is meant by ‘readily accessible’; and —— has the insurer complied with its obligation under the ICA to ‘clearly inform’. Consent may be express or implied. ‘Consent’ is defined in section 5 of the ­Electronic Transactions Act to include ‘consent that can reasonably be inferred from the conduct of the person concerned’. The consent must exist at the time the information was given, so a prudent insurer, intending to act electronically, would ensure early in the process compendious consent is obtained from the insured. There may be an argument, absent express consent, that a course of dealing electronically may give rise to implied consent. Such a concept is well known to the common law and, indeed, in an analogous context, is part of the rationale behind the postal acceptance rule. An ‘electronic communication’ is defined relevantly in section 5 to mean ‘a communication of information in the form of data, text or images by means of guided and/or unguided electromagnetic energy’. Obviously, an email is an electronic communication. However, many other forms of the provision of information electronically do not so obviously fall within the definition, for example, use of a dropbox112 or making documents available via a hyperlink in an email.113 ASIC has recently amended the requirements relating to digital disclosure by financial service providers. Most disclosures required under Parts 7.6–7.9 of the Corporations Act can be delivered digitally, including Product Disclosure ­Statements (PDS), Financial Services Guides and Statements of Advice. By two instruments passed in July 2015, ASIC has made some significant changes that will promote wider use of digital disclosure methods and, it seems, encourage the use of more innovative PDS’s, for example interactive PDSs and the use of gamification. This is balanced by ‘good practice guidance’ to help ensure clients continue to receive clear, concise and effective information when disclosures are delivered digitally and that consumer protections are retained in the digital environment (see Regulatory Guide 221: Facilitating digital financial services disclosures).

112 In Conveyor & General Engineering Pty Ltd v Basetec Services Pty Ltd [2014] QSC 30, the Court held that it was not. ‘None of the data, text or images within the documents in the dropbox was itself electronically communicated, or in other words communicated “by guided or unguided electromagnetic energy”. Rather, there was an electronic communication of the means by which other information in electronic form could be found, read and downloaded at and from the dropbox website’. (at [28]) 113  Similar arguments would apply to a hyperlink.

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H. Conclusion While an insured’s obligation of utmost good faith has, over the years, received frequent judicial attention and legislative definition, both in the form of the imposition of a general duty and more particular provisions relating to different stages of the negotiation and performance of an insurance contract, an insurer’s obligation of utmost good faith has received relatively scant attention. It is arguable that while the history of insurance law was jealously protective of the position of insurers, reflecting perhaps an insurer’s vulnerability to the knowledge by insureds of the risk sought to be covered, insurers now have access to better information and are better able to assess and define risk, often with reference to mass policies rather than a policy to cover a particular venture. Flood insurance is a good example: the sheer quantity of available insureds and claim information allows insurers to draft policies that carefully craft the risk to produce a suitable actuarial outcome. For the individual insured, however, this has the consequence that a policy may have a risk carve out the insured intended and believed was covered. The obligations of insurers discussed in section 111 suggest considerable scope in the statutory provisions for further argument and under utilisation of the remedies for insureds presently available.

IV.  Time for Some Catch Up A.  Contracts Not Subject to the ICA The ICA does not apply to contracts and proposed contracts that fall outside the scope of section 8 or are listed in section 9, including reinsurance contracts, contracts to which the MIA 1909 applies, private health insurance and compulsory workers’ compensation and third party motor vehicle personal injury. Should any of these be brought into the ICA fold? Alternatively, should the ­legislation governing them be amended to apply the ICA or certain aspects of it to them?

i.  Marine Insurance The Marine Insurance Act 1906 (UK) (MIA 1906 UK) was a codification of the common law that applied to all insurance contracts. In Australia, the MIA 1909 copied the MIA 1906 UK in most respects. However, one respect in which it apparently differed is that MIA 1909 is said to have codified the law of marine insurance when enacted, whereas MIA 1906 UK codified the English common law. The MIA 1909 does not appear to have been applied beyond marine insurance. Section 4 of the MIA 1909 specifically preserves the rules of the common law except to the extent of inconsistency with the provisions of the Act. It appears to

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be the case that the Australian common law on disclosure has not substantially deviated from the principles set out in the provisions of MIA 1909. The question as to which of the MIA 1909 or the ICA applies in a particular set of circumstances is not always easy to answer.114 The inclusion of section 9A in the ICA in 1998 helped to establish the boundary line. Under section 9A, contracts of marine insurance made in respect of pleasure craft owned legally and beneficially by one or more individuals are covered by the ICA, not the MIA 1909. Section 9A(2) defines a ‘pleasure craft’ for the purposes of the ICA. Minor, irregular and infrequent use of a pleasure craft for purposes other than recreational or sporting activities will not preclude a relevant contract of insurance from falling under the provisions of the ICA. On 21 January 2000, the Commonwealth Attorney-General, the Hon Daryl Williams AM QC MP, asked the ALRC to review the MIA, taking into account, amongst other things: ‘the desirability of having a regime consistent with international practice in the marine insurance industry, and whether any change might result in a competitive disadvantage for the Australian insurance industry’. In the Review of the Marine Insurance Act 1909 (Cth) (ALRC Report No 91, 2001) the ALRC recommended, amongst other things, that: a) the test of materiality be retained; b) a policyholder be required only to disclose those circumstances which it knows to be material or which a reasonable person in its position would know to be material: [1.30]; c) in the case of fraud, the insurer be entitled to avoid the contract and keep the premium: [1.31]; d) except in the case of fraud (at [1.31]): (i) the insurer be ‘no longer entitled to avoid any liability unless it was actually induced by the non-disclosure … to enter into the contract’; (ii) ‘If the non-disclosure is not fraudulent but the insurer would not have entered into the contract at all, the insurer is entitled to avoid the policy but must return the premium’; (iii) If the insurer ‘would have entered into the contract but on different terms, the insurer is not relieved from liability under the contract as a whole. However, it does not have to indemnify the insured for any loss attributable to the matter which was the subject of … non-disclosure, and can modify any liability it does have to the insured to take into account any additional premiums, deductible or excess that may have been imposed’.

114 

Gibbs v Mercantile Mutual Insurance (Australia) Ltd [2003] HCA 39; (2003) 214 CLR 604.

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The ALRC said in its report (at [1.13]) that although its recommendations would bring the MIA and ICA regimes closer together: the familiarity of practitioners both within Australia and overseas with the basic structure of the MIA warrants its retention as a separate scheme as the amendments are more readily identifiable and accommodated by those practitioners. Furthermore, if all marine insurance contracts were covered by the ICA regime, many sections of the MIA would have to be re-enacted in the ICA to retain certain distinctive provisions that underpin marine insurance contracts both in Australia and in other countries whose legislation is based on the Marine Insurance Act 1906 of the United Kingdom. Accordingly, the Commission does not recommend the repeal of the MIA.

Since then: Nothing happened. So today the MIA 1909 is virtually identical to the MIA 1909 enacted a century ago in different times and circumstances. It is time the MIA 1909 non-disclosure regime was brought up to date and into line with the ICA. That would also bring the MIA 1909 closer to the modern UK regime, in particular, the Consumer Insurance (Disclosure and Representations) Act 2012, the Insurance Act 2015 and the Third Parties (Rights against Insurers) Act 2010.

ii. Reinsurance The Australian common law of disclosure is relevant to insurance contracts to which the ICA does not apply,115 including reinsurance. It is ostensibly the same as it was in and around the enactment of MIA 1909. If left alone, it will remain way out of step with the reformed laws in Australia and overseas. Reinsurance was not the primary focus of the ALRC when considering reform prior to the ICA: The Commission’s main concern is with issues arising from the relationship between direct insurer and insured. It is this relationship which is the prime focus of the reference. Nonetheless, recommendations concerning the relationship between insurer and insured may have indirect effects on reinsurance. In formulating its recommendations, the Commission has paid careful attention to the need to ensure that they do not have significant adverse effects on the availability or cost of reinsurance. That would not be in the interests of the insuring public.116

In choosing not to refer reinsurance to the ALRC there was confidence that the Australian common law was in line with the English common law. That has now changed with the commencement of the Insurance Act 2015. Reinsurance contracts are not infrequently expressly made subject to the ICA, particularly when dealing with the reinsurance of captives. It is important that reinsurance be back to back with the underlying direct cover that is subject to the

115  116 

See ss 8 and 9 of the ICA. ALRC 20, at [10].

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ICA. To avoid gaps the reinsurance is made subject to the ICA mutatis mutandis. This has been acceptable to many reinsurers who are well versed and comfortable with the ICA.

B.  Contracts Subject to the ICA Having regard to developments internationally and to the object of the ICA as articulated in its Long Title, is there scope for reform of any aspects of the ICA policyholder disclosure regime(s)? In particular, should: 1. An insured have a further modified duty of disclosure and duty not to misrepresent in relation to an eligible contract of insurance (namely, motor vehicle, home buildings, home contents, sickness and accident, consumer credit and travel insurance)? Has the regime under sections 21A and 21B of the ICA kept pace with developments elsewhere? For example, should there be a duty for an insured under an eligible contract of insurance to take ‘reasonable care’ not to make a misrepresentation similar to that in sections 2 and 3 of the Consumer Insurance (Disclosure and Representations) Act 2012 (UK)? 2. The range of eligible contracts of insurance be broadened? For example, should certain contracts of life insurance which are risk based and commonly effected by policy owners or life insureds (and those for the benefit of third party beneficiaries) be eligible contracts of insurance? 3. The questions of knowledge of an insured and knowledge of an insurer be the subject of further clarification under the ICA? Should there be further clarity around corporate as opposed to individual knowledge and knowledge through an agent or employee? 4. An insurer’s remedy for non-disclosure depend on whether non-disclosure is innocent or negligent or perhaps grossly negligent? Should an insurer’s remedy for negligent non-disclosure be a reduction by the proportion that the actual premium charged by the insurer bears to the premium the insurer would have charged if there had been proper disclosure? So, for example, if an insurer charged premium of $1,000 and would have charged premium of $2,000 if there had been proper disclosure, the amount payable for any claim under the policy will be halved.

V. Conclusion Lord Mansfield decided Carter v Boehm before Australia was born (insurance lawwise). Australia was not way ahead of the game when the ICA came into effect 30 years ago; the ICA reform was well overdue. But it was well ahead of the rest

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of the world in redressing the balance between the interests of insurers, insureds and other members of the public carefully and comprehensively, amongst other things, by limiting an insurer’s remedies for breach of an insured’s pre-contractual duty of disclosure. With recent insurance law reform in other parts of the world, it is time Australia looked again at achieving the balance sought by the Long Title to the ICA for all contracts of insurance within the Commonwealth of Australia’s reach.

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6 Pre-contractual Duties in the UK Insurance Law after 2015: Old (or New?) Wine in New Bottles? YONG QIANG HAN

Neither do men put new wine into old bottles: else the bottles break, and the wine runneth out, and the bottles perish: but they put new wine into new bottles, and both are preserved. Matthew 9:17, The Bible (King James Version)1

I. Introduction ‘Anyone who talks about old wine in new bottles nowadays is referring to any attempt to pass something old off as new.’2 This quotation here certainly does not imply that the UK Parliament harboured such passing-off intention in the Consumer Insurance (Disclosure and Representations) Act 2012 (‘CIDRA’) and the Insurance Act 2015, both of which are essentially applicable in the whole UK (England and Wales, Scotland and Northern Ireland). Nor did the (English) Law Commission and the Scottish Law Commission who jointly led the insurance law reform over almost 10 years since 2006. Nevertheless, not infrequently, commentators in or outside common law jurisdictions speak or write of what is thought of as the ‘new duty’3 to make a fair presentation of the risk, or state, inadvertently or otherwise, that the duty of utmost good faith is replaced by this ‘new’ duty.4 1 

The quotation here is only for etymological purpose. It is not intended to imply comments. D Crystal, Begat: The King James Bible and the English Language (Oxford, OUP, 2010) 239. 3  D Hertzell, ‘The Insurance Act 2015: Background and Philosophy’, in M Clarke and B Soyer (eds), The Insurance Act 2015: A New Regime for Commercial and Marine Insurance Law (London, Informa, 2016) 7. Meanwhile, Hertzell noted, at page 8, that ‘The Law Commissions decided to retain the obligation to volunteer information for all insured who are not consumers—the so-called duty of disclosure.’ 4  P Gregoire, ‘The UK Insurance Act 2015 and Its Impact on the Hong Kong Insurance Market’ (2016) 6 Hong Kong Lawyer 36, 37: ‘The UK Act re-dresses this imbalance [within the old law], by replacing the insured’s duty of disclosure with a new duty requiring the insured to make “a fair presentation of the risk”.’ 2 

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It seems more so in the many e-bulletins of law firms and in corporate briefs of some insurance companies. The influence of such understanding, particularly of the Insurance Act 2015, on the wider knowledge or understanding of the two Acts within and outside common law jurisdictions, cannot be taken lightly. Given that there are already ample formal comments on the two Acts,5 this chapter has the moderate aim of investigating a basic point about the reform: what is actually or apparently new in the reformed law on pre-contractual duties, and what still remains old or unchanged? An old legal rule is not necessarily less progressive or less desirable than the new one, but to tell them apart is certainly relevant. The extent to which a common law rule is old is only relative. The Carter v Boehm6 rules are of course old, so is the Marine Insurance Act 1906, but aspects of both such as the test of materiality for pre-contractual disclosure became settled only less than 25 years ago. Until the recent law reform, the consequence of policyholder’s (or the insured’s)7 non-disclosure and/or misrepresentation is insurer’s avoidance of insurance contract. Only in the late 1990s did courts begin to express hostile views toward the draconian remedy of avoidance available to insurers.8 Therefore attempts were made to reform this aspect of English insurance law in the 1950s and the 1980s, but the reform proposals were aborted on both occasions. In 2006, the (English) Law Commission and the Scottish Law Commission jointly re-launched the insurance contract law reform project. Within almost 10 years, the resurrected law reform culminated in the two Acts. The CIDRA 2012 and the Insurance Act 2015 have brought substantial changes, actual or apparent, to the old legal rules on policyholder’s pre-contractual duty of disclosure, the fundamentals of which have been entrenched since Carter v Boehm. It happens that the Insurance Act 2015 took effect (on 12 August 2016) 250 years after Lord ­Mansfield’s judgment in Carter v Boehm. What follows in this chapter is an overview of the requirement of good faith which purportedly originated from Carter v Boehm. Then it lays out major rules on policyholder’s pre-contractual duty under the CIDRA 2012 and the Insurance Act 2015. Where it is necessary, this is done in comparison with aspects of the ­pre-reform old rules. After this, the discussion shifts to insurer’s pre-contractual duty, as discussed opaquely in the House of Lords La Banque Financière de la Cité SA v Wetsgate Insurance Co Ltd  9 and partly provided for in the Insurance Act 2015. 5 R Merkin and O Gurses, ‘The Insurance Act 2015: Rebalancing the Interests of Insurer and Assured’ (2015) 78 MLR 1004; J Lowry and P Rawlings, ‘“That wicked rule, that evil doctrine …”: Reforming the Law on Disclosure in Insurance Contracts’ (2012) 75 MLR 1099. In particular, the collection of papers in M Clarke and B Soyer (eds), The Insurance Act 2015: A New Regime for Commercial and Marine Insurance Law (London, Informa, 2016). 6  Carter v Boehm (1766) 3 Burrow 1905. 7  This chapter does not distinguish ‘policyholder’ from ‘insured’. 8  P Eggers, ‘The Fair Presentation of Commercial Risks under the Insurance Act 2015’ in M Clarke and B Soyer eds, The Insurance Act 2015: A New Regime for Commercial and Marine Insurance Law (London, Informa, 2016) 12. 9  La Banque Financière de la Cité SA v Wetsgate Insurance Co Ltd [1989] 2 All ER 952 (HL); [1990] 2 ALL ER 947 (HL); [1991] 2 AC 249 (HL).

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The conclusion summarises what is new and what is old in the CIDRA 2012 and the Insurance Act 2015 in respect of pre-contractual duties, and more importantly explains the force driving such changes.

II.  Overview of Utmost Good Faith A.  The Obscure Origin in Common Law In English insurance law, the entrenched principle of ‘utmost good faith’ and the doctrine of policyholder’s pre-contractual duty of disclosure (of material information, broadly speaking) have been widely—but not unanimously as is noted below—believed to have their common law origin in Carter v Boehm. Numerous subsequent cases affirmed or followed the principle and the doctrine. But the status of Carter v Boehm as the origin of the requirement of utmost good faith is not free from doubt. This is firstly because Lord Mansfield in Carter v Boehm did not mention or discuss ‘utmost good faith’; instead what he discussed in relation thereto was ‘good faith’. Second, there are different views about where the origin of utmost good faith or uberrima fides really is. It is submitted that The first recorded use of the phrase in the law reports was by Lord Commissioner Rolfe (later Lord Cranworth LC) in Dalglish v Jarvie (1850) 2 Mac & G 231 at 243 …; the phrase was however already current by that date as the judgment shows.10

According to Bennett, prior to Carter v Boehm there had been ‘earlier authorities on utmost good faith’11—De Costa v Scandret12 (1723) in equity and Seaman v Fonereau13 (1742) at common law. The reported judgments of both cases were very brief. In the former, a merchant having a doubtful account of his ship, insures his ship without acquainting the insurers what danger the ship was in. All that was reported of the Lord Chancellor’s ruling is as follows: The insured has not dealt fairly with the insurers. In this case he ought to have disclosed to them what intelligence he had of the ship’s being in danger, and which might induce him, at least, to fear that it was lost, though he had no certain account of it; for if this had been discovered, it is impossible to think, that the insurers would have insured the ship at so small a premium as they have done, but either would not have insured at all, or would have insisted on a larger premium, so that the concealing of this intelligence is a fraud.14

10  Manifest Shipping Co Ltd v Uni-Polaris Shipping Co Ltd (‘The Star Sea’) [2001] 1 All ER 743; [2001] UKHL 1 [44] (per Lord Hobhouse). 11  H Bennett, The Law of Marine Insurance 2nd edn (Oxford, OUP, 2006) 105. 12  De Costa v Scandret (1723) 2 P Wms 170; 24 Eng Rep (1557–1865) 686. 13  Seaman v Fonerau (1742) 2 Strange 1183; 93 Eng Rep (1378–1865) 1115. 14  De Costa v Scandret (1723) 2 P Wms 170, 170; 24 Eng Rep (1557–1865) 686, 686.

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It is unsound to regard this brief judgment as the origin of policyholder’s precontractual duty of disclosure, let alone the origin of the requirement of utmost good faith which was not mentioned in it at all. As was often the case in the court of equity, the essence of this ruling was more that the insured had ‘not dealt fairly’ with the insurers and he ‘ought to have disclosed’ the relevant information and that his concealment was a ‘fraud’ which was certainly culpable in equity, than that policyholders had a general duty of disclosure. In addition, it is perhaps not negligible that in his ruling the Lord Chancellor mentioned that ‘in this case’ the insured ought to have made disclosure. This qualifying (rather than general) statement was consistent with the equity’s practice that the decisions of the Chancery or of the Lord Chancellor ‘were basically regarded as ad hoc exercises of his power to do justice in individual cases—he was not regarded as constructing a body of rules [of generality].’15 The latter case, of common law, concerned the pre-contractual non-disclosure, by the policyholder/insured’s agent of a letter describing the weather-related risks on particular days to the voyaging ship that was insured. Despite those risks, the ship continued its voyage but was taken by the Spaniards. The adjudication at Guildhall was very briefly reported: Several brokers were examined, and proved that the agent ought to have disclosed the letter; for either the defendant would not have under-wrote, or insisted on a higher premium. And the Chief Justice was of that opinion, and declared, that as these are contracts upon chance, each party ought to know all the circumstances. And he thought it not material, that the loss was not such an one as the letter imported; for those things are to be considered in the situation of them at the time of the contract, and not to be judged of by subsequent events; he therefore thought it a strong case for the defendant [i.e. the insurer].16

From the above judgment that ‘each party to an insurance contract ought to know all the circumstances’, it can be inferred that there should be pre-contractual disclosure—and the disclosure must be mutual—of circumstances or risks even though they turn out to be unrelated to or non-causative of the actual loss. This was already close to part of Lord Mansfield’s opinion in Carter v Boehm, but it was not as full. It can be gathered from the foregoing common law case that if the pre-­ contractual duty of disclosure were the same as the requirement of utmost good faith, then in Carter v Boehm ‘Lord Mansfield restated the doctrine of utmost good faith as a doctrine of common law’.17 Meanwhile, what underlies this observation is often the relaxed equation between utmost good faith and the pre-contractual duty of disclosure, which these two pre-Carter v Boehm cases indeed concerned— but neither referred to utmost good faith: so they were not authorities or the 15  J Penner, The Law of Trusts 10th edn (Oxford, OUP, 2016) [1.5] (on the characteristics of the jurisdiction in equity and its differences from the jurisdiction in common law). 16  Seaman v Fonerau (1742) 2 Strange 1183, 1183; 93 Eng Rep (1378–1865) 1115, 1115. 17  Bennett (n 10) 105.

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origins of utmost good faith. However given that utmost good faith is so closely related to and broad enough to incorporate the pre-contractual duty of disclosure, these two pre-Carter v Boehm cases were indeed ‘earlier authorities on [—but not of—] utmost good faith’.18 On the other hand, according to MacGillivray on Insurance Law,19 the first case referring to uberrima fides was Wolff v Horncastle (1798),20 which was over three decades after Carter v Boehm (1766). The issue in this case was whether the policy in question was valid under the Marine Insurance Act 1788 (28 Geo 3, c 56), and whether the plaintiffs had insurable interests to a specified amount. Buller J delivered the lead judgment, in which he stated inter alia that ‘From the language of the two statutes, as well as the consideration that we are construing a contract uberrimae fide; viz. a policy of insurance, we must avoid bearing harder upon the Plaintiffs than is absolutely necessary.’21 From this statement it can be inferred that prior to Wolff v Horncastle22 an insurance contract had already been recognised as a contract requiring utmost good faith. But this case gave no earlier authority for the recognition as such, nor did it cite Carter v Boehm as the authority or the origin of the requirement of utmost good faith. This means that more than 30 years after 1766, Carter v Boehm still did not seem to be very important as far as the origin and relevance of the phrase or terminology utmost good faith is concerned. But this is perhaps not very surprising: Wolff v Horncastle did not concern the pre-contractual duty of disclosure—and hence there was no explanation of the meaning of utmost good faith. Just as Rome was not built in a day, the landmark status of a case or precedent such as Carter v Boehm is not always immediately recognised; for Carter v Boehm that was developed through generations of judges.23 For the requirement of utmost good faith or perhaps any legal requirement, its meaning matters more than its origin.

B.  The Specious Meaning What is no less, if not more, important, than the origin of utmost good faith in insurance law is certainly its meaning and particularly its difference, if any, from (plain or ordinary) good faith. Again, this is also contestable. Prima facie, it seems to be only a difference in the degree of good faith, and indeed this was noted by Lord Hobhouse, who opined that ‘The connotation [of the word ‘utmost’]

18 

ibid, 105, emphasis added. Legh-Jones, J Birds and D Owen, MacGillivray on Insurance Law 8th edn (London, Sweet & Maxwell, 2008) 435 fn 1; see also J Birds, B Lynch and S Milnes, MacGillivray on Insurance Law 13th edn (London, Sweet & Maxwell, 2015) 453, fn 4. 20  Wolff v Horncastle (1798) 1 Bos & Pul 316. 21  ibid 316, 322. 22  ibid 316. 23  R Hasson, ‘The Doctrine of Uberrima Fides in Insurance Law—A Critical Evaluation’ (1969) 32 MLR 615; republished as Chapter 4 in this book with permission. 19  N

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appears to be the most extensive, rather than the greatest, good faith.’24 At least two points can be made about this opinion. First, this is consistent with and perhaps enlightened by the finding, in a South African case referred to by Lord ­Hobhouse, that there is no magic in the expression uberrima fides. There are no degrees of good faith. It is entirely inconceivable that there could be a little, more or most (utmost) good faith. The distinction is between good faith or bad faith. There is no room for uberrima fides as a third category of faith … uberrima fides is not a juristic terms with a precise connotation. It cannot be sued as a yardstick with a precise legal meaning.25

One year before this, in English insurance law, Stephenson LJ had already noted: It is not necessary, even if it were possible to go into degrees of good faith, or the question what degree of good faith may apply to other contracts. It is enough that much more than an absence of bad faith is required of both parties to all contracts of insurance.26

Second, in what sense is ‘utmost good faith’ the most extensive among all ‘good faith’? To this query, one might argue that utmost good faith is always more— hence the most—extensive than (ordinary) good faith because utmost good faith applies or binds pre-contractually, the underlying point in contrast being that good faith applies or binds post-contractually. This immediately runs into a problem of logic. Contrary to Lord Mansfield’s opinion in Carter v Boehm that ‘The governing principle [of good faith] is applicable to all contracts and dealings’, English contract law does not recognise a general requirement or principle of good faith at all.27 Therefore the problem is that, as a matter of comparison, unless the superlative ‘utmost’ carries substantive meanings—but it is ‘only a form of hyperbole’28—it is illogical to have ‘utmost good faith’ which is always the more extensive, due to its pre-contractual binding effect, than ordinary good faith, a general requirement which however is not recognised in English contract law. Therefore it is not surprising that whether there is a difference between ‘good faith’

24  Manifest Shipping Co Ltd v Uni-Polaris Shipping Co Ltd (‘The Star Sea’) [2001] 1 All ER 743; [2001] UKHL 1 [44] (per Lord Hobhouse). 25  Mutual and Federal Ins Co v Oudtshoorn Municipality 1985 (1) SA 419, 433 (per Joubert JA). 26  Container Transport International Inc. v Oceanus Mutual Underwriting Assn. (Bermuda) Ltd [1984] 1 Llloyd’s Rep 476 at 525. 27  Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd [1989] 1 QB 433 (CA), 439: ‘English law has, characteristically, committed itself to no such overriding principle [of good faith] but has developed piecemeal solutions in response to demonstrated problems of unfairness.’ (per the then Bingham L). Although the High Court in Yam Seng PTE Ltd v International Trade Corporation Ltd [2013] EWHC 111 (QB) at [153] has suggested that ‘the traditional English hostility towards a doctrine of good faith in the performance of contracts, to the extent that it still persists, is misplaced’ (per ­Leggatt J), soon afterwards the Court of Appeal in Mid Essex Hospital Services NHS Trust v Compass Group UK and Ireland Ltd (t/a Medirest) [2013] EWCA Civ 200 at [105] reiterated that ‘there is no general doctrine of “good faith” in English contract law’ (per Jackson LJ). 28  For this criticism in more detail, see R Powell, ‘Good Faith in Contracts’ (1956) 9 Current Legal Problems 16, 25–26.

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and ‘utmost good faith’ is unclear to Aikens LJ29 and that the two modern concepts are viewed as interchangeable.30 Nor shall the broad requirement or principle of utmost good faith simply be equated with the specific pre-contractual duty of disclosure of policyholders. As codified in the Marine Insurance Act (MIA) 1906 section 17, a contract of insurance is based upon utmost good faith. The requirement of utmost good faith is binding to both policyholders and insurers, not only at the pre-contractual stage but also post-contractually.31 The MIA 1906 section 18 on the pre-contractual duty of disclosure, section 20 on the pre-contractual duty not to misrepresent and the attendants rules, are not exhaustive listings of the MIA 1906 section 17 requirement of utmost good faith.32

C. The Statutory Change to the Requirement of Utmost Good Faith The phrase and requirement of ‘utmost good faith’ or ‘uberrima fides’, was codified into the MIA 1906 section 17, which until the recent reform read: ‘A contract of marine insurance is a contract based upon the utmost good faith, and, if the utmost good faith be not observed by either party, the contract may be avoided by the other party.’ Also codified into the MIA 1906 were the policyholder’s two pre-contractual duties under the umbrella of utmost good faith: the section 18 duty of disclosure which is particular to insurance, and the section 20 duty not to misrepresent which for long has been part of the general contract law. Although the requirement of utmost good faith and the two duties are codified in a ‘marine’ insurance act, they and the rules attendant thereto apply not only in marine insurance but also in non-marine insurance.33 This is mainly because many nonmarine insurance legal rules, such as those on policyholder’s pre-contractual duty of disclosure, originate from marine insurance law and that is where the two sets of rules overlap. It is also because, unlike in civil law jurisdictions, the title of an Act in the UK does not always formalistically indicate its scope of applicability and/or of its content. 29  R Aikens LJ, ‘The Post-Contract Duty of Good Faith in Insurance Contracts: Is There a Problem that Needs A Solution?’ (2010) 5 Journal of Business Law 379. 30 G Swaby and P Richards, ‘Insurance Reforms: Rebalancing the Kilter?’ (2011) 6 Journal of Business Law 535. 31  K/S Merc-Scandia XXXXII v Lloyd’s Underwriters (The Mercandian Continent) [2001] EWCA Civ 1275, [40] (post-contract duty of good faith is ‘a continuing one’, per Longmore LJ). 32  The Star Sea [2001] 1 All ER (Comm) 193, 198, 209, 221; see also ERH Ivamy, Chalmers’ Marine Insurance Act 1906 10th edn (London, Butterworths, 1993), citing Stephenson LJ in Container Transport International Inc. v. Oceanus Mutual U/W Association (Bermuda) Ltd. [1984] 1 Lloyd’s Rep 476 (CA), 525. 33  The provisions of the MIA 1906 on the duty of good faith were held to apply to both marine and non-marine insurance contracts. See Pan Atlantic Insurance Co. Ltd. v Pine Top Insurance Co Ltd [1994] 2 Lloyd’s Rep. 427, 447, Lord Mustill; The Star Sea [2001] UKHL 1 [47] (per Lord Hobhouse); HIH Casualty & General Insurance Ltd v Chase Manhattan Bank [2003] UKHL 6 [42] (per Lord Hoffmann).

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As a result of the changes thereto stipulated in the CIDRA 2012 section 2(5) and the Insurance Act 2015 section 14 which abolishes avoidance of insurance contracts on the ground of non-observance with utmost good faith, now the MIA 1907 ­section 17 only reads: ‘A contract of marine insurance is a contract based upon the utmost good faith.’ This is so for both consumer insurance and business ­insurance—and the rest is deleted or abolished. The requirement of utmost good faith under the MIA 1906 section 17 is no longer quite the same as it was, but the phrase or terminology has remained despite its untraceable origin and specious meaning as has been noted in the twenty-first century. This perhaps verifies ­Hasson’s observation about the magical effect of couching a phrase or terminology in Latin.34 The practical effect of the change to the pre-reform MIA 1906 s­ection 17 is obvious. On the one hand, the intention of the change is that ‘good faith will remain an interpretative principle, with section 17 of the 1906 Act and the common law continuing to provide that insurance contracts are contracts of good faith.’35 On the other hand, insurers can no longer use the new section 17 as a ground, but certainly not the sole ground, for avoiding the contract in the case of alleged non-disclosure and/or misrepresentation by the policyholder as they could do under the old section 17 of the MIA 1906. Less obviously, First, section 17 may itself be elevated into the status of an Australian-style implied term, with damages available for its breach … although … that cannot easily apply to a precontractual failure to disclose by insurers, given that at that stage there is no contract into which a term can be implied. Secondly, section 17 may be used as the basis for implying specific terms into a contract of insurance, a step which the courts had begun to take even before the passing of the Insurance Act 2015.’ Thirdly, the courts might adopt entirely fresh remedies, eg, an estoppel which precludes a party—typically, the insurer—from relying upon a policy term or other right that might otherwise be open to that party.36

Under the pre-reform MIA 1906 ss 18 and 20, the duty of disclosure and the duty not to misrepresent are conceptually different. For long, however, they have been treated as one and the same in English insurance law and often misrepresentation is subsumed into non-disclosure.37 This is no longer conceptually tenable due more to the CIDRA 2012 than to the Insurance Act 2015.

III.  Policyholder’s Pre-contractual Duty Previously under the pre-reform Marine Insurance Act 1906, a policyholder had a duty of disclosure and a duty not to misrepresent. The latter has been part of

34 

Hasson (n 23). Insurance Act 2015 Explanatory Notes [116]. 36  Merkin and Gurses (n 5) 1008. 37 See the Introduction chapter in this book, and also Zurich General Accident and Liability Insurance Co v Leven: 1940 SC 406, 415 cited below, as well as Birds, Birds’ Modern Insurance Law 10th edn (London, Sweet & Maxwell, 2016) 119–20. 35 

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English general contract law, under which however a party to a contract has no duty to disclose or volunteer information. In insurance law, the breach of either duty entitles the insurer to avoid the contract, which in this sense is ‘voidable’ at the option of the insurer38 and if avoided the contract becomes void or invalid from the start. These rules are applicable to all insurance,39 including non-marine insurance and consumer insurance. For consumer insurance, the EU consumer law and EU insurance directives may have implications, but domestically the Unfair Contract Terms Act 1967 did not apply to insurance. So consumer protection in the common law of insurance has been fairly weak until the recent insurance law reform has designed different regimes for consumer insurance to which the CIDRA 2012 applies and business insurance to which the Insurance Act 2015 applies in respect of pre-contractual duties. ‘The CIDRA [2012] makes the greatest changes to the MIA 1906’,40 but it codifies what the Financial Ombudsman Service already does.41 The Insurance Act 2015 brought significant but not fundamental changes in this respect for business insurance.

A.  The Duty in Consumer Insurance: Fundamental Changes i.  A Change of the Duty The CIDRA 2012 has abolished, for consumer policyholders, the duty to volunteer or disclose information as required under the Marine Insurance Act 1906. What has replaced this duty is provided for in the CIDRA 2012 section 2(2): ‘It is the duty of the consumer to take reasonable care not to make a misrepresentation to the insurer.’ Although section 2 ‘makes provision about disclosure and representations by a consumer to an insurer before a consumer insurance contract is entered into or varied’ and the CIDRA 2012 is ‘an Act to make provision about disclosure and representations in connection with consumer insurance contracts’, the said section 2(2) clearly brings a fundamental change to policyholder’s pre-contractual duty in consumer insurance and it is not just a matter of renaming the old duty of disclosure. Now under the CIDRA 2012 section 2(2), a consumer policyholder has the pre-contractual duty only to take reasonable care not to misrepresent to the insurer, which means more often the old duty of disclosure no longer binds consumer policyholders. Meanwhile, it must be noted that it is a duty ‘to take reasonable care not to make a misrepresentation’ (to the insurer), not a duty not to make a misrepresentation, nor a duty to take reasonable care in not making a misrepresentation. In other words, it is a duty to take reasonable care with a view not to make 38 

Ivamy (n 33) 25, citing Morrison v Universal Marine Insurance Co (1873) LR 8 Ex Ch 197. Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co Ltd [1995] 1AC 501, 518; see also Manifest Shipping Co Ltd v Uni-Polaris Shipping Co Ltd (‘The Star Sea’) [2001] 1 All ER 743; [2001] UKHL 1 [47]. 40  Hertzell (n 3) 6. 41  Lowry and Rawlings (n 5) 1121. 39 

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­ isrepresentation. ‘The essential question is: did the consumer take reasonable m care? … There is no remedy if the consumer’s misrepresentation was reasonable’.42 If the consumer insured has taken reasonable care for such a purpose but still made a misrepresentation, the misrepresentation per se is unlikely to be a breach of duty. This can be gathered from the CIDRA 2012 provision, concerning remedy following a breach of duty, that an insurer has a remedy against a consumer for a misrepresentation made by the consumer before a consumer insurance contract was entered into or varied only if—(a) the consumer made the misrepresentation in breach of the duty set out in section 2(2), and (b) …43

This change made through section 2 is based on the justifiable but underappreciated difference between disclosure and representation or between nondisclosure and misrepresentation. The difference has been stated as follows by Lord President Normand in Zurich General Accident and Liability Insurance Co v Leven: In general, non-disclosure means that you have failed to disclose something which was not the subject of a question but which was known to you and which you ought to have considered for yourself would be material, whereas a representation is something directly said in answer to a specific question …44

But until the CIDRA 2012, the difference has not been legally or practically important in English insurance law particularly.45 Now with the CIDRA 2012 section 2(2) in force, however, it is no longer conceptually tenable to continue to disregard the difference. Meanwhile, it must be noted that the difference still will not mean much practical difference for two reasons. First, non-disclosure and misrepresentation might overlap: a representation of ‘half-truth’ is a misrepresentation of the full truth, and also a non-disclosure of the other half that is not represented. This perhaps also tells why the CIDRA 2012 applies to ‘disclosure and representations’. Second, although the substantial changes described above are friendly to consumer policyholders, it is unlikely that there will be a surge of consumer insurance cases in courts. This is because consumer insurance disputes mostly have been, and will continue to be, resolved out of court and by the insurance division of the Financial Ombudsman Service (since 2001, and previously by its insurance predecessor the Insurance Ombudsman Bureau from 1981 to 2001). This is a mechanism for alternative dispute 42 

Hertzell (n 3) 6. CIDRA 2012 s 4(1), emphasis added. 44  Zurich General Accident and Liability Insurance Co v Leven: 1940 SC 406, 415. Although this is a Scottish case, the point above holds water also in English insurance law from which the Scottish insurance law is not fundamentally different particularly on the matter of pre-contractual duties. Perhaps that is why the (English) Law Commission and the Scottish different carried out the insurance law reform together and why this particular point amongst others has been quoted in their joint consultation paper Insurance Contract Law: The Business Insured’s Duty of Disclosure and the Law of Warranties (2012) [2.10]. 45  See the Introduction in this book. 43 

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resolution, and the Financial Ombudsman Service does not have to apply the black-letter law legalistically—though it often takes the law into consideration— as long as ‘[a] complaint is to be determined by reference to what is, in the opinion of the ombudsman, fair and reasonable in all the circumstances of the case.’46 Therefore it is unlikely that the Financial Ombudsman Service will hinge its decision on a fine distinction between non-disclosure and misrepresentations. Under the CIDRA 2012, ‘whether or not a consumer has taken reasonable care not to make a misrepresentation is to be determined in the light of all the relevant circumstances.’47 The standard of care required is that of a reasonable consumer,48 and it is to be presumed, unless the contrary is shown, that the consumer had the knowledge of a reasonable consumer.49 This is also a fundamental change from the old abolished rule whereby it was ‘the judgement of a prudent insurer’50 that mattered. Meanwhile, the ‘reasonable consumer’ standard of care in consumer insurance is subject to the CIDRA 2012 section 3(4) and section 3(5). According to section 3(4), if the insurer was, or ought to have been, aware of any particular characteristics or circumstances of the actual consumer, those are to be taken into account. According to section 3(5), a misrepresentation made dishonestly is always to be taken as showing lack of reasonable care.51

ii.  Breach and the Changes in Remedies Another fundamental change to the old law on policyholder’s non-disclosure is the remedies for the insurer in the case of breach of duty by the policyholder. Basically, for insurers, the single remedy of avoidance (by the insurer) of contract under the MIA 1906 is supplemented by a variety of remedies. Depending on the degree of culpability of the policyholder in breach of the pre-contractual duty, now the multiple remedies available for the insurer include avoidance, deemed variation of the underwriting terms, and proportional payment. The change is made in respect of both consumer insurance and non-consumer or business insurance. For remedies, according to the CIDRA 2012 section 4(1), an insurer has a remedy against a consumer for a misrepresentation made by the consumer before a consumer insurance contract was entered into or varied only if the consumer policyholder made the misrepresentation in breach of the duty under section 2(2) to take reasonable care not to make a misrepresentation to the insurer, and the insurer shows that without the misrepresentation that insurer would not have entered into the contract (or agreed to the variation) at all or would have done so only on different terms. So a misrepresentation fitting section 4(1) must satisfy the

46 

Financial Services and Market Act 2000 s 228(2). CIDRA 2012, s 3(1). 48  ibid, s 3(3). 49  ibid, s 5(5)(a). 50  Marine Insurance Act ss 18(2), 20(2). 51  CIDRA 2012, s 3(5). 47 

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requirement of inducement for the law of misrepresentation under general contract law. Besides, it must be noted that not just any misrepresentation, whether blameworthy or not, will fit with section 4(1): it must be a misrepresentation and it must be made in breach of the section 2(2) duty. ‘A misrepresentation for which the insurer has a remedy against the consumer is referred to in this Act as a “qualifying misrepresentation”.’52 A qualifying misrepresentation is either deliberate or reckless, or careless.53 Therefore, a qualifying misrepresentation is careless if it is not deliberate or reckless.54 Hence an innocent misrepresentation is not a ‘qualifying’ one. According to the CIDRA 2012 section 5(2), it is deliberate or reckless if the consumer knew that it was untrue or misleading, or did not care whether or not it was untrue or misleading, and knew that the matter to which the misrepresentation related was relevant to the insurer, or did not care whether or not it was relevant to the insurer.55 But it is to be presumed, unless the contrary is shown, that the consumer had the knowledge of a reasonable consumer, and that the consumer knew that a matter about which the insurer asked a clear and specific question was relevant to the insurer.56 The particular remedy available among a variety thereof for the insurer depends in the first place on the culpability—whether deliberate or reckless, or careless—of the breaching consumer policyholder. If a qualifying misrepresentation was deliberate or reckless, the insurer may avoid the contract and refuse all claims, and need not return any of the premiums paid, except to the extent (if any) that it would be unfair to the consumer to retain them.57 If, however, the qualifying misrepresentation was careless and the consumer policyholder claims insurance moneys, the insurer’s remedies are based on what it would have done if the consumer had complied with the section 2(2) duty to take reasonable care not to misrepresent. If the insurer would not have entered into the consumer insurance contract on any terms at all, the insurer may avoid the contract and refuse all claims, but it must refund the premiums.58 If the insurer would have entered into the consumer insurance contract on different terms (unrelated to the premium), the contract is to be treated as if it had been entered into on those different terms if the insurer so requires.59 If the insurer would have entered into the consumer insurance contract but would have charged a higher premium, the insurer may reduce proportionately the amount to be paid on a claim.60 ‘Reduce proportionately’ means that the insurer need to pay only X per cent of what it

52 

ibid, s 4(2). ibid, s 5(1). ibid, s 5(3). 55  ibid, s 5(2). 56  ibid, s 5(5). 57  ibid, Schedule 1, para 2. 58  ibid, para 5. 59  ibid, para 6. 60  ibid, para 7. 53  54 

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would otherwise have been under an obligation to pay under the terms of the contract (or under the different terms if applicable), where— X

Premium actually charged 61  100 Higher premium

If the qualifying misrepresentation was careless and the consumer policyholder does not yet claim insurance moneys, the future of the insurance contract in question is to be dealt with according to the following rules provided for in the CIDRA 2012 Schedule 2 paragraph 9. If the insurer would not have entered into the contract at all, then naturally the insurer may avoid the contract (and must return the premiums). If the insurer would have contracted on different terms or for a higher premium (or both), then in non-life insurance, either side is entitled to terminate future cover on reasonable notice, and for life insurance the insurer must continue the policy either on the existing terms or on amended terms.62 If either party terminates the contract under this paragraph, the insurer must refund any premiums paid for the terminated cover in respect of the balance of the contract term.

B.  The Duty in Business Insurance: How ‘New’ is it Post-reform? i.  Is the Duty of Fair Presentation New? The Insurance Act 2015 sections 3(1) and 3(2) provide for a seemingly new ‘duty of fair presentation (of risks)’ which replaces the MIA 1906 sections 18, 19 and 20 duty of disclosure and duty not to misrepresent. After all, the Insurance Act 2015 section 21(3) states that any rule of law to the same effect as any of sections 18, 19 and 20 of the MIA 1906 is abolished. Nevertheless the duty of fair presentation is not really or completely new. This can be seen by comparing the Insurance Act 2015 section 3(3), which defines a fair presentation, with the pre-reform MIA 1906 sections 18 and 20. The section 3(3) definition of fair presentation is as follows. 3(3) A fair presentation is one— (a) which makes the disclosure required by subsection (4), (b) which makes that disclosure in a manner which would be reasonably clear and accessible to a prudent insurer, and (c) in which every material representation as to a matter of fact is substantially correct, and every material representation as to a matter of expectation or belief is made in good faith.

61 

ibid, para 8.

62  Explanatory

Notes to the Consumer Insurance (Disclosure and Representations) Bill (274, as brought from the House of Lords on 17 January 2012), [82].

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3(4) The disclosure required is as follows, except as provided in subsection (5)— (a) disclosure of every material circumstance which the insured knows or ought to know, or (b) failing that, disclosure which gives the insurer sufficient information to put a prudent insurer on notice that it needs to make further enquiries for the purpose of revealing those material circumstances. 3(5) In the absence of enquiry, subsection (4) does not require the insured to disclose a circumstance if— (a) (b) (c) (d) (e)

it diminishes the risk, the insurer knows it, the insurer ought to know it, the insurer is presumed to know it, or it is something as to which the insurer waives information.

Under section 3(3), the duty of fair presentation still consists of the prospective insured’s disclosure defined in section 3(4) and representation described in section 3(3)(c). Under the section 3(4) definition of disclosure, the basic limb in section 3(4)(a) is not fundamentally different from the assured’s duty of disclosure in the first sentence of the MIA 1906 section 18(1) pre-reform; although section 3(4)(b) is different from that, it is only a secondary and alternative limb of disclosure. The term ‘circumstance’ includes any communication made to or information received by the insured,63 and this is the same as the pre-reform MIA 1906 section 18(5). The section 3(3)(c) description of non-misrepresentation is the same as the prereform MIA 1906 sections 20(4) and 20(5) which are two of the essential elements of the assured’s duty not to misrepresent. Even the exceptions in the Insurance Act 2015 section 3(5) are basically the same as those in the pre-reform MIA 1906 section 18(3). From these, it can be seen that although ‘the duty fair representation replaces the existing duties in relation to disclosure and representations contained in section 18, 19 and 20 of the 1906 Act, … it retains essential elements of those provisions.’64 ‘Section 3(4)(a) [of the Insurance Act 2015] effectively replicates the disclosure duty in section 18(1) of the 1906 Act’,65 and ‘the third element of the duty of representation is the duty not to make misrepresentations … it is based on section 20 of the 1906 Act.’66 ‘Exception (a) and (e) [of the Insurance Act 2015 s3(5)] replicate the relevant provisions in the 1906 Act [ss 18(3)(a) and (c)] almost exactly. The rest of the exceptions … replace similar provisions in the 1906 Act [s 18(3)(b)].’67 As to the way a fair presentation is made, it must be made ‘in a manner which would be reasonably clear and accessible to a prudent insurer’68 but it need not be made only one-off (in only one document or oral presentation). 63 

Insurance Act 2015, s 7(2). Insurance Act 2015 Explanatory Notes [40]. 65  ibid [44]. 66  ibid [47]. 67  ibid [49]. 68  Insurance Act 2015, s 3(3)(b). 64 

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As far as the foregoing layered definition of duty of fair presentation is concerned, its apparent difference from the pre-reform MIA 1906 lies in section 3(4)(b). Being secondary and alternative to the Insurance Act 2015 ­ section 3(4)(a), section 3(4)(b) is intended to operate where the insured has failed to satisfy the strict duty in section 3(4)(a) but has nevertheless disclosed enough information to put the insurers on notice that it needs to ask for further information from the insured before it makes the underwriting decision.69

The Insurance Act 2015 section 3(4)(b) seems to be a novel creation through legislation, because the MIA 1906 does not have a provision literally or functionally similar thereto. Nevertheless, section 3(4)(b) is actually not new either, because it ‘reflects the approach taken already by the courts in some cases’70 such as ­Container Transport International Inc v Oceanus Mutual Underwriting Association (Bermuda) Ltd71 and Garnat Trading & Shipping (Singapore) PTE Ltd v Baominh Insurance Co.72 ‘The duty to make a fair presentation of the risk [under the Insurance Act 2015] incorporates both the law on non-disclosure and that on representation.’73 It is ‘a re-branding and re-packaging’74 of the old pre-contractual duties in the essence. Meanwhile, the name ‘fair presentation’ is also an established phraseology in ­English insurance law: according to Merkin and Gurses, it can be found in pre1906 authorities.75 Post-1906, ‘[a] search of reported judgments shows that the phrase “fair presentation of the risk” has been used in at least 15 cases in the past ten years. This shows it is now a common part of the case law.’76

ii.  Knowledge of the Insured Under section 3(4)(a), the duty of fair presentation in terms of disclosure is ­limited to material circumstance which the insured knows or ought to know. 69 

ibid, s 7(2). Insurance Act 2015 Explanatory Notes [45]. 71  Container Transport International Inc v Oceanus Mutual Underwriting Association (Bermuda) Ltd [1984] 1 Lloyd’s LR 476. 72  Garnat Trading & Shipping (Singapore) PTE Ltd v Baominh Insurance Co [2011] EWCA Civ 773. 73  Hertzell (n 3) 8. 74  Eggers (n 8) 28. 75  Such as Bates v Hewitt (1866–67) LR 2 QB 595; Morrison v The Universal Marine Insurance Company (1872–73) LR 8 Ex 197; Blackburn v Vigors (1887) 12 App Cas 531; Harrower v Hutchinson (1869–70) LR 5 QB 584; Haywood v Rodgers (1804) 4 East 590; Ionides v Pender (1873–74) LR 9 QB 531; Sibbald v Hill (1814) II Dow 263; Anderson v Pacific Fire & Marine Insurance Co (1871–72) LR 7 CP 65. See Merkin and Gurses (n 5) note 32 at page 1010. 76  Law Commission and Scottish Law Commission, Insurance Contract Law: Business Disclosure; Warranties; Insurers’ Remedies for Fraudulent Claims; and Late Payment (LAW COM No. 353 and SCOT LAW COM No. 238, 2014) [5.50]. For example, WISE (Underwriting Agency) Ltd v Grupo Nacional Provincial SA [2004] EWCA Civ 962 [63]: ‘[T]he assured must perform his duty of disclosure properly by making a fair presentation of the risk proposed for insurance.’(per Rix LJ). Of earlier contemporary authority, for example Iron Trades Mutual v Companhia de Seguros Imperio [1991] Re LR 213 at 224: ‘If a proposer has made a fair presentation of the risk, he has discharged his duty’(per Hobhouse J). 70 

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For this purpose, section 4 provides for what is actual knowledge and what is imputed knowledge. According to section 4(2), an insured who is an individual knows only what is known to the individual and what is known to one or more of the individuals who are responsible for the insured’s insurance. According to section 4(3) an insured who is not an individual (eg a corporate entity) knows only what is known to one or more of the individuals who are part of the insured’s senior management or who are responsible for the insured’s insurance. For this purpose ‘senior management’ means those individuals who play significant roles in the making of decisions about how the insured’s activities are to be managed or organised.77 For both section 4(2) and section 4(3), an individual is responsible for the insured’s insurance if the individual participates in any capacity on behalf of the insured in the process of procuring the insured’s insurance.78 The ‘intended effect of the phrase “knows only …” is that the common law on attribution of information to the insured is replaced by the terms of the [Insurance] Act [2015].’79 A qualification to the sections 4(2) and 4(3) rules of attributing the knowledge of the individual(s) responsible for the insured’s insurance to the insured concerns confidential information known to the individual. Thus according to section 4(4), an insured is not taken to know confidential information known to an individual if the individual is the insured’s agent or is an employee thereof 80 and the information was acquired by the insured’s agent (or by an employee of that agent) through a business relationship with a person who is not connected with the contract of insurance.81 This is particularly relevant to a broker holding confidential information of many clients who are unconnected to one another for insurance matters. For the qualifying purpose, the persons ‘connected with a contract of insurance’ are the insured and any other persons for whom cover is provided by the contract, and, in the case of reinsurance, the persons who are connected with the contract of primary insurance.82 As to what an insured ‘ought to know’, section 4(6) provides that an insured ought to know what should reasonably have been revealed by a reasonable search, conducted by making enquiries or by any other means, of information available to the insured. This is so regardless of whether the insured is an individual or not. For this purpose, ‘information’ includes information held within the insured’s organisation or by any other person (such as the insured’s agent or a person for whom cover is provided by the contract of insurance).83

77 

Insurance Act 2015 s 4(8)(c). ibid, s 4(8)(b). 79  Insurance Act 2015 Explanatory Notes [54]. 80  Insurance Act 2015, s 4(8)(a): For the purposes of s 4, ‘employee’ in relation to the insured’s agent includes any individual working for the agent, whatever the capacity in which the individual acts. 81  ibid, s 4(4). 82  ibid, s 4(5). 83  ibid, s 4(7). 78 

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iii.  Knowledge of the Insurer Pursuant to s 3(5), in the absence of enquiry an insured is not required to disclose a circumstance that is actually known, or ought to be known, or is presumed to be known to the insurer. Section 5 is a provision in definition of insurer’s knowledge of the three types. Section 5(1) provides that an insurer actually knows a circumstance only if it is known to one or more of the individuals who participate, in any capacity, on behalf of the insurer in the decision whether to take the risk, and if so on what terms. This provision is intended to capture the person or people involved in making the ­particular underwriting decision—essentially the underwriter. The relevant individuals may be, for example, employees of the insurer or of the insurer’s agent. Again, the intended effect of the phrase ‘knows … only’ is that the common law on attribution of information to an insurer is replaced by the terms of the Act.84

According to section 5(2), an insurer ought to know something only if its employee or its agent knows it and ought reasonably to have passed on the relevant information to an individual mentioned in section 5(1), or alternatively the relevant information is held by the insurer and is readily available to an individual mentioned in section 5(1). The former ‘is intended to include, for example, information held by the claims department or reports produced by surveyors or medical experts for the purpose of assessing the risk.’85 The latter ‘is intended to require the relevant underwriter to make a reasonable effort to search such information as is available to them within the insurer’s organisation, such as in the insurer’s electronic records.’86 Pursuant to section 5(3), an insurer is presumed to know things which are common knowledge, and 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. The inclusion of the latter kind of things ‘is intended to be a modernisation of the reference in section 18(3)(b) of the 1906 Act to “matters which an insurer in the ordinary course of his business, as such, ought to know”.’87 The modernisation is consistent with the modern practice that ‘many underwriters work by class of business (such as property or professional indemnity insurance) rather than by industry sector (such as oil and gas).’88 Which means that ‘an insurer ought to have some insight into the industry for which it is providing insurance, but this insight may reasonably be limited to matters relevant to the type of insurance provided.’89

84 

Insurance Act 2015 Explanatory Notes [61]. ibid [63]. 86  ibid [64]. 87  ibid [67]. 88  ibid [67]. 89  ibid [67]. 85 

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iv. Materiality: Pan Atlantic still Matters In spite of the pre-reform MIA 1906 s 18(2) and s 20(2) on the test of materiality respectively in non-disclosure and in misrepresentation, the test has been controversial among insurance lawyers until Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co Ltd 90 settled the controversy as a matter of positive law. In this regard, the Insurance Act 2015 section 7(3) provides: ‘A circumstance or representation is material if it would influence the judgement of a prudent insurer in determining whether to take the risk and, if so, on what terms.’ This ‘is based on sections 18(2) and 20(2) of the 1906 Act.’91 Section 7(3) does not refer to ‘fixing the premium’ as in the pre-reform MIA 1906 section 18(2) and section 20(2). But this does not signify a change, because premium is eventually fixed also in one of the terms of the insurance contract in question. As the test of materiality under the Insurance Act 2015 is still the same as the pre-reform MIA 1906 test which was clarified in Pan Atlantic, the key points of law in this regard still stand. In relation to materiality of circumstances, the House of Lords decision of this case interprets the meaning of ‘influence the judgement’ in the pre-reform MIA 1906 sections 18(2) and 20(2). Two interpretations, hence two tests, were argued for before the Law Lords. One is the ‘decisive influence’ test, by which a prudent insurer would have made a different underwriting decision had there been disclosure and representation. The other is ‘mere influence’ test, by which a prudent insurer would want to know the circumstance(s) although its underwriting decision might not have been changed. With a bare majority of 3:2, the House of Lords in Pan Atlantic upheld the ‘mere influence’ test. The Insurance Act 2015 section 7(4) gives three examples which may be material circumstances: special or unusual facts relating to the risk; any particular concerns which led the insured to seek insurance cover for the risk; and 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. Of course these examples are illustrative but not exhaustive. Another key point of law clarified in Pan Atlantic is that an additional requirement of inducement was introduced into the law of non-disclosure although it had been only part and parcel of the law of misrepresentation. Under general contract law, an actionable misrepresentation is one which has induced the representee to enter into the contract in question. Although the pre-reform MIA 1906 section 20(2) does not have this requirement, it was implied in Pan Atlantic into the insurance law of misrepresentation, and also into the law of non-disclosure. This is aligned with the fusion of non-disclosure and misrepresentation in insurance law although, as pointed out,92 the two are conceptually different. 90 

Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co Ltd [1995] 1 AC 501 (HL). Insurance Act 2015 Explanatory Notes [74]. 92  See the Introduction in this book; also Part II.A above. 91 

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The requirement of inducement, however, is less a test of materiality than an additional requirement for avoidance of contract on the ground of non-­ disclosure or misrepresentation of circumstances of materiality. Arguably, it is more like a causation requirement, as is under the general contract law in respect of misrepresentation. This understanding is supported by the Insurance Act 2015 section 8(1)(a) on remedies against the insured’s breach of duty of fair presentation.

v.  Breach and Changes in the Remedies Like the CIDRA 2012, the Insurance Act 2015 provides for a set of structured remedies for insurers in the case of breach by the insured and the remedies range from avoidance to deemed contract to proportional payment by the insurer. The Insurance Act 2015 in the first place provides in section 8(1) that the insurer has a remedy against the insured for a breach of the duty of fair presentation only if the insurer shows that, but for the breach, the insurer would not have entered into the contract of insurance at all, or would have done so only on different terms.

It is understood that ‘this reflects the current law on inducement as developed ­following the decision in Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co Ltd.’93 A breach for which the insurer has a remedy against the insured is referred to in this Act as a ‘qualifying breach’,94 which is either deliberate or reckless, or neither deliberate nor reckless.95 A breach is deliberate or reckless if the insured knew that it was in breach of the duty of fair presentation, or the insured did not care whether or not it was in breach of that duty.96 The definition of recklessness ‘is intended to indicate a greater degree of culpability than acting “carelessly”. ­“Deliberate or reckless” will include fraudulent behaviour.’97 There is a real change in the remedies for insurers against the business policyholder’s qualifying breach of the pre-contractual duty of fair presentation. Like in consumer insurance, the remedies vary according to the culpability in the breach. If the qualifying breach is deliberate or reckless, the insurer may avoid the contract without refunding the premiums collected.98 If, in the absence of the qualifying breach, the insurer would not have entered into the contract on any terms at all, the insurer may avoid the contract and refuse all claims, but must return the premiums paid.99 If the insurer would have entered into the contract, but on different terms not concerning the premium, the contract is to be treated as if it

93 

Insurance Act 2015 Explanatory Notes [77]. Insurance Act 2015, s 7(3). 95  ibid, s 7(4). 96  ibid, s 7(5). 97  Insurance Act 2015 Explanatory Notes [80]. 98  Insurance Act 2015, Schedule 1, para 2. 99  ibid, para 4. 94 

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had been entered into on those different terms if the insurer so requires.100 If the insurer would have entered into the contract, but would have charged a higher premium, the insurer may reduce proportionately the amount to be paid on a claim.101 ‘Reduce proportionately’ means that the insurer need pay on the claim only X per cent of what it would otherwise have been under an obligation to pay under the terms of the contract (or under the different terms if applicable),102 with the formula for X the same as above for consumer insurance.

C.  Contracting Out? Both the CIDRA 2012 and the Insurance Act 2015 prevent insurers from contracting out to the detriment of consumer policyholders and business policyholders respectively. A term of a consumer insurance contract, or of any other contract, which would put the consumer in a worse position as regards the consumer’s pre-contractual disclosure and representation to the insurer and any remedies for qualifying misrepresentations than the consumer would be in by virtue of the provisions of the CIDRA 2012 is to that extent of no effect.103 Similarly, a non-consumer insurance contract term which would put the insured in a worse position as regards any of the other matters provided for in the Insurance Act 2015 Parts 2, 3 or 4 (on the duty of fair presentation, warranties and fraudulent claims respectively) than the insured would be in by virtue of the provisions of those Parts, is to that extent of no effect. The exception to this is where the insurer has taken sufficient steps to draw the disadvantageous term to the insured’s attention before the contract is entered into or the variation agreed.104

IV.  Insurer’s Pre-contractual Duty A.  The Duty of Disclosure and Banque Financière Although the question of utmost good faith usually arises with reference to the conduct of the assured or the policyholder, utmost good faith is binding on both parties to an insurance contract. Lord Mansfield stated in Carter v Boehm that

100 

ibid, para 5. ibid, para 6(1). ibid, para 6(2). 103  CIDRA 2012 s 10. Meanwhile, according to the Insurance Act 2015 s 15(1), a term of a consumer insurance contract, or of any other contract, which would put the consumer in a worse position as respects any of the matters provided for in Part 3 or 4 (concerning warranties and other terms and fraudulent claims) of the Insurance Act 2015 than the consumer would be in by virtue of the provisions of those Parts (so far as relating to consumer insurance contracts) is to that extent of no effect. 104  Insurance Act 2015, s 16(2), 17(2). 101  102 

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‘good faith forbids either party, by concealing what he privately knows, to draw the other into a bargain from his ignorance of that fact, and from his believing the contrary.’105 The pre-reform MIA 1906 section 17 in its latter part provides that ‘if the utmost good faith be not observed by either party, the contract may be avoided by the other party.’ The wording ‘either party’ expressly indicated that the duty of utmost good faith in terms particularly of the pre-contractual duty to disclose and not to misrepresent mutually binds both policyholders and insurers. ‘The duty [of disclosure] extends to the insurer as well as to the insured’, as is recognised in La Banque Financière de la Cité SA v Wetsgate Insurance Co Ltd106 (the first English decision on an insurer’s pre-contractual duty of disclosure) in the House of Lords—previously as Banque Keyser Ullman SA v Skandia (UK) Insurance Co Ltd107 in the High Court and in the Court of Appeal. In this case, a syndicate of banks entered into separate loan agreements totalling about 80 million Swiss francs with Mr Ballestero’s four companies. For each loan, the principal security was a credit insurance policy and a deposit of gemstones whose value was certified by a valuer. The banks were co-insured under the insurance policy and the insured in respect of the loan to the fourth company. In order to complete the first loan by January 1980, Mr Lee the broker of the banks arranged to place the insurance in one primary layer and two excess layers. The insurance company, through its senior underwriter Mr Dungate, issued ‘held covered’ notes on a temporary basis; although the insurance cover was not complete, Mr Lee issued cover notes representing that cover was complete, and on that basis the lead bank advanced 26.25 million Swiss francs to Ultron, one of Mr Ballestero’s companies, under the first loan agreement. Although Mr Dungate was fully aware by June 1980 that Mr Lee had deliberately concealed from banks the gap in credit insurance cover to the detriment of the banks, he underwrote further loans on behalf of the insurers, without reporting the matter either to the brokers or to the insurers, nor did he inform the banks of Mr Lee’s deceit. The borrowing companies defaulted on the loans, but the gemstones proved substantially over-valued and therefore of little value, and Mr Ballestero disappeared with the moneys of the banks. In claiming damages against the insurers, the banks raised two arguments: first, the insurers, having been aware of the fraud of the broker, breached utmost good faith in the failure by Mr Dungate to disclose to the banks the broker’s fraud; second, the failure was also a breach of a common law duty of care which would sound in damages in negligence. On the first argument, both the Court of Appeal and the High Court held that the duty of pre-contractual disclosure was reciprocal, but only the Court of Appeal held that the breach of the duty did not lead to an award of damages. On the second argument, the High Court found for ­damages

105 

Carter v Boehm (n 6). La Banque Financière de la Cité SA v Wetsgate Insurance Co Ltd [1991] 2 AC 249 (HL). 107  Banque Keyser Ullman SA v Skandia (UK) Insurance Co Ltd [1990] 1 QB 665 (CA). 106 

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for breach of a duty of care in negligence but this was overruled in the Court of Appeal. Mainly by way of construing the wordings of the fraud exceptions in favour of the insurers, the House of Lords upheld the Court of Appeal’s judgment and dismissed the banks’ appeal. In this course, four of the five Law Lords only touched upon the banks’ foregoing two arguments above. A number of observations can be made from the four Law Lords’ relatively brief discussions of the two arguments above. First, it is not doubted that both policyholders and insurers have a pre-contractual duty of disclosure toward each other.108 Second, in the case of non-disclosure or misrepresentation by the insurer, the remedy for the policyholder is avoidance of contract and return of premiums, but there can be no award of damages. This is due to the pre-reform MIA 1906 section 17, 18(1) and 20(1) provision on avoidance of contract without the remedy of damages. Third, the scope of the insurer’s duty of disclosure is perhaps broader than that of policyholder’s disclosure, because Lord Bridge said he did ‘not dissent from this statement’109 by Slade LJ: [T]he duty [of disclosure] falling upon the insurer must at least extend to disclosing all facts known to him which are material either to the nature of the risk sought to be covered or the recoverability of a claim under the policy which a prudent insured would take into account in deciding whether or not to place the risk for which he seeks cover with that insurer.110

So if a fact known to the insurer is material to the risk or to the recoverability, then the insurer should disclose it to the policyholder. For this purpose, the relevance of materiality to the risk is not disputable, because it simply mirrors the relevance of materiality to the risk in respect of the scope of policyholder’s pre-contractual disclosure. It seems the relevance of materiality to recoverability is doubted, because although Lord Bridge agreed with Slade LJ on such relevance it was not mentioned at all in Lord Jauncey’s discussion of the scope of insurer’s disclosure. Lord Jauncey held that Mr L’s fraud ‘neither increased nor decreased’111 the underwritten risk that Mr Ballestero and his companies would default in repaying the loan. Therefore in this case the insurer had no duty to disclose Mr Lee’s fraud which was immaterial to the risk. Lord Bridge held that Mr Lee’s fraud was immaterial to the recoverability of a claim under the policy; therefore it was not subject to disclosure by the insurers. Fourth, insurers do not owe policyholders a common law duty of care in negligence in the matter of pre-contractual disclosure. This is not only due to the ‘combination of circumstances of a very unusual nature’112 in this case, but also 108  La Banque Financière de la Cité SA v Wetsgate Insurance Co Ltd [1991] 2 AC 249 (HL), 268F, per Lord Bridge; 281G, per Lord Jauncey. 109  ibid, 268H, per Lord Bridge. 110  Above n 107, 772; cited also in [1991] 2 AC 249 (HL), 268G. 111  Above n 108, 282D. 112  ibid, 269C, per Lord Bridge.

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due to the difficulty in law to find a duty of care in negligence. At the time of the appeals, the test for duty of care had been laid down by Lord Bridge in Caparo v Dickman, according to which three criteria must be satisfied before a duty can be found: the damage must be foreseeable; there must be proximity of relationship between the parties; and it must be fair, just and reasonable for such a duty to exist in the circumstances. Both Lord Ackner and Lord Jauncey found that the insurer’s obligation to act with utmost good faith did not involve disclosing to the banks the dishonesty of their broker, and therefore ‘the first step toward establishing the necessary proximity to found a duty of care at common law did not exist.’113 Since there was no proximity of relationship, there was no duty of care. On the foregoing point, the Court of Appeal had clear reasoning in finding that the insurers had no duty of care to the policyholders. Slade LJ agreed with Steyn J in the High Court that the damage or economic loss of the type actually suffered by the banks was a reasonably foreseeable consequence of the insurer’s non-­ disclosure of the broker’s dishonesty.114 However, Slade LJ found no proximity of relationship between the insurers and the banks. According to Hedley Byrne & Co Ltd v Heller & Partners Ltd,115 such relationship could be found if in the circumstances of the case one party was shown to have assumed a voluntary responsibility to the other party and if the other party relied on the foregoing party’s conduct in relation to its assumption of voluntary responsibility. The Court of Appeal did not find justification for holding that Mr Dungate or the insurers assumed any responsibility in relation to Mr Lee’s dishonesty.116 Nor did the Court of Appeal find that the banks relied on any assumption of liabilities by the insurers.117 These sufficed for finding no duty of care. In addition, the Court of Appeal was not ­satisfied that justice and reasonableness would imperatively require the finding of a duty of care owed by the insurers to the banks, because this was not the only way by which the banks could have remedies.118 All that being briefly restated, the importance of La Banque Financière119 in the House of Lords and its prior judgments in the same case in the Court of Appeal120 cannot be overstated. This is because although the High Court and the Court of Appeal addressed at length the issues in the insurer’s pre-contractual duty of disclosure, these issues were not meaningfully approached in the House of Lords, in which ‘at the end of this long and complex litigation the outcome is dictated by a short point on the construction of the fraud exclusion clause’.121 This made it ‘not necessary [in the House of Lords] to consider’ whether or not the insurers

113 

ibid, 281C, per Lord Ackner. See also [1991] 2 AC 249, 282D–E. Above n 107, 791–92. Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465 (HL). 116  Above n 107, 792F–H. 117  ibid, 795C-F. 118  ibid, 801E–G. 119  La Banque Financière de la Cité SA v Wetsgate Insurance Co Ltd [1991] 2 AC 249 (HL). 120  Banque Keyser Ullman SA v Skandia (UK) Insurance Co Ltd [1990] 1 QB 665 (CA). 121  Above n 119, 269C. 114  115 

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were under a duty to disclose the broker’s misconduct by virtue of an insurer’s obligation of utmost good faith.122 Besides, this case involved ‘a combination of circumstances of a very unusual nature which is unlikely ever to be repeated.’123 ‘While Banque Financière might have heralded an exciting judicial development of a broad duty of good faith in insurance law, sadly that seems unlikely now to happen.’124 What is certain is only that the requirement of utmost good faith and the pre-contractual duty of disclosure are also binding on insurers, and that such a duty is not a common law duty of care in negligence. The scope of the insurer’s pre-contractual duty of disclosure is not fully defined—Lord Bridge only ‘[did] not dissent from’125 Slade LJ’s statement that ‘the duty falling upon the insurer must at least extend to disclosing all facts known to him which are material to the nature of the risk … or to the recoverability of a claim’.126 The wording ‘at least’ indicates that the Law Lords in this case did not fully ascertain the scope of the duty. As for the remedies for policyholders in the case of insurer’s breach of the pre-contractual duty of disclosure, in line with the pre-reform MIA 1906 sections 17, 18(1) and 20(1), the only remedy for the policyholder was avoidance of contract, not damages. However, the unavailability of damages has been contested.127 But now with the remedy of avoidance under the MIA 1906 section 17 being abandoned and the whole of sections 18 and 20 fully repealed, what remedies are available becomes more limited: even avoidance of contract could no longer be the remedy. From the other perspective, however, the post-reform MIA 1906 opens the possibility of damages award as a remedy for insurer’s breach of good faith. Nevertheless, ‘the revamping of s 17 is unlikely to alter the current state of play’.128

B.  The Transparency Requirements for Insurers In the UK, the clearest post-reform imposition of a pre-contractual duty on insurers is the Insurance Act 2015 section 17 ‘transparency requirements’. Section 17(2) requires that ‘the insurer must take sufficient steps to draw the disadvantageous term to the insured’s attention before the contract is entered into or the variation agreed.’ The exception to this requirement operates where the insured or the agent

122 

ibid, 280B. ibid, 269C. 124  J Birds, Birds’ Modern Insurance Law 10th edn (London, Sweet & Maxwell, 2016) 163–64. For another critical analysis of Banque Financière, see R Merkin, Colinvaux’s Law of Insurance 11th edn (London, Sweet & Maxwell, 2016) [6-197]–[6-206]. For an informative analysis mainly of the judgments of the High Court and of the Court of Appeal, see O Gurses, ‘An English Insurer’s PreContractual Duty of Utmost Good Faith’ (2012) 23 Insurance Law Journal 51, 52–69 and B Soyer, ‘The Insurer’s Duty of Good Faith: Is the Path Now Clear for the Introductions of New Remedies’, in M Clarke and B Soyer eds, The Insurance Act 2015: A New Regime for Commercial and Marine Insurance Law (London, Informa, 2016) 39–46. 125  Above n 119, 268G. 126  Above n 120,772; cited also in above n 119, 268G, emphasis added. 127  Birds (n 124) 162–63. 128  Soyer (n 124) 40. 123 

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thereof already had actual knowledge of the disadvantageous term.129 According to the ­Insurance Act 2015 section 16(2), ‘the disadvantageous term’ is one which puts the non-­consumer insured in a worse position than it would be under the Insurance Act 2015; unless the section 17 transparency requirements are met, the disadvantageous term is to that extent of no effect. Section 17(3) requires that ‘the disadvantageous term must be clear and unambiguous as to its effect.’ This means the effects of the disadvantageous term must be set out explicitly and it does not suffice that its language is clear and unambiguous.130 According to section 17(4), in considering whether the transparency requirements have been met, the characteristics of the insured persons of the kind in question and the circumstances of the transaction are to be taken into account. It must be noted that the section 17 transparency requirements for insurers are not a statutory creation. Instead it effectively expands common law rules which similarly required in relation to conditions precedent or warranties in insurance contract. The Court of Appeal stated clearly as follows in Re Bradley and Essex and Suffolk Accident Indemnity Society: Contracts of insurance are contracts in which uberrima fides is required, not only from the assured, but also from the company assuring. … It is especially incumbent on insurance companies to make clear, both in their proposal forms and in their policies, the conditions which are precedent to their liability to pay, for such conditions have the same effect as forfeiture clauses, and may inflict loss and injury to the assured and those claiming under him out of all proportion to any damage that could possibly accrue to the company from non-observance or non-performance of the conditions. … It is, in my opinion, incumbent on the company to put clearly on the proposal form the acts which the assured is by the policy to covenant to perform and to make clear in the ­policy the conditions, non-performance of which will entail the loss of all benefits of the insurance.131 I think it is the duty of all insuring companies to state in clear and plain terms, as conditions precedent, those provisions only which are such, … and I think further that it is their duty to call attention to such conditions in their form of proposal so as to make sure that the insurers understand their liabilities.132

Two pre-contractual duties of insurers can be drawn from the foregoing judicial opinion: the duty to clearly state the conditions precedent, and the duty to call attention thereto. The Insurance Act 2015 section 17 transparency requirements are broader and more specific than the foregoing two duties in at least three ways. First, these two duties apply in relation only to conditions precedent whereas the section 17 transparency requirements are applicable to any disadvantageous term including but

129 

Insurance Act 2015, s 17(5). Insurance Act 2015 Explanatory Notes, [128]. Re Bradley and Essex and Suffolk Accident Indemnity Society [1912] 1 KB 415 (CA), 430–31 per Farwell LJ. 132  ibid, 433 per Farwell LJ, emphasis added. 130  131 

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not limited to conditions precedent and warranties. Second, for the duty to clearly state conditions precedent, clarity in the language thereof might suffice, whereas for the section 17 transparency requirements the clarity in the language of the disadvantageous terms is not sufficient and instead under section 17(3) what is required is clarity as to the their effect. Third, the duty to clearly state the conditions precedent and to call attention thereto is fulfilled in respect of the proposal forms and policies per se, whereas the section 17 transparency requirements obliges insurers to ‘take sufficient steps to drawn the disadvantageous term to the insured’s attention’133—the ‘sufficient steps’ for this purpose might need to go further than ensuring clarity in the proposal form and the policy itself: ‘the characteristics of the insured persons of the kind in question and the circumstances of the transaction’ might necessitate the insurer’s provision of supplementary documents illustrative of the disadvantageous terms or even the insurer’s explanation thereof which serve to sufficiently call the insured’s attention thereto. It must be noted that the contract law rules regarding the need for one party to draw the other’s attention to particular kind of terms and conditions is also relevant and can be complementarily applicable to insurance contracts. It has been established in the Court of Appeal in Thornton v Shoe Lane Parking Ltd that one contractual party had a duty to bring exemptions and exclusions to the notice/ attention of the other party.134 That was reiterated in Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd, in which Dillon J said, ‘if one condition in a set of printed conditions is particularly onerous or unusual, the party seeking to enforce it must show that that particular condition was fairly brought to the attention of the other party’.135 These rules in contract law are certainly applicable to insurance contract, particularly to conditions precedent for insurer’s payment.

V. Conclusion The UK insurance law reform, spanning almost 10 years from late 2006 to early 2015, certainly has brought substantial and significant changes to the law of precontractual duties in insurance law, particularly to policyholder’s duties and less so to insurer’s duties. Substantial and significant as they are, the changes are not as big as thought. Although the terminology ‘utmost good faith’ remains, as usual it is still used interchangeably with ‘good faith’. As the latter half of the pre-reform MIA 1906 section 17 is deleted as the result of the reform, breach of the section 17 requirement of utmost good faith no longer independently gives rise to the remedy of avoidance by insurers of the contract in question. As the legislative

133 

Insurance Act 2015, s 17(2). Thornton v Shoe Lane Parking Ltd [1971] 2 QB 163 (CA); [1970] EWCA Civ 2. Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd [1989] QB 433 (CA), 439. Bingham LJ concurred: ‘[T]he more outlandish the clause the greater the notice which the other party, if he is to be bound, must in all fairness be given.’ 134  135 

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notes have explained, (utmost) ‘good faith will remain an interpretive principle’.136 So the requirement of (utmost) good faith has in a sense become a standard of interpretation and of conduct. The repeal of the pre-reform MIA 1906 sections 18, 19 and 20 on pre-contractual disclosure and representation certainly does not at all mean that the requirement of (utmost) good faith is repealed or abandoned. Rather the essence of those provisions gained new life particularly in the Insurance Act 2015, which ‘re-brands the pre-contractual duty of utmost good faith as the “duty of fair presentation”’137 although the single remedy of avoidance of contract under the old law for the breach of the duty has been substantially changed. The CIDRA 2012 codifies what the Financial Ombudsman Service has been doing in its alternative dispute resolution practices in its jurisdiction of insurance. In the two new bottles of the CIDRA 2012 and the Insurance Act 2015, it is not all new wines: there are old wines too. In respect of pre-contractual duties, in both Acts the new wine is an insurer’s triad of remedies against a policyholder’s breach of pre-contractual duty: it is no longer simply a matter of indiscriminate avoidance of contract; rather it is avoidance, contract with deemed different terms, and proportionate payment, with their applicability hinging on the policyholder’s culpability in the breach. So the old wine or remedy of avoidance remains but is restrained. However, for consumer policyholders the pre-contractual duty per se has changed: it is no longer the voluntary duty of disclosure which often subsumes the duty not to misrepresent; rather it is changed to a duty to take reasonable care not to misrepresent. For non-consumer or business policyholders, the precontractual duty seems to have changed drastically with the renamed ‘duty of fair presentation’ (of risks), but this is not what it appears. The ‘duty of fair presentation’, at least as far as its definition is concerned, is the re-packaged old duty of disclosure and the duty not to misrepresent combined. Also unchanged is the test of materiality in relation to the duty of fair presentation: the test is still the same as found by the majority of Law Lords in Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co Ltd.138 However, as aforementioned, the remedies against a breach of the duty of fair presentation or the consequences of the breach have changed substantially but without simply discarding the old single remedy of avoidance of contract. The pre-contractual duty of insurers still remain as obscure as before and since La Banque Financière de la Cité SA v Wetsgate Insurance Co Ltd,139 except that the Insurance Act 2015 obliges insurers to take sufficient steps to draw the policyholder’s attention to insurance policy terms which put policyholders in a position more disadvantageous in respect of pre-contractual duties and others than they can be under the reformed law.

136 

Insurance Act 2015 Explanatory Notes, [116]. Eggers (n 8) 27, and also 28: ‘Nevertheless, there is a re-branding and re-packaging of the duty in that it is now called a duty of fair presentation’. 138  Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co Ltd [1995] 1 AC 501 (HL). 139  La Banque Financière de la Cité SA v Wetsgate Insurance Co Ltd [1991] 2 AC 249 (HL). 137 

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7 Pre-contractual Duties under American Insurance Law MARTIN DAVIES AND JEFFREY W STEMPEL

I.  Introduction: The Differing Faces of American Insurance Law Generalising about United States insurance law presents a challenge because of its state-centred nature. In the system of federalism that prevails in the United States, the national government is limited in its ability to legislate, which usually requires linkage to an obviously national topic such as foreign policy, government lands or interstate commerce. The connection to interstate commerce, however, need not be large and insurance of course is large commerce. If the world insurance industry was a nation, it would have the fourth largest economy in the world.1 Yet despite this, insurance was not considered to be ‘commerce’ by the US Supreme Court until 1944.2 By then, the US had adopted a strong custom and practice of statecentred regulation and state common law regarding insurance policy construction and the rights and responsibilities of applicants, policyholders and insurers.3 In reaction to the Court’s decision, Congress quickly passed the ­McCarran-­Ferguson Act,4 which provides that absent an express intent, national legislation shall not be construed to displace state regulation of insurance.

1  See Richard V Ericson, Aaron Doyle, and Dean Barry, Insurance as Governance (Toronto, ­University of Toronto Press, 2003) 4, 43–53 (also noting degree to which requirements for obtaining insurance and protocols set by insurers shape behavior throughout society). 2 See Paul v Virginia 75 US 168 (1869), overruled by United States v South-Eastern Underwriters 322 US 533 (1944). 3 See Jeffrey W Stempel and Erik S Knutsen, Stempel and Knutsen on Insurance Coverage 4th edn (Alphen aan den Rijn, Wolters Kluwer L and Business, 2016) s 1.02 (first published as Jeffrey W Stempel, Interpretation of Insurance Contracts (New York, Little, Brown & Co, 1994)). 4  15 USC s 1101. The Act states that the US ‘Congress hereby declares that the continued regulation and taxation by the several States of the business of insurance is in the public interest and that salience on the part of the Congress shall not be construed to impose any barrier to the passage of the Act.’ ibid. The purpose underlying the statute is in essence to preserve the pre-1944 South-Eastern Underwriters situation in which insurance was primarily regulated by the states rather than the national government.

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Despite this state-centred focus, which can produce large differences regarding some insurance issues, there is relative uniformity regarding the duties of a prospective policyholder during the pre-contractual process.5 This is less so for the law on insurer’s pre-contractual duties: there are many different types of provisions requiring insurers to make pre-contract disclosure to prospective policyholders. Part II of this chapter offers an overview of the pre-contractual duties of policyholders in both marine insurance and non-marine insurance. Part III gives an account of insurer’s pre-contractual duties before the conclusion is drawn in Part IV.

II.  Policyholder’s Pre-contractual Duties in American Insurance Law For the most part, the US follows the English norm of imposing a strong duty of disclosure upon applicants or renewing policyholders concerning marine insurance, just as it does for insurers seeking reinsurance.6 For non-marine insurance, however, the applicant or policyholder’s duties of disclosure are normally satisfied so long as it gives truthful answers to the questions propounded by the insurer. For non-marine insurance, there is generally no duty of affirmative disclosure and such contracts are not subject to the ‘uberimae fidei’ duty of ‘utmost good faith’. That being said, as discussed in Chapter 15 of this book a strong ‘duty of utmost good faith’ continues to hold sway for reinsurance under United States law. See also United States v Fabe, 508 US 491(1991); Prudential Ins Co v Benjamin 328 US 408, 429 (1946). This in turn buttresses the view in the United States that the common law of contracts (and insurance policies are contracts, of course) is normally governed by state law rather than national law. Randy Maniloff and Jeffrey Stempel, General Liability Insurance: Key Issues in Every State (first published Oxford, OUP, 2010, 3rd edn, National Underwriter Co, 2015); Gary L Wickert and Lee R Wickert, Fundamentals of Insurance Coverage in All 50 States 6th edn (Huntington, Juris, 2016). 5  See generally Maniloff and Stempel, ibid (although there are some areas of pronounced divergence, most state law of insurance is relatively consistent); Wickert and Wickert, ibid (same). See also American Law Institute, Restatement of the Law of Liability Insurance (Proposed Final Draft, March 28, 2017) (RLLI) (distilling essence of American law regarding liability insurance but noting areas of divergence and majority and minority rules).Although the RLLI is obviously focused on liability insurance, the law of pre-contractual duties reflected in the RLLI cuts across all lines of insurance in that all insurance policies are sold through an application and underwriting process. Consequently, the RLLI provisions on the topic—which emerge from a process involving what might be termed the ‘legal establishment’ in the US—are a good encapsulation of US law and jurisprudential thinking on the topic. 6  This norm of imposing a duty of heightened disclosure and good faith is found in many countries. See generally International Bar Association Insurance Committee, ‘The Duty of Utmost Good Faith’ (August 2014) (hereinafter IBA Report) (reviewing use of term and good faith standard in Argentina, Belgium, Brazil, China, Costa Rica, Denmark, France, Germany, Hungary, Italy, the Netherlands, Nigeria, Poland, Spain, Sweden, Switzerland, Thailand and Turkey as well as the UK, the US (States of California, Illinois, Massachusetts, New Jersey, New York and Ohio), Australia, Canada, India, Ireland, Malaysia, Malta and Singapore).

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A. Marine Insurance Continues to Follow the Traditional Approach Unlike English marine insurance law,7 it has long been held in the United States that claims under marine insurance contracts fall within the admiralty jurisdiction of courts, which is federal jurisdiction.8 As a general rule, ‘With admiralty jurisdiction comes the application of substantive admiralty law’,9 meaning that when courts exercise federal admiralty jurisdiction, they must apply the federally uniform body of general maritime law.10 The law governing claims made under marine insurance contracts is a significant and anomalous exception to the general rule. Such marine insurance claims may be governed by state law, rather than by federal general maritime law, as a result of the decision of the US Supreme Court in Wilburn Boat Co v Fireman’s Fund Insurance Co,11 where the US Supreme Court refused to adopt as federal maritime law a rule that, like the long-standing but recently-amended rule of English law,12 would have denied the assured recovery because of the breaches of warranty, notwithstanding the absence of causative effect. The Court observed that a rule ‘forfeiting all right of recovery in the absence of strict and literal performance of warranties’ was ‘harsh’ in its effect, and noted that: ‘Most States, deeming the old rule a breeder of wrong and injustice, have abandoned it in whole or in part’.13 Accordingly, the Court remanded the case to the District Court ‘for a trial under appropriate state law’.14 When considering a marine insurance case, an American court generally starts with the Wilburn Boat question whether the relevant issue is governed by a ‘judicially established federal admiralty rule’. If there is such a federal rule, it supplants state law. If not, state law governs. Despite the US Supreme Court’s condemnation in Wilburn Boat of the strict compliance rule, most American courts at both federal and state level continue to apply it and its close cousin, the doctrine of uberrima fides. The doctrine of uberrima fides made its first appearance in the United States in 1828, in McLanahan v Universal Insurance Co.15 It is certainly arguable that the decision in McLanahan is enough in itself to make the doctrine of u ­ berrima 7  Marine insurance contracts do not fall within the list of admiralty claims contained in the Senior Courts Act 1981 (UK), s 20(2). 8  Ins Co v Dunham 78 US (11 Wall) 1, 20 LEd 90 (1870). 9  East River Steamship Corp v Transamerica Delaval Inc 476 US 858, 864, 106 S Ct 2295, 2298–9 (1986); Yamaha Motor Corp v Calhoun 516 US 199, 206, 116 S Ct 619, 623 (1996). 10  ibid. The federal admiralty jurisdiction may be exercised by federal or state courts. State courts exercising federal admiralty jurisdiction apply federal maritime law. 11  Wilburn Boat Co v Fireman’s Fund Insurance Co 348 US 310, 75 S Ct 368 (1955). 12  Marine Insurance Act 1906 (UK), s 33, which was amended with effect from 12 August 2016 by the Insurance Act 2015 (UK), ss 10(7)(a), 23(2). 13  Wilburn Boat, 348 US at 320, 75 S Ct at 373–74. This assertion was stoutly contested by one contemporary commentator who surveyed the statutes of the principal maritime states and discovered that very few of them had modified the strict performance rule. Benjamin Yancey, ‘State Regulation of Marine Insurance’ (1956) 23 Insurance Counsel Journal 143. 14  ibid 348 US at 321, 75 S Ct at 374. 15  McLanahan v Universal Insurance Co 26 US (1 Pet) 170, 1998 AMC 285 (1828).

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fides a ‘judicially established federal admiralty rule’ for the purposes of the Wilburn Boat test. The doctrine was often cited and applied in the 127 years between McLanahan and Wilburn Boat. Furthermore, the Wilburn Boat Court’s objection was to the creation of new federal admiralty rules, not the recognition of existing ones.16 It comes as no surprise, then, to discover that most courts take the view that the doctrine of uberrima fides is part of federal general maritime law and is to be applied notwithstanding the Wilburn Boat rule favouring state law. The doctrine has been acknowledged and/or applied as ‘entrenched’ federal general maritime law by circuit courts of appeal in post-Wilburn Boat cases in the First,17 Second,18 Third,19 Eighth,20 Ninth,21 and Eleventh22 Circuits, and by district courts in the Fourth,23 Sixth (perhaps),24 Seventh,25 and Tenth26 Circuits. 16  Wilburn Boat Co v Firemans Fund Ins Co 348 US 310, 316, 75 S Ct 368, 371 (1955): ‘The whole judicial and legislative history of insurance regulation in the United States warns us against the judicial creation of admiralty rules to govern marine policy terms and warranties.’ 17  Catlin (Syndicate 2003) at Lloyds v San Juan Towing and Marine Services Inc 778 F3d 69, 2015 AMC 694 (1st Cir 2015). In the US, one refers to the national courts of appeals according to the region of the country represented by a particular US Court of Appeals—such for the First Circuit (reviewing the decisions of national or ‘federal’ trial courts in the states of Maine, Massachusetts, New Hampshire and Rhode Island), the Second Circuit (reviewing the decisions of the federal trial courts in the states of Connecticut, New York and Vermont), and so on. There are 11 numbered federal Courts of Appeal as well as a District of Columbia Circuit and a Federal Circuit, which specialises in intellectual property disputes and claims against the government. 18  Puritan Ins Co v Eagle Steamship Co SA 779 F2d 866, 870, 1986 AMC 1240, 1245 (2d Cir 1985); Knight v US Fire Ins Co 804 F2d 9, 13, 1987 AMC 1, 5 (2d Cir 1986); Firemans Fund Ins Co v Great American Ins Co of New York, 822 F3d 620, 2016 AMC 1217 (2d Cir 2016). See also Commercial Union Ins Co v Flagship Marine Services Inc 982 FSupp 310, 313 (SD NY 1997); Thebes Shipping Inc v Assicurazioni Ausonia Spa, 599 FSupp 405, 426–27 (SD NY 1984); American Home Assurance Co v Masters Ships Management SA 423 FSupp 2d 193, 2007 AMC 1888 (SD NY 2006). 19  AGF Marine Aviation & Transport v Cassin, 544 F3d 255, 2008 AMC 2300 (3d Cir 2008). 20  St Paul Fire and Marine Ins Co v Abhe & Svoboda Inc 798 F3d 715, 2015 AMC 2113 (8th Cir 2015). 21  Certain Underwriters at Lloyds London v Inlet Fisheries Inc 518 F3d 645, 2008 AMC 305 (9th Cir 2008); New Hampshire Ins Co v C’est Moi Inc 519 F3d 937, 2008 AMC 931 (9th Cir 2008). 22  Steelmet Inc v Caribe Towing Corp 747 F2d 689, 1985 AMC 956 (11th Cir 1984); HIH Marine Services Inc v Fraser 211 F3d 1359, 2000 AMC 1817 (11th Cir 2000); AIG Centennial Ins Co v O’Neill 782 F3d 1296, 2015 AMC 1217 (11th Cir 2015). See also Certain Underwriters at Lloyds London v Giroire 27 FSupp 2d 1306, 1998 AMC 2153 (SDFla 1998); International Ship Repair & Marine Services v St Paul Fire & Marine Ins Co 922 FSupp 577, 1997 AMC 225 (MD Fla 1996); La Reunion Francaise SA v Christy 122 FSupp 2d 1325, 1999 AMC 2499 (MD Fla 1999); Great Lakes Reins PLC v Barrios 2009 AMC 482 (SD Fla 2008). 23  Commercial Union Ins Co v Detyens Shipyard, Inc 147 FSupp 2d 413, 423, 2001 AMC 2121, 2131 (D SC 2001). 24 In New Hampshire Ins Co v Home Savings and Loan Co of Youngstown 2008 WL 2446066 at *3 n2 (ND Oh 2008), rev’d on other grounds 581 F3d 420, 2009 AMC 2448 (6th Cir 2009), the district court quoted Ninth Circuit authority for the proposition that ‘[u]berrimae fidei is a longstanding federal maritime doctrine that applies to marine insurance contracts’ but pointed out that it is part of state law in Ohio in any event. 25  St Paul Ins Co of Illinois v Great Lakes Turnings Ltd 829 FSupp 982, 1993 AMC 2539 (ND Ill 1993) (at least for insurance of ocean-going adventures). Compare, however, Progressive Northern Ins Co v Bachmann 314 FSupp 2d 820, 2004 AMC 1745 (WD Wis 2004), which distinguished Great Lakes Turnings and applied Wisconsin state law to insurance of a pleasure boat in Wisconsin state waters, saying that it was ‘disingenuous’ of the insurer to argue for application of a supposed federal doctrine of uberrima fides, given the disagreement between circuit courts of appeal. 26  Great Lakes Reins (UK) PLC v Sea Cat I LLC 653 FSupp 2d 1193, 1200, 2010 AMC 703 (WD Ok. 2009) (obiter).

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The only iconoclast is the US Court of Appeals for the Fifth Circuit, which held in Albany Insurance Co v Anh Thi Kieu27 that the doctrine of uberrima fides is not an entrenched rule of federal general maritime law and that Wilburn Boat requires application of state law to the question of pre-contractual representations and conduct. Even if a court in the Fifth Circuit chooses state law by applying the ‘vertical’ choice of state law required by Anh Thi Kieu, it must still make a ‘horizontal’ choice of law to determine which state’s law governs the assured’s conduct. In relation to this issue, it must first be observed that in making its ‘horizontal’ choice of law between state laws, the court is obliged to use the federal choice of law rule. Whether the court is a state court or a federal court, it is exercising federal jurisdiction when considering a claim on a marine insurance contract,28 so it must use the federal maritime choice of law rules, not those of the particular state in which it sits.29 Many standard form marine insurance contracts in the United States choose New York law. If New York law governs the contract, then the doctrine of uberrima fides applies as a matter of New York state law.30 Similarly, the doctrine of uberrima fides is part of state law in California,31 as well as in smaller states such as Delaware,32 Ohio,33 and several others. In contrast, the law of states such as Florida,34 Texas35 or Massachusetts,36 ameliorates the strictness

27 

Albany Insurance Co v Anh Thi Kieu 927 F2d 882, 1991 AMC 2211 (5th Cir 1991). See above n 2. 29  Advani Enterprises Inc v Underwriters at Lloyds 140 F3d 157, 162, 1998 AMC 2045, 2051 (2d Cir 1998). When exercising its jurisdiction based on diversity of citizenship, a federal court must apply the choice-of-law rules of the state in which it sits, but when sitting in admiralty, the court must apply federal choice-of-law rules. Calhoun v Yamaha Motor Corp USA 216 F3d 338, 343 (3d Cir 2000). 30  See, eg, Merchants & Shippers Ins Co v St Paul Fire & Marine Ins Co 220 NYS 514, 1927 AMC 577 (NY App Div 1927); Alaz Sportswear v Public Service Mutual Ins Co 600 NYS 2d 63, 64–65 (NY App Div 1993). Except for insurance policies relating to hospital, medical, surgical or prescription drug expenses, which are only avoided by intentional misrepresentation, any material misrepresentation voids an insurance policy under New York state law: see NY Law s 3015(2) (McKinney, 2011). 31  California Insurance Code s 1900 provides: ‘In marine insurance each party is bound to communicate …: (a) All the information which he possesses and which is material to the risk … (b) The exact and whole truth in relation to all matters that he represents or, upon inquiry assumes to disclose’. This has been held to impose a duty to act uberrimae fidei, identical with that imposed by federal admiralty law: see Cigna Property and Casualty Ins Co v Polaris Pictures Corp 159 F3d 412, 420 n3, 1999 AMC 1, 11 n3 (9th Cir 1998); Markel American Ins Co v Fitt 528 FSupp 2d 1010, 1017, 2008 AMC 387, 396 (SD Cal. 2007); Butler v Clarendon America Ins Co 494 FSupp 2d 1112, 1138, 2007 AMC 1620, 1648 (ND Cal. 2007), affirmed on other grounds 317 Fed Appx 648 (9th Cir 2009). 32  18 Delaware Code s 2711 is equivalent to uberrimae fidei: see Griffith v American National Fire Ins Co 1997 AMC 2745 (D Del 1996). 33  New Hampshire Ins Co v Home Savings and Loan Co of Youngstown 2008 WL 2446066 at *3 n2 (ND Oh 2008). 34  Florida Statutes Annotated s 647.409(2). 35  Vernon’s Texas Insurance Code s 862.054. 36  Massachusetts General Laws ch 175 s 186, which provides: ‘No oral or written misrepresentation or warranty made in the negotiation of a policy of insurance by the insured or in his behalf shall be deemed material or defeat or avoid the policy or prevent its attaching unless such misrepresentation or warranty is made with actual intent to deceive, or unless the matter misrepresented or made a warranty increased the risk of loss’. 28 

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of the doctrine of uberrima fides. Thus, the ‘horizontal’ choice of law question remains significant, even if the Anh Thi Kieu37 ‘vertical’ choice of law indicates that the question is governed by state, not federal, law. Several courts have applied New York state law, with its uberrimae fidei standard, solely because of a choice of law clause in the insurance contract.38

i.  The Content and Duration of the Obligation The content of the duty to act uberrimae fidei is both well settled and familiar. It requires the assured to make full disclosure to the insurer of all facts material to the calculation of the insurance risk.39 There is some disagreement between federal circuits about materiality, with the Ninth Circuit adopting a ‘bright line’ rule that any matter specifically raised in a question posed by the insurer is automatically regarded as material,40 but the Eleventh Circuit preferring a more fact-specific inquiry.41 Apart from such relatively minor differences, courts in the United States fairly uniformly apply a ‘decisive influence’ test for materiality: that is, in order to be material, the fact in question must be ‘something which would have controlled the underwriter’s decision’.42 With the exception of the question of materiality, where the American test is quite different from the English, the content of the duty to act uberrimae fidei appears much the same when applied by American courts as by English courts.43 As in Carter v Boehm itself,44 one can occasionally find dicta in American cases reminding the reader that the duty applies to the insurer as well as to the assured.45

37 

Above n 27. eg, Great Lakes Reinsurance (UK) PLC v Southern Marine Concepts, Inc, 2009 AMC 1093 (SD Tex 2008); Great Lakes Reinsurance (UK) PLC v Durham Auctions, Inc, 585 F3d 236, 2010 AMC 185 (5th Cir 2009). 39  See, eg, Steelmet Inc v Caribe Towing Corp 747 F2d 689, 695, 1985 AMC 956, 965 (11th Cir 1984) (‘In the case of marine insurance the insured must disclose all facts material to the risk … In other words, an applicant for marine insurance must state all material facts which are known to him and unknown to the insurer.’). 40  See, eg, New Hampshire Ins Co v C’est Moi, Inc 519 F3d 937, 2008 AMC 931 (9th Cir 2008). 41 See, eg, HIH Marine Services Inc v Fraser 211 F3d 1359, 2000 AMC 1817 (11th Cir 2000). (analysing evidence to determine whether misrepresentation about custody of vessel was material); La Reunion Francaise SA v Christy 122 FSupp 2d 1325, 1999 AMC 2499 (MD Fla 1999) (analysing evidence to determine whether misrepresentation about assured’s prior criminal convictions was material); Great Lakes Reins (UK) PLC v Roca 2009 WL 200252 (SD Fla 2009) (analysing evidence to determine whether misrepresentation about assured’s prior claims record was material). 42  See, eg, Btesh v Royal Ins Co Ltd of Liverpool 49 F2d 720, 721, 1931 AMC 1044, 1046 (2d Cir 1931). 43  See generally Thomas Schoenbaum, ‘The duty of utmost good faith in marine insurance law: a comparative analysis of American and English law’ (1998) 29 Journal of Maritime Law and Commerce 1, 14–31. 44  Carter v Boehm [1766] 3 Burr 1905 at 1909; 97 ER 1162 at 1164 per Lord Mansfield. 45  See, eg, Tremaine v Phoenix Assurance Co 45 P2d 210, 213, 1935 AMC 753, 757–58 (Cal App 1 Dist 1935) Legros v Great American Ins Co of New York 865 So 2d 786, 790 (La App 3 Cir 2003) (applying Louisiana state law but observing, ‘We cannot imagine that the doctrine of uberrimae fidei would not impose the same duty on the insurer; namely, the duty to notify its insured of its choice not to renew his policy’.). 38  See,

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Less well established is the American answer to the question considered by the House of Lords in Manifest Shipping Co Ltd v Uni-Polaris Shipping Co Ltd (The Star Sea),46 namely whether and to what extent the duty to act uberrimae fidei extends beyond the point when the contract is made. In considering the content of the post-contract duty in The Star Sea, Lords Hobhouse and Scott referred to a decision of the Supreme Court of Connecticut in a fire insurance case, Rego v Connecticut Placement Facility.47 In Rego, a fire insurer sought to rely on misrepresentations made during trial as the basis for denying cover. The Court held that it would be inconsistent with the normal function served by a trial to permit the insurer to await the testimony at trial to create a further ground for escape from its contractual obligation.48 Rego has not been widely followed on this issue outside of Connecticut, but there is ample authority in both non-marine49 and marine50 cases for the narrow proposition that an insurer cannot avoid an insurance contract for ‘fraud and false swearing’ during litigation. There is, however, much less authority on the question whether the duty to act uberrimae fidei governs the conduct of the parties after the contract is formed but before a claim is made. The dearth of authority should be enough in itself to lead to application of state law under the principle stated in Wilburn Boat. That was the conclusion that the US District Court for the Northern District of California arrived at in Chiariello v ING Groep NV,51 where the insurer argued that it had no obligation to indemnify the assured for the loss of a yacht under a hull policy because the assured had failed to disclose to the insurer that his only crew ­member had left his yacht and that he would henceforth be sailing the yacht ­single-handed.52 Although the Court took the view that the doctrine of ­uberrima fides is ‘well-established federal law’, it went on to observe that, ‘However, the question of whether the doctrine of uberrimae fidei imposes a continuing obligation on the assured to notify the insurer of any subsequent change in a material fact is not similarly well-established’.53 Accordingly, the Court applied New York state law, which was the governing law of the contract. The Chiariello court then followed a decision of the US District for the Southern District of New York, 46 

Manifest Shipping Co Ltd v Uni-Polaris Shipping Co Ltd (The Star Sea) [2003] 1 AC 469. Rego v Connecticut Placement Facility 593 A 2d 491 (Conn 1991), cited ibid 504 per Lord ­Hobhouse, 507 per Lord Scott. 48  Rego 593 A 2d at 497, quoting from American Paint Service v Home Ins Co of New York 246 F 2d 91, 94 (3d Cir 1957). 49  Republic Fire Ins Co of North America v Weides 81 US (14 Wall) 375, 382–83 (1872); Royal Ins Co v Story 40 So 2d 719, 721–22 (Ala. App 1949), cert denied 40 So 2d 724 (1949); American Paint Service v Home Ins Co of New York 246 F2d 91, 94 (3d Cir 1957); Home Ins Co v Cohen 357 SW 2d 674, 676–77 (Ky. 1962); Tarzian v West Bend Mutual Fire Ins Co 221 NE 2d 293, 297–98 (Ill. App 1966); Foreign Credit Corp v Aetna Casualty & Surety Co 276 FSupp 791, 793–94 (SD NY 1967). 50  American Home Assurance Co v Masters Ships Management SA 423 FSupp 2d 193, 224–25, 2007 AMC 1888, 1925–26 (SD NY 2006). 51  Chiariello v ING Groep NV 2006 AMC 2135 (ND Cal. 2006). 52  The insurer also argued, unsuccessfully, that the policy contained an express warranty prohibiting single-handed operation: see ibid 2140–43. 53  ibid 2143. 47 

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Navegacion Goya, SA v Mutual Boiler & Machinery Insurance Co,54 which held that under New York state law, the assured does not have a continuing obligation to inform the insurer of material changes to the risk insured, unless the insurer notifies the assured at the time coverage is granted of any changes that will result in a loss of coverage. This was so despite the fact that New York state law applies the doctrine of uberrima fides to marine insurance contracts.55 Similarly, in Rallod Transportation Co v Continental Insurance Co,56 the US Court of Appeals for the Ninth Circuit held that under California state law the assured’s duty to disclose material information terminates altogether once the contract is formed. In contrast, in Windsor Mount Joy Mutual Insurance Co v Giragosian,57 the US Court of Appeals for the First Circuit stated that, Once policy coverage has commenced, the doctrine [of utmost good faith] imposes an equally strict, continuing obligation on the vessel owner to ensure that the vessel will not, through either bad faith or neglect, knowingly be permitted to break ground in an unseaworthy condition. (emphasis added)

As the court in Chiariello noted, however, this dictum confuses the doctrine of uberrima fides with the implied modified negative warranty of seaworthiness, and so should not be regarded as persuasive on the question of a continuing duty to act uberrimae fidei.58 When referring specifically to the question of post-contract disclosure of material information by the assured, the Giragosian court said: Whatever the exact extent of the applicability of the strict uberrimae fidei standard, we cannot believe that in these times it requires a pleasure boat owner to notify the insurer every time the craft takes on a small amount of water, or has engine trouble, at pain of losing coverage.59

These dicta from Giragosian implicitly support the proposition that there is at least some post-contract duty of disclosure, albeit one that does not extend to minor matters. Nevertheless, as the Chiariello court pointed out, it would be unwise to place too much emphasis on the Giragosian court’s decision. It is safer to assume, as Chiariello did, that any continuing obligation of disclosure should be governed by state law, which may produce the result, as it did in Navegacion Goya (under New York law) and Rallod (under California law), that there is no continuing duty to disclose at all.

54  Navegacion Goya, SA v Mutual Boiler & Machinery Insurance Co 411 FSupp 929, 1977 AMC 175 (SD NY 1975). 55  Although the choice of law provision referred to ‘established, entrenched [federal] precedent’ it must be recalled that Anh Thi Kieu (above n 27) was binding authority requiring the Southern Marine Concepts (above n 38) court to hold that there is no such established federal precedent requiring ­application of uberrima fides, which is why the clause defaulted to New York state law. 56  Rallod Transportation Co v Continental Insurance Co 727 F2d 851 (9th Cir 1984). 57  Windsor Mount Joy Mutual Insurance Co v Giragosian 57 F3d 50, 55, 1995 AMC 2542, 2548 (1st Cir 1995). 58  Chiariello v ING Groep NV 2006 AMC 2135, 2144 (ND Cal 2006). 59  Giragosian 57 F3d 50, 55, 1995 AMC 2542, 2548 (1st Cir 1995).

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ii. The Significance in the US of the 2015 Reforms to English Marine Insurance Law In QBE Seguros v Morales-Vazquez,60 the US District Court for the District of Puerto Rico was invited by an assured to abandon its adherence to the doctrine of uberrima fides on the ground that the jurisdiction that gave birth to the doctrine, the UK, has recently passed legislation to remove the all-or-nothing effect of material non-disclosure. Perhaps not surprisingly, the Court declined the invitation. All circuit courts of appeal except the Fifth Circuit are emphatic that the doctrine is entrenched federal maritime law, so it is extremely unlikely that the US Supreme Court will ever take a case that would give it the opportunity to consider the doctrine. Four circuit courts of appeal (the First, Second, Eighth and Eleventh) have affirmed or reaffirmed their support for the doctrine in just the past three years.61 The US Congress will not legislate in relation to marine insurance; it never has, and is unlikely to be lobbied to do so on this particular issue. The UK may have changed the ground rules laid down in Carter v Boehm 250 years ago, but there is almost no prospect that the USA will follow suit. If anything, the tide is flowing in the other direction. However, a US court exercising admiralty jurisdiction would almost certainly apply UK law if the contract were to contain a choice of law provision choosing that law, unless the UK had no substantial relationship to the parties or the transaction or unless UK law conflicts with the fundamental purposes of maritime law.62 It might be argued that the new UK provisions do conflict with a fundamental purpose of American maritime law, given the extent of authority favouring the doctrine of uberrima fides, but if there is some objective connection with the UK, such as the place of business of the insurer, it seems likely that a US court would apply the UK rule if called on to do so by the presence of a choice of law clause. Although the doctrine of uberrima fides is concerned with precontractual non-disclosure or misrepresentation, its effect is on the enforceability of the insurance contract, which should surely be governed by the governing law of the contract. This leads to the intriguing possibility that astute American insurance brokers might soon begin to place their clients’ marine insurance business in the London market, to take advantage of the more generous UK law, rather than in the US market, where the law continues to cleave with fervour to the doctrine of uberrima fides.

60 

QBE Seguros v Morales-Vazquez 260 FSupp2d 148, 2016 AMC 2820 (DPR 2016). Catlin (Syndicate 2003) at Lloyds v San Juan Towing and Marine Services Inc 778 F3d 69, 2015 AMC 694 (1st Cir 2015); Firemans Fund Ins Co v Great American Ins Co of New York 822 F3d 620, 2016 AMC 1217 (2d Cir 2016); St Paul Fire and Marine Ins Co v Abhe & Svoboda Inc 798 F3d 715, 2015 AMC 2113 (8th Cir 2015); AIG Centennial Ins Co v O’Neill 782 F3d 1296, 2015 AMC 1217 (11th Cir 2015). 62  Stoot v Fluor Drilling Services, Inc 851 F2d 1514, 1517, 1989 AMC 20, 24 (5th Cir 1988). The US Court of Appeals for the Fifth Circuit said: ‘[U]nder admiralty law, where the parties have included a choice of law clause, that state’s law will govern unless the state has no substantial relationship to the parties or the transaction or the state’s law conflicts with the fundamental purposes of maritime law.’ 61 

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Wilburn Boat has always been a deeply unpopular decision,63 notorious for stubbornly swimming against the smooth and relentless tide that flows towards national uniformity of maritime law in the United States.64 Nevertheless, the Supreme Court’s primary motivation in Wilburn Boat seems to have been the desire to override the ‘harsh’ strict compliance rule in relation to warranties, rather than to strike a blow for states’ rights in the complex balance of federalism.65 One of the many mysteries surrounding the Wilburn Boat decision is why the Supreme Court did not simply do away with the strict compliance rule in relation to marine insurance warranties by creating a new, federal, rule of general maritime law that would be applied uniformly throughout the country.66 Like the strict compliance rule, the harsh doctrine of uberrima fides has so far managed to survive the Supreme Court’s oblique method of trying to protect the assured through application of state law. As the recent UK reforms show, there is not much to be said for the doctrine of uberrima fides in the twenty-first century, so it is rather baffling to see how often American courts work actively to find ways of applying it. Even in the Fifth ­Circuit, the main (indeed, only) haven for application of state law, the Wilburn Boat choice of law inquiry often loops and eddies around through vertical and horizontal inquiries until it arrives back at uberrima fides, sitting unmoved in many jurisdictions (such as New York) like a baleful frog.67 Thus, overall, Carter v Boehm continues to thrive in the United States, despite the efforts of many state legislatures to enact regimes more generous to assureds.

B.  Disclosure Standards in Non-marine Insurance As discussed above, the prevailing US disclosure standards applied to policyholders in cases of marine insurance and for insurers seeking reinsurance are 63  Grant Gilmore and Charles Black, The Law of Admiralty 2nd edn (Mineola, Foundation Press, 1975) 68, 71 (called Wilburn Boat ‘persistently problematic’ and ‘nightmarish’). The decision played a part in prompting Currie to coin one of the best-known titles for a journal article about maritime law: D Currie, ‘Federalism and the Admiralty: “The Devil’s own mess”’ (1960) Supreme Court Review 158, which refers to Wilburn Boat as ‘unsatisfactory’: ibid 210. 64  On the importance of uniformity, see CS Haight, ‘Babel Afloat: Some Reflections on Uniformity in Maritime Law’ (1997) 28 Journal of Maritime Law and Commerce 187. The Maritime Law Association of the United States (MLAUS) has a Uniformity Committee, which surveys developments that may threaten national uniformity of federal law and recommends that the Association file amicus briefs favoring uniformity in such cases. 65  See J Goldstein, ‘The life and times of Wilburn Boat: A Critical Guide (Part I)’ (1997) 28 Journal of Maritime Law and Commerce 395, 410–17, who reviews the notes and papers written by the Supreme Court Justices when coming to their decision. 66  Goldstein suggests that the Court’s reluctance to create a new federal rule stemmed from the views of Black J, who wrote the final opinion and who wrote in his notes that he would not ‘wrest the decision from the States’: see ibid 411. 67  See, eg, the two Great Lakes Reinsurance cases Great Lakes Reinsurance (UK) PLC v. Southern Marine Concepts, Inc 2009 AMC 1093 (SD Tex. 2008); Great Lakes Reinsurance (UK) PLC v. Durham Auctions, Inc. 585 F3d 236, 2010 AMC 185 (5th Cir 2009).

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congruent with the burdens traditionally imposed by English law. For land-based, non-marine insurance, however, the US has long differed from England by in essence requiring only that prospective policyholders answer the questions asked by the prospective insurer. In the US, an applicant’s failure to voluntarily disclose material fact in an insurance application will not allow the insurer to void the policy, unless the insurer asked for information about that fact or perhaps where the insurer can prove that the insured had a fraudulent intent.68 Thus, an innocent failure to disclose under American law ‘will not avoid insurance coverage, except in marine insurance ­controversies.’69 Unless the prospective policyholder is asked about a fact, the general rule in the US is that the policyholder has no obligation to address that fact and no obligation to alert the insurer to the risks posed by a fact.70 This is considered sufficient good faith in the US regarding non-marine insurance, which does not require the applicant/policyholder to demonstrate the ‘utmost’ good faith of volunteering information during the pre-contractual period. This departure from the UK approach has been prominent in the US for more than a century,71 and has been particularly dominant since the mid-twentieth century.72 The focus in determining materiality is upon the risk assumed by the insurer rather than the actual cause of loss. For example, a life insurance applicant may erroneously state that he has never been diagnosed with diabetes or that his age is 40 rather than 50. These are clearly inaccurate statements, knowingly made unless the applicant is mentally impaired. They are also material to the risk assumed by a life insurer. All things equal, a diabetic policyholder is more likely to die

68  Jeffrey W Stempel, Peter Nash Swisher and Erik S Knutsen, Principles of Insurance Law (first ­published 1988, 4th edn, New York, LexisNexis, 2012) 479. 69  ibid 479. See also Robert E Keeton and Alan I Widiss, Insurance Law (St Paul MN, West Academic Publishing, 1988) s 3.7; Lee R Russ and Thomas F Segalla (eds), Couch on Insurance 3rd edn (St Paul MN, West Group, 2010) s 137:10. 70  See Stempel, Swisher and Knutsen (n 68) 479–80. 71  See, eg, Penn Mut Life Ins Co v Mechanics Sav Bank & Trust Co 72 F413 (6th Cir 1896) (applying Pennsylvania statutory law). In the US, policyholders, like tort plaintiffs, have generally preferred to sue in state court while insurance companies, like tort defendants, generally prefer the federal courts, which are perceived as more favourable to defendants. Consequently, if a policyholder sues in state court to obtain a favorable coverage ruling, the insurance company defendant will almost always remove the case to federal court. But pursuant to the famous U.S. Supreme Court decision in Erie Railroad Co v Tompkins 304 US 64 (1938), the federal court, applying the conflict of law protocols of the forum state, will select the most applicable state contract and insurance law to use in deciding the case. See Klaxon Co v Stentor Elec Mfg Co 313 US 487 (1941) (logic of Erie decision, which emphasises that the applicable law to a contract dispute should be the same in federal and state court, requires a ­federal court with diversity of citizenship jurisdiction to apply the forum state’s choice of law ­methodology). Regarding conflict of laws methodology used by states for insurance disputes, see Maniloff and Stempel (n 4) (chapter authored by Steven M Klepper). 72  See Knutsen and Stempel (n 3) s 3.08 (‘Insurer Rescission on Grounds Related to Fraud or ­Misrepresentation’) (finding that unintentional or nonfraudulent misstatements in an ­application are not grounds for rescission unless the inaccurate responses are material to the risk and that this has been the dominant US law during the twentieth and twenty-first centuries).

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­ rematurely than one without diabetes and a 50-year-old is more likely to die p sooner than a 40-year-old. If, immediately after having obtained the policy, the insured is murdered or dies in a traffic accident, his beneficiary may argue that misstatements about diabetes or age had nothing to do with the cause of his death and that the misstatements were not material to the loss. True enough. But because the misstatements were material to the risk assumed by the insurer,73 the insurer may in good faith deny the claim.74 The focus on risk of loss rather than cause of loss in US law is consistent with that of the UK and other countries. The main US difference lies in the fact that in the US the non-marine applicant/policyholder generally has traditionally had no affirmative duty to disclose material information, only a duty to answer inquiries truthfully. The typical approach of American courts is reflected in the proposed Restatement of the Law of Liability Insurance (RLLI) by the American Law Institute (ALI),75 which provides that ‘[a]ny statement of fact made by a policyholder in an application for an insurance policy is a representation by the policyholder’ and that an ‘incorrect representation’ made in an application entitles the insurer to ‘deny a claim or rescind’ the applicable policy provided that two conditions are met: (1) that the ‘misrepresentation was material’ and (2) that the ‘insurers reasonably relied upon the misrepresentation in issuing or renewing the policy.”’76 The RLLI further provides that a misrepresentation made during application or renewal is material ‘only if, in the absence of the misrepresentation, a reasonable insurer in this insurer’s position would not have issued the policy or would have issued the policy only under substantially different terms.’77 As previously discussed, this reflects longstanding US law on the topic.

73  Had the insurer known about the diabetes, it almost surely would have priced the policy differently or perhaps declined to issue the policy. Had the insurer known the applicant’s true age, it surely would have charged a higher premium, although it is unlikely to have otherwise refused the risk, at least on age grounds. 74  See Knutsen and Stempel (n 3) ss 3.08–3.10. Some states have precedent or statutes (such as those of Texas and Louisiana) providing that a breach of warranty, even if material to the risk, will not destroy coverage unless the warranty breach is material to the actual loss in question. It is important to note that this body of law that softens the harshness of the traditional rule requiring strict compliance with warranties is separate from the question of the requirements of pre-contractual disclosure. In this latter arena, the clear majority of American states focuses on whether a misrepresentation is material to the risk assumed by the insurer rather than the actual loss at issue. 75  See RLLI (n 5) s 7. The RLLI has been somewhat more controversial than other Restatement projects and has incurred the opposition of some significant elements of the U.S. insurance industry, who successfully persuaded ALI leadership to defer final consideration of the RLLI until the May 2018 ALI Annual Meeting (it had been scheduled for final approval at the May 2017 Annual Meeting). Perhaps more important, the RLLI sections on misrepresentation, materiality, and reliance (ss 7–9), at least as currently drafted, have not met insurer resistance or been the subject of controversy. An earlier version of the RLLI took a more pro-policyholder view of misrepresentation more resistant to rescission. It was revised to its current form in response to insurance industry criticism. These provisions now appear to be universally viewed as reflecting mainstream US law. 76  See above RLLI (n 5) s 7. 77  See ibid, s 8.

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The RLLI also sets forth the criteria for reasonable reliance, which is to some degree imbedded in the definition of materiality, requiring that ‘[a]bsent the representation, the insurer would not have issued the policy or would have issued the policy only with substantially different terms’ and that the insurer’s ‘actions would have been reasonable under the circumstances.’78 Although the drafting of ‘black letter’ of this section perhaps opens the door to an argument that a subjective element has been introduced into the materiality inquiry, the Comments and Reporters’ Note to the section, particularly when read in tandem with the materiality definition of RLLI §8, make it clear that in the US the standard is an objective one.79 As noted by the RLLI Reporters and other commentators, the American states can differ regarding misrepresentation and rescission doctrine. Even though there is a clear majority approach and perhaps even something approaching consensus, there remain some large differences between the states (eg, the objective test for materiality versus a subjective test for materiality) and there are often nuances in the application of the prevailing methodology. In addition, because of the statecentred nature of US insurance, each state has different statutes regarding insurance that may differ in ways large or small from the prevailing approach. 78  See ibid, s 9 and s 8, Comment d (determination of materiality requires ‘[a]n objectively reasonable basis for the underwriting judgment’ (italics removed). Further, it ‘is important to emphasize that the materiality analysis focuses on a “reasonable insurer in this insurer’s position,” not on “this insurer.” The work that the reasonableness requirement is doing in this context is to require that there be some evidence supporting the actual insurer’s judgment that the information is important, so that there is a basis for the trier of fact to evaluate whether a reasonable insurer in this insurer’s position would agree with that judgment. This evidence can consist of an actuarial opinion, an empirical study, testimony regarding custom and practice, or any other evidence that a reasonable insurer would use to decide whether a category of information is sufficiently important for the purpose of deciding whether to insurer an applicant and, if so, at what price.’ RLLI (n 5) s 8, Comment d (Proposed Final Draft at 82–83). Accord, York Mut Ins Co v Bowman 746 A2d 906, 909 (Me 2000); New York Life Ins Co v Kuhlenschimt 33 NE 2d 340, 347 (Ind 1941); Jeffrey E Thomas, New Appleman on Insurance Law Library Edition (New York, LexisNexis, 2012) s 3-16[1][d] (‘The generally accepted test for determining the materiality of misrepresentation to the insurer is whether reasonably careful and intelligent underwriters would have regarded the misrepresentation … as substantially increasing the chances of loss insured against so as to bring about a rejection of the risk or the charging of an increased premium.’). 79 See Reporters’s Notes d, e, and f to RLLI s 9. However, in relatively rare cases, a policyholder may be able to overcome a misrepresentation defence to coverage even when the misrepresentation is objectively material (ie, enough to cause a reasonable insurer to refuse to issue, alter, or increase price) if it can demonstrate that the particular insurer routinely accepts such risks (ie, those involving the risks inaccurately disclosed in the application) at no additional premium. For example, a life insurance applicant may incorrectly answer ‘no’ to a question regarding whether the applicant has a job that reasonable insurers consider sufficiently dangerous to affect underwriting such as logging, deep sea commercial fishing, or working high steel construction. But if the insurer in question has a history of insuring equivalent applicants who answer ‘yes’ to the question at the same rate, this would appear to be a situation in which the inaccurate ‘no’ answer meets the RLLI s 8 requirement of materiality but fails the RLLI s 9 requirement of reliance. This of course is unlikely but not impossible. Perhaps the insurer is affiliated with unions that insure workers with dangerous jobs and as result regularly charges high premiums. Perhaps the insurer wishes only to insure such workers. This scenario is of course also unlikely in that it is hard to imagine an applicant who does not know his occupation, which suggests that a judge or jury is likely to find the misrepresentation to be intentional and fraudulent.

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For example, the most common language in misrepresentation statutes provides that [m]isrepresentations … shall not prevent a recovery under the policy or contract unless either: (1) Fraudulent; (2) Material either to the acceptance of the risk or to the hazard assumed by the insurer; or (3) The insurer in good faith would not have issued the policy or contract …80

The statutory language is not entirely clear and leaves some doubt as to whether an objective or subjective standard applies, an arguable ambiguity that is resolved in favour of an objective standard by case law and practice. Regarding fraudulent but immaterial misrepresentations, fraud is sufficiently disfavoured that it is often said that any intentional fraud in applying for insurance makes the policy voidable (and certainly would support a denial of ­coverage).81 However, two noted commentators not only think this anti-fraud rhetoric is comparatively ‘rare’ but ‘[m]ore importantly, no court appears to have voided an insurance policy because an insured fraudulently misrepresented an immaterial fact.’82 They further note that [s]ome courts purporting to adhere to the rule that a fraudulent misrepresentation will void the policy irrespective of the representation’s materiality have reintroduced what is in effect a materiality requirement by demanding that the misrepresentation affect the risk or influence the insurer’s judgment.83

These competing assessments can probably be reconciled due to the 20-year difference in the publication dates of the treatises. Although there remains a strong anti-fraud sentiment among the courts, it appears that the modern or emerging trend is one in which even an intentional, knowing or fraudulent misrepresentation in seeking insurance will not support coverage denial or rescission unless the misrepresentation is material. For example, an insurance applicant who is a religious unmarried woman from a small town may intentionally answer a question (eg, ‘have you ever been ­pregnant?’) inaccurately to avoid embarrassment. Or she may have the ‘fraudulent’ intent of deceiving the insurance agent, whom she finds attractive but worries will not be interested in her if he knows of her past pregnancy. But most US Courts would not permit rescission or coverage denial based on this type of misstatement unless the insurer could show that the inaccuracy was somehow material to the risk undertaken by the insurer issuing the policy.

80 

For example, Alabama Code § 27-14-7; 8 Vt Stat Ann § 3736; KRS § 304.14-110. See Russ and Segalla (n 69) s 82:25 (‘Where the misrepresentation is made by the insured with the fraudulent intent of deceiving the insurer, however, there is authority that the misrepresentation is made material by such fraudulent purpose. Other courts face the issue more directly and hold that when a misrepresentation is fraudulent it is not necessary to determine whether it is material.’). 82  Robert H Jerry, II and Douglas R Richmond, Understanding Insurance Law 4th edn (New York, LexisNexis, 2007) s 102[f], 780. 83  ibid s 102[f], 780. 81 

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For example, if the applicant intentionally falsely denies a past pregnancy that involved medical intervention because she is currently seeking medical insurance in anticipation of a future pregnancy, this type of false statement may well be sufficiently material to the risk (that any future pregnancy would also be complicated and medically expensive) to bar coverage. Of course, an example of this type could easily be rendered null by national or state law barring insurer underwriting based on pre-existing conditions. The view that only material misrepresentations impact coverage regardless of intent is consistent with the maxim ‘law abhors a forfeiture’84 and the prevailing norm in US courts that immaterial breaches of a contract should not result in disproportionate forfeiture of contract benefits.85 The dominant ‘notice-prejudice rule’, which provides that late notice of a claim or loss does not vitiate coverage unless the insurer can demonstrate prejudice, is an example of this view,86 as is the requirement that breaches of the duty to cooperate do not bar coverage unless the insurer is prejudiced,87 and the view that an anti-assignment clause in an ­insurance policy is not enforceable if assignment takes place after a loss or injury has already taken place.88 The more policyholder-friendly US approach regarding pre-contractual disclosure and duties for non-marine insurance likely stems in part from the more relaxed US attitude (as compared to the UK) that the US has traditionally taken regarding statements of fact in contractual arrangements in general.89 During early

84 See People v Wilcox 53 Cal 2d 651 656–67 (Cal 1060) (law ‘traditionally disfavors forfeitures and statues imposing them are to be strictly construed’); People v Surety Ins Co 136 Cal App 3d 556, 561 (1982) (‘The law traditionally disfavors forfeitures and this disfavor extends to forfeiture of bail’); People v Far West Ins Co 93 Cal App 4th 792 (2001). 85 See E Allan Farnsworth, Contracts 4th edn (Alphen aan den Rijn, Wolters Kluwer Law and ­Business, 2004) ss 8.15–8.16 (immaterial breaches of a contract me entitle the non-breaching party to damages or other remedies but generally do not permit the abrogation of the entire agreement); David G Epstein, Bruce A Markell and Lawrence Ponoroff, Making and Doing Deals: Contracts in Context 4th edn (St Paul MN, West Academic Publishing, 2014) 748–50 (same; also noting that US courts often avoid the possible forfeiture affect of a breach by finding that there has been ‘substantial compliance’ with a contract provision); Robert Works, ‘Excusing Nonoccurrence of Insurance Policy Conditions in Order to Avoid Disproportionate Forfeiture: Claims-Made Formats as a Test Case’ (1998) 5 Connecticut Insurance Law Journal 1. See, eg, Acme Markets Inc v Federal Armored Express Inc 648 A2d 1218­ (Pa Super Ct 1994) (construing condition precedent requiring documentation of receipt of funds ­narrowly so as to avoid undue forfeiture of contract). 86  See above Maniloff and Stempel (n 4) ch 3 (finding that all but a handful of the 50 US States ­follow the notice-prejudice rule for occurrence basis insurance policies). 87  See above RLLI (n 5) s 30 (insured’s breach of duty of cooperation bars coverage only if the insurer ‘demonstrates that the failure caused or will cause prejudice to the insurer’). 88  Because in this type of situation, the assignment of the insurance policy does not increase the insurer’s risk of loss because the loss has already been incurred and an assignment then becomes a simple transfer of a contract right. Contract rights in the US are presumptively assignable unless they involve personal services or alter the risk of the parties. See above Epstein, Markell and Ponoroff (n 85) 1012–34. 89  See above Stempel, Swisher and Knutsen (n 68) ch 6 (‘Insurer’s Limitations of Risk; Warranties, Representations, and Concealment’).

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US history, American law largely tracked English law. Like England, the US gave formal treatment to ‘warranties’ designated in an insurance policy.90 A warranty in this context means not a guarantee of performance as in a product warranty but rather meant a contracting party’s assurance regarding a certain state of facts.91 Historically, any ‘breach’ of such a warranty was ground for rescinding a ­policy, even if the breach was immaterial to the risk.92 Courts made the very formal distinction between ‘representations’, where inaccuracy would not vitiate coverage unless material, and ‘warranties’ where even the slightest inaccuracy barred ­coverage.93 Consequently, during the first decades of US law, even a minor breach of warranty unrelated to the loss could result in loss of coverage. American states came to view this English approach, now obsolete in the wake of the (UK) Insurance Act 2015, as too formal and too harsh. In both legislation and judicial decisions, ‘warranties’—even if labelled warranties in the insurance policy—were treated as representations. And representations needed to be material to support rescission or coverage denial.94 Further, as discussed above, the prospective policyholder was responsible only for the representations it made, either voluntarily or in response to insurer questions. The applicant was not required to make affirmative disclosures. US Courts have also softened the impact of warranties by focusing on whether they are ‘affirmative’ or ‘promissory’95 and

90  See William R Vance, Insurance 3rd edn (St Paul MN, West Publishing Co, 1951) 408–10; Edwin Patterson, ‘Warranties in Insurance Law’ (1934) 34 Columbia Law Review 595. 91  See above Stempel, Swisher and Knutsen (n 68) 429–30; Keeton and Widiss (n 68) s 5.6. 92  See William R Vance, Insurance (first published in 1951, 4th edn, Cincinnati, Anderson Pub Co, 1952) s 71; Knutsen and Stempel (n 3) s 3.08[C]. 93 ibid. 94  ibid. See, eg, Fidelity-Phoenix Fire Ins Co v Pilot Freight Carriers Inc 193 F2d 812 (4th Cir 1952) (applying North Carolina law) (‘warranty’ and ‘condition precedent’ are often used interchangeably to create a condition to the insurer’s promise) Benson v Leaders Life Ins Co 339 P3d 843 (Okla 2012) (no rescission granted to insurer when applicant indicated he did not drink alcohol; he was a drinker but in a motor vehicle accident while a pedestrian, a risk the court deemed entirely unrelated to his alcohol consumption). The correctness of the Benson Court’s analysis is open to question in that it looks to have focused on whether misrepresentation was material to the loss that occurred rather than the risk presented. Even though Benson may not have died because of drinking, a reasonable life insurer in that situation may have been able to show that it would not have sold the policy or would have charged a higher premium had it known of the applicant’s drinking. 95  US courts also insist on clear language in the insurance policy before treating the warranty as promissory and thus more demanding of the policyholder. For example, if an applicant merely ‘warrants’ that there ‘is a night watchman’, the warranty is not breached in the absence of a night watchman at the time of loss (even a loss such as a burglary where the presence of the watchman is material to loss as well as the risk) so long as there was a watchman on duty at the time of the application. By contrast, a warranty that the ‘building will have a night watchman on duty at all times’ is a promissory warranty that is arguably breached if the policyholder fails to have a night watchman on duty for even a single evening, even an evening where no loss occurs. See above Stempel, Swisher and Knutsen (n 3) 434–37. Compare Reid v Hardware Mut Ins Co 166 SE 2d 317 (SC 1969) (finding warranty to be affirmative and not breached) with Heniser v Frankenmuth Mut Ins 534 NW 2d 502, 506 (Mich 1995) (finding warranty to be promissory and breached, destroying coverage).

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avoided some technical or minor breaches by finding that there had been substantial compliance with the warranty.96 However, where an applicant does more than simply stay silent but engages in the deliberate and knowing ‘concealment’ of material information with the intent of misleading the insurer, US courts may in these instances support rescission or coverage denial.97 But to vitiate coverage, an applicant’s concealment must be something more than failing to identify material risk and voluntarily disclose it. Rather, the applicant must be failing to disclose in response to inquiry. In such cases, the failure to disclose may support denial of coverage or rescission if the insurer is deceived even if the answer to a specific question is not itself inaccurate.98 Life insurance policies in the US have an additional trait that adds somewhat to the applicant’s pre-contractual duties. After an application has been taken by the insurer for processing and underwriting, the prospective policyholder is not yet completely freed of the burdens of disclosure. During the underwriting period, the policyholder is required to inform the insurer of any material intervening facts that may impact the life insurer’s decision regarding issuance or pricing of the policy.99 To summarise, for non-marine insurance applications in the US, rescission and coverage denial cannot as in the cases of marine insurance and reinsurance be supported by mere failure to recognise and disclose material information.100 Materiality is generally determined by an objective test focusing on what a reasonable insurer would have done, but there are jurisdictions adopting a subjective test focusing on the mental intent of the insurer involved in the case.101 Notwithstanding agreement on the basic doctrine, cases are very-fact dependent and can appear inconsistent.102 Seeking to synthesise the seemingly disparate results, two commentators have suggested the following list of factors a­ ffecting

96  See, eg, Liverpool & London & Globe Ins Co v Kearney 180 US 132 (1901) (warranty that business papers would be kept in an iron safe substantially complied with when store owner was distracted by fire and did not place papers inside safe as was his usual custom and practice). 97  See above Knutsen and Stempel (n 3) s 3.08[D]. 98  See above ibid s 3.08[D], s 3.10. 99  See above Stempel, Swisher and Knutsen (n 3) 471. See, eg, Stipcich v Metropolitan Life Ins Co 277 US 311 (1928). 100 For an interesting example of an insurer (presumably inadvertently) stripping itself of the ­protections it would have enjoyed under maritime insurance law, see King v Allstate Ins Co 906 F2d 1537 (5th Cir 1990) (applying Louisiana law). There, the applicant sought coverage for a recreational boat that later sank under circumstances the insurer regarded as mysterious. The applicant had failed to accurately disclose the purchase price and current value of the boat as well as whether he had previously purchased insurance or claimed a loss concerning the boat during the previous five years. 101  See above Stempel and Knutsen (n 3) s 3.10, 3-84 (subjective test appears to be minority view). 102  ibid at 3-84 and 3-85 (‘Courts have sometimes deemed age misstatement material while finding it immaterial in other situations’ and the same inconsistency can be found regarding medical information and valuation of property).

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­misrepresentation decisions103 in US Courts: the actual cause of loss;104 the ­magnitude of the misstatement;105 the clarity of the insurer’s inquiry;106 whether the transaction as a whole permitted the insurer to both understand the inquiry and appreciate its significance and respond in a thoughtful, accurate fashion;107 the insurer’s actual knowledge of the policyholder and the insurance risk;108 and the insurer’s likely response if furnished with a true statement rather than the misstatement under attack.109

III.  Insurers’ Pre-contractual Disclosure Obligations110 The provision of the McCarran-Ferguson Act, described above, created a principle called ‘reverse pre-emption’,111 which produces exactly the opposite result from that which usually prevails under American constitutional law. In other areas of the law, the Supremacy Clause of the US Constitution112 produces the result that federal statutes pre-empt (ie, override) the operation of state statutes to the extent of any inconsistency (usually called ‘conflict pre-emption’),113 or if there is such comprehensive federal regulation or dominant federal interest that it is apparent that the US Congress intended to ‘occupy the field’ and thus to displace state law

103 

List drawn from Stempel and Knutsen (n 3) s 3.10, 3-86 to 3-87 (italics from original omitted). Even with the well-established rule that materiality is to be assessed according to the statement’s relation to risk of loss rather than cause of loss, it appears that courts are sometimes nonetheless influenced by whether a misstatement actually affected the loss and itself raised the insurer’s exposure. 105  Technically, of course, a misrepresentation either affects risk or it does not in terms of policy issuance or pricing. Nonetheless, it appears that courts are influenced by whether the affect is large or small. For example, a misrepresentation that correlates to a slightly higher premium is less likely to destroy coverage than misrepresentation that would have prevented issuance of the policy altogether. 106  Where a question is ambiguous, courts in the US are reluctant to label a response as a misrepresentation. If the policyholder can show that it answered accurately as it understood the question, this may be sufficient to defeat the insurer’s misrepresentation defence even though it arguably drifts from an objective approach to a subjective approach and even in situations where the average applicant would have held a different understanding of the insurer’s question. 107  Where an insurance application is rushed or completed under distracting conditions, US courts appear more reluctant to find misrepresentation. 108  Where an insurer knows the actual facts, it is almost by definition unable to claim reliance upon an inaccurate statement in an application. As a practical matter, such an insurer is likely to be an unsympathetic defendant as well. 109  This factor, like others, has the potential to blur the objective and the subjective. Perhaps it would be more accurate to say that the response of a reasonable insurer to an inaccurate statement is an important factor in the outcome of cases where a misrepresentation defence is raised. 110  This Part is an adaptation of Martin Davies, ‘Insurer’s Pre-Contractual Disclosure ­Obligations: The Position in the United States of America’ (2012) 23 Insurance Law Journal 71. 111  See, eg, Ojo v Farmers Group Inc, 356 SW 3d 421 at 424 (Tex, 2011). 112  US Const, art VI, cl 2. 113 See Pacific Gas and Electric Co v State Energy Resources Conservation and Development Commission, 461 US 190 at 204, 103 S Ct 1713 at 1722 (1983); Wisconsin Public Intervenor v Mortier, 501 US 597 at 605, 111 S Ct 2476 at 2482 (1991). 104 

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(usually called ‘field pre-emption’).114 In contrast, the McCarran-Ferguson Act provides that state insurance statutes override federal statutes unless the latter specifically relate to the business of insurance. In interpreting the McCarran-Ferguson Act, the US Supreme Court has stated a three-part test for determining whether reverse pre-emption occurs: (1) the federal statute at issue does not specifically relate to the business of insurance; (2) the state law was enacted for the purpose of regulating the business of insurance; and (3) application of the federal statute will invalidate, impair or supersede the state law.115 The consequence of McCarran-Ferguson reverse pre-emption is that regulation of the activities of insurers lies almost entirely with the states. With one small but rather surprising exception, federal law has little relevance, unless state regulation of insurance business contravenes the US Constitution, particularly the Due Process clause.116 As a result, the US Supreme Court rarely hears insurance cases, because the state supreme courts are the highest authority for resolution of insurance law questions. Some states have passed specific unfair insurance practices acts, which usually impose far-reaching obligations on insurers not to engage in ‘unfair or deceptive acts’. Such statutes have been held to require insurers to disclose many different kinds of information. The issues raised by such insurance-specific legislation are considered in Part III.A below. Other states have applied their general consumer protection legislation to require pre-contractual disclosure by insurers. The issues raised by the application of such legislation in the insurance context are considered in Part III.B. In addition to these sources of legislative intervention, many states use a doctrine of interpretation known as the ‘reasonable expectations’ doctrine. Although this doctrine does not require pre-contractual disclosure by insurers, it creates a strong and obvious incentive for insurers to make full disclosure. The doctrine is considered in Part III.C. The small but surprising pocket of federal law is considered in Part III.D.

A.  Unfair Insurance Practices Acts Many states have created unfair insurance practices acts, which are consumer protection statutes designed specifically to regulate the activities of insurers. By far the most common use of such legislation by insurance consumers is to complain of unfair or bad faith settlement of claims by insurers, a claim often combined with an allegation of breach of a contractual obligation of good faith

114 

Crosby v National Foreign Trade Council, 530 US 363 at 372–73, 120 S Ct 2288 at 2292–93 (2000). US Department of Treasury v Fabe, 508 US 491 at 500–01, 113 S Ct 2202 at 2208–09 (1993); Humana Inc v Forsyth, 525 US 299 at 307, 119 S Ct 710 at 716 (1999). 116  See, eg, People ex rel Lewis v Safeco Insurance Co of America, 414 NYS 2d 823 at 864 (NY Sup, 1978) (‘Clearly, the power of the State to regulate insurance companies is not absolute; an insurer is still entitled to due process of law.’). 115 

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and fair dealing.117 Depending on the terms of the statute, however, an insured may also be able to use the relevant legislation to complain of a pre-contractual failure to disclose on the part of an insurer. Most, but not all118 such statutes provide a private right of action to an individual plaintiff who has suffered loss as a result of the unfair insurance practice. For example, the state of New Mexico has passed legislation known as the Unfair Insurance Practices Act (UIPA) that prohibits (among other things) ‘unfair or deceptive act[s] or practice[s]’ by insurers,119 or the publication of ‘any estimate illustration, circular, statement, sales presentation or comparison’ that misrepresents the benefits, advantages, conditions, terms, effects, or premiums of an insurance policy.120 In Azar v Prudential Insurance Co of America,121 the Court of Appeals of New Mexico held that insurance policyholders could not rely on the implied covenant of good faith and fair dealing to impose a duty of disclosure on an insurer before the policies were issued, because that covenant depended upon the existence of an underlying contractual relationship, but the policyholders could nevertheless rely on a statutory duty to disclose imposed by the UIPA. The policyholders’ claim was for failure by a life insurer to disclose the additional cost of paying premiums in installments. Similarly, California’s Unfair Insurance Practices Act (CUIPA) proscribes many different kinds of ‘deceptive acts or practices in the business of insurance’, including misleading statements about the contents, benefits or advantages of policies, or misleading advertising.122 As is the case in other jurisdictions, most of the claims under this legislation are concerned with alleged unfairness in the insurer’s claims investigation or settlement processes,123 but the statute has been used as the basis for complaint about pre-contractual non-disclosure by insurers.124 For example, in Village Northridge Homeowners’ Association v State Farm Fire and

117  For one of many examples, see Oehlmann v Metropolitan Life Insurance Co, 644 F Supp 2d 521 (MD Pa, 2007), considering whether a life insurer violated Pennsylvania’s Unfair Insurance Practice Act (40 Penn Stat Ann §§ 1171.1–1171.15) and common law claims for bad faith and the breach of the covenant of good faith and fair dealing in the manner in which it handled the plaintiff ’s claim. 118  See, eg, Showpiece Homes Corp v Assurance Co of America, 38 P 3d 47 (Colo, 2001), where the Supreme Court of Colorado held that no private right of action could be maintained against an insurer under Colorado’s insurance-specific Unfair Claims Deceptive Practices Act (UCDPA), Co Rev Stat Ann § 10-3-1101 et seq. See also note 124 below. 119  New Mex Stat Ann §§ 59A-16-1, 59A-16-3. 120  New Mex Stat Ann § 59A-16-4. 121  Azar v Prudential Insurance Co of America 68 P 3d 909 (NM App, 2003). The same court reached a similar decision in Smoot v Physicians Life Insurance Co, 87 P 3d 545 (NM App, 2003). 122  West’s Ann Cal Ins Code § 790.03. 123 See, eg, August v Provident Life and Accident Insurance Co, 772 F Supp 2d 1197 (CD Cal, 2011)(whether insurer had violated CUIPA by treating insured’s claim as one based on ‘sickness’ rather than ‘injury’). 124  The Supreme Court of California has held that CUIPA itself does not create a private right of action (Moradi-Shalal v Fireman’s Fund Insurance Co, 758 P 2d 58 (Cal, 1988)) but CUIPA is used by policyholders in conjunction with California’s general Unfair Competition Law (UCL)(Cal Bus & Prof Code § 17200) as the basis for statutory action against insurers. Moradi-Shalal is examined in further detail below.

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Casualty Co,125 the Supreme Court of California stated that CUIPA126 subjected an ­earthquake insurer ‘to strict and enforceable standards of conduct’ about disclosing insurance policy limits before contracting. To take another example, in Neufeld v Balboa Insurance Co,127 the insured brought suit after her insurer denied her claim for losses incurred when the roof of her ski lodge collapsed. The insurer moved for summary judgment, relying on the contractual one-year limitations period contained in the insurance policy. The Court of Appeal for the Fourth District, California, held that the insurer was estopped from raising the one-year limitation defence because it had failed to disclose the existence of the relevant provision to the insured, as it was required to do by CUIPA. These examples from New Mexico and California show that, as noted above, unfair insurance practice legislation in broad general terms can impose ­far-­reaching obligations on insurers to disclose a wide variety of information. It should be stressed again, however, that such legislation is neither rare nor ubiquitous in the United States.

B. General Unfair Trade Practices and Consumer Protection Legislation In those states where there is no unfair insurance practices legislation, or where the unfair insurance practices legislation does not confer a private right of action,128 plaintiffs have turned to their states’ general consumer protection statutes, which usually protect consumers against misleading or deceptive conduct and other predatory business behaviour. General consumer protection legislation of this kind often applies broadly to the sale of ‘goods and services’ or ‘goods, services or property’, which raises the preliminary question of whether the sale of insurance falls within the reach of the legislation. Most state courts have answered that question in the affirmative, holding that the sale of insurance is the sale of a ‘service’,129 or ‘property’,130 or both,131 and thus is caught by the general consumer protection legislation. Where the state does not have specific legislation relating to unfair insurance practices, this is the only question of relevance. Rather more controversial, however, is the question of whether an action may be brought under general consumer protection legislation if the state also has ­specific legislation relating to unfair insurance practices, which legislation does

125  Village Northridge Homeowners’ Association v State Farm Fire and Casualty Co 237 P 3d 598 at 608 (Cal, 2010). 126  In conjunction with California’s UCL: see above n 124. 127  Neufeld v Balboa Insurance Co 101 Cal Rptr 2d 151 (Cal App 4 Dist, 2000). 128  See above, notes 118 and 124. 129  Wagner v Travelers Property Casualty Co of America, 209 P 3d 1119 at 1129 (Colo App, 2008). 130  Showpiece Homes Corp v Assurance Co of America, 38 P 3d 47 (Colo, 2001). 131  Dodd v Commercial Union Insurance Co, 365 NE 2d 802 (Mass, 1977).

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not provide a private right of action for individual plaintiffs. One view is that the state legislature’s failure to provide a private right of action under the insurancespecific legislation indicates that there should be no private right of action against insurers under the general legislation, because if the legislature had intended that an action could be brought, it would have so provided in the insurance-specific legislation. This view was adopted, for example, by the Supreme Court of New Hampshire in Bell v Liberty Mutual Insurance Co,132 and the Georgia Court of Appeals in N ­ ortheast Georgia Cancer Care LLC v Blue Cross & Blue Shield of Georgia Inc.133 Conversely, some states hold that the failure to provide a private right of action in the insurance-specific legislation cannot be interpreted as a bar on more general private remedies for unfair and deceptive insurance practices unless the insurancespecific legislation specifically provides that it is intended to be the exclusive remedy for deceptive trade practices in the insurance industry. This view was adopted, for example, by the Supreme Judicial Court of Massachusetts in Dodd v Commercial Union Insurance Co,134 by the Supreme Court of Colorado in ­Showpiece Homes Corp v Assurance Co of America,135 and by the Superior Court of Delaware in Grand Ventures Inc v Whaley.136 Each of these decisions allowed suit under general consumer protection legislation despite the fact that there was no private right of action under the insurance-specific legislation. California has adopted a third position. In Moradi-Shalal v Fireman’s Fund Insurance Co,137 the Supreme Court of California held that the state’s general Unfair Competition Law (UCL)138 supplements the absence of a private right of action in California’s Unfair Insurance Practices Act (CUIPA),139 so that policyholders in California may point to a violation of CUIPA as a basis for a private right of action against an insurer under the UCL. The differences between these three positions point inexorably to the rather anodyne conclusion that everything depends on the words of the relevant statutes, which may or may not apply to insurance and which may or may not be pre-empted by the insurance-specific legislation. This serves only to illustrate further the opening proposition of this chapter: generalisation about US insurance law is impossible. The reader can only be advised to inquire about the particular jurisdiction in which he or she is interested, and be warned that it does not necessarily take the same position as its neighbours or, indeed, any other American jurisdiction.

132  Northeast Georgia Cancer Care LLC v Blue Cross & Blue Shield of Georgia Inc 776 A 2d 1260 (NH, 2001). 133  Bell v Liberty Mutual Insurance Co 676 SE 2d 428 at 434 (Ga App, 2009). 134  Dodd v Commercial Union Insurance Co 365 NE 2d 802 (Mass, 1977). 135  Showpiece Homes Corp v Assurance Co of America 38 P 3d 47 (Colo, 2001). 136  Grand Ventures Inc v Whaley 622 A 2d 655 (Del Super, 1992). 137  Moradi-Shalal v Fireman’s Fund Insurance Co 758 P 2d 58 (Cal, 1988). 138  Cal Bus & Prof Code § 17200. 139  West’s Ann Cal Ins Code § 790.03.

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C. The ‘Reasonable Expectations Doctrine’ and Pre-contract Disclosure by Insurers Many (but not all)140 states have adopted a version of the ‘reasonable expectations’ doctrine, which is a special principle of interpretation of insurance contracts. The doctrine was the brainchild of Professor (later Judge) Robert Keeton, who wrote a seminal two-part article on the subject in the Harvard Law Review in 1970.141 In its strongest form,142 the doctrine requires a court to interpret the terms of an insurance policy according to the reasonable expectations of the insured, ‘even though painstaking study of the policy provisions would have negated those expectations’.143 For example, in Clark-Peterson Co Inc v Independent Insurance Associates Ltd,144 the Supreme Court of Iowa held that an umbrella liability insurer was obliged to provide cover for an intentional employment discrimination claim made against the insured employer, despite the fact that the umbrella policy expressly provided that it did not cover liability for intentional acts. The insured had bought the policy to provide it with cover against employment discrimination liability. The effect of the policy’s exclusion for intentional acts ‘would be to withdraw with the policy’s left hand what is given with its right’.145 The Supreme Court of Iowa said that an ‘ordinary layperson’ would expect the policy to provide coverage against claims of intentional discrimination.146 Interpreting the policy in accordance with the insured’s reasonable expectations led the court to ignore the express exclusion for intentional acts and, thus, to require the insurer to provide cover. A rather milder version of the reasonable expectations doctrine uses it as a means of resolving doubt and ambiguity in the interpretation of an insurance contract. According to this version of the doctrine, any ambiguity in an insurance policy should be resolved by considering what a reasonable insurance policy purchaser would think when entering into the contract.147 This version of the

140  See, eg, Nautilus Insurance Co v Country Oaks Apartments Ltd, 566 F 3d 452 at 455, 458 n 4 (5th Cir 2001), stating that the reasonable expectations doctrine is not part of Texas law. 141  R Keeton, ‘Insurance Law Rights at Variance with Policy Provisions’ (1970) 83 Harvard Law Review 961 and ‘Insurance Law Rights at Variance with Policy Provisions: Part Two’ (1970) 83 Harvard Law Review 1281. The doctrine of reasonable expectations appears in Part Two. 142  Courts have applied several different versions of the reasonable expectations doctrine. Jerry and Richmond (n 82) 164–67 describe three different versions ranging from ‘strong’ through ‘mid-range’ to ‘weak’. See also R Jerry, ‘Insurance, Contract and the Doctrine of Reasonable Expectations’ (1998) 5 Connecticut Journal of Insurance Law 21. 143  Rodman v State Farm Mutual Automobile Insurance Co, 208 NW 2d 903 at 906 (Iowa, 1973), quoting R Keeton, Basic Text on Insurance Law (St Paul MN, West Publishing, 1971) 351. 144  492 NW 2d 675 (Iowa, 1992). 145  ibid, 679. 146  ibid, 678. 147  See, eg, Breland v Schilling, 550 So 2d 609 at 610–11 (La, 1989); In re Katrina Canal Breaches Litigation, 495 F 3d 191 at 207 (5th Cir, 2007).

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­ octrine also protects the insured’s reasonable expectations ‘even though a careful d examination of the policy provisions indicates that such expectations are contrary to the expressed intention of the insurer’.148 It has often been said that the reasonable expectations doctrine imposes on the insurer a de facto obligation of pre-contract disclosure.149 Even in its strong form, the doctrine applies only when ‘an ordinary layperson would misunderstand [the policy’s] coverage, or there must be circumstances attributable to the insurer which would foster coverage expectations’.150 Either of those requirements is more likely to be satisfied if the insurer does not fully disclose the details of the policy to the insured. Without a full explanation from the insurer, the ‘ordinary layperson’ is more likely to misunderstand, and that misunderstanding is more likely to be regarded as being attributable to the insurer’s silence. Thus, although the doctrine of reasonable expectations does not require pre-contractual disclosure by insurers, it creates an obvious incentive for full and detailed disclosure.

D.  Federal Law: RICO At first sight, the Racketeer Influenced and Corrupt Organizations Act (RICO)151 may seem to have nothing to do with pre-contract disclosures by insurers, who are often accused of many things, but seldom racketeering. To a reader who has followed the explanation of McCarran-Ferguson reverse pre-emption given ­ above, there may seem to be a second reason why RICO has nothing to do with disclosure by insurers: RICO is federal legislation made by the US Congress, and the ­McCarran-Ferguson Act stipulates that state legislation pre-empts f­ederal ­legislation unless the latter is specifically concerned with insurance business. Nevertheless, in Humana Inc v Forsyth,152 the US Supreme Court held that an action under the federal RICO statute did not impair Nevada state law regulating the insurance business, and so it was not precluded by the McCarren-­Ferguson Act. The decision confirmed that the door was open for federal RICO claims against insurers. But how can RICO, which was passed as part of a decades-long fight against organised crime,153 be relevant to pre-contract disclosures by insurers?

148  Louisiana Insurance Guaranty Association v Interstate Fire & Casualty Co, 630 So 2d 759 at 764 n 9 (La, 1994). 149 Jerry and Richmond, above n 82, at 216; D Schwartz, ‘Resolving the Disclosure Puzzle in ­Insurance Law’ (2007) Florida State University Business Law Review 175 at 198. 150  Clark-Peterson Co Inc v Independent Insurance Associates Ltd, 492 NW 2d 675 at 577 (Iowa, 1992), citing Farm Bureau Mutual Insurance Co v Sandbulte, 302 NW 2d 104 at 112–13 (Iowa, 1981). 151  18 USC §§1961–68. 152  Humana Inc v Forsyth 525 US 299, 119 S Ct 710 (1999). 153  RICO was passed as Title IX of the Organized Crime Control Act of 1970, Pub L No 91-452, § 901(a), 84 Stat 922 at 941, in order to aid ‘the elimination of the infiltration of organized crime and racketeering into legitimate organizations operating in interstate commerce’: see S Rep No 91-617 at 76 (1969).

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The answer lies in a combination of the remarkable breadth of the RICO ­legislation and the ingenuity of American trial lawyers. In enacting RICO, Congress specifically directed that the Act’s provisions should be liberally construed to effectuate its remedial purposes.154 Liability for triple RICO damages is made out on satisfaction of the following five elements: (1) the commission of two or more offences that are regarded as the ‘predicates’ to RICO liability; (2) that the predicate offences form ‘a pattern of racketeering activity’; (3) that there was an ‘enterprise’ for purposes of RICO; (4) that there is a nexus between the pattern of racketeering activity and the enterprise, and (5) damage that results from the above factors.155 In relation to requirement (1), RICO defines the predicate offences very broadly, and they have been interpreted yet more broadly. It has been held, for example, that overbilling by an insurer may be the basis for a civil RICO mail fraud case, thus satisfying the ‘predicate offence’ requirement if done on two or more ­occasions.156 To satisfy requirement (2), the two or more predicate offences must be related to one another and must pose a threat that such conduct will ­continue157—a requirement that is readily satisfied if the insurer’s pre-contract disclosure practice is found to constitute a ‘predicate offence’. In relation to requirement (3), the US Supreme Court has held that the RICO statute applies to any ‘enterprise’, including legitimate as well as illegitimate ones.158 A policyholder cannot claim ‘damage’ for the purposes of factor (5) by alleging that he or she paid too much in premiums for a misleadingly-advertised insurance product, but rather must show that he or she was denied insurance coverage, even though coverage had been promised.159 Without this, the policyholder cannot show that the benefits that he or she received under the policy were compromised or diminished as a result of the insurer’s pre-contractual pattern of conduct.160 However, a policyholder can claim ‘damages’ by alleging that he or she would not have bought the insurance at all but for the pattern of misrepresentation by the insurer and its agents.161 Although no RICO claim against an insurer has yet made it to judgment, several have survived motions to dismiss and for summary judgment.162 If the insured’s 154 

Pub L No 91-452, § 904(a), 84 Stat 922 at 947 (1970). USC § 1962. See generally S Douglas and T Layne, ‘Racketeer Influenced and Corrupt ­Organizations’ (2011) 48 American Criminal Law Review 1075. 156  Sandwich Chef of Texas Inc v Reliance National Indemnity Insurance Co, 111 F Supp 2d 867­ (SD Tex, 2000). 157  HJ Inc v Northwestern Bell Telephone Co, 492 US 229, 109 S Ct 2893 (1989); Brown v Cassens Transport Co, 546 F 3d 347 (6th Cir 2008). 158  US v Turkette, 452 US 576, 101 S Ct 2524 (1981), interpreting 18 USC § 1961(4). 159  Maio v Aetna Inc, 221 F 3d 472 (3d Cir, 2000). 160  ibid at 488. 161  McClain v Coverdell & Co, 272 F Supp 2d 631 (ED Mich, 2003). See, eg, In re National Western Life Insurance Deferred Annuities Litigation, 467 F Supp 2d 1071 (SD Cal, 2006) (life insurers selling deferred annuities to senior citizens might violate RICO); Bendzak v Midland National Life Insurance Co, 440 F Supp 2d 970 (SD Iowa, 2006) (same). 162  See above, n 161; Weiss v First Unum Life Insurance Co, 482 F 3d 254 (3d Cir, 2007). 155 18

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claim survives these stages, settlement is likely because of the prospect of triple damages against the insurer under RICO. The potential significance of a RICO claim should therefore be obvious.

IV. Conclusion To the outsider, law in the United States can often look like what Alfred, Lord Tennyson called ‘[t]hat wilderness of single instances’, a ‘codeless myriad of precedent’ where no legal proposition is held to be true more than once.163 In the area of insurance law, the ‘wilderness of single instances’ is wilder still because of the McCarran-Ferguson reverse pre-emption doctrine, which resolutely provides that regulation of the insurance industry generally, and pre-contract disclosure in particular, is almost exclusively a matter for state law and state regulation. No proposition about insurance law is uniformly, or even mainly, true throughout the United States. All that can be said with any degree of confidence is that there are many different types of provision requiring insurers to make pre-contract disclosure to prospective insureds. For any more detailed information about a particular jurisdiction, one must plunge into the wilderness in search of the ‘single instance’ proposition of relevance—or ask an American colleague for assistance. Although US insurance law is less protective of insurers than that of the UK and many other nations regarding pre-contractual disclosures, that difference is largely confined to non-marine insurance, where American insurance applicants generally need only provide truthful answers to specific questions asked by a prospective insurer. When seeking these insurance products, American are not subject to a duty of utmost good faith requiring affirmative disclosure of all facts known to the applicant that are material to the risk. However, for marine insurance and reinsurance, US courts hold applicants to this higher duty of disclosure even when the marine insurance or reinsurance applicant has not been asked a specific question as part of the insurer’s underwriting process.

163 Tennyson, Aylmer’s

Field: With Introduction and Notes (1891).

Part III

Pre-contractual Duties in Insurance Law: Civil Law Jurisdictions

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8 Pre-contractual Duties under the Chinese Insurance Law YONG QIANG HAN AND FENG WANG*

I. Introduction In mainland China, like in other jurisdictions, pre-contractual duties have been one of the most contested topics in insurance law. Discussions and debates in this respect have been ongoing among two generations of academic and practising insurance lawyers shortly before and long after the Chinese Insurance Act 1995 took effect. Like many other branches of what is often referred to as ‘Chinese ­commercial/business law’—including company law, insurance law, negotiable instruments law, maritime law and bankruptcy law—the Chinese Insurance Act 1995 is also a partial and fragmented transplantation from the Anglo-American insurance law. After effectively 15 years of trial and error, the Chinese insurance law in respect of pre-contractual duties of policyholders and of insurers has been substantially reformed in 2009. Basically, the Insurance Act 2009 has made the pre-contractual duties much less onerous than before for policyholders or insurance applicants, but a little more cumbersome for insurers.1 The Insurance Act 2009 did not resolve the disparities and inconsistencies in its application. So then in 2013, the Supreme People’s Court Interpretation II to the Insurance Act (the ‘SPC Interpretation II to the IA’) further clarified a number of points, including matters of pre-contractual duties. This chapter critically expounds the Chinese law of policyholders’ and insurers’ pre-contractual duties. In the first place, an overview of the principle of (utmost) good faith in the discussion of the Chinese insurance law is necessary.

* 

YQ Han writes Parts I, II, IV; F Wang writes Part III. Part V is co-authored. recent amendments in 2014 and 2015 to the Insurance Act concerned only a few wordings in relation to the regulation of insurance businesses. This paper will follow the customary reference in China to the PRC Insurance Act (2009) concerning its statutory provisions on insurance contract. Unless stated otherwise, references to statutory provisions in the PRC Insurance Act are to as amended in 2009 and remaining current. 1  The

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II.  (Utmost) Good Faith in Chinese Insurance Law: An Overview The principle of utmost good faith has a somewhat awkward position in the discussion, particularly in China, of the Chinese insurance law. This is because on the one hand an insurance law principle of ‘utmost good faith’ has been recognised the most widely among insurance lawyers,2 whereas on the other hand the Chinese statutory source refers to ‘good faith’ only. In this regard, the Insurance Act 2009 section 5 reads: ‘Parties to insurance activities should conform to the principle of good faith in their exercise of rights and performance of obligations.’3 Both academic and practising insurance lawyers in China have for three ­decades since the restoration of Chinese insurance law in the 1980s4 and in particular since discussions of the PRC Insurance Act 1995 comfortably accepted the p ­ osition entrenched in common law jurisdictions that parties to insurance contracts should be bound by the principle of utmost good faith, that such a principle has Lord Mansfield’s seminal judgment in Carter v Boehm as its origin, and that the principle was further enshrined in the UK’s pre-reform Marine Insurance Act 1906 section 17.5 This consensus among the Chinese insurance lawyers is hardly surprising, because although China is a civil law jurisdiction, its b ­ usiness law and commercial law, including insurance law, are heavily influenced by Anglo-American law through legal transplantation. This is not only because the economies with Anglo-American or common law traditions have for long been the de facto global leading force in commerce, but also for long Chinese academic insurance lawyers are relatively more versed in the global English language than other foreign languages. The two factors have made it more necessary and convenient for Chinese insurance lawyers to look up to Anglo-American law for comparative law purposes and/or for legal transplantation.

2  Only a couple of academic insurance lawyers cast a doubt on the ‘utmost good faith’ principle. See Zili Ren, ‘Examining the Principle of Utmost Good Faith’ [2010] 3 Jurists 106; Yong Qiang Han, ­‘Disenchanting the Principle of Utmost Good Faith in Insurance Law’ [2011] 2 Journal of Gansu ­Institute of Political Science and Law 153; Yong Qiang Han, ‘The Past and the Present of the Principle of Utmost Good Faith in Insurance Law’ [2013] 1 Journal of East China University of Political Science and Law 34. 3  Its precursor was the PRC Insurance Act 1995 s 4: ‘Engagement in insurance activities should conform to laws and administrative regulations, to the principle of voluntariness, and to the principle of good faith.’ The ‘principle of voluntariness’ was abolished due to the introduction of compulsory insurance into the Act. 4  Early Chinese statutory provision after 1978 on insurance contracts are ss 25 and 46 of the PRC Economic Contracts Act 1982 which were applicable however only to property insurance or general insurance. The Act was superseded by the PRC Contract Act 1999. 5  Although the Marine Insurance Act 1906 is only a partial codification of the common law of insurance, its s 17 on utmost good faith in the statutory form is enshrined, in line with the (Chinese) civilian legal thinking, as the most authoritative and unchallengeable recognition of ‘utmost good faith’ in common law jurisdictions, more so than Carter v Boehm per se.

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The entrenchment of ‘utmost good faith’ in Chinese insurance law discussions other than the black-letter statutory Insurance Act is the result of uncritical acceptance, more in China than in the UK, of the English (mis-)reading of Carter v Boehm and the almost enshrined status the UK Marine Insurance Act 1906 section 17 which provides inter alia that ‘A contract of marine insurance is a contract based upon the utmost good faith’. The late Professor Hasson’s argument in 1969 against the conception of ‘utmost good faith’ and his critical examination of Carter v Boehm and precedents afterwards has been unknown in China until it was brought to the attention thereto in 2011 and 2013.6 Hopefully more and more insurance lawyers in China will come to realise that the conception of ‘utmost’ good faith might be fairly problematic in itself and that the PRC Insurance Act consistently provides for the principle of ‘good faith’ rather than ‘utmost good faith’ instead. It must be noted that under the PRC Insurance Act 2009 (and its predecessors), good faith binds not only insurance applicants or insureds and insurers but also to others such as insurance agents, brokers, etc and even loss adjusters. This is because the section 5 requires all ‘parties to insurance activities’ (emphasis added), not just parties to insurance contracts, to comply with the principle of good faith. In the PRC Insurance Act 2009, in connection with its section 5 requirement of good faith and in particular the pre-contractual good faith, are section 16 on insurance applicant’s duty to make truthful representations and section 17 on insurer’s duties to explain, to remind and to elucidate. The SPC Interpretation II to the IA, which has been effective as of 8 June 2013, has also further clarified ­relevant points of the said section 16 and section 17 amongst others.

III.  Policyholder’s Duty of Truthful Representations An insurance applicant or a policyholder’s pre-contractual duty is governed mainly by the PRC Insurance Act 2009 section 16. Unlike the dominance of the duty of disclosure in this respect in the pre-reform English insurance law, what the PRC Insurance Act 2009 section 16 provides for is more a duty of truthful representations than a duty of disclosure.

6  Han, ‘Disenchanting the Principle of Utmost Good Faith in Insurance Law’ (n 2) 153, 155; Han, ‘The Past and the Present of the Principle of Utmost Good Faith in Insurance Law’ (n 2) 34, 39–41. In addition to existing discussions in English, Han’s article in 2011 (n 2) has argued that the principle of good faith was codified into the civil law codes in continental Europe much later than the common insurance law’s recognition of utmost good faith, therefore it defies the assumptive logic that ‘utmost good faith’ is an enhanced ‘good faith’ as it literally seems to be.

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A.  What is the Duty? In China, the primary legal source of the pre-contractual duty of disclosure in insurance law is the PRC Insurance Act 2009 section 16(1), which states: ‘In the negotiation of an insurance contract, where the insurer makes inquiries on circumstances connected with the subject matter of the insurance or with the insured, the insurance applicant shall make truthful representations.’ The duty of the insurance applicant or policyholder is not really a duty of disclosure which is voluntary in nature, as was under the traditional rule in English insurance law. Rather, it is more like a duty not to misrepresent in response to insurer’s enquiries. Meanwhile, this provision leaves some doubt in that the wordings ‘where the insurer makes inquiries’ seem to indicate that there is the possibility that the insurer does not make inquires. This inference is consistent with the pre-2009 old provision that the insurer ‘may make inquiries’7 which indicates the insurer can also choose not to make enquiries. Neither the old law nor the Insurance Act 2009 section 16 has provided for the policyholder’s duty where the insurer does not make inquiries. This however is more an academic than practical issue. In practice, insurers now usually make inquires so that the policyholder is obliged to make truthful representations in relation thereto. This is because section 6 of the SPC Interpretation II to the IA further reiterates: ‘An insurance applicant’s duty of truthful ­representation is limited to the ambit and to the content of the insurer’s ­inquiries.’8 Therefore there is no voluntary duty of disclosure under the Chinese insurance law, even though the information may be clearly known to the insurance applicants.9 Insurers are expected to ask or enquire, then the insurance applicant should truthfully answer, or respond to, the insurer’s enquiries or questions.10

B.  How Broad is the Duty? An important issue stems from section 6, quoted above, of the SPC Interpretation II to the IA. That is: How broad will the specific information in the general terms be? Will the insured be responsible for any questions in the general terms which may not even relate to the insured’s risk? In addition, will the insurer ­successfully fulfill the obligation to ask for disclosure by inserting any kinds of specific terms?

7 

PRC Insurance Act 2002 s 17(1). SPC Interpretation II to the IA s 6(1). 9  ibid s 5. 10  Note that the rule is different for marine insurance in China. Under the PRC Maritime Act 1992 s 22(1), it is the assured who bears the pre-contractual duty of disclosure which is not premised on insurer’s enquiries. 8 

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Currently, academics in China hold the view that the SPC Interpretation II to the Insurance Act may, in fact, not serve its intended function. This piece of law was supposed to fulfil the legislative intention under the Insurance Act 2009 section 16, but it may entitle the insurer to abuse this right when making inquiries. However, the specific information cannot be random: it must be relevant to the risk of the insurance policy. Therefore, the insurer cannot discharge its indemnity or payment obligations based on the policyholder’s misrepresentations of any information beyond the questionnaire. However, discharge of insurer’s obligation might be possible as the result of contract terms in relation to misrepresentations. Nevertheless, in judicial practice, Chinese courts hardly allow an insurer to be exempt from its payment obligation simply because specific terms have been inserted. In line with the Insurance Act 2009 section 17, the insurer shall explain exclusionary terms to the policyholder or at least require that these terms have been brought to the assured’s attention; otherwise such terms cannot be effectively relied upon for excluding the insurer’s payment obligation.

C. Materiality Under the Chinese insurance law, an insurance applicant is only expected to make truthful representations of material circumstances. However, the law fails to clearly define materiality. The Insurance Act 2009 section 16(2) states: Where the insurance applicant fails to perform the duty of telling the truth as prescribed in the preceding paragraph intentionally or out of gross negligence, affecting the ­insurer’s decision on whether to underwrite the insurance or raise the insurance premium, the insurer shall have the right to rescind the insurance contract.

According to the foregoing section 16(2), material facts should be considered as factual information that may affect the insurer’s decision to underwrite the insurance or raise the insurance premium. Three issues arise from the foregoing section 16(2). First, the assured is not expected to disclose every material fact that may influence the insurer’s decision. The insured is only responsible for any breach which is either intentional or grossly negligent. Second, the phrase ‘gross negligence’ indicates that the insured must represent those facts which a normal and reasonable person ought to know.11 The third issue regards the criteria for determining whether a fact is material or not. In other words, how does the court decide whether or not an insurer would have accepted the proposed risk upon another condition if the truth had been told? This question has also been a subject of debate in English law.

11  Normally, in Chinese law, the insured’s gross negligence leading to the omission the application for insurance is taken to be legally equivalent to an intentional omission. However, there is a debate in academia that these two scenarios should be distinguished. See Dashun Cai, ‘Reconstruction of the Legal Liabilities for Gross Negligence in Insurance Law’ [2016] 3 Journal of Politics and Law 116, 119.

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Clearly, the Chinese Insurance Act 2009 does not transplant into itself the ­ osition of English law as evidenced in Pan Atlantic Ins Co Ltd v Pine Top Ins p Co Ltd. In this case, it was held that the appropriate test is whether the matter would have been taken into account by the prudent insurer when assessing the risk; it is not necessary to show that the matter would have had a decisive influence on the prudent insurer.12

With regard to the materiality test, English law does not require that the non-­ disclosure or misrepresentation should have a decisive influence on the insurer. However, under Chinese law, material facts must be those which influence the insurer’s decision. Moreover, in English law, there is also a requirement that the underwriter should have been induced to make the contract by the material nondisclosure or misrepresentation. In contrast, there is no requirement of inducement in the Chinese Insurance Act 2009. The insurer need not prove that he has taken the risk based on the insured’s false statements. Instead, the insurer only needs to prove that it would not have taken the risk—or that it would have taken the risk, but on different terms—had the truth been told by the insured. Thus, the Chinese law in respect of the issue of materiality is clearly more ­subjective and therefore more problematic than English law. The reason for this position is that the insured does not have the duty to initiate the disclosure of material facts. The insured only needs to do so in response to the insurer’s ­inquiries.13 As such, the inquiries of the insurer are vital to the formation of the insurance contract. So, if the insured intentionally or negligently misrepresents the material facts, then the insurer’s right to form a contract has been repudiated at the moment that the insured filled the form with concealment, and there is no need to wait for the insurer to enter into the contract.

D.  The Parameters of the Duty As to the parameters of the duty to inform under the Chinese Insurance Act 2009, a number of observations can be made. First, the assured also needs to represent those circumstances which a reasonable insured (person) should know. Section 5 of the SPC Interpretation II to the Insurance Act states as follows: When an insurance contract is entered into, what is known to the policyholder regarding the subject matter of insurance or regarding the assured shall be the information about which the policyholder shall make truthful representations as required under the Insurance Act [2009] s 16(1).

12 

Pan Atlantic Ins Co Ltd v Pine Top Ins Co Ltd [1995] 1 AC 501(HL). This is not so for Chinese marine insurance. Under the Maritime Act 1992 s 222(1), the insured in a marine insurance should disclose, whether asked by the insurer or not, the material circumstances to the insurer. 13 

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However, ‘what is known to the policyholder’ should be construed as including such knowledge as can be readily available thereto. There are no clear authorities on this; however, it is evident that if the policyholder is allowed to ignore the facts which can easily be known thereto, then good faith in the insurance contract will be undermined. In addition, the imbalance of information between the insurer and the insured still exists today. Through the use of inquiry forms insurers can seek information from the insurance applicants or policyholders. However, this does not justify that the insured is entitled to conceal material circumstances which can be readily known thereto where particular questions are not asked in the inquiry form. Some circumstances need not be represented. The Insurance Act 2009 section 16(6) states: ‘Where the insurer knows the truth of the circumstances which the insurance applicant fails to represent when they enter into an insurance contract, the insurer shall not rescind the contract.’14 This rule is obviously a general one; however, more specific rules can be deduced from it. The first exception scenario is where the insurer fails to ask questions which are material. Because ‘an insurance applicant’s duty of truthful representation is limited to the ambit and to the content of the insurer’s inquiries’,15 the insured who does not make representations at all cannot be prejudiced by the insurer’s omission to make inquiries. The second scenario is a circumstance which the insurer knows or ought to have known. Due to the information imbalance between the assured and the insurer, the purpose of the duty of truthful representations is to help the insurer to assess the risk of the subject matter to be insured. If the insurer already knows the circumstances regarding the subject matter, then there is no need for the insured to make representations about the circumstances to the insurer. This also applies to circumstances which the insurer ought to know. A possible problem may arise in this scenario: if the insurer asks questions related to the circumstances which ought to have been known by the insurer, does the policyholder still need to respond? There are currently two arguments on this point. The first argument is based on the wording of the statute and holds that the policyholder should still make truthful representations. However, the second argument holds that the aim of the statute is to assist insurers and since the insurer should have had the information that is necessary for assessing the risk to be underwritten there is no need for the insured to make more representations than what the insurer should have known. In light of this, the second argument is more reasonable. The intent of the statute needs to be fulfilled. Furthermore, if the first argument was valid, it would entitle the insurer to abuse its right by asking questions unrelated to the insured’s risk.

14  15 

Insurance Law 2015 Art 16 s 6. SPC Interpretation II to the IA s 6(1).

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The third exception is as follows: where the policyholder fails to clearly answer the insurer’s particular questions, and the insurer fails to make further enquires on such particular issues, then the insurer cannot raise the policyholder’s failure in the answer as a defence later. This is a common rule in countries of civil law or of common law. For instance, Australia Insurance Contract Act 1984 states that Where a person: (a) failed to answer; or (b) gave an obviously incomplete or irrelevant answer to; a question included in a proposal form about a matter, the insurer shall be deemed to have waived compliance with the duty of disclosure in relation to the matter.16

The reason for similar rules is that in the insurance industry nowadays insurers mainly use standard inquiry forms and standard insurance contracts. The questions on the standard inquiry forms are the same regardless of who is the person seeking insurance. If the insurer fails to ask particular questions, then it should be considered that the insurer has waived his right to ask for further information about circumstances that could be material to the insurer. Furthermore, standard inquiry forms may fail to cover unique questions for a particular insured, and may also include questions which the policyholder is unable to answer, or questions which are unrelated to the risk to be underwritten. Then, similarly, the policyholder would not be responsible for this either. The last exception is as follows. If the insurer waives its right to obtain more information from the policyholder, then clearly the policyholder will be relieved from his duty to make representations. The insurer can expressly waive its right to do so. Scenarios such as the insurer’s agent filling in the form wrongfully for the insured or falsely inducing the insured into misrepresentation also amounts to such waiver.

E.  Consequences of the Breach under the Insurance Act 2009 The consequences of the policyholder’s misrepresentations are also provided for in the Insurance Act 2009 section 16. Like the recently reformed English insurance law, the basic consequence of the misrepresentation is rescission, by the insurer, of the insurance contract, and refund of the premium, but the refunding hinges on the misrepresentor’s culpability. According to the Insurance Act 2009 section 16(2), the insurer may rescind the contract if the policyholder intentionally fails to make truthful representations, or so fails out of gross negligence, and the misrepresentations are material, ie influencing the insurer’s decision of whether to underwrite the risks or to raise the premiums. From this it can be inferred that the insurer shall not avoid the contract where the policyholder’s

16 

Insurance Contract Act 1984 s 21 (3).

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misrepresentation is neither intentional nor grossly negligent. It can also be inferred that in relation to the culpability of the breaching policyholder there are perhaps four types of misrepresentations: intentional, grossly negligent, ordinarily negligent17 and innocent. Rescission of the insurance contract does not apply to misrepresentations out of ordinary negligence or of innocence. As a corollary to the said section 16(2), where the policyholder has made material misrepresentations, the insurer is entitled to rescind the contract and is not obliged to pay the indemnity or insurance benefits for an insured event which occurs before the rescission.18 But where the misrepresentation is intentional, the insurer is not obliged to refund the premium,19 and the insurer shall refund the premium if the misrepresentation is made out of gross negligence.20 However, an insurer cannot directly refuse to make indemnity payment on the ground of the Insurance Act 2009 section 16(4) or 16(5) without first exercising its right to rescind the insurance contract, because courts shall not uphold such a direct refusal.21 The distinction between intentionality, gross negligence and ordinary negligence is relevant particularly in business insurance which usually involves a larger sum of premium. However, the Chinese positive private law fails to give a clear definition of gross negligence. Broadly in civil law, ordinary negligence means that without intention to commit the tortious conduct the tortfeasor only fails to exercise due care as required by law. However, gross negligence means that the tortfeasor knows or should have known that his conduct can be harmful to others and still commits it regardless. Therefore, compared to general negligence, gross negligence is closer to intentionality. Hence the consequence for the assured under gross negligence is more severe than for ordinary negligence and is similar to that for intentional breach.22 However, one thing which can be distinguished from intentionality in the insurance context is that the tortfeasor/policyholder under gross negligence does not have the intention to deceive the insurer. Another point which is different between intentionality and gross negligence is that, to sustain an intentional breach, no severe consequence of the breach would be needed, and proof of the insured’s breach with intention alone is sufficient. However, for a gross negligence to sustain, guilty intention alone does not suffice: there must be a severe consequence resulting from such negligence.

17  The Chinese civil law classifies fault into intentionality and negligence. Under the PRC Tort Liability Act 2009, negligence breaks down into gross negligence and (ordinary) negligence. Gross negligence can be deemed as intentionality, and slight negligence as innocence. Civil law theories occasionally discuss ‘slight negligence’ as a third category of negligence but the Chinese positive law does not recognize it. 18  Insurance Act 2009, s 16(3) and s 16(4). 19  ibid, s 16(3). 20  ibid, s 16(4). 21  Art 8 of Interpretation II. 22  Under the Insurance Act 2009 section 16, gross negligence entitles the insurer to rescind the contract, the same consequence as to intentionality.

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The difference between intentional misrepresentation and fraud is quite blurred. Under civil law, the notion of fraud is clear; fraud occurs when the insured intentionally commits a fraudulent action and induces the insurer to act on such fraudulent information. The scenario of intentional misrepresentation is that the insured has the intention to conceal material circumstances from the insurer in order to enter into the insurance contract or to enter on better terms. Therefore, it is clear that in both circumstances the insured has committed a conduct without good faith and the insurer has acted accordingly. Thus, from this point of view, intentional misrepresentation by the policyholder should be considered as fraud under Chinese law. Due to the severe consequences of misrepresentations, other issues may arise. The first issue is whether a causal link was required between the misrepresentation and the occurrence of events covered under the insurance contract. It is recognised that most academics think that such causal link is unnecessary.23 The second issue is whether the insurer can change or vary the terms of contract after the insurer discovers the misrepresentation, instead of just rescinding the contract. For this question, there is no clear indication in Chinese insurance law as to whether this is possible. However, according to the principle of freedom of contract, the insurer clearly has the right to do so, as long as the contract is neither voidable under the Chinese Contract Act 1999 section 54, as is to be discussed below in Part III.F, nor null and void under the Chinese Contract Act 1999 section 52.24 ‘Moreover, in circumstances where the policyholder’s misrepresentation only affects the premiums under the insurance policy, it would seem too severe for the insured if the insurer rescinds the insurance contract solely because of this. Hence, the insurer may choose not to terminate the contract. This is inferred from the Insurance Act 2009 section 16(2) wording that ‘the insurer has the right to rescind the contract’, which means the insurer can choose not to exercise this right of rescission. The first reason for this is that, as a known general rule, the insurer can only collect premiums in relation to its underwriting before the termination of the contract; the insurer cannot collect premium for the post-rescission unperformed part of contract.25 Therefore, after assessing the risk in the wake of representations

23  Ning Ma, ‘Reconstruction of Duty of Disclosure in Insurance Law’ [2014] 1 Journal of Politics and Law, 58, 64. 24  A contract shall be null and void under any of the following circumstances: (1) a contract is concluded through the use of fraud or coercion by one party to damage the interests of the State; (2) malicious collusion is conducted to damage the interests of the State, a collective or a third party; (3) an illegitimate purpose is concealed under the guise of legitimate acts; (4) damaging the public interests; (5) violating the compulsory provisions of laws and administrative regulations. 25  Which is known as no risk no premium, as indicated by Art 54 of Insurance Law 2015: ‘Where the insurance applicant requires rescission of the contract before the insurance liability commences, it shall pay a commission charge to the insurer as agreed upon in the contract, and the insurer shall refund the insurance premium. Where the insurance applicant requires rescission of the contract after the insurance liability commences, the insurer shall refund the insurance premium to the insurance applicant after deducting the receivable part from the day of commencement of insurance liability to the day of contract rescission, as agreed upon in the contract’.

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by the insured, the insurer might be willing to take the risk on different terms in order to obtain the premium. Second, according to the freedom of contract, the law should not prohibit an insurer from making a decision that may favour the insured in not rescinding the contract. Therefore, in this regard the Chinese insurance law might as well look to the Principles of European Insurance Contract Law, by which ‘the insurer shall be entitled to propose a reasonable variation of the contract or to terminate the contract’26 in the case of the policyholder’s breach of its pre-contractual duty. Currently, there is no equivalent to this in the Insurance Act 2009. Therefore, clearly, under the Chinese insurance law, the policyholder’s misrepresentation does not necessarily result in the rescission of contract by the insurer. It only means that the contractual parties have the option to change the contract. Last but not least important, an overarching restriction or exception to rescission by insurers is similar to a constructive waiver. If the insurer has collected premium while having actual or imputed knowledge of the policyholder’s misrepresentations, then courts will deny the insurer the right to rescind the contract under the Insurance Act 2009 section 16(2). This is what section 7 of the SPC Interpretation II to the IA section 7 has prescribed. It seems that in this circumstance the insurer’s collection of premiums is deemed as a waiver of the requirement of truthful representations by the policyholder.

F.  Consequences of the Breach under the Contract Act 1999 Another issue related to the consequences of policyholder’s misrepresentation is whether the insurer, to whom the remedies under the Insurance Act 2009 section 16 are not available due to lapse of time27 or the innocence of the misrepresentation, can invoke the Contract Act 1999 section 54 to seek avoidance of the contract. According to the Contract Act section 54, a party to a contract can seek to vary or to avoid the contract (ie render the contract voidable) if it is concluded as the result of gross misunderstanding, or fraud, or duress, or one party being taken advantage of, or is concluded with evident unconscionability. The ‘gross misunderstanding’ here is thought to be similar to the issue of mistake in contract law. In the context of insurance, the policyholder’s misrepresentations, especially when it is intentional or grossly negligent, might cause insurer’s ‘gross misunderstanding’ of the risks but the underwriting decision is based thereon.

26 

PEICL Article 2:102 (b). The Insurance Act 2009 s 16(3): ‘The right to rescind an insurance contract as prescribed in the preceding paragraph shall be annulled 30 days after the insurer knows the cause of rescission. Two years after an insurance contract is concluded, the insurer may not rescind the contract; and where an insured incident occurs, the insurer shall pay indemnity or insurance benefits.’ 27 

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There are currently two arguments that can be made regarding this. The first argument is that the insurer can invoke the Contract Act 1999 section 52 for ­avoidance of contract and further for refusing to pay insurance money to the policyholders. This is because constitutive requirements, the intention of the law and the consequences misrepresentations in the insurance contract and the rules of mistakes in contract law are all different. Therefore, there is no contradiction between these two rules and each can be applied independently of each other. The second argument is that the insurer can only rely on the particularised remedies that have been provided for in insurance law. This is because the insurance law rules of misrepresentation are the application of general contract law rules to an insurance contract. Therefore, according to the general principle that particular rules should prevail over general rules in the judicial application, the remedies under the Insurance Act 2009 section 16 prevail over the Contract Act 1999 ­section  54. The second argument is more plausible for its consistency with the legislative purpose of the Insurance Act 2009 section 16(3), by which the insurer’s right to rescind the contract in the case of the policyholder’s misrepresentation shall be exercised within 30 days after the insurer knows it has the right to do so, and two years after the insurer’s knowledge as such, the insurer loses the right of rescission and shall pay the insurance money if risks within the coverage have occurred. The purpose underlying the Insurance Act 2009 section 16(3) is to make sure that insurers exercise the right of rescission within a stipulated timeframe and thus bring certainty and predictability to the insurance transaction. This will be made nugatory and sidelined if insurers, after the lapsed time, can still be allowed to have recourse to the Contract Act 1999 section 52 to seek to eschew its indemnity obligation under insurance law. In this regard, there might be concerns this could be taken advantage of by a fraudulent policyholder. However, fraud can be caught under the Contract Act 1999 section 54(2), by which a contract concluded out of fraud by one party can be judicially varied or avoided upon the petition of the other party who suffers loss from the fraud.

G.  Consequence of the Breach: The ‘All-or-Nothing’ Approach It can be clearly seen from the Insurance Act 2009 section 16 that Chinese law adopts the ‘all or nothing’ approach to the payment of insurance money in addressing the issue of policyholder’s misrepresentation. This approach is too harsh to the insured and over-protects the insurer. Such a piece of law does not reflect the realities in the current trends of development of insurance law in the world. Under the Insurance Act 2009, there are no effective means to ameliorate the ­negative impact of the right of rescission. This is a common issue in other countries as well, and various mechanisms have been designed to resolve this problem. For example, the Insurance Act 2009 section 16(3) sets a maximum

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of a two-year timeframe within which the insurer can rescind the contract. This however practically applies to life insurance only.28 Furthermore, section 7 of the SPC Interpretation II to the IA section 7 has insurer’s collection of premiums with knowledge of misrepresentation as a constructive waiver of requiring policyholders to make truthful representations. The aim of this section is to protect the interest of the insured. Nevertheless this aim can only be partly achieved. This is because, in the event of a rescission claim by the insurer, it is very hard for the policyholder to prove that the insurer had known or should have known the policyholder’s misrepresentations. In addition, even after confirmation of the causal link between the misrepresentation and the occurrence of insured loss, the courts will have to decide upon the issue on a case-by-case basis without a set of uniform criteria, and this means a significant increase in the legal cost. Moreover, under the all-or-nothing approach, if the courts choose to protect the assured’s interests, then the insurer will also lose everything, under the current law. There is growing agreement that proportionate remedies are now a better substitute for the all-or-nothing approach, under which the insurer’s liability under the insurance contract will be deducted according to the actual premium’s proportionate difference or gap from the higher premium which could have been charged but for the misrepresentation. The remedy of proportionate payment has been adopted in English insurance law has been adopted in the CIDRA 2012 and the Insurance Act 2015. (For a description, see in this book Chapter 6 Part III.A.ii and Part III.B.v.) The basic principles of proportionate remedies could be seen as a proper method to resolve current difficulties in Chinese law. First, in cases of misrepresentation which arise due to the insured’s gross negligence, the insurer should have the right to reconstruct or to vary the contract with the assured. If there are no agreements between the insured and the insurer, then the insurer is still entitled to rescind the contract and return the premium. Second, if the insurer can prove that had he known the undisclosed facts earlier on he would not have entered into the insurance contract with the insured, then the insurer is still entitled to refuse to pay the claim, but should return the premium. Third, if the insurer can prove that had he known the misrepresentations, he would have entered into the contract on different terms, then the insurer’s liability will be ascertained based on the new terms. Fourth, if the insurer can prove that had he known the undisclosed facts, he would have charged the insured a higher premium, then the insurer’s payment obligations will be adjusted according to the proportion of the premium between which the insurer has received and which the insurer would have collected under

28  This is because in property and liability insurance, the insured period will normally be less than two years, therefore, such a period is of less importance to the assured under these two kinds of insurance contracts.

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the new or different contract. Finally, if the insurer cannot prove any of these circumstances, then the insurer will need to fully fulfil its payment obligation under the insurance contract. The merits of such proportionate remedies are clear. Such remedies can allow the courts to ascertain the insurer’s obligations based on the real risk which the insurer undertakes and the policyholder can also claim indemnity for part of the damage or loss thereto as long as there was no fraud committed by the policyholder. In addition, judges also do not need to make difficult decisions between the insurer who gains profit from the policyholder’s misrepresentation and the insured who intends to transfer risks to the insurer by misrepresentation. Such proportionate remedies would promote the normal operation of the insurance industry. Therefore, proportionate remedies should be adopted by Chinese insurance law to meet the demands of the Chinese insurance market. The final question is whether the policyholder’s misrepresentation due to general negligence through no fault of the policyholder would be detrimental thereto. Currently, no clear answers can be found in Chinese insurance law regarding this. There was an argument prior to 2009 stating that, based on the basic principle of good faith in insurance law, the insurer should have the right to claim higher premiums from the insured in scenarios where the misrepresentation arises from the insured’s general negligence.29 However, such arguments cannot be used under the Insurance Act 2009, under which the insurer is entitled to rescind the contract and refuse the policyholder’s claim for insurance money where the policyholder intentionally or grossly negligently made misrepresentations. From this it can be inferred that the policyholder’s misrepresentation due to general or ordinary negligence will not be punished under current law. It has been argued that a provision otherwise can cause more problems. For example, it is possible that the policyholder cannot be aware of the subject matter for physical or mental reasons, hence it cannot be said that the policyholder was not of good faith in making misrepresentations. Therefore, under such circumstances, the risk of the policyholder should be transferred to the insurer who normally can bear the losses. This cannot be seen as a breach of the principle of good faith. However, the argument still does not mean that the general negligence of the policyholder should be ignored by the court. It is still vital to bear in mind that the insurer and the policyholder should have the freedom to conclude their own insurance contract. Also, if the policyholder’s concealment or misrepresentations due to general negligence or gross negligence had influenced the insurer’s decision to accept or reject the risk, then the insurer should still have the right to terminate the contract accordingly. There is a difference between termination of contract and rescission of contract: termination only relieves the insurer from future performance under the ­contract, but the insurer is still liable to payment upon occurrences of covered events.

29  This is because in insurance law prior to 2009, the assured shall be liable for non-disclosure which is caused by intentionality and negligence, rather than gross negligence after the reform in 2009.

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­ urthermore, the insurer also needs to return the premium which the insurer has F charged the insured in advance. Similar rules can be found in Germany Insurance Contract Act 2008 Article 19 (3)30 and also in PEICL Article 2:102 (3).31

IV.  Insurer’s Duties to Explain, to Remind and to Elucidate A.  Good Faith and Insurer’s Pre-contractual Duties: An Overview Under the Chinese law, without any doubt, insurers are bound by the principle of good faith. This is because the current Chinese Insurance Act (as amended in 2002 and 2009)32 section 5 provides that ‘All parties to insurance activities should abide by the principle of good faith in exercising rights and performing duties.’ This means both insurance applicants and insurers, as well as insurance intermediaries, are all subject to the principle of good faith. On this there has been a much wider consensus in China than in the UK that good faith binds not only insurance applicants but also insurers, both pre-contractually and post-contractually. The principle of good faith is always hailed as one of the rationales of an insurer’s precontractual duty to explain and to elucidate, as provided primarily in the Chinese Insurance Act 2009 section 17. Section 17 of the Chinese Insurance Act (as amended in 2009) expressly imposes pre-contractual duties on insurers. Such duties fall into two with different application. The first, as provided in section 17(1), is the general duty to explain to insurance applicants the standardised clauses of the insurance contract. The second, as in section 17(2), is the particular duty to elucidate to insurance applicants the exemption clauses in the insurance contract; what is special about the latter is that, as a result of the amendment in 2009 to the Chinese Insurance Act, an insurer’s duty to elucidate goes hand in hand with the insurer’s duty to remind its insurance applicant of the exemption clauses.33 In the first place, the insurer has the duty to so remind in a manner that sufficiently draws the attention of the insurance 30  Stating that the insurer’s right to withdraw from the contract shall be ruled out if the policyholder breached his duty of disclosure neither intentionally nor by acting with gross negligence; in such cases, the insurer shall have the right to terminate the contract subject to a notice period of one month. 31  Stating the insurer shall not be entitled to terminate the contract if the policyholder is in innocent breach of Art 2:101, unless the insurer proves that it would not have concluded the contract, had it known the information concerned. 32  There were minor amendments in 2014 and in 2015 to the Chinese Insurance Act, but they concerned not the statutory provisions on insurance contracts but those on supervision of insurance businesses. Almost all amendments to the Insurance Act provisions on insurance contract were made in 2009, and also through further judicial interpretations of the (People’s) Supreme Court in 2013 and in 2015. 33  The Chinese Insurance Act was initially legislated in 1995, but it does not provide for the insurer’s duty to remind as such until the amendment thereto in 2009.

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applicant thereto; meanwhile the insurer has the duty to elucidate the exemption clauses by spoken words or in writing. Before we elaborate sections 17(1) and 17(2) of the Insurance Act 2009, it is interesting and perhaps even necessary to have a look at its precursor under the Insurance Act 1995 as originally legislated, and also section 39 of the Chinese Contract Act 1999. The Insurance Act 1995 also imposed a similar, but simpler pre-contractual duty on the insurer in section 17. Without sub-sections, s­ ection 17 of the Insurance Act 1995 provided that ‘Where in an insurance contract there are clauses that exempt the insurer’s liabilities [ie obligations], in concluding the contract the insurer should elucidate such clauses to the insurance applicant. In a failure of elucidation, the exemption clauses are invalid.’ By the wording, this establishes the insurer’s duty to elucidate exemption clauses, and it applies to any exemption clause whether or not it is standardised one. The Contract Act 1999 section 39, however, limits such duty to only standardised clauses in a contract. Pursuant to the Contract Act section 39(1), the profferer of a standardised contract shall ‘take reasonable measures to remind the counterparty of the contract clauses which exempt or restrict its own [ie the profferer’s] liabilities, and, upon the counter-party’s request, should explain such clauses thereto.’ This establishes the general duty to remind, and to explain, upon request though, standardised exemption clauses or restrictive clauses of similar effect. Clearly the Insurance Act 2009 section 17 is a partial conflation of the Contract Act 1999 section 39 and the Insurance Act 1995 section 17. The Insurance Act 2009 section 17(1) draws upon the Contract Act 1999 section 39. Both apply to standardised clauses, but section 17(1) expands section 39 by imposing the duty to explain standardised clauses without being requested by the other party, and section 17(1) in the meantime limits section 39 by relieving the insurer from the duty to remind the insurance applicant of the standardised clauses. On the basis of the Insurance Act 1995 section 17, the Insurance Act 2009 section 17(2) also draws upon the Contract Act 1999 section 39 by basically taking in the duty to remind as provided in section 39 with some fine-tuning.

B.  The Section 17(1) Duty to Explain Pursuant to section 17(1), where the insurance contract is proffered by the insurer as standardised, the standardised contract terms or clauses shall be annexed to the policy provided by the insurer, and more importantly the insurer ‘should explain to its insurance applicant the content of the insurance contract.’ The wording ‘content’ is not qualified in section 17(1), so it is understood as referring to the full content of the standardised insurance contract. Practically this means that the insurer has the statutory duty to explain to the insurance applicant all terms or clauses of the standardised insurance contract proffered thereby. Section 17(1) seems hardly controversial, because almost all scholarly and ­judicial discussions of section 17 centre solely on section 17(2) or insurer’s duty

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to elucidate the exemption clauses in the insurance contract. This is because first whether an insurance contract is standardised or not is invariably very clear, and often it is standardised, and therefore section 17(1) applies indisputably to almost all insurance contracts in China, most of which are standardised consumer insurance contracts.34 Second, that is also because section 17(1) requires insurers only to ‘explain’, which is fairly easy for insurers to do, without in contrast requiring in section 17(2) an insurer to ‘elucidate (ie clearly explain)’ the clauses in question.

C. The Section 17(2) Duty to Remind and to Elucidate (or ‘Clearly Explain’) Pursuant to section 17(2), for insurance contract clauses that exempt the insurer’s liabilities—or obligations more precisely—amid concluding the contract the insurer should remind the insurance applicant of such clauses in manners which sufficiently draw the insurance applicant’s attention thereto. In addition to that, the insurer shall elucidate, or explain clearly, as section 17(2) prescribes literally, to the insurance applicant the content of such exemption clauses. The elucidation can be made in writing or in speech. Where the insurer fails to remind or fails to elucidate, the exemption clause is invalid. This is consistent with the Chinese Contract Act 1999 section 39(1), under which Section 17 of the Chinese Insurance Act is basically an extension, enhanced though, of this general provision applicable to all contracts to insurance contract specifically. However, until in 2013 when the SPC Interpretation II to the IA clarified aspects of section 17(2), such statutorily extended application has been highly controversial in Chinese insurance law, particularly with section 17(2).

i.  What are ‘Clauses that Exempt the Insurer’s Liabilities?’ Until the Supreme Court clarifies, it has been disputed what the ‘clauses that exempt insurer’s liabilities’ really are. A narrow and literal interpretation is that they are only clauses under the heading of ‘exemption clauses’ in the insurance contract. A broad and liberal interpretation is that they are insurance clauses which are intended to and have the effect of restricting or narrowing down the insurer’s liabilities. This is consistent with the Contract Act 1999 section 39 under which contract clauses that either exempt or restrict the liabilities of the ­profferer

34  Long term insurance, known as ‘personal insurance’ under the Chinese insurance law, are certainly consumer insurance. General insurance, known as ‘property insurance’ under the Chinese insurance law, are mostly consumer insurance, because data shows that 70 per cent of the property insurance premiums are collected from motor insurance policyholders most of which are individual natural persons. Source: The Chinese Insurance Regulation Commission website: update 12 May 2014, last access 10 Dec 2017.

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of the standardised contract should be explained by the proferrer. The SPC ­Interpretation II to the IA adopts the liberal approach. Under section 9(1), ‘clauses that exempt or reduce the insurer’s liabilities’ are as provided for in the Insurance Act section 17(2) and they include but are not limited to exemption clauses (in its narrow and literal sense), clauses on the amount of deductibles, clauses on the rate of deduction, and clauses on proportionate payment. Meanwhile, the SPC Interpretation II to the IA section 9(2) emphasises that clauses on insurer’s right of avoidance on the ground that the insurance applicant and/or the insured has breached its legal or contractual obligations do not fall under the Insurance Act section 17(2).

ii. The Duty to Remind in Manners that ‘Sufficiently Draw the Insurance Applicant’s Attention’ This is a subjective standard or test for the insurer’s duty to remind. It is very different from the Contract Act section 39 which sets an objective test for the duty to remind: under the section 39, the profferer of standardised contracts is obliged to ‘take reasonable measures to draw the exempting or restrictive clauses to the other party’s attention’. Though what is ‘reasonable’ has always been contestable, it is more contestable for insurers to be required to ‘sufficiently draw the insurance applicant’s attention’ to insurance clauses of restrictive nature. That being said, clearly it does not suffice if the insurer simply shows to the insurance applicant such clauses in the contract, nor to just plainly tell or notify the insurance applicant that such clauses exist. In practice, insurers often use special obvious symbols with special fonts of bigger size in contrasting colour and/or underlining to highlight such clauses. The Supreme Court has confirmed such practices as sufficient for performing the duty to remind.35 In addition, where the insurance contract is concluded electronically or online—this has become increasingly common in China over the recent years—it suffices that the insurer uses webpage, audio or video means to perform the duty to remind and the duty to elucidate.36

iii.  The Duty to Elucidate—How Clearly? The Insurance Act 2009 section 17(2) imposes on insurers the duty to elucidate or ‘clearly explain’ exempting clauses to insurance applicants. The Act however does not define or describe what is meant by ‘clearly explain’. It has been clarified and understood since 2000 that to ‘clearly explain’ means to explain to the effect that ‘the insurance applicant [latterly the insured] clearly knows the real meaning and the legal consequences of the clause in question.’37 Obviously, this is so subjective

35 

Supreme Court’s Second Judicial Interpretation to the Insurance Act s 11(1). ibid, s 12. 37  SPC, ‘The SPC Reply to How ‘Clearly Explain’ in the Insurance Act s 17 should be Understood’, SPC Research Department [2000] No 5. 36 

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that it gives the insured the readily available defence that the exempting or restrictive clause is invalid because the insurers fail to ‘clearly explain’ it thereto in that the insured does not clearly know the real meaning and the legal consequence of the clause despite the insurer’s explanation. As a result, any exemption or restrictive clause in an insurance contract would be made nugatory. The Chinese Supreme Court took 13 years to fundamentally change this standard. In 2013, the Supreme Court reinterpreted ‘elucidate (or clearly explain)’ under the Insurance Act 2009 section 17(2). By the reinterpretation, such a wording means that insurers should explain the clauses in question to the effect that ‘an ordinary and normal person can understand them’.38 This effectively repealed the extremely subjective standard set in 2000, and establishes an objective standard. Courts should find that an insurer which has satisfied this new standard has performed the duty to elucidate or clearly explain.39 Also noteworthy in this regard is an additional provision in the SPC Interpretation II to the IA. It concerns statutory prohibitions. It is not uncommon for insurers in China to have breach of prohibitive statutory provisions as the ground of exemption (in its narrow and literal sense) of insurer’s liabilities. Exemption clauses of this kind certainly are subject to section 17(2). In particular, the SPC Interpretation II to the IA stresses that once the insurer has reminded the insurance applicant, the beneficiary or the insured of such exemption clauses, courts should not support the contention that such clauses are invalid because the insurer fails to elucidate or clearly explain these clauses. Simply put, clauses of exemption grounded on breach of prohibitive statutory provisions are subject to the duty to remind, but not to the duty to elucidate. This is due largely to a public policy, which is that the general public including these parties shall understand the prohibitive statutory provisions and abide by them, therefore not knowing or not understanding the law should not be a pretext; hence the insurer is not obliged to make sure that these parties understand the prohibitive statutory provisions which are among the grounds of exemption of insurer’s liabilities.

iv.  Matters of Proof The Supreme People’s Court has provided that the burden of proof of performance of the section 17(2) duty to elucidate falls on the insurer.40 This is onerous to insurers, because it reverses the burden of proof. Normally, under the Chinese civil litigation rules, the party who alleges certain facts should prove such facts and bear the burden of proof; only in a few limited circumstances that is reversed to the counter-party, but an insurance dispute is not among such circumstances until the SPC now so provides. Therefore, the insurance applicant or the insured

38 

SPC Judicial Interpretation II to the Insurance Act s 11(2). ibid, s 11(2). 40  ibid, s 13(1). 39 

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who argues that the insurance clause in question is invalid under the Insurance Act 2009 section 17(2) because the insurer fails to perform its duty to elucidate or clearly explain would normally have to prove the insurer’s such failure in this duty. This is however reversed by the SPC. As a result of the reversal of burden of proof, the insured or insurance applicant need only contend that the insurer has failed in its duty to elucidate without having to prove the insurer’s failure. Instead, to effectively defend against such a contention, the insurer should take the pains to prove it has performed the duty. This is why, for evidentiary purposes, Chinese insurers over recent years commonly have video recordings of the process in which they perform their duties under section 17(1) and section 17(2). Another means by which Chinese insurers protect themselves in relation to section 17(2) is to require the insurance applicant to formally confirm that the duty under section 17(2) has been performed. The SPC has confirmed this pervasive practice. According to the SPC judicial interpretation, where the insurance applicant has confirmed, by signature, seal or stamp, or other forms, that the insurer has performed its duty to elucidate, the insurer should be deemed or presumed to have performed the duty unless proved otherwise.41

D.  Reflections on the Rationales of the Section 17(2) Duty i.  Utmost Good Faith, or Good Faith? One purported rationale of the section 17(2) duty is that such a pre-­contractual duty of insurers is the corollary of the principle of utmost good faith. This is questionable in the Chinese context. This is first because, as has been argued, the conception of ‘utmost’ good faith per se is fairly problematic, and as a matter of positive law it is not really transplanted into the Chinese Insurance Act. Second, like in the UK, in China the principle of utmost good faith has for long been thought to impose pre-contractual duty mainly, as a matter of fact, on policyholders or insurance applicants. Carter v Boehm has been widely recognised as the legal source of the principle and of policyholder’s or insurance applicant’s precontractual duty of disclosure. Although in English insurance law, the principle undoubtedly binds both parties to an insurance contract, there is no consistency in the Chinese context when the principle, which has been thought to be binding more to insurance applicants, is thought to be a good rationale also of insurer’s pre-contractual duty. To rid such inconsistency, it must be widely ­recognised in the Chinese insurance law academia that Lord Mansfield in Carter v Boehm made it clear that good faith bound both parties to insurance contracts. That being said, it could be more appropriate to have the requirement of good faith, rather than utmost good faith, as a rationale of insurer’s duty to explain,

41 

SPC Interpretation II to the IA s 13(2).

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to remind and to elucidate. This is because both the Contract Act 1999 and the Insurance Act 2009 require all parties, including insurers certainly, to observe good faith. Regardless of the Insurance Act 2009 section 17, the principle of good faith can still be invoked as requiring insurers to remind insurance applicants of the restrictive or exempting clauses and to explain thereto under the Contract Act 1999 section 39.

ii.  Balancing the Asymmetry of Information? Another rationale is that there is asymmetry of information between insurers and insurance applicants in regard to the content or the clauses of the insurance contract. However, in this context there seems to be an over-use and a misuse of the terminology or the theory of ‘asymmetry of information’. Asymmetry of information typically refers to imbalanced knowledge of the information usually about the subject matter of the transaction—as when the theory was originally put forward by George Akerlof discussing the market for ‘lemons’ or defective used cars. It does not refer to the gap in understanding the terms and/or conditions of a transaction. An insurance applicant’s duty of pre-contractual disclosure addresses asymmetry of information, because it is to disclose to the insurer information about the subject matter of the insurance and such information as is not known to the insurer but well-known to the better-positioned insurance applicant. Nevertheless, this is not so for insurers’ pre-contractual duties in respect of the contract terms which are not the subject matter of contract but (the content of) the contract per se. Moreover, this rationale does not explain why the duty still applies where the insurance applicant or the insured is a business rather than a consumer. Asymmetry of information on the terms or clauses of contract, if this is the right sense in this context, is certainly pervasive in consumer insurance, and therefore it might be rightly submitted that the insurer’s pre-contractual duties to explain, to remind and to elucidate are intended to address such asymmetry of information. However, similar reasoning hardly stands in business insurance, because it is presumed that business insureds and insurers are in a level-playing field. This is particularly so in reinsurance contract.

iii.  Upholding Party Autonomy, or Informed Choice? Another justificatory rationale is that insurer’s duty to elucidate serves the purpose of maintaining the autonomy of contractual parties—in this scenario it is autonomy of the insurance applicant. In other words, the duty is intended to make sure that an insurance applicant can make one’s own proper decision as to whether the insurance contract clauses are binding thereto. Such decision invariably must be based on informed choice and further on the insurance applicant’s understanding, or knowledge at the least, of the contract terms, particularly those clauses which are potentially prejudicial to the rights of the insurance applicant or the insured.

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However, the ‘party autonomy’ or ‘freedom of contract’ rationale is still flimsy to a large extent. By freedom of contract, parties should be as free as possible to make agreements on their own terms without interference from the state. This is not quite the case in the context of insurer’s duty of elucidation under the Insurance Act 2009 section 17. That is first because insurance contracts are mostly adhesive contracts; as a result, insurance applicants or the insureds are hardly free in respect of the contract terms or clauses to make agreements with insurers. Second, pursuant to section 17(2), exemption clauses not brought to the attention of or not elucidated to insurance applicants or insureds have no effect. This is none other than interference from the state. Therefore the imposition of the duty to elucidate, or more precisely the imposition of the consequence of the breach of such a duty runs counter to the non-interventionist spirit of freedom of contract. That being said, it is perhaps more accurate to say that the rationale of the duty is to ensure informed choice (of insurance applicants or insureds). Also under the banner of freedom of contract, ‘parties are ordinarily free to contract on whatever terms they choose and the court’s role is to enforce them.’42 In order for the insurance applicants to have real freedom to choose, they must have the opportunity in the first place to know of the insurance contract clauses—hence the insurer’s duty to remind; in the second place it must be ensured that they have some understanding of those clauses, hence the insurer’s duty to elucidate such clauses which are actually drafted by the insurer. Meanwhile, the cooling-off period in consumer contract law can serve the same purpose of informed choice, because the consumer insured can choose to opt out of the insurance contract once it finds out within the cooling-off days that the insurance product is not quite what is expected. This makes insurer’s pre-­contractual duty to remind and to elucidate less necessary.

E.  Breach of the Section 17(2) Duty and the Bias against Insurers The section 17(2) duty to remind and to elucidate over-favours the insured or insurance applicant too much,43 and meanwhile is too onerous to insurers. ­Empirical investigation44 shows that between 2009 and June 2013 when the SPC ­Second Judicial Interpretation to the Insurance Act was issued, there were 501 court cases that involved the Insurance Act 2009 section 17(2). Insurers won only 19 out of the 501 cases, with a losing rate as high as 96.2 per cent. From June 2013 to 31 October 2014, there were 151 court cases involving the same section 17(2), 42 

Prime Slight Ltd v Lavarello [2013] UKPC 22 (per Lord Toulson, emphasis added). A tentative query is: why could ignorance of contractual provisions be a bar to the binding force of the contract, whereas ignorance of law is no bar to the binding force to law upon the person concerned? Is this because contract is only a ‘private law’ between and binding only to the parties and is based on their autonomy, but state law is imposed upon the public by coercion? 44  Judicial data in this and the following paragraph are cited from Ning Ma, ‘A Critique to Insurer’s Duty to Elucidate’ [2015] 3 Chinese Journal of Law 102, 104–06. 43 

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and insurers lost 118 cases out of the 151, with a losing rate of 78.1 per cent. These numbers and rates regarding cases lost by insurers do not per se mean that ­section 17(2) is biased against insurers. But some of the judicial reasoning which leads to judgment against insurers, or the judicial application of statutory rules in regard to section 17(2), does seem so. In 51 out of the 118 post-June 2013 cases that were lost by insurers, although it was proved that insurers had performed its duty under the Insurance Act 2009 section 17 and the ancillary SPC Interpertation II to the IA, the insurers still lost their cases. In particular, in 21 out of the 51 cases, the reason of the judgment against insurers is that the signatures under ‘Insurance Applicant’s Declaration’ and ‘Special Reminder’ were found not to be that of the insurance applicant in question. Such judgment was sustained even though it had been proved that the insurer had reminded the insurance applicant of the policy clauses at issue and had elucidated such clauses, or that the signature thereunder was authorised by the insurance applicant. This is inconsistent with section 13(2) of the SPC Second Judicial Interpretation to the Insurance Act, by which courts should accept or recognise that the insurer has performed its duty to elucidate where the insurance applicant has confirmed so by signing, stamping or other means in relevant document, unless it is proved otherwise. Similar to the 21 out of the 51 cases, in another two cases (also out of the 21), the court ruled that the insurers failed in their duty to remind because the exemption clauses were found to be not in bold or highlighted for the purpose of reminding the insurance applicant thereof. So was it ruled although the ‘Insurance Applicant’s Declaration’ recorded that the insurers had already reminded the insurance applicants of those clauses and had also explained them thereto. The 23 (ie 21 plus two) out of the 51 cases lost by insurers in which their performance of the duties under section 17 had been proved are strong manifestations that the statutory rules are strained with judicial biases against insurers. This bias against insurers, or favouritism to insurance applicant and insureds, is consistent with and directly related to what can be called ‘consumer-welfarism’45 in Chinese insurance contract law. The consumer-welfarism in Chinese insurance law is naturally consistent with the fact that absolutely most of the insurance in China has been consumer insurance. This is certainly so for long-term insurance or what is called ‘personal insurance’ under the Chinese Insurance Act. Premiums income of personal insurance accounts for over 60 per cent, ranging from 62.5 per cent to 77.6 per cent,46 of total premiums income across the whole insurance industry from 1999 to 2014. This is much more than that of general insurance or ‘property insurance’ as is broadly termed under the Chinese Insurance Act. Given

45  J Adams and R Brownsword, ‘The Ideologies of Contract’ (1987) 7 Legal Studies 205, 206. For a contract-ideological analysis of insurance law, see Yong Qiang Han, The Relevance of Adams and Brownswords Theory of Contract Law Ideologies to the Insurance Law Reform in Britain: An Interpretative and Evaluative Approach (University of Aberdeen PhD Thesis, 2013). 46  Calculations based on the Chinese Insurance Regulation Committee’s industry data published on the CIRC website.

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the much larger market share of consumer insurance in China, it is not surprising that the Chinese insurance law is fairly consumer-welfarist and so are the rules of insurer’s pre-contractual duties. This is particularly so when the Consumer Rights and Interest Protection Act (as amended in 2013) has expressly availed itself to consumer insurance disputes.

F.  Reform (in the Long Future?) in Consumer Insurance Before business insurance in China has a substantial market share in comparison with consumer insurance, it is unlikely there would be a strong need for reforming or relaxing the legal rules of insurer’s pre-contractual duty in the foreseeable future. Insurers’ lobby capacity for this purpose does not seem to be effective. Actually the amendment in 2009 to the Insurance Act substantially tightened the previous statutory provision. The enhancement of consumer protection in insurance regulation and in insurance dispute resolution also means it is very unlikely for the Insurance Act section 17 in its current state to be relaxed or return to what it was before 2009.

i.  Consumer Insurance versus Business Insurance That being said, vision requires considering possible approaches that might be relevant to legal reform in this respect in the long future. In the first place, there should be a distinction in this respect between consumer insurance and business insurance. The insurer’s duty to remind and to elucidate should not apply to business insurance, and they should apply only to consumer insurance. This is because, unlike consumer insurance-applicants, the business insurance-applicant is more resourceful to have the professional service of lawyers and/or insurance brokers in negotiating for insurance coverage. It is generally a ‘market-individualist’47 business transaction at arm’s length. Sometimes the insurance contract is even not drafted or proffered by the insurer but by the insurance applicant (or its broker, as is often the case). In this circumstance, the current Insurance Act 2009 section 17 should be totally inapplicable to business insurance. This is because, as pointed out above, Insurance Act 2009 section 17 is the product of strong ‘consumer-welfarism’ in the Chinese insurance market, which nevertheless has been dominated by consumer insurance.

ii.  A Return to Contract Act 1999 Section 39(1)? Premised on a distinction between consumer insurance and business insurance, the following approaches to reforming the Insurance Act 2009 section 17 in its current state are worth considering. The first approach is to return to the 47 

Adams and Brownsword (n 45) 205, 206.

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Contract Act section 39(1), which requires that the profferer of a standardised contract shall ‘take reasonable measures to remind the counter-party of the contract clauses which exempt or restrict its own [ie the profferer’s] liabilities, and, upon the counter-party’s request, should explain such clauses thereto.’ In the context of insurance, this means the insurer certainly still has the duty to remind the insurance applicant of the exempting or restrictive clauses in an insurance contract. However, the insurer has the duty to explain such clauses only upon request by the insurance applicant to do so. Of course it is unlikely that the insurance applicant will not request this. However, the insurer has no duty to ‘clearly explain’ or explain to the extent that such clauses ‘are understood by an ordinary person’48 or by the particular insurance applicant. In the meantime, it is noteworthy that such an approach, ie a return to general contract law rules on adhesive contracts, will inevitably be soon subject to and consistent with the particular provisions in the ‘Contract Chapter’ of the Chinese Civil Code expected in March 2020.49

iii.  Expanding the Application of a Cooling-off Period? A second alternative approach is to expand the application of a cooling-off period to consumer insurance. The Consumer Rights and Interest Protection Act 2013 section 25 provides for what is essentially a seven-day cooling-off period for particular sale of consumer ‘goods’. This is hardly applicable to insurance contracts, which are ‘financial services’50 but not ‘goods’ under this Act. If ‘goods’ under this Act can be expanded through judicial interpretation to include financial ­services including but not limited to insurance contracts—arguably insurance can be viewed as a ‘product’, as the oft-used jargon ‘insurance product’ in China literally indicates—the cooling-off period will to at least a moderate extent alleviate the need to resort to the Insurance Act 2009 section 17 ex post an insurance dispute. Rather the insured or the former insurance applicant can opt out of the insurance contract that is found to be unwanted.

iv.  The Duty to Provide Information? A third alternative approach is the duty to provide information in combination with the duty to remind but without the duty to elucidate. The duty to provide information requires that the insurer provide all essential information to the insurance applicant. For consumer insurance, the insurer’s duty to provide material information has its statutory basis in the Consumer Rights and Interest Protection Act 2013 section 28, which requires that financial services providers such as insurers should proffer such information inter alia as the quantity and quality

48 

SPC Judicial Interpretation II to the Insurance Act s 11(2). The rekindled (in Nov 2014) project to enact a Chinese Civil Code has been ongoing since 2015. 50  Consumer Rights and Interest Protection Act 2013 s 28. 49 

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of the services, the price or expenses, the time-span and means of performance or provision of services, the safety dos and don’ts as well as risk alerts, the after-sale services, and civil liabilities etc. What follows from this is that insurers should fully rather than selectively provide all essential information of the prospective insurance contract to the insurance applicant. However, the duty to provide information is necessary but not sufficient, because ‘providing’ of information could simply be a matter of presenting or showing pages and pages of contract clauses to the other party, and this will not always really be helpful thereto. Hence it needs to be coupled with the duty to remind, as is under the Insurance Act section 17. This means the insurer must alert the consumer insurance applicant of the potential pitfalls or of what is risky thereto so that the insurance-applicant can make an informed choice as to whether it would want to enter into the insurance contract under consideration. Under the fourth approach, with the duty for insurers to provide information but without explanation or elucidation, the insurers are no longer obliged to proactively (though involuntarily) help the consumer customers to u ­ nderstand the exempting or restrictive clauses in the insurance contract. This might sound ­somewhat harsh and risky to consumers. But couldn’t consumers in the 21st century be expected to at least try to learn to take care of their consumer life? With robust consumer rights organizations, is it really so necessary for consumer (insurance) law to be so paternalist? Is it really just impossible for the wordings of insurance contracts to be made intelligible or accessible to the ordinary consumers, so that a particular extra duty for insurers to elucidate might be unnecessary?

v.  The Doctrine of Reasonable Expectations? It is argued that a complementary approach could be the doctrine of reasonable expectations of the insured.51 Although insurance law academics in China have argued for it for over a decade by now,52 this American insurance law doctrine is hardly likely to be introduced into the Chinese insurance law. It is not only because it is controversial in the US and in common law jurisdictions broadly, or it is allegedly dying if not dead in the US—which turned out to be not quite true.53 It is

51 

Ma (n 44) 102, 118. Qirong Fan, ‘A Review of the Doctrine of Reasonable Expectations in American ­Insurance Law’ [2004] 3 Law and Business Studies 117; Hongtao Sun, ‘Exploring the Principle of Reasonable Expectations in Construction of Insurance Contract’ [2009] 4 Contemporary Legal Science 23; Ning Ma, ‘Reasonable Expectations of the Insured: Returning from Doctrine to Principle’ [2015] 5 Comprarative Law Studies 76. 53  J Stempel and E Knusten, Stempel and Knutsen on Insurance Coverage, 4th edn (New York, Wolters Kluwer 2016) § 4.09[D][5] ‘The Current Status of Reasonable Expectations’. Also Y Han, Policyholder’s Reasonable Expectations (Oxford, Hart Publishing 2016) Chapter 5 ‘Revisiting the Doctrine of Reasonable Expectations in American Insurance Law’. It is submitted in the two books, independent from each other, that nowadays 41 and 40 states (to Stempel/Knusten and Han respectively) in the US apply the doctrine of reasonable expectations in one way or another. 52 Notably,

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also because its inexplicably entangling relation to contra proferentum makes it almost redundant in Chinese insurance law. The Insurance Act 2009 section 30 in its second sentence already expressly adopts contra proferentum. More importantly, it is also because the conception of ‘reasonable expectations’ is yet to have a place in the legal-academic discourse or in the positive principles or rules of Chinese contract law. In contrast, the foundational importance of this conception has always been recognised in one way or another in Anglo-American contract law. In his seminal discussion of contract of adhesion, Kessler argued that ‘In dealing with standard contracts courts have to determine what the weaker contracting party could legitimately expect … and to what extent the stronger party disappointed reasonable expectations based on typical life situation.’54 As recently as the 1950s Corbin argued that ‘the law of contracts attempts the realisation of reasonable expectations that have been induced by the making of a promise.’55 Agreeing with Corbin and from the perspective of the historical origin of contract law, Goodhart made his point that ‘contractual liability is based on the disappointment of the promisee’s reasonable expectations.’56 Roscoe Pound also professed his preference for a principle of reasonable expectations to the will theory of contract and other various contract theories.57 Actually, there is such a widespread acceptance of a principle of reasonable expectations that it has been described as being ‘traditional’.58 According to John Adams and Roger Brownsword, reasonable expectation ‘is the key to contractual obligation.’59 More recently, as Collins explains: ‘It is not the intention of the promisor but the reasonable expectation generated by the promise from the point of view of the promisee that determines the content of the contractual obligation.’60 This perception of contract law is also shared by some prominent judges, although in both judicial and extra-judicial context. More than two decades ago, Steyn LJ as he was then, opined that ‘a theme that runs through our law of contract is that the reasonable expectations of honest men must be protected.’61 In only two years, Lord Steyn extra-judicially professed fulfilling reasonable expectations as ‘an important subject for the future development of English contract law.’62 Similarly, Dyson LJ opined that ‘an implied term is

54 F Kessler, ‘Contract of Adhesion—Some Thoughts about Freedom of Contract’ (1943) 43 ­Columbia Law Review 629, 637. 55  A Corbin, Law of Contracts, vol 1 (St Paul, West & Co, 1950) 2 (emphasis added). 56  A Goodhart, English Law and the Moral Law (London, Sweet & Maxwell, 1953) 101–02. 57  R Pound, ‘Considerations in Equity’ in JH Wigmore, Celebration Legal Essays: By Various Authors to Mark the Twenty-Fifth Year of Service of John H Wigmore, As a Professor of Law in Northwestern ­University (Chicago, Northwestern University Press, 1919) 459. See also R Pound, Jurisprudence, vol 3 (St Paul, West & Co 1959) 175. 58  PS Atiyah, ‘Contracts, Promises and the Law of Obligations’ (1978) 94 LQR 193, 214. 59  J Adams and R Brownsword, Key Issues in Contract (London, Butterworths 1995) 153–54. 60  H Collins, The Law of Contract 4th edn (London, LexisNexis UK, 2003) 223. 61  First Energy (UK) Ltd v Hungarian International Bank Ltd [1993] 2 Lloyd’s Rep 194 (CA), 196. 62  Lord Steyn, ‘Contract Law: Fulfilling the Reasonable Expectations of Reasonable Men’ (1995) 9 LQR 433, 433.

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necessary in order to give effect to the reasonable expectations of the parties.’63 As recently as only six years ago, Lord Hoffmann stated extra-judicially: ‘The purpose of the law of contract is to fulfil reasonable expectations and such expectations should therefore be self-fulfilling.’64 All these insights into general contract law certainly shed bright light on and lend force to the doctrine of policyholder’s reasonable expectations in Anglo-American insurance contract law. To a large extent, together these insights could serve as an institutional foundation of that insurance law doctrine. While this foundation is hardly consolidated, an unconsolidated foundation is better than no foundation at all. However, such basis has been lacking in the academic discussion of Chinese contract law or in its black-letter law. Unless there would be such a foundation to be built therein, the doctrine of policyholder’s reasonable expectations is just too alien to be transplanted to or introduced into the Chinese insurance contract law. After all, matters of insurance disputes are matters of contractual disputes as well. Insurance law is not different, and should not be different, from general contract law.65 General contract law is always the basis of insurance (contract) law in a civil law jurisdiction (such as China) where the generality of any law always looms large over the specificity. This is certainly so when it comes to insurance contract law. Before the Chinese general contract law would adopt the principle of ­reasonable expectations, it is infeasible and therefore unlikely for the Chinese insurance law to adopt the doctrine of policyholder’s reasonable expectations as part of the positive law.

V. Conclusion Whilst in China both academic and practicing lawyers, and even judges too, ­frequently highlight the principle of ‘utmost good faith’ in insurance law, the ­Chinese Insurance Act consistently provides for a principle of good faith only despite of several amendments thereto. The Chinese private law already recognises the well-established overarching principle of good faith, there is indeed no need for a principle of utmost good faith. This is particularly so now that ‘utmost’ hardly adds substantive meaning to good faith and that, although semantically sound, the assumption that utmost good faith is an enhanced or higher degree of good faith is historically untrue. Therefore it is the high time for discussants

63 

Nash v Paragon Finance Plc [2001] EWCA Civ 1466, [36]. Lord Hoffmann, ‘The Achilleas: Custom and Practice or Foreseeability?’ (2010) 14 Edinburgh Law Review 47, 59. 65  M Clarke, Policies and Perceptions of Insurance Law in the Twenty-First Century (Oxford, OUP, 2005) 357. 64 

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in China of this theme to jettison the conception and terminology ‘utmost good faith’ and return to the positive law of the principle of good faith in the context of insurance. In this regard, discussions on the insurance law requirement of good faith, in terms of policyholder’s pre-contractual duty not to misrepresent is dynamic although it still keeps some of the traditional English insurance law that has been transplanted. However, the positions of Chinese law in this area have remained stable since 2009 when the previous duty of voluntary disclosure was replaced by a duty to make truthful representations to insurer’s enquiries, regardless of ­consumer insurance or business insurance. The SPC Interpretation II to the IA complements the primary law with details, which however are not free from ­criticism and further improvement. Insurer’s pre-contractual duties are heavy under the Chinese Insurance Act 2009 section 17 and the SPC Second Judicial Interpretations ancillary thereto. Where the insurance contract is standardised—and very often it is—insurers have the statutory duty to explain to the insurance applicant the content of the insurance contract. When it concerns ‘clauses that exempt the insurer’s liabilities’, insurers have in the first place the statutory duty to remind the insurance applicant thereof, and second also the further duty to elucidate or ‘clearly explain’ such clauses to the insurance applicant; failure of either duty will render the clause in question invalid. ‘Clauses that exempt the insurer’s liabilities’ are not limited to literal ‘exemptions’ and/or ‘exclusions’ in insurance contract. ‘Clearly explain’ means explanations to the degree that the clauses in question are understood by an ordinary person. But what is ‘an ordinary person’ varies massively in different geographical and/or social-economic context. The duty to elucidate is not so justifiable as it is believed to be: neither utmost good faith, asymmetry of information nor autonomy of will could persuasively justify the onerous duty on insurers. Generally, in regard to insurer’s pre-contractual duties the Chinese insurance law is highly consumer-welfarist. This is consistent with the dominance of consumer insurance in the Chinese insurance market. Unless there is a noticeable market dominance of business insurance, reform in this aspect of insurance law is unlikely in the near future. Although long-term considerations of reform require vision, speculated approaches such as return to the Contract Act, the cooling-off period, the duty to provide information and the doctrine of reasonable expectations all are faced with institutional challenges, big or small, within the Chinese private law.

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9 Pre-contractual Duties under the French Insurance Law SEBASTIEN LEROY

I. Introduction Two hundred and fifty years ago, Lord Mansfield delivered one of the most wellknown decisions in English law, Carter v Boehm.1 In this decision, the learned judge famously held ‘[g]ood faith forbids either party by concealing what he privately knows, to draw the other into a bargain, from his ignorance of that fact, and his believing the contrary.’ While Lord Mansfield also mentioned that this ‘governing principle is applicable to all contracts and dealings’, Carter v Boehm is nowadays seen in English law as a case creating a pre-contractual duty to disclose information binding the (future) policyholder in insurance contracts only. Insurance contracts are indeed very special in that one party (the insurer) agrees to assume the financial consequences of the occurrence of a risk taken either by the other party (the policyholder) or by a third party whereas the insurer does not agree to be the victim of this so-called moral hazard gratuitously. He will ask a consideration, which is called the premium. The amount of such premium will, of course, depend on the likelihood of the occurrence of the risk. Since the occurrence of the risk may often depend on the policyholder’s background, the insurer will need to obtain information from the policyholder and rely on that information. Objectively speaking, at the time of conclusion, the (future) insurer is thus in an inherently weaker position than the (future) policyholder is. However, such statement would appear odd to the nowadays layman. The latter would certainly object that he is in a stronger position when negotiating with an insurer. Indeed, nowadays, insurers are large corporations insuring mass risks. Insurance contracts are most of the time adhered to rather than negotiated. The image of abstract negotiating parties negotiating at arm’s length of the nineteenth century has been now widely replaced by the image of the biblical confrontation between King David and the giant Goliath. In addition, insurance contracts are no longer mainly 1 

Carter v Boehm (1766) 3 Burr 1905.

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seen as contracts ensuring a maritime venture. They are more and more laymen wishing to ensure their day-to-day life. They are often without the sufficient legal skills to understand the terms of the contracts and their financial consequences, and have often a very poor idea of their real needs. Modern insurance contracts present thus the paradox of having both parties suffering from an asymmetry of information. As this chapter will show, the ­modern French law of pre-contractual relationships in insurance contracts is the product of this paradox. Part II will show that by means of the general principle of good faith French law has committed itself to reduce as much as possible the asymmetry of information on both sides, even if the influence of good faith in the law of the pre-contractual relationships has considerably diminished as a result of the process of codification. Part III will show how the policyholder’s precontractual informational duty has evolved from a duty to disclose information to the duty to answer the insurer’s question. It will also show how French law has tried to find an equilibrium between the need to protect the interest of the insurer and the need to avoid that inexperienced policyholders will lose their coverage for a mistake caused by their inexperience. This equilibrium has been found in the distinction between honest and dishonest misrepresentations of the risk through different remedies. Part IV will detail the insurer’s pre-contractual informational duty, which existence is far more recent. It will show that such duty is composed with both harmonised and individualised information. Hence, the insurer is bound to both provide information required by the Insurance Code and to advise the policyholder on the adequacy of the coverage to his personal situation.

II.  Pre-contractual Good Faith in French Civil Law: An Overview The new Article 1104 of the Code Civil provides that ‘contracts have to be negotiated, concluded, and performed in good faith’.2 This provision is placed among the introductory provisions related to contracts. This offers a good indication of the importance that French contract law attached to the devoir de bonne foi (duty of good faith). Under French law, contractual good faith is generally said to have two main meanings. It is first a norm of interpretation of the contract, under which the parties’ respective rights and duties should not be determined by the sole reference to the terms of the contracts. Instead of a strict adherence to the terms of the instrumentum, the judge should determine those rights and duties by reference to the parties’ intention, the nature of the contract and equity. Hence, contractual good faith means both determining the content of the contract as wanted by the 2 

All translations are mine unless provided otherwise.

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parties and supplementing the contract with duties seen as necessary in the name of justice. The main example is the duty of safety binding those parties which provide a service for the public (transportation, health care, hotels and catering, sports activities …).3 Nowadays, this norm of interpretation is to be found in the Code Civil.4 Under a second meaning, contractual good faith refers to a norm of behaviour. Here, good faith means acting ‘loyally, sincerely, honestly; to keep one’s word; to keep one’s promise’.5 The use of those terms to explain the meaning of the duty to behave in good faith has been criticised for their vagueness.6 But most authors are less interested in proposing a definitive conceptualisation of good faith than determining how it is used in practice. Hence, the content of good faith will be inferred from case laws.7 Hence, the duty to behave in good faith, in its second sense, has given rise to a general pre-contractual informational duty under which the parties need to disclose the facts known to them as being essential for the just assessment of the proposed good or service by the other.8 The duty to behave in good faith is generally said to impose contractual duties of loyalty and cooperation. Being loyal means being perseverant (doing as agreed until the end of the contract), vigilant (being proactive to avoid deadlocks), transparent (informing the other party about possible issues) and faithful (avoiding any action preventing the other party from benefiting from the contract). Under the duty to cooperate, authors mention informational duties during performance and the adaptation of the contract to the evolution of the circumstances.9 The parties should also refrain from contradicting themselves, and more generally to focus on the spirit of the contract rather than its letter. Acting in good faith would thus mean subjugating oneself to the contractual goal.10 A violation of the duty to behave in good faith exposes to the annulment of the contract, to the payment of damages or to the ­neutralisation of the provision which enforcement is sought in bad faith (for an illegitimate purpose). However, this judicial power is limited to the so-called contractual

3  See generally P Le Tourneau and M Poumarède, ‘Bonne foi’ in Répertoire de Droit Civil Dalloz (edn 2014) no 56. 4  See arts 1188 and 1194. 5 See B Fauvarque-Cosson and D Mazeaud (eds), European Contract Law—Materials for a Common Frame of Reference: Terminology, Guiding Principles, Model Rules (Munich, Seller. European law publishers, 2008) 163. 6  See B Jaluzot, La bonne foi dans les contracts—Etudes comparative de droit francais, allemand et japonais (Paris, Dalloz, 2001) no 401. 7 The French method does not differ from Summers’ excluder model. See RS Summers, ‘The General Duty of Good Faith—Its Recognition and Conceptualization’ (1982) 67 Cornell law review 810. 8  See Part III. 9 For references, see especially Y Picod, ‘Article 1134 et 1135’ Fasc. unique: Contrats et Obligations—Effet obligatoire des conventions—Exécutions de bonne foi des conventions, in ­ ­Encyclopédie du Jurisclasseur: Code Civil (Lexis Nexis, edn Juin 2015) no 99. 10 S Lequette, Le contrat-coopération—Contribution à la théorie générale du contrat (Paris, ­Economica, 2012) no 432.

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prerogatives (unilateral contractual powers). The judge cannot thus violate ‘the very substance of the rights and obligations’.11 The concept of uberrimae fidei (utmost good faith), however, is nowhere to be found in French law. It is also rarely used by authors, and when they do, it is to describe contracts in which English law recognises a duty to disclose information,12 and those requiring a higher level of loyalty because of the needed trust or vulnerability of one party in contracts such as insurance contracts13 or the mandat de protection future (enduring power of attorney).14 The reason of such disregard is that such concept has never been seen as necessary for normative purposes. Under French law, the duty to perform in good faith applies to every contract. As mentioned above, what is required by this duty will depend on the type of contract and on the parties. In other words, whatever the particular obligation or the particular behaviour that a duty of utmost good faith might require, this particular obligation or this particular behaviour can perfectly arise from the duty to perform in good faith. There was therefore no reason to distinguish between bona fidei contracts and uberrimae fidei contracts. Hence, it was by means of the principle of good faith that the policyholder’s precontractual informational duty was introduced in French law at least a century before Carter v Boehm.15 And if the insurer’s pre-contractual duty to inform and advise the policyholder entered into insurance contract law, it was the result of the creation of such duty in all contracts on the ground of good faith.16 However, recourse to the principle of good faith appears less and less important in French insurance law. The policyholder’s pre-contractual informational duty was part of legislation on maritime insurance law before Carter v Boehm, and has been included in all codes and legislation ever since.17 The insurer’s duty to inform the policyholder is part of the Insurance Code since 1989, which indeed contains several exhaustive lists of information that need to be provided to prospective policyholders. Besides, the pre-contractual obligation to inform, containing the obligation to advise, has been now codified in article 1112-1 of the Code Civil. In other words, ensuring what good faith requires at the pre-contractual stage in insurance law is now ensured by specific provision in the codes. The importance

11 

Com, 10 juill 2007, no 06-14.768: R, p 436; Bull civ IV, no 188. FX Lucas, ‘Le manquement à l’obligation de contracter de bonne foi, cause de nullité des conventions’ (1996) II(15) La Semaine Juridique—Edition générale 22736; Monzer Rabih, ‘Les effets de la mondialisation sur la responsabilité précontractuelle. Régimes juridiques romanogermaniques et anglo-saxons’ (2007) 59(3) Revue internationale de droit comparé 523–49; See also Fauvarque-Cosson and Mazeaud (n 5) 187. 13  See J Kullman and L Louvel (eds), Le Lamy Assurances (Paris, Wolters Kluwer, 2016) no 28. 14  See G Raoul-Cormeil, ‘Le mandat de protection future, un contrat pour preserver les biens profesionnels ou l’intérêt de la famille’ (2014) 13 Les Petites Affiches 43. 15  See Part III. 16  See Part IV. 17  See Part III. 12  See

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of the duty of good faith is thus more and more spiritual notional rather than practical of legal application. It would come as no surprise to the reader that Carter v Boehm is devoid of any relevance in modern French law. In fact, it well seems that the development of the French law of pre-contractual informational duties occurred without any consideration to what was happening on the other side of the Channel. In a recently published article,18 a French author has shown how the policyholder’s pre-­contractual informational duty has developed from the seventeenth century to the reform of the civil code in 2016.19 The author did not mention the landmark English case, which implies that Carter v Boehm has probably never have any influence on French lawmakers. In the other way around, an author20 has argued that Lord Mansfield’s introduction of the duty of good faith in the Common law was the result of his studies of Roman law, continental writers’ works and ‘the then recently adopted French Code de Commerce.’21 Without trying to provide a definitive answer to this statement, I will mention a few elements that might help elucidating Carter v Boehm’s doctrinal origin. First, it is certain that Lord Mansfield never read the French Code of Commerce, as the latter was enacted 14 years after his death. Second, the idea of a duty to disclose information is coherent with the state of French law at that time, at least in maritime insurance contracts.22 However, such general duty only became part of a specific legislation in 1807. Unless Lord Mansfield had access to French courts’ decisions, he might not have found such general duty to disclose information in French law. It is also known that Lord Mansfield owned23 a copy of the treatise,24 which influenced the courts but did not mention such general duty. Mansfield’s approach appears to follow Labeo’s definition of the dolus malus (a case of misrepresentation or fraud justifying the annulment of a contract) in the Digest25 but contradicts both Cicero and Pothier for which a dolus malus required a positive act, and excluded thus the silence.26

18 A Profit, ‘Le développement de l’obligation d’information dans l’assurance maritime’ (1 Dec 2016) 4 Revue Des Contrats 760. 19  See Part III. 20 BL Shientag, ‘Lord Mansfield Revisited—A Modern Assessment’ (1941) 10 Fordham Law Review 345. 21  ibid, 350. 22  See Part III. 23  See F Trivellato, ‘Usages and Customs of the Sea’ (2016) 84 Tijdschrift voor rechtsgeschiedenis 193, 222. 24  E Cleirac, Us et coustumes de la mer, divisées en trois parties, I: De la navigation, II: Du commerce naval & contracts maritimes, III: De la iurisdiction de la marine. Avec un traicté des termes de marine & reglemens de la navigation des fleuves & rivieres (Bordeaux, 1647). 25  See D Deroussin, Histoire du droit des obligations 2nd edn (Paris, Economica, 2012) 516; see also R Zimmermann, The law of obligations: Roman foundations of the civilian tradition (Cape Town, Wetton and Johannesburg, Juta&Co Ltd, 1990) 257 and 665–67. 26  See Deroussin, ibid 534.

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III.  Policyholder’s Pre-contractual Duty under French Law A.  The Obligation to Truthfully Answer i.  From the Duty to Disclose to the Duty to Truthfully Answer The existence of the policyholder’s pre-contractual informational duty can be traced back to at least a century before Carter v Boehm in the second part of a treatise published in 1647 titled the Guidon de la Mer (Guidon).27 According to the Guidon, policyholders were required to provide specific information according to the kind of insurance. A voluntary false statement in the declaration of risk would have led to the insurance contract being considered void.28 The insurer was seen as the weaker party, since it needed to rely on the policyholder’s honesty to adequately assess the risk and thus to determine the fair amount of premium. Merchant courts saw the policyholder’s dishonesty as a délit (civil wrong) called dol.29 Hence, to find the policyholder’s délit, courts required both the existence of a misstatement by the policyholder and its intention to deceive the insurer. Courts went as far as considering the policyholder’s voluntary silence on an essential fact as if it was a lie, voiding thus the insurance contract.30 The rules described in the Guidon entered the first French legislation on maritime insurance, the Ordonnance de la Marine d’Août 1681. However, French law adopted the principle of consensualism when enacting the Code Civil in 1804. According to this principle, the conclusion of a contract only requires the meeting of the parties’ will and the consent of the parties. It is in this context that the Code de Commerce replacing the Ordonnance of 1681 was enacted in 1807 after the Code Civil. The then article 348 of the Code de Commerce introduced the system of the spontaneous declaration of all facts liable to be decisive for the assessment of the risk. Any misstatement would have led to the annulment of the contract, whether the misstatement was voluntary or not. In other words, the purpose of this provision was not to sanction the policyholder’s dol, but to protect the consent of the insurer, as later confirmed by the Cour de Cassation.31 The legislator reintroduced the distinction between intentional and unintentional false statement in terrestrial insurance contracts in 1930.32 It substituted

27 

Cleirac (n 24). Ch II, Art VII of the Guidon. 29  See Profit (n 18) 760. 30 ibid. 31 ibid. 32  Loi du 13 juillet 1930 relative au contrat d’assurance. 28 

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a system of proportional adjustment of the premium with the annulment of the contract when the false statement had not been made in bad faith. The purpose of the Act of 1930 was to provide a comprehensive mandatory legal regime applicable to all insurance contracts, allowing thus all policyholders to benefit from a similar legal protection. This Act was the legislator’s response to the evolution of the insurance market that had occurred in France in the meantime. The traditional image of the insurer and policyholder negotiating at arm’s length became unrealistic. As more and more policyholders were not professional businesspersons, they were less and less capable of determining which information was likely to have an impact on the insurer’s assessment of the risk. Since the mistakes were generally discovered after the claim was made, good faith policyholders were left without any coverage. This new rule revealed itself as unsatisfactory in this regard. The system was nevertheless incorporated into the Code des Assurances in 1976, which was the fruit of the codification of the Act of 1930 and other regulations related to insurance companies.33 The legislator replaced this system of spontaneous declaration by the system of the closed questionnaire in 1989.34 Under article L 113-2 of the Insurance Code, the future policyholder is thus obligated ‘to truthfully answer questions put by the insurer, in particular, in the loss reporting form’.35 Hence, the policyholder is now only obliged to truthfully answer the insurer’s questions, which means that the policyholder cannot be blamed for not having disclosed information related to circumstances regarding which no question was asked. The legislator has thus transferred the burden on determining which information should be disclosed from the policyholder to the insurer. The underlying idea is that insurers in mass risks contracts are more experienced than the policyholders, and know thus better what information is needed to adequately assess a particular risk. This explains why the reform of 1989 kept the system of the spontaneous declaration in maritime insurance contracts.36 Policyholders involved in such contracts are indeed mostly experienced professionals routinely concluding insurance contracts and perfectly capable of negotiating their contracts at arm’s length with insurance companies.

33  Décret no 76-667 du 16 juillet 1976 relatif à la codification des textes règlementaires concernant les assurances. 34  Loi no 89-1014 du 31 décembre 1989 portant adaptation du code des assurances à l’ouverture du marché européen. 35  The translation of the provisions of the French Code des assurances are those of the English version of the code available on the website of the French Ministry of Justice: www.legifrance.gouv.fr/ Traductions/en-English/Legifrance-translations. 36  Art L 172-2.

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ii.  The Available Remedies a.  The Special Remedies The Insurance Code mentions two special remedies, whose availability will depend on the policyholder’s good or bad faith. According to article L 113-8, the insurance contract is ‘null and void’ if the policyholder has intentionally made a false statement or omitted to declare some information, ‘when such omission or fraudulent misrepresentation changes the subject of the risk or decreases the insurer’s assessment’. The cancellation of the contract produces effect towards everyone since the time of the misrepresentation.37 Article L 113-8 further states that the insurer will ‘be entitled to [both] the premiums paid … [and] to payment of all due premiums by way of damages’. Hence, if the misrepresentation or the omission has been made in bad faith, the policyholder will not only lose the benefit from the contract but also loose the paid and due premiums. The policyholder is here sanctioned on moral grounds for his lack of good faith.38 If there is no bad faith from the policyholder, the contract will not be cancelled. Instead, article L 113-9 provides an adjustment mechanism. If the misstatement or the omission is discovered prior to any loss, the insurer will be entitled to require an increase of the premium to the policyholder. If the latter refuses, or if the insurer does not wish to remain in the contract, the insurer ‘will be entitled to terminate the contract ten days after notice sent by registered letter by returning the part of the premium paid for the period not covered by the insurance’. If the misstatement or the omission is discovered after the loss, the indemnity will be ‘reduced in proportion to the rate of the premiums paid in relation to the rate of premiums that would be owed if the risks had been truthfully and exhaustively declared.’ Hence, if the adequate premium is 10 per cent higher than the contractual premium, the insurer will be able to reduce the amount of the indemnity by 10 per cent. If the policyholder contests the reduction to the court, the insurer will have both to explain his calculation and justify the amount of the adequate premium used in the calculation.39 If the insurer has already paid, he will be entitled to request restitution of the difference to the court. In settling the payment pro rata, a trial judge is not bound to follow the insurer’s calculations. However, if the trial judge acknowledges that the conditions of article L 113-9 are met, he or she will not be able to refuse the reduction of the indemnity, or to order restitution. The trial judge will have to determine the adequate reduction. This calculation will be left to his or her discretional appraisal. Similarly to the cancellation according to article L 113-8, the reduction applies

37 

See Crim, 2 déc. 2014, no 14-80.933. See L Mayaux, ‘Contrats d’assurances’, in Répertoire de Droit Civil Dalloz (edn 2016) no 288; see also A Pimbert, ‘Contrat d’assurance: la declaration des risques à l’épreuve du droit commun des contrats’ (2011) 195 Les Petites Affiches 7. 39  See Civ 1re, 6 juin 2000, no 97-19.241, Bull civ I, no 171. 38 

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towards everyone. The insurer can thus use this reduction to limit the quantum of the indemnity to be paid to the victim.40 For humanitarian reasons, this rule will not apply in the hypothesis of a traffic accident.41 But in this situation, the insurer will be able to sue the policyholder for the sum exceeding the reduced amount.42 b.  The Remedies under the General Law of Obligations Article L 113-8 of the Insurance Code explicitly mentions that the special remedy does not preclude the use of remedies under the general law of obligations. In theory, an insurer is thus allowed by this provision to claim that his consent has been vitiated by an error, a dol, or violence under article 1130 of the Code Civil, and thus claim that the contract was not valid. However, in practice it would be unlikely. Violence can be excluded without question. The error is not more helpful since it requires a mistake which rests either on the very substance of the other party’s performance or the person of the other party.43 The dol is defined as the obtaining of the other party’s consent by the use of schemes, lies, or the intentional dissimulation by one party of information, which he knows to be decisive for the consent of the other (so-called réticence dolosive).44 However, insurers have never successfully claimed the annulment on the ground of a dol before the reform, and it is unlikely that it will change in the future. Indeed, article L 113-2 requires that the insurers ask questions to the policyholder. As the Cour de Cassation noted, ‘it would be contradictory to require the insurer to ask a question [on a particular fact] on the one hand, and, on the other hand, to require the policyholder to disclose [this fact on his own motion]’.45 Besides, the Cour de Cassation also rejected to accept the idea that an insurer could claim that the answer to a question that it did not ask could be decisive for its consent.46 Taking into consideration the lack of practical impact of general law’s remedies, I will limit the further development to the special remedies.

B.  What Needs to be Proven In order to benefit from the application of articles L 113-8 and L 113-9, the insurer needs to prove the existence of a causal link between the misrepresentation and his assessment of the risk. If the insurer wishes to claim that the contract is null and void, he will also have to prove the bad faith of the policyholder when the latter has made the misrepresentation.

40 

See Civ 2e, 17 avril 2008, no 07-13052. See art R 211-13. 42  See Civ 1re, 25 mai 1988, no 85-15.598, Bull civ I, no 151. 43  See art 1132. 44  See art 1137. 45  Civ 2e, 3 juin 2010, no 09-15.876. 46  Civ 2e, 3 juill 2014, no 13-18.760. 41 

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i. The Causal Link between the Misrepresentation and the Insurer’s Appreciation of the Risk The insurer will need to prove that if the policyholder had answered correctly to the question, it would not have agreed to underwrite the risk, or would have agreed to do so for a higher premium. The evaluation of the causal link is made on a case-by-case basis, which means that a fact that might be seen in abstracto as irrelevant might be decisive in a particular situation. Hence, the value of the stock inside a warehouse might be of importance in determining the premium for the coverage against fire, as the value might be an indication of the amount of goods in the warehouse, which might have an impact on the spreading of the fire. In most situations, the causal link will be obvious. Hence, in an automobile insurance contract, the amount of the premium will necessarily vary according to factors such as the personality of the usual driver, the place where the usual driver lives, the type of vehicle, its use (professional or not), the fact that the driver is young, and history of traffic accidents. In insurance contracts covering risks related to personal health, the insurer would need to obtain accurate information related to the state of health, or the professional activity. In a case of 1993, a life insurance contract included the payment of a specific amount of insurance money to a woman if the policyholder were to die. The Cour de Cassation upheld the trial judge’s ruling which declared the contract void because the policyholder had stated that he was a company manager but had failed to mention his link to organised crime, which exposed him ‘to abnormal risks’.47 But however obvious the causal link might appear to be, the insurer has to prove its existence. The causal link needs to be determined at the time of conclusion of the contract. Hence, as mentioned in article L 113-8, the circumstances of the claim are irrelevant. The following example can explain what lies behind this rule. An insurance contract concluded in 2002 covered the risk of death and incapacity to work. A few months later, the policyholder was involved in a traffic accident, and, as a result, became completely incapacitated. He did not mention that he had been treated for depression in 1992. It was clear that the depression had nothing to do with the traffic accident. However, the concealment of the depression had a clear impact on the insurer’s assessment of the risk of death and incapacity to work. If the policyholder had not concealed the depression, the insurer would have indeed charged a higher premium.48 If the contract covers several distinct risks, the causal link has to be appreciated one risk at a time. Judges can only cancel the part of the contract corresponding to the coverage of the risk for which the misrepresentation had an influence.

47  48 

Civ 1ere, 1 déc 1993, no 91-17.201. Civ 2e, 12 févr 2009, no 08-12.425; see also Civ 2e, 23 mai 2013, no 12-19.952.

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If a contract covers the risks of accidents and thefts, the insurer cannot refuse its ­coverage of the latter on the ground that the policyholder had disguised past traffic accidents.49

ii.  The Policyholder’s Bad Faith If the insurer wishes to claim that the contract was null and void, he will need to prove that the policyholder has voluntarily provided an incorrect answer in order to harm his interest,50 which means either obtaining the coverage or a lower premium. Determining whether the policyholder has acted in bad faith is left to the discretional appraisal of trial judges.51 Proving the state of mind of the policyholder at the time of the declaration of risk is not easy. To do so, judges will infer this state of mind from the circumstances of the case. The primary criterion is the clarity of the questions to which the courts will add elements such as the temporal closeness of the non-declared pathology or accident. In a case of 2005,52 bad faith was proved on a balance of probabilities because the policyholder answered ‘no’ to both a question related to medical examination and a question on a potential ophthalmologic treatment in spite of having consulted doctors four months before. In another case,53 the policyholder answered ‘no’ to the question ‘Are you currently unable to work?’ while being on a sick leave. However, the policyholder will be deemed not in bad faith when the inaccuracy of the information given in the answer was caused by the ambiguity of the question. Hence, judges have considered that it was not necessarily clear that the policyholder had to disclose suffering from epilepsy as an answer to the question ‘Are you suffering from a disability or a serious illness?’.54 The ambiguity can also be the consequence of the drafting of the questionnaire, especially when the insurance contract covered several distinct risks. In a case of 2010,55 the policyholder wanted to subscribe to a ‘multi-risk habitation’ contract, which included the coverage of the policyholder’s home and the coverage for third party liability. The two first items of the insurer’s questionnaire referred to the coverage of the home. Under the third item, the policyholder declared that no claim occurred during the past 24 months. The fourth item referred to third party liability coverage. The policyholder answered negatively to the third item but the insurer discovered that the policyholder was held civilly liable for the several criminal offences committed by the son during the past 24 months. For the court, the 49 

See Civ 2e, 12 mai 2011, no 10-10.412. See Civ 2e, 19 oct 2006, no 05-18.886. 51  See Civ 2e, 30 juin 2016, no 15-22.842. 52  Civ 2e, 8 sept 2005, no 04-16.487. 53  Civ 2e, 3 févr 2011, no 10-30.569. 54  See Civ 1er, 15 oct 1991, no 90-11.725. 55  Civ 2e, 17 juin 2010, no 09-67.081. 50 

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questionnaire was ambiguous because the policyholder could have honestly thought that the third item only referred to the coverage of the home and not to the third party liability. The courts also take into consideration the policyholder’s personal intellectual skills. Policyholders’ lawyers, indeed, try sometime to present their clients as too intellectually limited to understand the questions. In one case,56 it was successfully argued that a house painter suffering from diabetes could be ignorant that diabetes is a metabolic disease and thus answered ‘no’ to the question ‘Are you suffering from a metabolic disease?’ without bad faith.

C.  The Means to Prove the Misrepresentation An easy way to prove the inaccuracy of an answer to a question is providing both the questionnaire and the policyholder’s answers to be checked against each other. However, in practice, insurers have tried to allege the existence of a misrepresentation by using so-called pre-written declarations, which are to be discussed below. The evidentiary value of those declarations was and still is the subject of a controversy. An important decision of 2014 has only partly solved a schism between two chambers of the Cour de Cassation by requiring the existence of questions in order to prove the misrepresentation without rejecting the use of alternative means of proof.

i.  The Issue of the Evidentiary Value of Pre-written Declarations a.  The Situation before the Decision of the Mixed Chamber The so-called pre-written declarations appear either in the form of an already filled form,57 or in the form of a statement of facts.58 The statement often ends with a formula according to which the policyholder agrees that the information contained in the statement of facts is accurate. The policyholder is then required to sign the statement and to add the formula ‘Read and approved’ to the end of the statement. Can the insurer use those declarations to prove the policyholder’s misrepresentation? This question received two different answers from respectively the second civil chamber and the criminal chamber. The former consistently upheld trial court rulings which accepted those pre-written declarations as evidence of misrepresentation,59 whereas the latter systematically required the presentation of the questionnaire to prove the existence of a misrepresentation.60 56 

Civ 2e, 15 nov 2011, no 10-19.694. driver: William Murray; Date of Birth: 02/03/…; Driving Licence no …’ 58  ‘The usual driver is William Murray, born the 2nd of March …, which professional activity is …; He did not experience any at-fault accident within the last 48 months …’ 59  See Civ 2e, 8 mars 2012, no 11-10.857 and Civ 2e, 12 avr 2012, no 11-30.075. 60  See Crim 18 sept 2007, no 06-84.807 and Crim 10 jan 2012, no 11-81.647, Bull Crim No 3. 57  ‘Usual

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Hence, the availability of the legal remedies depended on evidentiary strength, and literally also on whether the cancellation was sought during a criminal proceeding or a civil proceeding.61 b.  The Decision of the Mixed Chamber To solve this unsatisfactory problem, a mixed chamber was called in 2014 and the facts of the case brought before the mixed chamber exemplify the issue.62 A specific article of a contract contained a statement according to which the policyholder was the usual driver of the covered vehicle. The statement also mentioned that its driving licence had neither been suspended for more than two months nor been cancelled because of an accident or a violation of traffic regulation during the past 38 months. The statement also contained the following sentence: [Y]our contract has been established in accordance with your declarations which are reflected in those particular conditions, including your background … Every concealment or wilful misrepresentation would trigger the application of the sanctions enumerated in article L. 113-8 and article L. 113-9 of the Code des assurances.’

The policyholder signed and added the formula ‘Read and approved’ just below this sentence. However, the policyholder, a medical doctor, had in fact been involved in a traffic accident three years before the declaration. At that time, he ran from the crash scene, then declared the vehicle stolen, then accused his son of being the driver before admitting his role in the accident. One year after the accident, a court had cancelled his driving licence because of the hit-and-run crime, and also prohibited him from re-applying for a driving licence during a period of one year and a half. The Court of Appeal noted that the policyholder’s intention to misrepresent was unquestionable, because of his criminal background,63 of his declaration to the police that his driving licence had been cancelled one year after the signature, and of his declaration of not driving any motor vehicle since the cancellation of its driving licence. For the Court of Appeal, the insurance contract was thus to be cancelled. If the mixed chamber adopted the second civil chamber’s approach, the Court of Appeal’s decision would have been upheld, since the policyholder’s bad faith, in terms of his intentional misrepresentation, was hardly questionable. If, however, the mixed chamber adopted the criminal chamber’s approach, the contract would

61  Under French law, criminal judges are competent both to determine the penalties for the criminal offence (imprisonment and fines) and to award damages to the victim (in tort). According to art 388-1 of the Code de procédure pénal (Code of criminal procedure), ‘the insurers called upon to cover the damage are allowed to intervened and may be joined in the proceeding’ (as translated in the English version of the code available on the website of the Ministry of Justice, see n 34). Insurers may thus try to argue that the insurance contract was void to avoid having to pay for the damages that will be awarded to the victim. 62  Cass, ch mixte, 7 févr 2014, no 12-85.107. 63  He had been condemned two times for driving without licence.

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not have been cancelled, since the statement of fact was not a questionnaire containing the policyholder’s answers. The mixed chamber of the Cour de Cassation overturned the Court of Appeal’s decision and held: [T]he insurer can only cancel the contract on the ground of a wilful misrepresentation if it can be proved that it had asked the policyholder a question about the circumstances constituting the subject matter of the alleged misrepresentation and that the policyholder has incorrectly answered the question. The [sole incorporation of the pre-written declaration] in the particular conditions of the policy cannot constitute such proof. It needs to result from the providing of both the questionnaire and the answers.

The Court grounded its decision on articles L 113-2, L 113-8 and L 112-3 (fourth paragraph)64 of the Insurance Code. The use of article L 113-2 and L 113-8 indicates that article L 113-8 is a sanction for the breach of the obligation to answer exactly to the insurer’s questions under article L 113-2. Hence, if there is no question, there is no answer. If there is no answer, there is no wrong answer, and, as a result, the sanction mentioned in article L 113-8 cannot apply.65 The debate over the good or bad faith of the policyholder is thus irrelevant. The reference to article L 112-3 seems to imply that the questions need to be put in writing. However, a textual approach of the three provisions on which the decision was made leads to the conclusion that none of them imposes such formalism.66 Only article L 112-3 makes a reference to written questions, but this article only indicates that the insurer who has asked an imprecise question in writing cannot cancel the contract if the policyholder has given an imprecise answer. It does not mean that the insurer has to provide a written questionnaire. A careful reading of the report to the Court (Report) made by one magistrate67 suggests that this interpretation of the articles of the Insurance Code by the Cour de Cassation may have been influenced by public policy concerns. The Report indicates first that pre-written declarations are usually impersonal and thus cannot ensure that questions have always been effectively asked. The Report mentions some authors who consider indeed that accepting pre-written declarations would amount to a switch from a system of closed questionnaire to a system of induced declarations, which will induce incorrect answers. It is not certain indeed that policyholders will either read those declarations carefully, especially if they are mentioned in the middle of the contract, or can understand the meaning and scope of those vague and impersonal statements. Policyholders might thus lose

64  It reads: ‘When, before the conclusion of the contract, the insurer has posed questions in writing, particularly on the application form or by any other mean, it may not rely on the fact that a question expressed in general terms has received an imprecise answer.’ 65  See J Kullmann et L Mayaux, ‘Déclaration pré-rédigée des risques: deux voix pour un arrêt’ (2014) Revue Generale du Droit des Assurances 196, and A Pélissier, ‘La déclaration des risques en questions’ (2014) Recueil Dalloz 1074. 66 ibid. 67  Available at www.courdecassation.fr/IMG///rapport_gibod_mixte1285107_140207.pdf (‘Report’).

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their coverage, as well as their premiums, because of an approbation of a vague and impersonal statement such as ‘I declare that I am in good health’.68 The alternative of accepting a system that induces incorrect answers is also seen as too favourable for insurers. As capitalistic companies, insurers have an interest in signing as many insurance contracts as possible to increase their balance sheet without having to investigate the risk. The insurer would thus be placed in a ­win-win situation. If the policyholder does not make any claim, the insurer will keep the premiums without paying any indemnity. If the policyholder does make a claim, the insurer will use the pre-written declaration to seek to cancel the contract without even refunding the already paid premiums. The Report further implies that the rejection of the pre-written declarations is a way to avoid the transfer of the financial consequences of the occurrence of the risk from the insurer to someone else, which may be the victim, all policyholders, or the ex-policyholder. In France, indeed, the victim of a motor accident caused by a person driving without insurance can receive an indemnity from a guarantee fund aggregated by all insurers and policyholders. The multitude of situations in which contracts could be cancelled would have thus the effect of increasing premiums to all policyholders. Also, the fund covers bodily injuries without limitation, but the indemnity for property loss is limited. Since ex-policyholders will often have insufficient financial resources, the Report concludes ‘it is preferable for a victim to face an insurance company rather than to face the guarantee fund’. However valuable those public policy considerations may be,69 they cannot be the ground for non-compliance with the provisions of the Insurance Code. French judges are indeed bound by the principle Ubi lex non distinguit, according to which judges are prevented from restricting the substance of the law by introducing requirements that the law does not contain.70 By requiring a written questionnaire where the law does not require a written questionnaire, the mixed chamber has deviated from Ubi lex non distinguit. The mixed chamber should have accepted pre-written declarations even if it would have meant to sacrifice honest policyholders. Under French law, the task of avoiding injustice caused by the strict formalist application of the law is vested on the legislator, not the judiciary.

68  See J Kullmann et L Mayaux (2014); see also H Groutel, ‘Droit des assurances terrestres—janvier 2012- décembre 2012’ Recueil Dalloz 2013. 1981. 69 Those two arguments are not without criticism. Refusing the pre-written declarations may indeed be seen as a way of protecting the interest of honest policyholders, while safeguarding dishonest policyholders from the consequences of their lies. Also, it undermines the inherent psychological value of both the signature and the words ‘read and approved’. Besides, it implies that the agent asking the questions and reporting the answer is necessarily a liar, which creates a paradox. How, indeed, can one argue that no question was asked when the pre-written declarations contain information that could not have been known to the insurer without having been told by the policyholder? The requirement of a written questionnaire may also mean the death of insurance concluded through the telephone and under an emergency. See Kullmann and Mayaux (2014) (n 64). 70  See H Roland and L Boyer, Adages du droit francais, vol II, 2nd edn (L’HERMES, 1986) 1061.

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c.  The Aftermath of the Mixed Chamber’s Decision Without any surprise, the criminal chamber has followed its own jurisprudence. A month after the decision, it upheld a refusal to cancel a contract on the ground that the policyholder signed a pre-written declaration containing a wrong statement related to the suspension of the policyholder’s driving licence.71 ­ A ‘No’ following the mention ‘sanction for blood alcohol’ was not considered sufficient either a few months later.72 And a few months ago, the criminal chamber ­confirmed the necessity of a question by refusing to take into consideration the mention of the obligation to declare any conviction of drunken driving in both the general condition and the declaration guidelines.73 One year after the decision of the mixed chamber, the second civil chamber74 faced a common situation, for which it would have considered the contract as void. The particular conditions of the contract contained a pre-written declaration mentioning that the policyholder had not been subject to a sanction related to the driving of a motor vehicle within the past three years. The policyholder, whose driving licence had been cancelled for drunken driving three months before, signed the declaration and added the mention ‘Read and approved’. Citing the mixed chamber, and thus subjugating itself there, the second civil chamber overturned the Court of Appeal’s decision in which the latter had considered the contract as void on the ground on article L 113-8. The rule was applied in two later cases in 201575 and 2016.76 However, the picture is not yet complete. One of the critics of the mixed chamber’s decision was related to the situation in which the statement of facts contains information that the insurer could not have obtained without asking a question. If the declaration contained information that the insurer could not have reasonably obtained without asking a question to the policyholder, why would that information be contained in the particular conditions? In a case of 2015,77 the second civil chamber faced a declaration mentioning information related to the policyholder personal information, vehicle information and motor insurance claims history. For the court, considering the precision and individualisation of the declaration, the information has necessarily been obtained through questions. In other words, judges can presume the existence of questions from the information contained in the pre-written declaration. This possibility was confirmed in another case,78 in which the policyholder signed under the following statement: ‘I declare that my home is not equipped with an insert or a stove.’ In this case, the Cour de Cassation

71 

See Crim, 18 mars 2014, no 12-87.195. See Crim, 21 oct 2014, no 13-85.178. 73  See Crim, 31 mai 2016, no 15-82.252. 74  Civ 2e, 5 févr 2015, no 13-28.538. 75  Civ 2e, 10 déc 2015, no 14-25.046, no 14-29.811. 76  Civ 2e, 19 mai 2016, no 15-20.233. 77  Civ 2e, 11 juin 2015, no 14-17.971. 78  Civ 2e, 19 nov 2015, no 14-17.010. 72 

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indicated that the Court of Appeal has used its discretional appraisal of the terms and circumstances in which the declaration was made to conclude that the information was necessarily collected as an answer to a precise question. Whether or not the use of such deductive reasoning conforms to the decision of the mixed chamber,79 it creates another incompatibility between chambers. In the case mentioned above,80 the criminal chamber faced a statement of facts containing information such as the policyholder’s name and date of birth, the number and date of establishment of the driving licence and the number of claims during the past three years. Under this last item, the statement contained the number ‘2’. But the criminal chamber held that such statement could not constitute the proof of a misrepresentation. It means, once again, that the legal outcome of a particular situation does not depend on the facts of this case, but depends on the chamber that will hear the case. If the criminal chamber persists in requiring the presentation of a written questionnaire to compare with the answer to the questions, another mixed chamber will be needed. The position of the criminal chamber is not sustainable, as a recent case of the second civil chamber81 shows. The rider to the existing contract contained the following provision: ‘Since the 11/08/2002, the designated drivers:—were convicted of a hit and run crime, and/or drunken driving, and/or use of drugs? No.—or their permit have been cancelled or suspended for two months or more? No.’ Technically speaking, the provision qualifies as a questionnaire because it contains questions and answers. Would the criminal chamber consider this provision as a questionnaire? If it would accept that such provision is a questionnaire, would it mean that the cancellation of an insurance contract depends on whether a question mark or a colon has been used? The legal and economic consequences of the application of article L 113-8 are too serious to be determined by such trivial distinction.

ii.  Alternative Means of Proof In the previous part, the issue was related to the possibility to use the information contained in the pre-written declarations alone as evidence of the policyholder’s wilful misrepresentation. After the decision of the mixed chamber, the issue moved towards the existence of questions to which the policyholders have given incorrect answers. However, article L 113-8 of the Code does not refer either to any answer to a question or to article L 113-2. It means that it might be possible to demonstrate a wilful concealment or misrepresentation without referring to

79  For an author considering that the second civil chamber has managed to ‘read between the lines of the solution of the decision of the mixed chamber’, see A Pélissier, ‘Dernières touches au tableau des modalities probatoires de la fausse declaration de risques’ (2016) 4 Revue Générales du Droit des ­Assurances 165; and for an author considering that the second civil chamber is resisting, see D Noguéro, ‘Le carnaval de la déclaration des risques’ (2016) Recueil Dalloz 691. 80  See n 67. 81  Civ 2e, 14 avr 2016, no 15-18.226.

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any wrong answer to a question. Two categories of evidence have been proposed: the policyholders’ spontaneous declarations and admissions as discussed below. a.  The Policyholder’s Voluntary Disclosure or Spontaneous Declarations As previously mentioned, the system of the closed questionnaire means the policyholder cannot be blamed for not having disclosed a fact on which the insurer did not ask a question. However, it does not imply that the disclosure of a fact on which no question was asked cannot constitute a misrepresentation. Such situation occurred in a case of 2009. The then prospective policyholder sent a ­‘telecopy’ to the insurer in order to subscribe to professional liability insurance. The telecopy contained a proposition of contract, which included detailed information and the expression of the policyholder’s agreement to both the general conditions and the additional premium corresponding thereto. The insurer established the policy on the basis of that information and sent it to the policyholder who signed it. However, the ‘telecopy’ indicated that the policyholder had not been sued on the ground of professional liability since 1995, which later turned out to be false. The insurer sought cancellation on the ground of article L 113-8. The policyholder argued that this provision was not applicable because the false information was not an answer to a question. For the second civil chamber, however, ‘the judge can take into consideration the declarations made by the policyholder on its own initiative during the conclusion of the contract in order to appreciate the existence of a wilful misrepresentation’.82 Would the use of a so-called spontaneous declaration survive the decision of the mixed chamber? In the Report, the author distinguished spontaneous declarations from pre-written declarations which were considered as having gathered answers. In pre-written declarations, indeed, the bad faith of the policyholder in giving an incorrect answer is determined by reference to the questions asked, since the inaccuracy of the answer might have been caused by the ambiguity in the questionnaire. In spontaneous declaration, the bad faith of the policyholder is determined by the inaccuracy of the spontaneous declaration itself, since the policyholder necessarily knows that the information is not true. The second civil chamber confirmed this analysis in a case of 201683 in which a policyholder that wanted to renew the coverage of an old building went to the insurer’s local agency to inform the insurer that the building had been completely renovated and that it was leased, which appeared to be false. These spontaneous declarations were thus sufficient to declare the contract void on the ground of article L 113-8. As an author mentioned,84 the second civil chamber applied a rule, which was not rejected by the mixed chamber. However, one may ask, as the author implicitly

82 

Civ 2e, 19 févr 2009 no 07-21.655. Civ 2e, 4 févr 2016, no 15-13.850; see previously the decision by another chamber of the Cour de Cassation confirming the possibility to use spontaneous declarations: Civ 3e, 8 juill 2015, no 13-25.223. 84  Noguéro (n 79). 83 

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does, why was the rule developed by the mixed chamber not applied in this case. For the author, indeed, two reasons should have led to the application of the rule. First, every policyholder will take the initiative to make a spontaneous declaration if it wishes to have risks covered by the insurer. Second, if the policyholder went to the insurer’s office and detailed the risk to be covered, it would appear odd to imagine that the insurer did not ask any question to the policyholder. For the Court of Appeal, indeed, the precision of the mentions in the particular conditions demonstrates that the company had answered to a specific questionnaire. But the second civil chamber did not apply the deductive reasoning here. This means that the deductive reasoning is not necessary to conclude a misrepresentation without providing the questionnaire. Contrary to the case in 2009, the policyholder did not send any document containing that information. Those ‘spontaneous declarations’ were the detailing of the new situation of the building made by the policyholder to an agent of the insurer in his premises. Hence, all policyholders entering into an insurer’s office and detailing the risk which they wish to be covered by the insurer might be considered as having made ‘spontaneous declarations’. And the proof of those spontaneous declarations is to be found in the particular contract terms and conditions, which have been rejected as an evidence of the existence of question by the mixed chamber. Therefore it seems that the second civil chamber is ‘resisting’ the rulings by the mixed chamber. b.  The Policyholder’s Admissions The easiest way to demonstrate both the wilful misrepresentation and its causal link on the misevaluation of the risk by the insurer will certainly be the policyholder’s admission that it had wilfully misrepresented the risk for prevention of the insurer’s adequate risk evaluation. The first case brought before the Cour de Cassation concerned a father involved in a car accident.85 In the policy, his son was mentioned as the usual driver. During the investigations following the car accident, the father admitted both that actually he was the usual driver of the vehicle, and that he would not have been able to pay the premiums had that been truthfully mentioned. Cancellation of the contract was sought by the insurer, and supported by the Court of Appeal. The policyholder appealed, arguing that the insurer had not provided the questionnaire. Hence, he could not have proven that he had been asked a question about the possibility that the father would also be the driver. For the second civil chamber, the father’s admission showed the inaccuracy of the declaration, its causal link on the misevaluation of the risk, and the intention to make this misrepresentation. Hence, the conditions of article L 113-8 were met. Would the decision of the mixed chamber have an impact on the admissibility of the policyholder’s admission? Logically, the answer should be ‘no’. The issue related to the pre-written declarations only concerned the evidentiary value of 85 

Civ 2e, 4 oct 2012, no 11-23.897.

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those declarations for proof of the misrepresentation. The remedy under article L 113-8 applies whenever there is wilful misrepresentation made by the policyholder. As the admission by the policyholder that he has made a wilful misrepresentation proves that the policyholder has made a wilful misrepresentation, there is nothing more to prove to apply article L 113-8. Hence, there is no reason to require the questionnaire whose only purpose here is to prove what the admission has already proved. The second civil chamber, logically, followed its jurisprudence in two cases in 2016 whose facts were similar to those in the case in 2012.86

IV.  Insurer’s Pre-contractual Informational Duty in French Law A.  Origin of the Insurer’s Pre-contractual Informational Duty The existence of the insurer’s pre-contractual informational duty is far more recent than that of the policyholder. Should the silence kept by an insurer on essential information be a dol? This relates to the general civil law in the first place. Pothier, one of the main sources of inspiration of the drafters of the Code Civil agreed with the Roman jurist Cicero. What constituted a dolus malus should not be determined by reference to an abstract idea of what is morally wrong, but by reference to the practice among merchants. If a practice was commonly accepted among merchants, then a merchant abiding by such practice did not commit any wrong. While merchants rejected the dishonest representation of the risk, they never rejected the practice of concealing information allowing them to obtain a better price. As long as the other party did not ask a question related to a fact, there was no obligation to disclose that fact. The drafters of the French civil code followed Pothier and adopted the adage emptor debet esse curiosus (the buyer should be curious). The code of 1804 did not thus contain any obligation to disclose information. Neither the enactment of the Code de Commerce in 1807 nor the enactment of the Act of 1930 introduced such obligation for the insurer. A change occurred during the 1950s when the Cour de Cassation expanded the concept of the dol to the silence kept by one party on a fact, which he knows to be decisive for the consent of the other. This so-called réticence dolosive was applied to contracts based on mutual trusts (partnerships), to contracts in which the party providing goods or a service is a professional, and when it was impossible for one party to obtain that information.87 During the

86 

Civ 2e, 3 mars 2016, no 15-13.500; Civ 2e, 30 juin 2016, no 15-18855, no 15-19.772. See Deroussin (n 25) 550; see also F Terré, P Simler and Y Lequette, Droit Civil—Les obligations 10th edn (Paris, Dalloz, 2009) no 233. 87 

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f­ ollowing decades, courts sometimes established a connection between the duty to conclude in good faith and the réticence dolosive, the latter being seen a violation of the former.88 Then, the duty to conclude in good faith became autonomous and served as a ground for the existence of a general pre-contractual informational obligation during the 1990s. Judges thought that such obligation would prevent the risk of imbalanced contracts by removing the asymmetry of information. The party providing goods or a service became thus bound by an obligation to provide the essential information related thereto. However, the courts went further. They added the obligation to provide individualised information. The party providing goods or a service need to determine the opportunity for the other to enter into a specific contract. In other words, a seller has to inform the buyer on the adequacy of the good to the intended use.89 As insurance contracts are contracts, insurers became thus bound by such precontractual informational duty as well. They shall thus provide information on the proposed insurance and determine the proposed coverage is adequate to the policyholder’s needs. In 1989, the legislator decided to require insurers to provide pre-determined information before the conclusion of the contract to ensure equal information for all prospective policyholders. The reform of the law of obligations in 2016 has introduced the general pre-contractual informational duty in article 1112-1 of the Code Civil. In other words, the recourse to the duty of good faith has become superfluous. The insurer is indeed bound to provide standardised information required by the Insurance Code (section B below) and by a duty to give advice required under the Code Civil (section C below).

B. The Insurer’s Pre-contractual Obligation to Provide Standardised Information i. The Insurer’s Pre-contractual Obligation to Provide Information to the Policyholder The Insurance Code contains several exhaustive lists of information that the insurer shall provide to the prospected policyholder. The list mentioned in article L 112-2 applies to all insurance contracts unless provided otherwise by the Code. The Code indeed provides some specific lists for distance insurance contracts,90 insurance contracts concluded in addition to the purchase of goods,91 insurance contracts concluded with an insurance intermediary,92 group insurances93 and life

88 

See Le Tourneau and Poumarède (n 3). See Civ 1ere, 30 mai 2006, no 03-14.275, Bull civ I, no 280. 90  See art L 112-2-1. 91  See art L 112-10. The model is detailed in the annex to art A 112-1. 92  See art L 520-1. 93  See art L 141-4. 89 

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insurance contracts.94 This chapter will only have an overview of the requirements of article L 112-2, which applies to all contracts.95 Article L 112-2 provides that the insurer shall provide an information sheet about the price premium and the coverage, as well as a draft contract and its attachment or a booklet providing a precise description of the coverage and exclusions as well as the insured’s obligations. The information sheet shall contain information about the different categories of coverage and the respective prices. The Code requires the sheet to follow a particular model.96 The Code excludes this obligation for both large risks and short-term risks related to tourism and carried baggage.97 The Code does not detail the content of the draft contract but is more specific about the required content of the booklet, which shall describe the coverage and the exclusions precisely, as well as the obligations of the policyholder. Both documents need to contain several items such as the applicable law (if it is not French law), the insurer’s head office address and the subsidiary proposing the coverage, and the internal and external settlement procedures. The documents have to be written in French.98 The Code explains that the proof of the fulfilment of this obligation will be a signed and dated annotation made by the policyholder at the bottom of the policy,99 in which the policyholder recognises having received the documents.

ii.  The Remedies The Insurance Code does not mention any specific remedy for the insurer’s breach of the informational duty. As a result, one needs to look into the general law of obligations. The insurer’s failure may thus trigger two different types of remedy according to the situation: the annulment of the contract100 or the unenforce­ ability of some provisions. The annulment of the contract is rarely sought in practice for at least two reasons. First, it will be unlikely that insurers will deliberately avoid providing the information required by law to the policyholder. Hence, the dol will be excluded. Second, if a policyholder were mistaken at the time of conclusion, he would be unlikely to discover the mistake before the risk has occurred. Hence, he will only know that he was mistaken after having already suffered from the occurrence of the risk. The reasonable policyholder will try instead to claim that the insurer had failed to fulfil his obligation to give advice, as the associated remedy allows the policyholder to receive damages.101

94 

See Part IV. B. iii. French law does not distinguish between professionals and consumers. See art L 224-102 of the Code de la consommation (Consumer code). 96  See the annexe of art A. 112. 97  Art R 112-2. 98  Art L 112-3. 99  Art R 112-3. 100  See Part III. A. ii, b. 101  See Part IV C. 95 

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A policyholder may also have the opportunity to claim that the contractual terms the enforcement of which is sought by the insurer are unenforceable. The insurance contract is concluded by the meeting of the parties’ minds. The provisions not made known to the policyholder are not consented to by the policyholder. As a result, they will not be enforceable. Insurers will often try to rely on conditions, limitations and exclusions of the coverage. To claim the enforceability of such provisions, the insurer shall prove that he has made those provisions known to the policyholder. If he had failed to include them in the legally required documents, he will not be able to use them to limit or exclude the claimed indemnity.102 But the courts do not simply require the inclusion of those provisions in the general conditions. The insurer shall make those provisions readily accessible. In short, conditions, exclusions and limitations of the coverage should be highlighted in the document through the use of a specific policy or through their inclusion in a specific article of the contract.103 That being said, the Cour de Cassation has recently indicated that it would not be necessary to make an exclusion known to the policyholder every time the contract is renewed,104 unless this exclusion did not exist in the previous policy.105

iii.  The Specific Rules Related to Life Insurance Contracts a. The Legally Required Pre-contractual Information and the Specific Associated Remedy Before 2005, article L 132-5-1 of the Code required the insurer to provide two ­distinct documents: the information note detailing the essential terms of the contract and a draft of a letter of renunciation. The courts systematically refused the practice of the inclusion of the essential terms and the renunciation ­letter in the general conditions. They required thus the handover of two distinct documents.106 The legislator modified the article in 2005 and created a new article L 132-5-2107 under which the obligation is fulfilled if the proposition of insurance or the draft contract contains a sidebar detailing the nature of the contract, the fees, the coverage, the availability of the funds and the conditions of the designation of the beneficiaries.108 Hence, the model revocation letter is no longer required to be distinct from the general conditions or the information note.109 Article L 132-5-1 offers a right to revoke the contract to any individual who has signed a life insurance contract during 30 days. The period begins when the individual knows that the contract is concluded. The revocation allows the 102  See, among others, Civ 1re, 27 mars 2001, no 98-19.48, Bull civ I, no 82; Civ 2e, 5 févr 2004, no 01-03585 and Civ 2e, 11 janv 2007, no 06-11.478. 103  See Crim, 9 sept 2014, no 13-84.198. 104  See Civ 2e, 19 nov 2015, no 14-26.351. 105  See Civ 2e, 8 mars 2006 no 05-11.319. 106  See Civ 2e, 7 mars 2006, no 05-12.338. 107  Loi no 2005-1564 du 15 décembre 2005. 108  Art A 132-4 of the code contains a model to be used. 109  See Civ 2e, 12 sept 2013, no 12-22.649.

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subscriber to recover the entirety of its payment. However, article L 132-5-2 indicates that the failure to provide the legally required documents extends the time limit of article L 132-5-1 until the thirtieth day following the handover of the documents. The Code contains an eight-year time limit, which starts when the subscriber was informed that the contract was concluded. b.  The Availability of the Right to Revoke A failure by the insurer to provide the required documents allows the policyholder to claim back all his payments during a potential period of eight years. It is no surprise that the use of this right has been controversial, due to an (in)famous decision of the Cour de Cassation in 2006 mentioned above.110 The Court faced two issues: the possibility to exclude the benefit of this legal right as a result of a specific provision and the possibility to deny such benefit as a result of the circumstances in which this right was used. The Court first indicated that this right was d’ordre public, and therefore the parties cannot exclude it from their contract.111 The Court then rightfully held that the right to revoke was discretionary and did not thus require any justification from the policyholder. But the insurer also claimed that the right had been exercised in bad faith. To him, the purpose of the right is to offer a cooling-off period allowing policyholders to escape a contract entered into impulsively and uninformed. However, in this case the policyholder knew very well what he was doing. He chose by himself the unit-linked policy, and made more and more speculative choices during the two first years of the contract, then he exercised the right to revoke because of his dissatisfaction concerning the evolution of financial markets. The Cour de Cassation rejected the insurer’s claim and held that the purpose of article L 132-5-2 was to sanction its failure to provide the legally required document automatically, and that the policyholder’s good faith was not necessary for the extension. This solution was heavily criticised for at least two reasons. First, the discretionary nature of a right only means that its use does not require a justification. As the Cour de Cassation mentioned two years before this decision,112 the use of a discretionary right is subject to the prohibition of the abuse of rights. The theory of the abuse of right sanctions the misuse of a right causing damage to others. The abuse or misuse of right does not necessarily mean that the intention of the user was to harm the interest of the other. It is sufficient that the right was used for a purpose other than the reason of its recognition by the given legal order. A party using a right in bad faith commits an abuse of right. The policyholder did not use the right to renounce because he was misinformed but because he wanted to avoid the financial consequences of his own bad choices. Second, the Court openly said that good faith was not necessary, which meant that the overarching duty to

110 

See n 106. See also Civ 2e, 3 sept 2009 no 09-10.475. 112  See Civ 3e, 2 févr 2005, no 03-15.409. 111 

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perform in good faith that applies to every contract should be disregarded here. Indeed, the decision of the Cour de cassation allowed the most experienced and well-informed policyholders to benefit from a right designed as a safeguard for inexperienced and uninformed policyholders, which they could use to speculate without having to bear the correlative risks. Despite those criticisms, the Cour de Cassation did not depart from this ­jurisprudence in later subsequent cases113 until in 2016. In 2014, the legislator intervened114 and introduced a limit to the right to renounce in article L 132-5-2. Resultantly, for all life insurance contracts concluded after 1 January 2015, the delay for the use of the right to renounce is expanded only for policyholders using their right in good faith. Since the law was not retroactive, the good or bad faith of policyholders in contracts concluded before January 2015 should have remained irrelevant. However, in 2016, the Cour de Cassation overturned its 10 year old rigid jurisprudence.115 The Court indicated that even if the right to revoke is discretionary, the exercise of it might be abusive. The Court explained that it could not maintain a jurisprudence that did not distinguish according to the good or bad faith of the subscriber. The overturn is not foreign to the modification of article L 132-5-2. It is indeed not believed that the judges of the Cour de Cassation suddenly thought that the jurisprudence was wrong.116 Instead, it is very likely that the judges have understood that the aim of the legislator was to break its unacceptable jurisprudence. Hence, the Cour de Cassation might have anticipated the application of the new law requiring good faith from policyholders.117 Therefore, the decision might be interpreted as providing guidelines for trial judges. To determine if the policyholder is exercising in good faith his right to revoke, judges should thus take into consideration the policyholder’s intellectual and professional background (experienced or not), and determine both whether the information was sufficient to make an informed choice and why the policyholder has exercised his right. Insurers have not missed the opportunity to benefit from the new rule. From the time of the overturn above until March 2017, one may find 11 decisions in which the Cour de Cassation has quashed the decision of a Court of Appeal that the purpose of the extension of the delay to use the right to revoke the contract was to sanction the failure to provide the legally required document automatically and that the good faith of the policyholder was therefore not necessary.118

113 

See Civ 2e, 15 déc 2011, no 10-24.430. Loi no 2014-1662 du 30 décembre 2014. 2e civ, 19 mai 2016, no 15-12.767, FS P+B+R+I ; note L Mayaux JCP G, no 28, 11 juillet 2016, 811. 116  See Mayaux, ibid; and J Kullmann, ‘Un revirement (in)espéré: l’exercice du droit de renonciation est susceptible d’abus’ (2016) 8–9 Revue Générales du Droit des Assurances 438. 117  See Mayaux, ibid and Kullmann, ibid. 118  The survey was conducted using the database of the French Ministry of Justice’s website www. legifrance.gouv.fr/initRechJuriJudi.do. 114 

115  Cass

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C. The Insurer’s Pre-contractual Obligation to Provide Advice to the Policyholder i.  The Obligation to Advise a.  The Content of the Obligation to Advise The Cour de Cassation defines the insurer’s obligation to advise as the obligation to highlight to the policyholder the adequacy of the coverage to his personal ­situation.119 The insurer shall help the policyholder in making an informed choice by explaining to the (prospective) policyholder the different features of the contract, the content of the warranties, their regime and how they tie in with another to give to the policyholder all the objective elements allowing the policyholder to choose the coverage that is appropriate to the risks.120 The insurer thus shall also provide guidance in accordance with the complexity of the operation. Hence, in a case in which the policyholder had concluded five contracts simultaneously to which the insurer had provided the adequate information for each contract, the Cour de Cassation held that the insurer should have also explained the consequences of concluding those five contracts simultaneously (risks of losing some tax benefits and the erosion of the savings). The insurer may thus have to warn the policyholder and advise against concluding a specific contract that he considers to be inadequate to the policyholder’s needs. On the other hand, the obligation to advise prevents the insurer from misguiding the policyholder. The insurer cannot make the policyholder sign a contract that does not contain the coverage that he has asked for; especially if the risk is mentioned in a way that he could reasonably have thought that it was covered.121 The insurer would not be able to use the clarity of the terms of the contracts as a shield if the advice was inaccurate and inductive to the policyholder’s consent to the contract.122 The insurer’s assessment of whether the proposed coverage is adequate for the policyholder will necessarily be made on a case-by-case basis. However, it is possible to draw a non-exhaustive list of the policyholder’s particulars that insurers may have to take into consideration. Hence, the insurer may have to take into consideration the policyholder’s financial capacities so as to avoid the possibility that the annual premiums exceed the policyholder’s revenues.123 In a case of 2014,124 the courts had considered that the exclusion of the incapacity to work in a mortgage insurance contract concluded to acquire an apartment was not ­inadequate

119 

See Civ 1er, 13 déc 2012, no 11-27.631, Bull civ I, no 259. See Civ 2e, 12 juin 2014, no 12-35.162. 121  See Civ 1ere, 10 févr 1987, no 85-15.329; see also Civ 2e, 17 jan 2008, no 06-19330: The particular conditions mentioned the bridge that the policyholder wanted to ensure, but the contract excluded the coverage implicitly. 122  See Civ 1er, 9 mai 2001, no 98.20-107. 123  Civ, 2e, 13 Juil 2006, no 05-17.331. 124  Com, 11 juin 2014, no 13-17.273. 120 

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because the three co-borrowers each had personal resources at the time of conclusion, the rentals of the apartment were supposed to finance the major part of the repayment, and the incapacity to work triggered access to social benefits. The insurer may also have to take into consideration the policyholder’s professional activity. Hence a policy excluding the coverage of theft without forced entry is inadequate to the business of delivery, as the vehicle will be left open during the unloading of the goods.125 The exclusion of the temporary incapacity to work for a self-employed policyholder may also be considered as inadequate as the status of self-employed will prevent the policyholder from receiving any revenue.126 The exclusion of the coverage of the partial incapacity to work will be considered as inadequate when the subscriber cannot exercise the activity that procures the major source of his revenue.127 In a case of 2016, the Cour de Cassation upheld a decision of the Court of Appeal, which blamed a bank for not having informed a borrower of the fact that working abroad precluded the latter from benefiting from the coverage of the loss of job.128 The insurer may also have to take into consideration the policyholders’ age when the coverage has an age limit,129 and the policyholder’s medical condition.130 b.  Who Owes the Duty? The obligor of the obligation to advise depends on the policyholder’s interlocutor. The obligor will thus generally be the insurer. According to article L 520-1 of the Insurance Code, the intermediaires d’assurance (insurance broker, agent of the insurer) also own the obligation to advise. In group insurances in which a bank (the subscriber), for example, proposes borrowers to adhere to loan insurances, the bank has an obligation to deliver an information note established by the insurer to the borrower.131 The Cour de ­Cassation said in 2007132 that the delivery of the note is insufficient. A lender proposing loan insurance to a borrower has to highlight to the borrower the adequacy of the coverage to his/her personal situation. Does this obligation also concern the insurer? The Cour de Cassation133 has answered negatively. In group insurances, only the subscriber has an obligation to advise the borrower. The solution is ­logical, as the bank is the sole interlocutor of the borrower.134

125 

See Com, 13 sept 2011, no 10-20.644. See Civ 2e, 24 mai 2006, no 04-14.024; See also Com, 10 mars 2015, no 13-26.794; Civ 2e, 7 avril 2011, no 10-17.221. 127  See Com, 16 sept 2014, no 13-19.459. 128  Civ 2e, 23 juin 2016, no 15-12113. 129  Civ, 1er, 14 oct 2015, no 14-21.855. 130  Com, 10 mars 2015, no 14-10.712. 131  See art L 141-4. 132  Cass, ass plén, 2 mars 2007 no 06-15.267; R, 443; Bull civ No 4, BICC 15 mai 2007, rapp RenardPayen, avis Main. 133  Com, 1er déc 2015, no 14-22.134. 134  See generally, P Paillier, ‘Précisions sur les obligations d’information du banquier souscripteur d’une assurance de groupe’ (2016) Recueil Dalloz 953. 126 

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c.  To Whom is the Obligation Owed? French insurance law, so far, does not distinguish between business policyholders and consumer policyholders. The purpose of the obligation to advise is to protect the interest of an inexperienced party. There is thus no reason to distinguish between a young business owner insuring his business and the lawyer insuring his private residence. The ability to apprehend risks or to understand the terms of the contract and their legal consequences does not depend on the reason to enter into the agreement. The young business owner is not more or less capable of understanding an insurance contract whether he wishes to insure his business or his private residence. Hence, the level of assistance required from the insurer will depend on the complexity of the contract, and on the background of the policyholder. The insurer might thus have to determine if the method to calculate the level of disability is understandable for an individual without prior legal knowledge.135 The courts will often reject claims based on the inadequacy of the contract where the terms of the contracts are clear and precise.136 For the same reason, some business policyholders will be considered as sufficiently capable of understanding contracts because of their sufficient experience in their fields or in dealing with insurance contracts in relation thereto. The Insurance Code also expressly excludes major risks and reinsurance from the benefit of article L 520-1 according to which insurance brokers and agents owes a duty to advise the prospective policyholder. d.  The Limits of the Obligation The obligation to advise is subject to general limits applying to all contracts. Since the purpose of the obligation is to avoid the asymmetry of information, the obligor does not have to advise on facts known to everybody,137 such as the existence of a contractual obligation of loyalty and sincerity during the conclusion of the contract.138 Also, the obligation does not extend either beyond the obligor’s sphere of competence or beyond the intended contract. The insurer will thus not be bound by the obligation to advise on the necessity to cover a risk that has nothing to do with the risk that the prospective policyholder intend to cover.139 The obligation also has particular limits specific to insurance contracts. First, the insurer cannot be blamed for not having taken into consideration an unforeseeable risk such as the theft of electric cable in an empty premise subject to surveillance.140 Second, the insurer cannot be blamed if the inadequacy of the 135 

See Civ 2e, 21 oct 2004, no 03-16.328. See for example Civ 2e civ, 4 nov 2004, no 03-17.888. 137  See Civ 3e, 20 nov 1991, no 90-10.286. 138  See Civ 1ere, 31 oct 2012. no 11-15.529. 139  Analogy made with Civ 1ere, 5 nov 1996 in which the Cour de Cassation held that the car mechanic who is obliged to change the wiper blade is not obliged to advise the other party on the necessity to change the oil. 140  See Civ 2e, 12 juin 2014, no 12-35.162. 136 

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coverage results from the inaccuracy of the information given by the policyholder. The obligation does not extend to verifying whether the information is accurate or not. The coverage needs only to be adequate to the policyholder’s situation as presented by the policyholder. Hence, if a prospective policyholder declares being an electrician, he will not be able to blame the insurer on the ground that he was not covered as a plumber as well even if the insurer could have easily found this information.141 Similarly, a policyholder will not be able to blame the insurer for not having proposed an adequate coverage for imported materials if he does not mention that the materials are imported.142 Finally, the Cour de Cassation has recently indicated that a bank does not have to advise the borrower on the opportunity to subscribe to a group insurance that it considers being facultative.143 The solution is logical because the bank is the main beneficiary of the coverage. If the bank does not require a subscription to group insurance, it will mean that the bank considers the borrower’s assets and revenues as being sufficient.144

ii.  The Particular Remedy of the Obligation to Advise a.  The Particular Damage: The Loss of an Opportunity The damage to the failure to fulfil the obligation to provide advice is the perte d’une chance (loss of a chance or opportunity), which is defined by the courts as ‘the current and certain disappearance of a favourable potentiality’.145 In insurance contracts, the policyholder’s damage will thus be the loss of the opportunity to conclude an adequate insurance contract, which mostly is a contract that does not exclude or limit the coverage of particular risks. Hence, in the hypothesis of the business of delivery mentioned above,146 the insurer’s breach of the obligation to advise resulted in the policyholder’s loss of the opportunity to conclude a contract covering thefts without force. As reminded by the Cour de Cassation,147 the damage to be taken into account is limited to the direct consequences of the fault. There must be a direct causal link between the failure of the obligation and the prejudice. The policyholder bears the burden of the proof of the existence of the opportunity. He shall demonstrate that he would have been able to obtain the adequate coverage. Hence, he has to prove that such coverage existed on the market at the time of conclusion of the insurance contract in question. If the policyholder cannot provide such proof, the judge will consider that the opportunity to conclude

141 

See Civ 2e, 24 mars 2016, no 15-14858. See Civ 2e, 11 juin 2015, no 14-18.141; see also Civ 2eme, 24 mars 2016, no 15-14858. 143  Com, 9 fév 2016, no 14-23.210. 144  See M Asselain’s comments on the previous case, L’Essentiel Droit des assurances 01/04/2016 no 4, p 1. 145  Civ 1ere, 21 nov 2006, no 05-15.674. 146  See n 129. 147  Civ 2e, 10 déc. 2015, no 14-26297. 142 

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an adequate alternative contract did not exist. As a result, there would be no damage.148 b.  The Recoverable Loss To determine the recoverable loss, judges have to answer the following question: What would have happened if the obligor had fulfilled the obligation to give advice?149 Since the policyholder has only lost the potentiality to conclude another contract, it is not certain that he would have actually concluded a contract that is adequate to his situation. There is thus an uncertainty on the causal link between the violation of the obligation to advise and the inadequacy of the coverage. It is not even sure that the insurer would have agreed to cover the risk. Hence, the Cour de Cassation considers that the recoverable loss cannot be equal to the indemnity that the policyholder would have obtained if the risk were covered.150 The judge has to determine the probability of the conclusion of the contract containing the coverage of the particular risk. The recoverable loss will thus correspond to the fraction of the indemnity that the policyholder would have received if he were covered. Trial judges have full discretion in determining this fraction, as long as the awarded damages are lower than the indemnity.151 The evaluation is made caseby-case. In some situations, the judge might consider that there is zero probability for this and thus zero recoverable loss. In a recent case,152 the borrower sued the lender because the loan insurance contract did not cover the partial inability to work. The trial judge recognised that the bank had violated its obligation to give advice and that the coverage was not adequate for a borrower working as a factory worker. However, the trial court reminded that covering partial inability to work would have been more costly. Since the factory worker had refused coverage against the risk of unemployment (a risk to which the policyholder was directly exposed), the trial court concluded that even if the insurer had well advised the borrower, the latter would surely never have concluded the adequate contract. There was thus no causal link between the fault (failure in the obligation to advise) and the damage (the lack of coverage of the risk). If judges consider however that there is a possibility that the policyholder would have concluded another contract, they will have to find out the probability of ­concluding the alternative contract. As mentioned above, trial judges have full

148  See Com, 1er déc, 2015, no 14-22.134: The contract stipulated that the coverage of the risk of the inability to work ended at the latest on the 31 December of the sixty-fifth anniversary of the policyholder. The latter could not demonstrate that other insurance companies would have offered coverage beyond this age. The Court especially noted that the possibility to obtain such coverage was illusory because 65 years old is the age at which the vast majority of French employees retire. 149  See O Sabard, ‘L’évaluation de la perte de change par le juge judiciaire’ (2013) 218 LPA, 23. 150  See Com, 13 sept 2011 no 10-20.644. 151  See Civ 2e, 1er juin 2011, no 10-19.630. 152  Civ 1er, 29 juin 2016 no 15-17.502.

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discretion in this. Judges will often take into consideration the difference between the premium under the policy with inadequate cover and the premium for the adequate coverage. The higher the premium that the policyholder would have had to pay will be, the lower the chance that he would have agreed will be.153

V. Conclusion This overview shows how the evolution of the insurance market has influenced the evolution of French insurance law. Historically, this area of the law was marked by the perception of an inherent asymmetry of information to the detriment of the insurer, which was seen as the disadvantaged party due to heavy reliance on the policyholder’s honesty in representing the risk to be insured. The dishonesty and silence of the policyholder were seen as a wrong justifying the end of the coverage. With the adoption of the principle of consensualism, the policyholder’s behaviour became irrelevant, and the sole protection of the insurer’s consent became the end-goal of the law, to the point where the honest policyholders were sacrificed. The attitude of the French legislator and courts changed with the development of mass risks. On the one hand, insurance contracts became more and more contracts to which the policyholder adhere to rather than contracts negotiated at arms’ length. On the other hand, policyholders were no longer solely seen as experienced entrepreneurs but as inexperienced individuals. This evolution affected French law in two ways. It first decided the legislator to protect the interest of the policyholder when declaring the risk. On the one hand, the legislator transferred the burden of determining which information are determinant for the evaluation of the risk from the policyholder to the insurer through the adoption of the system of the closed questionnaire. On the other hand, the legislator reintroduced the distinction made between honest and dishonest misrepresentations of the risk. It did so by creating an adjustment mechanism allowing the policyholder who had made a mistake to avoid losing his coverage. This mechanism has the advantage to ensure the protection of the interest of the insurer as well. The adjustment of the premium allows indeed the insurer to avoid abiding by the terms of a contract which economic imbalance was caused by the policyholder’s mistake. The legitimate need to fight against the bad faith of the policyholder is ensured by a sanction mechanism by which the policyholder will lose not only the benefit of the coverage but also the paid and due premiums. But the Cour de Cassation went too far when it took upon itself to deviate from the law by refusing the pre-written declarations as proof of the misrepresentation. This solution has indeed the effect of protecting the most dishonest policyholders to protect the honest ones.

153 

See Civ 1er, 18 sept 2008 no 06-17.859.

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The second effect of the evolution of the market of insurance contracts was the introduction into all insurance contracts of both the duty to inform and advise owned by insurers, lenders and insurance brokers. While the legislator took upon himself to introduce exhaustive lists of legally required documents that the insurer needs to provide for the prospective policyholder, the obligation to advise the ­policyholder entered insurance law through the general law of obligations. The legislator and courts sees thus policyholders as victims of information asymmetry. They also see the policyholder as being less knowledgeable about their own risks. Through the obligation to advise, indeed, courts see insurers as experienced ­businesses that thus know better than policyholders which coverage will be best needed for their personal situations. The purpose of alleviating information asymmetry was lost before the Cour de Cassation when it decided not to limit the use of the right to revoke in life insurance contracts. The legislator had thus to reinstate this purpose through a change in the law to break the court’s jurisprudence. French law is here to help policyholders who need help from the law to alleviate the asymmetry of information, not those who do not. What would Lord Mansfield think about the evolution of French law? In Carter v Boehm, the learned judge had intended good faith to be the ground for precontractual disclosure and to apply to all contracts. This chapter shows both how important good faith is in French contract law (even if its influence has diminished due to codification), and how committed French law has been to alleviating information asymmetry between parties through the introduction of pre-contractual informational duties for both all parties, including both insurers and policyholders. It is safe to imagine only that Lord Mansfield would have not have disapproved the spirit of the modern French law of pre-contractual relationships.

10 Pre-contractual Duties under the German Insurance Law MANFRED WANDT AND KEVIN BORK*

I.  The Non-Impact of Carter v Boehm on German Insurance Law German insurance contract law and the parties’ pre-contractual duties generally developed independently from Carter v Boehm in both positive law and comparative law.1 The reason for this non-existing impact from this landmark English case in German insurance law is that German law is familiar to the principle of good faith (Treu und Glauben) in both general contract law and by default the principle applies in insurance contract law. Especially insurance contract law is notably permeated by the principle of good faith.2 However, its precise meaning (if any) is seldomly clarified.3 Certainly one explanation for this phenomenon is the diminished importance of the principle of good faith in a norm-based (meaning based on an extensive body of written law) jurisdiction such as Germany when comparing with common law jurisdictions. Mostly, the principle of good faith is invoked as an additional ground for interpreting statutory law. In the revised ­German Versicherungsvertragsgesetz 2008 (VVG or VVG 2008—Insurance Contract Act 2008)4 the principle is most rarely utilised to originate autonomous

* 

The authors thank Steven Schindler and Marcel Straub for valuable support. Carter v Boehm [1766] 3 Burr 1905. Entscheidungen in Zivilsachen (RGZ) 3, pp 21 to 27; 16, pp 121 to 123; 19, pp 216 to 232; Bundesgerichtshof, Entscheidungen in Zivilsachen (BundesgerichtshofZ) 99, pp 228 to 236; ­Bundesgerichtshof, Neue Juristische Wochenschrift (NJW) 2003, pp 1596 to 1600; Bundesgerichtshof, Versicherungsrecht (VersR) 2000, pp 171 to 174; Bundesgerichtshof, Versicherungsrecht (VersR) 2005, pp 1673 to 1678; Bundesgerichtshof, Versicherungsrecht (VersR) 2009, pp 980 to 982; cf C Armbrüster in T Langheid and M Wandt (eds), Münchener Kommentar zum VVG, vol 1, 2nd edn (Munich, Verlag CH Beck, 2016), § 6 para 28; also J Scherpe, Das Prinzip der Gefahrengemeinschaft im Privatversicherungsrecht (Tubingen, 2011) p 150. 3  A Bruns, Privatversicherungsrecht (Munich, 2015), § 6 para 6. 4 An English version is available at www.gesetze-im-internet.de/englisch_vvg (although this ­translation is partially not addressing terminological differences, see eg II.A). 1 

2 Reichsgericht,

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rights. Hence, there was generally no incentive for the German insurance legislator to make a comparative-law analysis of Carter v Boehm, and especially no reason for acknowledging this landmark English case. Besides the general approach of legislative German insurance contract law, the principle of utmost good faith is reflected by Allgemeine Deutsche SeeversicherungBedingungen (of 1919) section 13 (ADS—German General Rules of Marine ­Insurance) which gained particular and even quasi-legal importance considering the missing legislation in the field of marine insurance.5 Pursuant to this provision, all parties involved must adhere to good faith im höchsten Maße (to an utmost degree). In this context, recent German doctrine is exceptionally referring to Carter v Boehm—albeit, it must be outlined that in Germany by now no one ­analysed the concept of utmost good faith in detail.6 With respect to pre-contractual duties dealing with information, a recourse to the principle of good faith is, in general, no longer necessary in the practical application of law since these duties were comprehensively laid down by revision of the VVG 2008.7 These duties will be addressed focussing on the policyholder’s duties first and the insurer’s duties thereafter.

II.  The Policyholder’s Pre-contractual Duties Not to Misrepresent A. Introduction The policyholder’s risk of economic loss devolves upon the insurer due to the insurance contract. The insurer calculates the risk based on different factors influencing its realisation. However, most of these factors are naturally within the applicant’s8 sphere of knowledge. The insurer depends on information about the circumstances relating to the risk in order to decide whether, and if so to what extent (insured amount, exclusions etc) it would conclude the insurance contract. In addition, the insurer depends on the knowledge of risk-relevant facts as well in order to calculate an adequate premium. Therefore, the policyholder’s

5 

cf VVG s 209. T Remé, Das Seeversicherungsrecht bleibt Kaufmannsrecht, speech given on 26 June 2007 in front of the Deutscher Verein für internationales Seerecht, available at www.seerecht.de/wp-content/uploads/ dvis-vortrag-20070626-das-seeversicherungsrecht-bleibt-kaufmannsrecht.pdf. Yet, see the extensive list of academic papers by H Abraham in C Ritter (ed), Das Recht der Seeversicherung, vol 1, 2nd edn (Berlin, Walter de Gruyter, 1967) 270 ff; also Scherpe (n 2) p 151. 7  Bruns (n 3) § 6 para 6. 8  ie the prospective policyholder. 6 

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­ re-contractual duty to ‘give specific information’ to the insurer is of significant p relevance in German insurance law as in most legal systems. Although German insurance law is solely distinguishing between misrepresentation and disclosure by way of adding an adjective (Anzeigepflicht und spontane Anzeigepflicht), we will follow the linguistic approach differing between the duty to (spontaneously) disclose (meaning to inform or to provide information without being explicitly asked to; spontane Anzeigepflicht) and the duty to take reasonable care not to make a misrepresentation to the insurer (in short ‘duty not to misrepresent’; meaning not to untruthfully answer a question asked by the insurer; Anzeigepflicht).9 With regard to general statements, we will use the term ‘duty to notify’. The revision of the rules on pre-contractual information duties was one of the core elements of the reform by the VVG 2008. The reason was that several rules of the VVG 1908 were unduly burdensome to the policyholder and, therefore, no longer complying with modern requirements on consumer protection. VVG 1908 section 16 imposed on a genuine pre-contractual duty to disclose to the insurer all risk-relevant facts even though the insurer had filed no inquiries. Nowadays, VVG 2008 section 19 constitutes the key provision on the policyholder’s pre-contractual duty not to misrepresent. Pursuant to VVG 2008 section 19(1), the policyholder must notify the insurer of all risk factors known to him, material to the insurer’s decision to conclude the insurance contract with the agreed content and requested by the insurer in text form (Textform). If the policyholder makes a misrepresentation, the insurer is entitled to avoid the contract unless less strict remedies apply as stipulated by VVG 2008 sections 19(3), 19(4) and 19(5). The provisions on the policyholder’s pre-contractual duty not to misrepresent (VVG 2008 sections 19, 20 and 21) are composed in a rather complicated way. In this respect, the law reform 2008 regrettably did not achieve its general objective to simplify the existing legal framework.10 Following the courts and prevailing doctrine in German insurance contract law, the legal nature of the duty not to misrepresent to the insurer is a gesetzliche Obliegenheit (‘legal obligation’). Unlike an enforceable duty (echte Rechtspflicht), a gesetzliche Obliegenheit does not confer an enforceable claim for either performance or damages. Instead, a breach of a gesetzliche Obliegenheit leads to other specific legal consequences determined by law.

9  For further advice with regard to England see Zurich General Accident and Liability Insurance Co v Leven [1940] SC 406, 415; J Lowry, ‘Pre-contractual information duties: the insured’s pre-contractual duty of disclosure—convergence across the jurisdictional divide’, in J Burling and K Lazarus (eds), Research Handbook on International Insurance Law and Regulation (Cheltenham and Northampton, Edward Elgar, 2011) pp 56 to 92. 10 M Wandt, ‘Haben sich die Neuregelungen zum Allgemeinen Teil des VVG 2008 bewährt? Gedanken aus der Perspektive der Rechtswissenschaft’, in R Koch, M Werber and G Winter (eds), Der Forschung—der Lehre—der Bildung: 100 Jahre Hamburger Seminar für Versicherungswissenschaft und Versicherungswissenschaftlicher Verein in Hamburg eV (Karlsruhe, Verlag Versicherungswirtschaft, 2016) p 229.

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The general provisions on the policyholder’s pre-contractual duty to inform, ie VVG sections 19 to 22, 47,11 are semi-mandatory (VVG section 32).12 This means that parties are prohibited from contracting out of these provisions to the policyholder’s disadvantage. These restrictions of the contractual freedom are, ­however, not applicable to large (industrial) risks in the meaning of VVG ­section 210. Thus, some sectors of insurance are granted a broader extent of contractual freedom, for example transport insurance, credit or suretyship insurance (unless contracts are concluded for private demand) and indemnity insurance, in general, if the policyholder is an entity exceeding a specific size.13 As a consequence of the l­imited scope of VVG section 210, the semi-mandatory provisions of the VVG are not only ­protecting consumers seeking and taking out insurance. Self-employed ­persons and tradespersons are also protected—as long as the requirements of VVG ­section 210 are not met. Even if parties of a contract regarding large (industrial) risks in the meaning of VVG section 210 are contracting by way of ­Allgemeine ­Geschäftsbedingungen (AGB—General Conditions of Insurance, GCI) the general provisions on the policyholder’s pre-contractual duty not to misrepresent (VVG sections 19 to 22) serve as a point of reference in the framework of controlling the legal admissibility of the respective GCI clause according to Bürgerliches ­Gesetzbuch sections 307 to 309 (BGB—German Civil Code). This causes evident uncertainty concerning the outcome of a judicial review. With regard to consumer contracts, the VVG 2008 is grosso modo similar to the rules of the UK Consumer Insurance (Disclosure and Representations) Act 2012. However, referring to non-consumer contracts the legal framework is considerably different from the Insurance Act 2015 in the UK. In German law, the VVG 2008 is applicable to both consumer and non-consumer insurance ­contracts, with the only exception to free parties to an insurance contract on large (­industrial) risks from the restrictions of semi-mandatory provisions in order to allow them to contract differently.

B. Content and Scope of the Pre-contractual Duty Not to Misrepresent According to VVG section 19(1), the policyholder shall represent to the insurer before the insurance contract is concluded all circumstances, which are m ­ aterial

11 Specific regulations apply for preliminary coverage (VVG s 56[1]), transport insurance (VVG s 131), life insurance (VVG s 157) and health insurance (VVG s 194[1] sentences 3 and 4). 12  The latest entire revision of the Act on the Supervision of Insurance Undertakings dates from 1 April 2015 (BGBl I, 434 to 570—legislative acts passed by the German Parliament [Bundestag] are generally accessible at www.bgbl.de/xaver/bgbl/start.xav?startbk=Bundesanzeiger_BGBl). 13  VVG s 210(2) para 3 provides that the policyholder must exceed at least two of the following characteristics: lit a) Euro 6,200,000 balance sheet total, lit b) Euro 12,800,000 net turnover, lit c) an average of 250 employees per fiscal year.

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to the insurer’s decision whether to conclude the contract with the agreed content and which were requested by the insurer in text form as defined by BGB ­section 126b. Thus—except in the case of fraudulent behaviour (see II.D.ii.c)—the ­pre-contractual duty not to misrepresent is limited to answering questions asked by the insurer in text form. Insurers most commonly use questionnaires fitting this particular purpose best. The insurer may ask questions on material circumstances as long as the contract is not concluded. Even if the insurer had asked questions before the policyholder has made his contractual declaration, the insurer may ask further questions as long as the contract is not concluded (VVG section 19[1] sentence 2). Assuming that the insurer asked questions regarding material circumstances, VVG sections 19 to 22 are also applicable in case of a renewal of a contract. In case of an amendment of the contract, these provisions shall apply with respect to the particular circumstances, provided that the amendment is substantial to the extent of coverage.14 In practice, the question of applicability only arises if on renewal or amendment the insurer asks questions on material circumstances.

i.  Questions Asked in Text Form Pursuant to BGB section 126b, text form means that inquiries of the insurer must be conducted on a durable medium. This includes, in particular, messages sent by telegram, telex, telefax and e-mail. The purpose of the intention behind the text form requirement is, on the one hand, to decrease the risk of misconceptions caused by spoken word and to give the policyholder the chance to read and re-read the inquiries word by word. On the other hand, this formality requirement serves evidentiary purposes. Hence, within the meaning of VVG section 19(1), solely displaying inquiries on the insurance agent’s laptop without having arranged for any separate documentation for the policyholder’s own use, must be considered ­insufficient.15 It is also insufficient if an agent fills in the questionnaire of the insurer on its own and urges the applicant to sign while not giving him due time to read the questions and respective answers.16

ii.  Questions Submitted by the Insurer VVG section 19 expressly requires the insurer to ask questions. Since queries must be made in writing, insurers mostly use questionnaires for this particular ­requirement. Hence, the insurer can easily demonstrate having asked questions in text form.17 14  cf T Langheid in T Langheid and M Wandt (eds), Münchener Kommentar zum VVG, vol 1, 2nd edn (Munich, Verlag CH Beck, 2016) § 19 VVG para 36 with further references. 15  Kammergericht Berlin, Versicherungsrecht 2014, pp 1357 to 1360. 16  D Looschelders in D Looschelders and P Pohlmann (eds), VVG Kommentar, 2nd edn (Cologne, Carl Heymanns, 2011), § 19 para 21. 17  Written questions of an agent with the authority to conclude the contract are those of the insurer (VVG s 71).

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However, the allocation of questions of an insurance broker can be problematic. With regard to a questionnaire of an insurance broker, the Oberlandesgericht Hamm (OLG—German Higher Regional Court) held that questions (with respect to risk factors) contained in such a broker questionnaire generally are not to be considered as questions of the insurer in the sense of VVG section 19(1)—and that, therefore, misrepresentations in this questionnaire do not trigger the legal consequences of VVG section 19.18 However, there might be scenarios in which an insurer takes ‘ownership’ of pre-defined questions, provided by the broker prior to the policyholder’s responses—in case these circumstances are apparent to the policyholder. According to several decisions of German Higher Regional Courts, those questions activate the policyholder’s duty not to misrepresent.19 However, this approach should be restricted to the field of non-consumer contracts in the sense of VVG section 210 whereas in the field of mass risk insurance (especially when it comes to personal insurance) such an approach is considered inadequate. This is why, in this field, the rule provided by law is to be followed strictly. It goes without saying that an insurance broker can contribute to preparing the wording of questions or even can impose the wording on the insurer—if the broker is sufficiently influential in the market. However, in the field of mass risk insurance there is no convincing reason why the insurer should be exempted from asking the policyholder its own questions.

iii.  Questions Material to the Conclusion of the Contract The insurer’s request for representation of a certain risk factor indicates that this circumstance is ‘material to the insurer’s decision to conclude the contract with the agreed content’, VVG section 19(1). The point of view of the prospective insurer is considered as a decisive factor with due regard to the insurer’s underwriting ­decision. However, considering the policyholder’s need for protection, the ­insurer’s subjective view should not be the exclusive criterion. According to the legislative materials, the inducement into contracting must also be evidential from an objective point of view. This requirement is not met, for instance, when a question refers to a matter reaching far back into the past.20 Substantially, it comes down to a double test: The inquired risk factor must be crucial in view of the actual insurer’s usually practised way of concluding insurance contracts,

18 Oberlandesgericht Hamm, Versicherungsrecht (VersR) 2011, pp 469 to 477, annotated by A ­Naujoks and I Heydorn, pp 477 to 481. 19  Oberlandesgericht Köln, Versicherungsrecht (VersR) 2015, pp 477 to 479; ­Oberlandesgericht Köln Versicherungsrecht (VersR) 2013, pp 745 f; Kammergericht Berlin, ­Versicherungsrecht (VersR) 2014, pp 1315 to 1317; Oberlandesgericht Frankfurt, decision of 17 September 2015 – 12 U 172/13; there is a dispute about the stipulations on the identification, in particular cf Langheid (n 14) § 19 VVG para 67. With regard to the allocation of a pseudo agent cf LG Dortmund, Recht und Schaden (r+s) 2012, pp 426 to 428 as well as H Tschersich, Recht und Schaden (r+s) 2012, pp 53 to 61 (p 55). 20  BT-Drucks 16/3945 p 64: Begründung der Bundesregierung zum Entwurf des VVG 2008 (Explanatory Notes of the German Federal Government regarding the Draft of Insurance Law 2008.

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but company-individual behaviour must also be reasonable as measured by the market-wide usually practised way of concluding insurance contracts. In this context, the Act on Human Genetic Testing (Gendiagnostikgesetz— GenDG)21 which shall prevent discriminations against persons with crucial diseases must be taken into account. According to GenDG section 18(1), the insurer is neither allowed to request the policyholder or the insured to undergo genetic testing or analyses, nor to request information on genetic testing and analyses conducted in the past, nor to receive any such information. However, this provision could be easily ignored unless the purpose of this provision is kept in mind. ­Therefore, the insurer is not allowed to ask if genetic testing has ever been previously conducted, either.22 In respect to already conducted genetic testing, this prohibition does not apply to life insurance, disability insurance and care pension insurance if the one-time insurance cover is more than EUR 300,000 or if the annual p ­ ension exceeds EUR 30,000 (the relevant sum is the fixed sum agreed upon in the contract, ignoring any dynamic progress). The reason for this ­re-exemption is to prevent an advantage in knowledge at the expense of the insurer or the insured individuals, constituting a community of solidarity. It is, however, controversial if sum limits are to be calculated per insurance contract with the consequence that a policyholder could conclude several contracts with various insurers up to the permitted sum (see above) without being obliged to reveal his genetic disposition.23 Yet, the policyholder must represent to the insurer existing and pre-existing conditions according to VVG sections 19 to 22, 47 even if these illnesses were diagnosed by genetic testing, GenDG section 18(2).24 In addition, requests aiming for revelation of circumstances, upon which any differentiated treatment of policyholders is unlawful pursuant to the ­General Equal Treatment Act (Allgemeines Gleichbehandlungsgesetz), are not permitted. This is true, for instance, regarding a request for revelation of any existing pregnancy.25

iv.  Clarity and Definiteness of Questions By limiting the pre-contractual duty to notify to questions asked by the insurer in text form (duty not to misrepresent), the VVG 2008 abolishes the ­policyholder’s

21 

Act of 31 July 2009, BGBl I, pp 2529 to 2538. RegE BT-Drs 16/10532, p 36. 23  According to the prevailing doctrine, several independent insurance contracts are to be added up in order to avoid that that a policyholder could conclude several contracts with various insurers up to the permitted sum without being obliged to reveal his genetic disposition; cf E Hahn, Zeitschrift für die gesamte Versicheurngswissenschaft (ZVersWiss) 2013, pp 519 to 536 (p 535); C Armbrüster, ­Versicherungswirtschaft (VW) 2010, pp 1309 to 1310 (favouring an analogous application); K Neuhaus, Recht und Schaden (r+s) 2009, pp 309 to 319 (p 315). 24  Oberlandesgericht Saarbrücken, Versicherungsrecht (VersR) 2012, pp 557 to 559. Regarding the pre-contractual duty not to misrepresent concerning genetic defects cf K Neuhaus, Zeitschrift für Schadensrecht (ZfS) 2013, pp 64 to 69. 25  O Brand, Versicherungsrecht (VersR) 2009, pp 715 to 721 (p 718). 22 

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burden to assess the relevance of a certain risk factor on his own and to disclose such risk factors (spontaneously, meaning without being asked expressly). ­Therefore, it is to be expected that courts will eventually evaluate those questions which were drafted and designed by the insurer in a way that the purpose of the insurer’s duty to ask is not undermined. Ambiguities in the interpretation of questions are resolved against the insurer (principle of contra proferentem).26 A telling example of this principle is the decision of the Oberlandesgericht Celle (German Higher Regional Court) in 2015.27 The policyholder requested a nursing care insurance beneficial for his child, who was advised to undergo chromosomal analysis due to the identification of a missing age-appropriate development. The insurer questioned about nursing care dependency, certain defined illnesses and stationary hospital treatments. Results of the chromosomal analysis were only available subsequent to the conclusion of the contract. It evidenced partial monosomy 18q (De-Grouchy syndrome). The court in this case held that the policyholder did not misrepresent since the question concerning nursing care dependency was not answered incorrectly. Moreover, the insurer solely made an inquiry on existing illnesses on a ‘yes/no-basis’, but did not inquire whether such illnesses may re-occur. Since a respective inquiry did not exist, a misrepresentation of the policyholder was not apparent. Even a query about brain disease or illness of the nervous system (which was listed) was—from a layman’s perspective—not to be interpreted as meaning a missing age-appropriate development. Since the insurer merely inquired about in-hospital treatment, the hospitalisation for the purpose of an MRI scan did not constitute a misrepresentation by the policyholder either. Following the court ruling, a treatment aims to cure a detected illness, whereas an MRI scan aims to diagnose/detect an illness. Lastly, the court held that the behaviour of the policyholder did not amount to fraud (this topic will be dealt with later in detail, see II.D.ii.c). The protective purpose of limiting the pre-contractual duty to notify to questions asked by the insurer (duty not to misrepresent) requires questions not to be too vague or too general. Yet, abstractness to a certain degree is essential for reasons of practicability. Otherwise, it would be virtually impossible to cover risk factors of ‘mass contracts’ as a whole, without straining the questionnaire’s transparency by implementing an almost endlessly detailed catalogue of questions. In this respect, courts must establish a judicial system of checks and balances between a minimum of precision and the essential abstractness of questions. Questions which are phrased too vaguely and, thus, contradicting the protective purpose of VVG section 19 should be considered to be immaterial (at least

26  D Looschelders, Versicherungsrecht (VersR) 2011, pp 697 to 705; see as well C Rolfs in H B ­ aumann, R Beckmann, K Johannsen et al, Bruck/Möller VVG Kommentar, vol 1, 9th edn (Berlin, Verlag CH Beck, 2009), § 19 VVG paras 29 f; see also Art 1:203(2) PEICL. 27  Oberlandesgericht Celle, Zeitschrift für Schadensrecht (ZfS) 2016, pp 270 to 274.

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if absolutely unclear) which means that non-response or incorrect reply would not constitute any misrepresentation.28 The irrelevance of such questions was pointed out by a court ruling on the basis of the old VVG—for example with regard to the question of the ‘habitual’ intake of medications.29 On the contrary, the O ­ berlandesgericht Frankfurt (German Higher Regional Court)30 held that a ‘catch-all-provision’ which askes for complaints concerning matters not mentioned by a specific question is valid.31 Keeping in mind the purpose of VVG section 19, such an approach seems inadequate. The same is true for the doctrine that a clear but very broad question should be relevant but restricted to material circumstances.32 Based on the arguments put forward, VVG section 19 should be construed in the sense of PEICL Article 2:101, which restricts the duty not to misrepresent to ‘clear and precise questions’.33

v.  Knowledge of the Policyholder The policyholder is solely obliged to reveal material circumstances known to him. Negligent lack of knowledge does not trigger his duty even if it is to be qualified as gross negligence. However, any policyholder, having forgotten facts priorly known to him, can reasonably be expected to try to memorise;34 the principle of good faith actually constitutes an obligation of the policyholder to look it up or to inquire.35 However, it is prevailing doctrine that, subject to fraud, the duty for policyholders to do reasonable research for information is restricted to facts ­previously known to the policyholder36 (see with regard to attribution II.F).

28  Also, C Karczewski, Recht und Schaden (r+s) 2012, pp 521 to 532 (p 523); cf also D Looschelders, Versicherungsrecht (VersR) 2011, pp 697 to 705 (p 698); however, the current prevailing doctrine is ­different, see eg Rolfs (n 26) § 19 VVG para 29; C Armbrüster in E Prölss and A Martin (founders), VVG Kommentar, 29th edn (Munich, Verlag CH Beck, 2015), § 19 VVG para 41. 29  Oberlandesgericht Oldenburg, Versicherungsrecht (VersR) 1994, p 1169. 30  Oberlandesgericht Frankfurt, Beck online Rechtsprechung (BeckRS) 2011, 28322. 31  See also Landgericht Kiel, Neue Juristische Online Zeitschrift (NJOZ) 2013, pp 1612 to 1615: Question if in the past three years there had been any symptoms, diseases, anomalies and/or accident consequences; no risk relevance for irritable colon [abdominal complaints of unclear origin], perioral dermatitis [cold sore at the mouth area] and exertional dyspnoea of unclear origin [breathing difficulties]. 32  Looschelders (n 16) § 19 VVG para 23. 33  With regard to the differences in European insurance laws see Art 2:101 PEICL N1 to N6 in J Basedow, J Birds, M Clarke, H Cousy, H Heiss and L Loacker (eds), Principles of European Insurance Contract Law (PEICL), 2nd edn (Cologne, Verlag Dr. Otto Schmidt, 2016) 106 to 108. 34  Established case law and doctrine cf Oberlandesgericht Frankfurt, decision of 23 July 2010 – 7 U 90/09; Langheid (n 14) § 19 VVG para 60 with further references. 35  Affirmative Langheid (n 14) § 19 VVG para 60. 36  Rolfs (n 26) § 19 VVG para 56; Looschelders (n 16) § 19 VVG para 33; as well as T Langheid in T Langheid and R Rixecker (eds), VVG Kommentar, 5th edn (Munich, Verlag CH Beck, 2016) § 19 VVG para 28.

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C.  Breach of the Duty Not to Misrepresent i.  Breach Regarding Content Subject to the test of materiality, the policyholder is obliged to fully and truthfully answer all questions asked by the insurer. He is not only breaching his duty by not revealing at all, but also by revealing incompletely or inaccurately. It should be recalled that questions must be asked in text form and ambiguities in the interpretation of those questions are resolved to the disadvantage of the drafter, the insurer (contra proferentem). If an insurance agent comments on a pre-formulated ­question of the insurer and, thereby, conceals or blurs the meaning of this question, this conduct must be taken into account when assessing whether the policyholder has misrepresented innocently or culpably. Regarding questions not answered at all or answered obviously inconsistently by the policyholder, German case law has imposed on the insurer a duty to request information. It is to be prevented that the insurer reserves its remedies until the insured event had occurred albeit serious indications pointing towards the ­policyholder’s incomplete, inconsistent or incorrect statements have existed prior to the occurrence. From a systematic point of view, the duty of the insurer to request information does not affect the policyholder´s duty. However, the insurer is not allowed to exercise any remedies (venire contra factum proprium).37 Contrary to former case law,38 it is now established that the insurer has no duty to request information in case the policyholder misrepresented to the insurer.39

ii.  Breach Regarding Timing The policyholder must fulfil his duty not to misrepresent prior to the submission of his contractual declaration, which regularly is the offer,40 VVG section 19(1) sentence 1. Subject to questions asked later—until the conclusion of the contract, VVG section 19(1) sentence 2—the duty not to misrepresent ends at this point in time, pursuant to VVG section 19.41 If the potential policyholder requests an insurance cover by way of a n ­ onbinding request, the so-called invitatio model (Invitatio-Modell) applies stating

37  Case law qualifies the duty to request as an Obliegenheit of the insurer; regarding its legal nature see s II.B. 38 Bundesgerichtshof, Versicherungsrecht (VersR) 1992, pp 603 f. 39 Bundesgerichtshof, Versicherungsrecht (VersR) 2007, p 96. 40  The legal technique of the VVG regards the policyholder (applicant) as the offeror while the insurer is the offeree. However, this only reflects the typical way of contracting and, therefore, is not binding to the contracting parties. This legal technique may cause difficulties of application or interpretation of respective provisions of the VVG. 41  However, after submitting his contractual declaration the policyholder must notify an aggravation of risk to the insurer. In the event of a breach of this duty to notify the insurer is entitled to the remedies provided for in VVG ss 24 to 26, which do not include a right to avoid the contract.

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that the relevant point in time for fulfilment of his duty not to misrepresent is generally determined by this request. The reason is that, at this point, the insurer must take into consideration the material risk factors if it intends to draw any conclusions when designing the content of the contract offer. Furthermore, the policyholder not assuming to be under an ongoing duty to notify should be protected unless the insurer submitting the offer asks further questions, for example requires the policyholder to confirm that material facts have not changed since his declaration when submitting the non-binding request. This approach corresponds with the provision in VVG section 19(1) sentence 2.

iii.  Breach Regarding Form Since VVG section 19 does not contain a formality requirement, the policyholder’s duty not to misrepresent may also be met by oral communication. However, w ­ ritten form as well as text form may be agreed upon by the contracting ­parties, VVG section 32(2). With respect to a formality requirement affecting pre-­contractual duties, the prospective parties to the insurance contract would have to agree on such a form requirement before concluding the insurance contract as such. Therefore, a clause within the GCI of the insurance contract is insufficient to affect pre-contractual duties. In addition, even if the parties agreed on this prerequisite previously, the policyholder is still allowed to orally communicate his answers to an insurance agent since the insurance agent’s statutory power to receive ‘notifications and other statements of the policyholder’ cannot be limited to written statements, VVG section 72.42 This follows from the interaction between the provision of VVG section 19(5) sentence 2 and the provisions on statutory power of insurance agents to receive information. In particular, according to VVG section 19(5) sentence 2, the insurer cannot derive any rights from a misrepresentation if the insurer was already aware of the misrepresented risk factors. Oral responses of the policyholder to the insurance agent, however, lead to an adequate knowledge of the insurer in accordance with VVG section 69(1) no 1, section 70.

D.  Remedies of the Insurer i.  Remedies at a Glance VVG section 19 provides for a scaled set of remedies with the right to avoid the contract being the basic remedy. Accordingly, the insurer’s right to avoid or to vary the contract is restricted only by exclusions set out in VVG sections 19(3), 19(4) and 19(5).

42  P Reiff in T Langheid and M Wandt (eds), Münchener Kommentar zum VVG, vol 1, 2nd edn (Munich, Verlag CH Beck, 2016), § 72 VVG para 16; Armbrüster (n 28) § 19 VVG para 79.

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The question whether the insurer is exempted from indemnifying the policyholder for loss suffered on the occurrence of an insured event prior to the avoidance is governed by VVG section 21(2). This crucial matter is linguistically hidden in the provision’s heading ‘exercise of the rights of the insurer’ and located between VVG section 21(1) (time period and the requirement to give reasons) and VVG section 21(3) (expiration period for remedies). For example, in life insurance there is a specific provision on false declarations of the insured person’s age. In such a case, and according to VVG section 157, the insurer’s liability is modified in the proportion that the insurance premium commensurate with his actual age bearing to the agreed insurance premium. In deviation from VVG section 19(2) the insurer shall only have the right to avoid the contract on account of the misrepresentation if it would not have concluded the contract had the age been notified correctly. In health insurance, an innocent misrepresentation does not lead to any negative consequences (VVG sections 194[4], 206). Contrary to VVG section 19(3), the insurer is not entitled to terminate the contract due to slight negligence of the policyholder in mandatory health insurance since any termination is excluded according to VVG section 206.43 Except in the case of fraudulent behaviour, any remedy requires that the insurer must have already instructed the policyholder in due time of the consequences of any misrepresentation (VVG section 19[5] sentence 1). The burden of proof generally lies with the insurer claiming remedies according to VVG section 19.44 However, the burden of proof regarding the fact that the ­policyholder acted without fault or only slight negligently lies with the ­policyholder (VVG section 19[3] sentence 1). This also applies to the fact that the insurer, nevertheless, would have concluded the contract had it known the facts, which were not revealed—albeit with other conditions. In order to prove the latter, the policyholder’s allegation is generally sufficient; in the aftermath, it is up to the insurer to substantiate that it would not have concluded the contract at all.

ii.  Legal Consequences in Particular For the ease of comprehension, the following depiction does not mechanically follow the intricate statutory regulation, but displays the legal consequences of breach with reference to the policyholder’s degree of fault. It should be noted that VVG sections 19 to 21 do not provide for a separate ­remedy in case of fraudulent intent of the policyholder. However, fraudulent

43  However, according to case law VVG s 206 does not exclude the general right to terminate a c­ ontract for the performance of a continuing obligation for a compelling reason without a notice period (BGB s 314); cf Bundesgerichtshof, Versicherungsrecht (VersR) 2012, pp 304 to 310. 44  This follows from the application of the general rules on burden of proof. In line with these ­general rules VVG s 69(3) sentence 3 states that the insurer bears the burden of proof for a misrepresentation (if an agent is involved).

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intent for which the burden of proof is borne by the insurer exempts the insurer from its duty to ask questions in case of obviously incomplete or inconsistent answers by the policyholder (see II.C.i). It also exempts the insurer from the requirement to instruct the policyholder on the consequences of a misrepresentation (see II.D.iii) and denies the policyholder a rebuttal of causality (see II.D.ii.d). a.  No Fault or Slight Negligence by the Policyholder If the policyholder misrepresents without fault or with only slight negligence, the insurer is entitled to terminate the contract within a one-month period where the insurer would have refrained from concluding the contract had it known the facts (Vertragshinderungsumstände). The one-month period aims to enable the policyholder to obtain insurance coverage elsewhere. If the insurer would have concluded the contract on different terms with regard to undisclosed facts (Vertragsänderungsumstände), both parties’ interests call for maintaining the contract with these ‘other conditions’. Therefore, the insurer is not entitled to terminate the contract but may require these ‘other conditions’ to subsequently vary the contract (remedy to adapt the contract). The temporal effectiveness of the contractual variation is determined by the policyholder’s degree of fault, VVG section 19(4) sentence 2. The adaption of the contract takes effect retroactively to the conclusion of the contract, unless the policyholder— indisputably or as evidenced by him—has acted innocently. In this case, the ­adaption of the contract takes effect retroactively to the beginning of the ­current insurance period (regarding specifics of the right to adapt the contract see II.D.ii.e). b.  Gross Negligence of the Policyholder If the policyholder misrepresents with gross negligence (which is assumed) the insurer is entitled to avoid the contract unless it had concluded the contract (albeit by agreeing upon different terms) with knowledge of the undisclosed circumstances. The insurer shall be entitled to the insurance premium up until the point in time the declaration of avoidance of contract becomes effective, VVG section 39(1) sentence 2. If the insurer would have concluded the contract on different terms with regard to undisclosed facts,45 the insurer may adapt the contract by notification. In this scenario, the different conditions become part of the contract retroactively to the conclusion of the contract. c.  Intent of the Policyholder If the policyholder has acted intentionally (which is assumed), the insurer may avoid the contract (VVG section 19[2]) being entitled to the insurance premium 45  It is worth mentioning that even if the policyholder has acted with gross negligence there is no sanction if the insurer would have concluded the contract on equal terms with regard to unrevealed facts.

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up until the point in time the declaration of avoidance of contract becomes effective (VVG section 39[1] sentence 2). d.  Discharge of the Insurer from Liability Upon avoidance of the contract, the insurer is released from its obligation with regard to a previously occurred insured event, VVG section 21(2).46 However, the insurer is liable if the policyholder proves that the misrepresentation is of a fact that has neither been the cause of the occurrence or of the assessment of the insured event nor of the determination or the scope of the insurer’s liability (rebuttal of causality, VVG section 21[2] sentence 1 half sentence 2). However, the policyholder is denied a rebuttal of causality if he misrepresented fraudulently, VVG section 21(2) sentence 2. e.  Specifics of the Right to Vary the Contract In the course of varying the contract, the equivalence ratio of insurance coverage and premium is either established retroactively from the beginning of the contract (in case of slight negligence) or retroactively from the beginning of the insurance period (in case of no fault). As a reaction to the notification by the insurer, the policyholder may terminate the contract within one month without prior notice if the insurance premium increases more than 10 per cent on account of an adaption of the contract or if the insurer refuses to cover the risk of the unrevealed circumstance, VVG section 19(6) sentence 1. The insurer shall notify the policyholder of this right of termination in the notification of the variation of the contract, VVG section 19(6) sentence 2. By retroactively inserting an exclusion clause, the insurer may be exempted from liability for an insured event that occurred after the adaption of the c­ ontract came into effect if the insurer proves that it would have concluded the contract with the exclusion clause had it known the unrevealed fact.47 It is argued, however, that such a solution would not be in line with the insurer not being ­entitled to avoid but only to terminate the contract. Following this argument, German doctrine proposes to teleologically reduce the application of VVG section 19(4) sentence 2 to the basis that slight negligent or innocent misrepresentation of a material c­ ircumstance (whose revelation would have caused the insurer to exclude the respective risk) does not entitle the insurer to exclude the

46 

This was already the position set out in the repealed VVG 1908 s 21. the prevailing doctrine, cf M Wandt, Versicherungsrecht, 6th edn (Munich, Verlag Franz Vahlen, 2016) para 842; implicitly confirmed by Bundesgerichtshof, Versicherungsrecht (VersR) 2016, pp 780 to 783 stating that pursuant to VVG s 19(5) the validity of the instruction is not called in question by the fact that the drawing of legal consequences of a contractual adjustment does not explicitly mention that already occurred insured events are not covered in case the contractual adjustment ­retroactively introduces a risk exclusion to the contract. 47 See

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risk ­retroactively but only for the future.48 However, this approach is not conclusive. If the insurer would not have concluded the contract at all, the misrepresentation would at least have been sanctioned by termination of the contract within one month. If, h ­ owever, the insurer would have concluded the contract but would have excluded the risk, a slightly negligent misrepresentation would not be sanctioned at all, if the risk exclusion solely applied for the future. Hence, a slightly negligent policyholder would be privileged in comparison with a policyholder properly representing all circumstances, since the latter was confronted with a risk exclusion from the very beginning. Consequently, the policyholder’s incentive in the precontractual representation of material circumstances would be weakened and the retroactive exclusion of the respective risk should, therefore, be possible.49

iii.  Instruction Requirement and Lack of Knowledge of the Insurer All available remedies require that the insurer has instructed the policyholder in a separate notification in text form of the consequences of any misrepresentation (VVG section 19[5] sentence 1; the burden of proof lies with the insurer). ­However, according to case law this requirement shall not apply to a fraudulent policyholder.50 ‘Separate notification’ does not require a separate document and it is sufficient that the notification clearly differs from the rest of any text, for instance by using typographical design and placing in order to ensure that the instruction catches the policyholder’s eye while he is fulfilling his duty not to misrepresent.51 Such instruction must generally be rendered prior to the date on which the policyholder must fulfil his duty.52 The insurer’s rights are excluded according to VVG sections 19(2), 19(3) and 19(4) if the insurer was aware of the unrevealed risk factors or the erroneous representation (VVG section 19[5] sentence 2; the burden of proof lies with the ­policyholder). In this respect, policyholders often invoke that the involved agent of the insurer was aware of a notifiable fact (for example a previous illness) and, on top of that, did expressly advise the policyholder not to mention this fact in the insurer’s questionnaire. According to VVG sections 69, 70, 72 the knowledge of the agent is equivalent to the knowledge of the insurer, since the agent is to be considered as being ‘eye and ear of the insurer’, with the result that the duty not to

48 

eg Looschelders (n 16) § 19 VVG para 67 with further references. confirmed by Bundesgerichtshof, Versicherungsrecht (VersR) 2016, pp 780 to 783 (p 781). 50 Bundesgerichtshof, Versicherungsrecht (VersR) 2014, pp 565 to 567. 51 Bundesgerichtshof, Versicherungsrecht (VersR) 2013, pp 297 to 300. 52  Until the contract has been finalised, the insurer should be allowed to file a previously missing instruction subsequently, provided that the insurer clearly warns the policyholder that the subsequent instruction is also related to questions already answered. Thus instructed, the policyholder is entitled to correct a previously given answer if, otherwise, he breaches his duty not to misrepresent. 49 Implicitly

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misrepresent is properly fulfilled to this extent.53 The same applies to a statement of the policyholder vis-a-vis the doctor being engaged by the insurer.

E.  Enforcement of Rights by the Insurer The insurer must assert its rights under VVG sections 19(2), 19(3) and 19(4) within one month in writing after learning of the misrepresentation, VVG section 21(1) sentences 1 and 2. With regard to the complicated gradation of the insurer’s rights depending on the policyholder’s degree of fault, it should be noted that a separate monthly period of time might start for each and every right. This may force the insurer to pursue remedies in the alternative. In this respect, the insurer’s knowledge of objective facts clearly indicating a breach of the duty not to misrepresent is always the starting point. It will cause the insurer to declare the avoidance within one month since the policyholder’s intent shall be assumed. However, if the insurer is aware of facts which are suitable (for the policyholder bearing the burden of proof) to exclude the policyholder’s intent and gross negligence, the insurer is well advised to, additionally, declare termination (alternatively to the avoidance). In cases of doubt, the insurer may as well be advised to alternatively claim that the contract must be adjusted retroactively to its conclusion; in the alternative, retroactively to the beginning of the current insurance period. When exercising its rights, the insurer shall express the circumstances, on which its avoidance of contract is based, VVG section 21(1) sentence 3 half sentence 1. However, the insurer is entitled to subsequently add further rationale provided that it does so before the respective monthly period lapses, VVG section 21(1) sentence 3 half sentence 2. Due to the unclear phrasing of VVG section 21(1) sentence 3 half sentence 2, there is a doctrinal debate concerning the question of from which point in time the respective one-month period starts running. It seems reasonable to start the period when the insurer gains knowledge of additional facts. The insurer’s rights shall lapse five years after the conclusion of the contract in accordance with VVG sentence 21(3) half sentence 1. This shall provide the ­policyholder with the assurance that the contract is still effective with the agreedupon content after lapse of the period. However, the preclusive period does not apply to an insured event occurring prior to the lapse of this term, VVG section 21(3) half sentence 2. Otherwise, the policyholder would be able to delay a claim until the period has elapsed under which the insurer would not have to perform due to a misrepresentation and, thus, obliging the insurer due to the exclusion of its rights under VVG sections 19(2), 19(3) and 19(4). If the policyholder ­misrepresented intentionally or fraudulently, the preclusive period of the insurer’s rights adds up to 10 years, VVG section 21(3) half sentence 2—as in accordance

53 

Established case law since Bundesgerichtshof, Versicherungsrecht (VersR) 1992, pp 217 f.

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with BGB section 124(3) regarding the avoidance of a contractual commitment based on deceit under BGB section 123.

F.  Attribution to the Policyholder If the contract is concluded by a person representing the policyholder when ­making an offer or—more rarely—when declaring acceptance, knowledge, the representative’s bad faith54 as well as intent and gross negligence is attributed to the policyholder, according to VVG section 20. With regard to indemnity insurance on account of a third party (für fremde Rechnung), VVG section 47(1) provides for the principle that knowledge and behaviour of the insured is equivalent to behaviour of the policyholder.55 Commensurate rules are set out in VVG sections 156, 193(2) concerning life and health insurance contracts taken out for another person (auf die Person eines anderen). Apart from these provisions, there are no provisions on the attribution of knowledge and fault if an auxiliary person of the policyholder, especially an insurance broker, is not a representative in the sense of VVG section 20. To this effect, rules have been developed by courts and doctrine.56 If the auxiliary person is entrusted by the policyholder to fulfil the duty not to misrepresent vis-a-vis the insurer (Wissenserklärungsvertreter), knowledge and fault of this person shall be attributed to the policyholder (by means of an analogous application of BGB ­section 166). In addition, if the auxiliary person is entrusted by the policyholder only to collect, record or forward knowledge (Wissensvertreter), established case law prescribes that knowledge and fault of this person shall be attributed to the policyholder provided that the auxiliary person acts on his or her own responsibility to a certain degree.57

G. Avoidance of the Contract in Case of Fraudulent Misrepresentation If the policyholder has misrepresented fraudulently, the insurer may assert the remedies according to VVG sections 19 to 21, or it may avoid the contract based on BGB section 123. VVG section 22 clarifies that the right of the insurer to avoid the contract on account of wilful deception pursuant to BGB section 123 shall remain unaffected. In particular, ‘remain unaffected’ means that the right 54 

cf bad faith, VVG ss 21(2) sentence 2, 21 (3) sentence 2. the dispute whether VVG s 47 is an attribution cf M Wandt in T Langheid and M Wandt (eds), Münchener Kommentar zum VVG, vol 1, 2nd edn (Munich, Verlag CH Beck, 2016) § 28 VVG para 102. 56  See also Art 6:101 PEICL N4, (n 33) 223. 57 Bundesgerichtshof, Neue Juristische Wochenschrift (NJW) 1992, pp 1099 to 1101; cf Wandt (n 47) para 428. 55 Regarding

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to avoid the contract based on BGB section 123 is not restricted to answering questions asked by the insurer in text form. With regard to BGB section 123 a duty not to m ­ isrepresent as a prerequisite of wilful deception may follow from BGB section 241(2) or the principle of good faith (BGB section 242). However, in order not to undermine the protective purpose of VVG section 19, also within the scope of BGB section 123, rather strict requirements must be imposed on the ­policyholder’s duty not to misrepresent. Therefore, it must be evident to the policyholder, even without any queries posed by the insurer, that an unrevealed fact is material to the contract decision of the insurer; additionally, it should be required that the fact is, thus, rare as well as abstruse so that a question concerning this ­matter cannot be expected by the insurer.58 Moreover, it follows from VVG section 22 that the lapse periods of VVG section 21(3) do not apply to the right to avoid on account of wilful deception pursuant to BGB section 123.59

III.  The Insurer’s Duties to Inform and to Advise A policyholder’s clear comprehension of his insurance cover is an important principle underlying German insurance law from the very beginning of the ­twentieth century on—at least from a regulatory perspective. With the enactment of the VVG 2008, the insurer’s duties to inform were substantially enlarged and ­broadened. Further ascertainment of pre-contractual information was set out by the VVG-Informationspflichtenverordnung (VVG-InfoV—Regulation on Duties of Information Relating to Insurance Contracts).60 It comprises a comprehensive catalogue of basic information material to all insurance contracts as well as additional requirements for life insurance and differing types of personal insurances. These duties to inform are accompanied by duties to advise with regard to the individual demands and needs of the prospective policyholder and to record given advice (VVG sections 6, 7). In case of a breach of information duties, the revocation period of VVG ­section 8 does not commence. While, insofar, no indemnification of the applicant is prescribed by the VVG, a claim for damages may only follow from general principles of contract law. However, in case of a breach of the duty to advise by the insurer, policyholders are entitled to claim damages (VVG section 6).

58 Oberlandesgericht Celle, Zeitschrift für Schadensrecht (ZfS) 2016, pp 270 to 274; U Knappmann, Versicherungsrecht (VersR) 2011, pp 724 to 727 (p 726); U Knappmann in R Beckmann and A Matusche-Beckmann (eds), Versicherungsrechts-Handbuch, 3rd edn (Munich, Verlag CH Beck, 2015), § 14 para 150; similar Looschelders (n 16) § 22 VVG para 9. 59 Bundesgerichtshof, Versicherungsrecht (VersR) 2016, pp 101 f. 60 cf Verordnung über Informationspflichten bei Versicherungsverträgen (VVG-InfoV) of 18 December 2007, BGBl I, pp 3004 to 3007.

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A.  Pre-contractual Information61 i.  Pre-contractual Information Duties62 according to VVG Section 7 a.  Applicability of VVG Section 7 to All Insurance Contracts The reformed VVG 2008 imposes a legal duty on the insurer to inform the policyholder on certain aspects of the insurance product in question. VVG section 7 (in connection with the VVG-InfoV, as referred to above), thus, contains a substantial regulation of the matter and affords the policyholder a personal claim against the insurer to be informed.63 This information duty applies to all insurance contracts irrespective of the ­policyholder being a consumer or not. If the essential content of a contract of insurance—except for distance contracts—refers to the insurer granting preliminary cover, the parties may agree that the insurer shall only send to the ­policyholder the GCI and the information (in accordance with VVG section 7[1] in connection with the VVG-InfoV) upon request, or with the insurance policy at the latest (VVG section 49[1]). VVG sections 7(1) to 7(4) do not apply to insurance contracts covering large risks in the meaning of VVG section 210(2). However, if the policyholder is a ­natural person, the insurer must pre-contractually inform him on the applicable law and the competent supervisory authority in writing (Textform), VVG section 7(5). b.  Content of the Information According to VVG section 7(1), the insurer must transmit to the policyholder in a timely manner before the contractual declaration its contractual terms including the GCI as well as the information as required by the VVG-InfoV. Concerning GCI, it goes without saying that these ‘terms which have not been negotiated individually’ are the legal heart of an insurance contract within a business-to-consumer (B2C) transaction. Standard terms of an insurance contract have significantly greater importance than those of contracts for the supply of goods. This is due to the fact that standard terms of an insurance contract define the main subject matter of the contract by describing the insured event and by

61 To some extent, the following deliberations are based on an unpublished report written by M Wandt and J Gal and submitted to the International Insurance Law Association/Association Internationale de Droit des Assurances (AIDA) in preparation of the World Congress in Rome in 2014. 62 Regarding other branch-specific standardised information duties of the insurer ­ according to VVG, cf L Loacker, Informed Insurance Choice (Cheltenham and Northampton, Edward Elgar, 2015) 200. 63  In this regard, it, arguably, differs from VAG old version s 10a (in connection with Annex D to the VAG), the rule it replaces. The latter has been characterised by some authors as a purely supervisory rule not granting any private claims to the policyholder. There are several other aspects VVG s 7 has changed in comparison with the old system of providing information.

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limiting the extent of coverage by way of exclusion clauses. Thus, perfect precontractual information for the prospective policyholder is crucial for his decision whether to conclude the particular insurance contract. However, with regard to GCI, the policyholder is further protected by (separate) requirements on their inclusion and content set out in BGB sections 305 ff.64 These requirements are not to be dealt with in the following.65 The VVG-InfoV, which has been enacted on the basis of VVG section 7(2), provides for certain information to be given to all applicants (section 1), some information to be given only to applicants for special insurance classes or types (life insurance and comparable insurances: section 2; health insurance: section 3) and some information only to applicants who are consumers in the sense of BGB section 13 (so-called information sheet: section 4). The VVG-InfoV also provides for which information an insurer must provide when contacting the policyholder via telephone (section 5) and what information an insurer must transmit to the policyholder during the term (section 6). The duty to inform must be observed towards all policyholders. In order to outline a brief overview of the required information: VVG-InfoV section 1 requires the insurer to inform about its own company (for example its name, its address), about its performance under the contract (for example general conditions of insurance, the nature, extent and due date of its performance and the price and total costs of insurance), about the modalities of contract (for example its mode of conclusion, its term and possibility of termination, the possibility of revocation) and about possible legal remedies, especially the policyholder’s ­possible access to an extra-judicial complaints and grievance procedure. If the contract is a life insurance contract or a similar insurance contract as required by VVG-InfoV sections 2(4), 2(5), the VVG-InfoV section 2, additionally, requires information especially on the share in the surplus, for instance the mode of calculation of the benefits of the contract, the way acquisition and distributions costs are debited from the premium (ie explanation of the Zillmer method) and the surrender value. Pursuant to VVG section 154 in connection with section 2(3), the insurer must meet specific requirements if it includes a model calculation. The duties of section 3 pertaining to the insurer of a health insurance are quite ­comparable to those of section 2. With regard to the revision of German insurance contract law, a new special ­feature exists: Consumers now must be provided with a product information sheet, VVG-InfoV section 4. There were jurisprudential concerns that a

64  It is controversial whether a waiver in accordance with VVG s 7(1) sentence 3 last half sentence without any explicit clarification is at the same time a waiver of the issuing of GCI as a condition for their inclusion in the contract according to BGB s 305(2). 65  cf for a comparative review see M Wandt, ‘Transparency of Insurance Contract Terms’ in V ­Kotsiris and K Noussia (eds), Liber Amicorum in Honour of Ioannis K. Rokas (Athens, Nomiki ­Bibliothiki, 2017) pp 419 to 432.

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large number of insurers would be induced by the new law to fulfil their duty to inform in a very formalistic manner by handing over voluminous information ­materials—with the intent to protect themselves against any sort of liability rather than with the goal to inform the policyholder as effectively as possible. To avert such a negative effect of the comprehensive duty to inform and to protect the consumer against a possible hypertrophy of information, the legislator, thus, chose to oblige the insurer to hand over a product information sheet which is to highlight the essential ­elements of insurance. The product information sheet (mandatorily bearing this name in its title) is to precede all other information that is to be given, VVG-InfoV ­section 4(5) sentence 1. Hence, the product information sheet must never be ‘hidden’ amongst the other information material but is to lie on the top of the heap. In it, the necessary information, as non-exclusively enumerated by VVG-InfoV section 4(2), shall be presented in a concise, clearly arranged and coherent manner while pointing out to the policyholder that the information is not conclusive, VVG-InfoV section 4(5). All information must be in writing (text form). This includes communication that provides a durable record, ie in particular messages sent by telegram, telex, telefax and e-mail (Textform, BGB section 126b). c.  Timeliness of the Information The crucial question concerning the insurer’s duty to inform will, however, be what exactly is to be understood, when requiring the information to be turned over ‘in a timely manner’ before the policyholder’s contractual declaration. This requirement excludes the application of the model of policy (as hitherto exercised by German insurers, ie turning over all necessary information only at the moment at which the insurer accepts the offer made by the policyholder). It nevertheless remains unclear how much in advance the information must be transmitted in order to be considered timely in the sense of VVG section 7(1) sentence 1. In interpreting the indefinite term ‘in a timely manner’, it is only certain that the latest possible point in time must be the moment at which the policyholder communicates his contractual declaration, ie acceptance or more typically offer. However, it may in several cases be preferable to assume an earlier moment for the information to be timely. Considering the wording of the legal rule, it seems to be preferable to interpret the prerequisite of timeliness on a case-tocase basis, ­taking into account the group of persons the policyholder belongs to and the nature of the product offered. This certainly precludes any dogmatic approach requiring for example for a three-day period to be observed in all cases. Rather, one should have regard to the following factors: Appropriate amount of ­protection of the policyholder against undue pressure to decide without having the necessary information, concrete circumstances of the contract conclusion, the type, the scope and the importance of the deal. Furthermore, in all cases where the timeliness of the information might be controversial, one should apply the principle one could baptise as ‘in dubio pro consumer protection’ and tend to interpret

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‘in a timely manner’ to the disadvantage of the person being obliged to inform. In all cases, it is only necessary that the policyholder could have read the information, not that he actually did it. There are, however, some exceptions to the pre-contractual requirement of ­information before the policyholder’s declaration. First, pursuant to VVG ­section 7(1) sentence 3 first half-sentence, the information must only be transmitted ­without undue delay after the contract was concluded if the contract on demand of the policyholder is concluded via telephone or another mean of communication that does not allow for the information in written form to be transmitted to the policyholder prior to the contract conclusion. Second, the same applies pursuant to VVG section 7(1) sentence 3 second half-sentence where the policyholder by a separate written declaration explicitly waives his right to be informed pre-contractually. d.  Duty of the Insurer Other than the duty to advise, the duty to inform is owed exclusively by the insurer, not by an insurance intermediary. This means that the policyholder has no independent claim under VVG section 7 or VVG sections 59 ff against the insurance intermediary to be informed but only against ‘his’ insurer (although against the insurance intermediary he may have a claim for ‘other’ information). The term ‘insurance intermediary’ describes both the insurance agent and the insurance broker. With regard to the insurer’s duty, this means in practice that an insurance agent, when turning over the information to the applicant, acts strictly as an agent of the insurer in order to fulfil the latter’s duty to inform. Any faults of the agent’s will be attributed to the insurer under BGB section 278(1). In concreto, one could say that the insurer is held by law to organise its business transaction in a way to ensure that the information is reliably transmitted to each and every applicant at the appropriate time. Hence, the insurer may not exculpate itself by raising that it transmitted the information at the appropriate point in time to the insurance agent. A more differentiated answer must be given, where the insurance contract is mediated not by an insurance agent but by an insurance broker in the sense of VVG section 59(3). In this scenario, the insurer may fulfil its duty by turning over the information material to the insurance broker, who acts as the agent of the applicant (so-called agency-model; Stellvertretermodell). It would then be the insurance broker’s contractual duty to turn over this information to the applicant. If the broker neglects to do so, the policyholder would still have no claim against the insurer and would not be able to revoke the contract but could claim damages from the broker under the brokerage contract. e.  Duty Solely Towards the Policyholder? The insurer’s pre-contractual duties to inform pursuant to VVG section 7 are exclusively directed to the policyholder, and do not persist towards an insured not

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identical to the actual policyholder. However, this solution is controversial in cases of group insurance, where an analogous application of VVG section 7 is discussed in order to grant insurance cover to an insured at the moment he is joining by way of an individual statement.66

ii.  Remedies Attached to VVG Section 7 The legislator, especially considering its aim to abolish the model of policy (ie the prior practice of insurers to deliver the information material only with the policy at the moment of their contract acceptance), could have provided for insurance contracts only to be concluded after all information has been transmitted. Such an approach, however, would not have served the interests of the policyholder best. The reason is that the policyholder in many cases will have a legitimate interest to have an effective insurance contract, notwithstanding any belated information. The legislator, hence, chose to sanction a violation of the duty to inform in a ­twofold manner: On the one hand, VVG section 8(2) no 1 provides that the two-week period67 in which the policyholder is entitled to revoke the contract shall only start at the moment at which all information has been received by the policyholder and, on the other hand, the policyholder may, additionally, claim damages pursuant to general contract law.68 a. Revocation The mandatory requirements for a policyholder to revoke the contract under VVG section 8 and the legal effects such a revocation has under VVG section 9 cannot be outlined in detail here. It may suffice to point out that the policyholder’s right to revoke the contract pursuant to VVG section 8(2) no 1 does not expire only until two weeks after the required information material has been received in entirety by the policyholder. By effect of this rule, the insurer is sanctioned for its breach of the duty to inform by the policyholder’s prolonged right of revocation which enables the policyholder to terminate the contract until the insurer fulfils its duty. In a worst-case scenario and provided that the insurer at no moment fulfils its duty completely, this prolonged right of revocation means that the policyholder has an eternal right to revoke (ewiges Widerrufsrecht). The insurer bears the burden of proof regarding the receipt of the documents, VVG section 8(2) sentence 2. VVG section 9(1) sentence 1 determines the fortune of the premium in s­ cenarios where the insurer properly instructed the policyholder (VVG section 8[2]

66 Denying: F Herdter, Der Gruppenversicherungsvertrag (Karlsruhe, Verlag Versicherungs­ wirtschaft, 2010) pp 98 to 128; E Franz, Versicherungsrecht (VersR) 2008, pp 1565 to 1577; K ­Schneider and K Reuter-Gehrken in A Staudinger, E Halm and D Wendt (eds), Fachanwaltskommentar Versicherungsrecht (Cologne, Luchterhand, 2013), § 6 VVG para 12; Armbrüster (n 2) § 7 VVG para 17; affirming the analogy: C Brömmelmeyer, Versicherungsrecht (VersR) 2015, pp 1460 to 1467 (for credit-residual-debt-group-insurance). 67  In life insurance: 30 days. 68  The policyholder may also complain to the supervisory authority or the insurance ombudsman.

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s­ entence 1 no 2) concerning his right to revoke the insurance contract, the consequences of such revocation and the partial premium which would have to be paid (given that the policyholder agreed that the cover starts before the revocation period ends).69 In such scenarios, the insurer shall restitute only part of the premium due for payment after the receipt of the revocation. ‘Only’ means without doubt that the insurer is not obliged to restitute those parts of the premium falling upon the time before the receipt of the revocation. This solution is reasonable, as well: In accordance with the policyholder’s agreement, the insurer granted ­insurance coverage until the policyholder has exercised his right to revoke the contract. Consequently, the policyholder shall pay only partial premium (so-called pro-rata premium). VVG section 9(2) sentence 2 provides a special rule in scenarios where an instruction in accordance with sentence 1 of the provision was not performed properly. In such scenarios, the insurer has the duty (pursuant to VVG section 9[1] sentence 1 first half sentence ) to restitute the part of the premium which falls due upon the time after the receipt of the revocation and which must be restituted in any case according to VVG section 9(1) sentence 1—and, additionally, premium paid for the first year of insurance cover (VVG section 9[1] sentence 1 first half sentence ) shall be restituted, as well. However, this is not so where the policyholder has already made use of his insurance cover, pursuant to VVG section 9(1) sentence 2 second half sentence . Moreover, stipulations set out in VVG section 9(1) sentence 2 are partly not conforming with the mandatory rules of the Directive 2002/65/EC on consumer protection in cases of distance-selling of financial services when it comes to distance contracts.70 In consequence, one must restrict the stipulations in said provision in conformity with the directive.71 Contrary to VVG old version section 5a (which is no longer in force), German courts were rarely confronted with the information duties under the VVG 2008.72 Keeping in mind the extent and the level of precision of the provisions in the VVG-InfoV, one can reasonably hope for the situation to stay like this. When it comes to the interpretation of detailed provisions, specific focus should be given to their respective purpose of ensuring adequate information for the p ­ olicyholder. With the enormous widening of sophisticated and detailed information duties combined with the beginning of the revocation period pursuant to VVG ­section 8, the aspect of legal certainty must be seen rather critically.73 The factual d ­ anger of

69  Without the consent of the policyholder regarding the commencement of the coverage prior to the ending of the revocation period the legal consequences of revocation are to be determined in analogy to BGB s 357a. 70  Wandt (n 47) para 341. 71  ibid, para 341. 72 Bundesgerichtshof, Versicherungsrecht (VersR) 2014, pp 941 to 945 (duties to inform in certified basic-pension-insurance). 73  cf O Brand in E Lorenz (ed), Karlsruher Forum 2011 (Karlsruhe, Verlag Versicherungswirtschaft, 2012) pp 57 to 92 (81 ff) who argues in favour of the de lege ferenda abolition of a mandatory right to revoke in cases which do not fall within the scope of application of directives.

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developing illegal practices with regard to detailed information duties is apparent. Since these practices will be reviewed by courts only several years later, the ­outcome will be eternal rights to revoke which will be multiply exercised. In conclusion and from a systemic and political point of view, the legal uncertainty resulting from an eternal right to revoke is not preferable either, since the court workload, which is to arise from this, will be tremendous. b.  Claim for Damages Furthermore, an insurer’s breach of its pre-contractual duty to inform may result in a claim by the policyholder for damages according to BGB sections 280(1), 311(2) no 1.74 VVG section 9 is not intended to cut off other (fault-based) c­ ompensatory claims the policyholder might have.

iii.  Pre-contractual Duties to Inform According to General Contract Law In addition to specific duties according to VVG section 7 in combination with the VVG-InfoV, pre-contractual information duties of the insurer may as well stem from general provisions of German contract law (for example, BGB sections 241[2] or section 311[2] [culpa in contrahendo]). According to these general rules, an obligation may also—dependent on its contents—oblige each party to take account of the rights, legal interests and other interests of the other party. These provisions represent an emanation of the general principle of good faith (BGB section 242). Looking at the precision and details of the pre-contractual information provisions in the insurance contract law (VVG section 7), the courts will ground their decisions on general provisions of general contract law, but will do so only in exceptional circumstances.

B.  Pre-contractual Duties to Advise i.  Insurer’s Duties to Advise a.  Insurer’s Duty to Advise according to VVG Section 6 In contrast to the old VVG 1908, VVG 2008 section 6(1) stipulates a duty of the insurer to advise the policyholder. VVG sections 6(1) to 6(4) are not applicable if the contract was mediated by an insurance broker (VVG section 6[6]), since in this scenario the duty to advise applies only to the insurance broker having a closer connection with the policyholder. An exception to this rule—with the result of the insurer having the duty to warn or correct—is acknowledged and based on the

74 

RegE BT-Drs 16/3945, pp 60 ff.

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principle of good faith (BGB sections 241[2], 311[2], 242) if the insurer is aware that the policyholder is mistaken despite being advised by the insurance broker.75 Pursuant to VVG section 6(6), the duty to advise neither applies to large risks in terms of VVG section 210(2) since in these cases for those large risks the policyholder typically has sufficient insurance-related business experience, a necessity of protection by specific duties to advise does not arise. Again, duties to advise according to general principles of contract law are still possible. VVG section 6(1) contains a whole series of pre-contractual duties of the insurer that aim to secure adequate advice to the prospective policyholder: The insurer is obliged to ask (if circumstances require) for wishes and needs of the potential policyholder, to advise and to reason given advice. Moreover, questioning, advising and reasoning are to be recorded in order to ease the proof of the facts in favour of the policyholder. A general prerequisite for setting up these duties for the insurer is a discernible cause.76 In case of a breach of a duty under VVG section 6, the insurer is obliged to pay damages pursuant to VVG section 6(5). A breach of this duty by an insurance agent can be attributed to the insurer by way of BGB sections 278, 311(2). On the other hand, the action of a broker (closer connected with the policyholder) is generally not attributed to the insurer. In exceptional circumstances the Bundesgerichtshof (Federal Supreme Court of Germany) attributes the action of all intermediaries of a structured distribution system in terms of a marketing network including brokers if the insurer refrained from building up its own distribution system in order to fulfil its duties to clarify and advise.77 Pursuant to VVG section 6(5) sentence 2 respectively section 63 ­sentence 2, there is a rebuttable presumption of the fault of the insurer or the insurance agent. Decisions of the Bundesgerichtshof concerning the insurer’s (and the insurance intermediary’s) duties to advise are still rare.78 This is due to the fact that the requirements adding up to a duty to advise (as stipulated in VVG sections 6 and 61) are deliberately drafted softly to keep up the opportunity to consider the circumstances of individual cases.79 However, when establishing duties to advise 75  Oberlandesgericht Saarbrücken, Versicherungsrecht (VersR) 2011, pp 1441 to 1448; M Rudy in E Prölss and A Martin (founders), VVG Kommentar, 29th edn (Munich, Verlag CH Beck, 2015) § 6 VVG para 70; Armbrüster (n 2) § 6 VVG para 352; R Rixecker in W Römer and T Langheid (eds), VVG ­Kommentar, 4th edn (Munich, Verlag CH Beck, 2014) § 6 VVG para 36; H-P Schwintowski in H Baumann, R Beckmann, K Johannsen et al, Bruck/Möller VVG Kommentar, vol 1, 9th edn (Berlin, Verlag CH Beck, 2009), § 6 VVG para 48. Dissenting view: J Muschner, Versicherungsrecht (VersR) 2012, pp 703 to 706. 76  The PEICL (Art 2:202 and Art. 2:203) followed this approach; this approach is criticised for being too defensive by Loacker (n 62) pp 221 ff, 248 ff, 256 ff, 291; E-M Kieninger, Archiv für die civilistische Praxis (AcP) 199 (1999), pp 190 to 247 (pp 195 ff); H Heiss, Zeitschrift für die gesamte Versicherungswissenschaft (ZVersWiss) 2003, pp 339 to 374 (p 367). 77 Bundesgerichtshof, Versicherungsrecht (VersR) 2012, pp 1237 to 1245; Bundesgerichtshof, Recht und Schaden (r+s) 2013, pp 117 to 119. 78  Yet, Bundesgerichtshof, Versicherungsrecht (VersR) 2014, pp 861 to 862. 79  cf A Beyer, Versicherungsrecht (VersR) 2016, pp 293 to 298; Loacker (n 62) p 291 (solely a ­principle-based approach is reasonable).

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German courts are not going down slippery slopes but rather ground such duties on principles of general contract law. Resultantly, court judgments on the required discernible cause (see above), up to now, are doubtlessly plausible when they had to deal with premature terminations of existing life insurance contracts, the conclusion of new life insurance contracts, substitutions of health insurers or risks resulting from underinsurance.80 Only in a special situation where a net policy with an additional payment agreement was concluded, the respective court had to reason its decision with profound dogmatics. Following the established case law of the Bundesgerichtshof, an insurance agent—in contrast to a broker81—shall instruct the customer on the impact of the conclusion of a net policy in cases of premature termination. In detail, this means that the agent must make the ­customer aware of the fact that he is still obliged to pay the agent-fee if the insurance contract is terminated after a short time period; if this instruction has not taken place, the court will assume that the policyholder would otherwise not have concluded the net police.82 The Bundesgerichtshof decided dogmatically rather uncomplicated that a breach of the duty to record leads to a reduction of the burden of proof in favour of the policyholder or even in an inversion of the onus of proof.83 If a necessary notice of evident importance has not been recorded at all, the Bundesgerichtshof states that the insurer or the insurance intermediary basically bears the burden of proof. b.  Insurer’s Pre-contractual Duties to Advise under General Contract Law According to German case law, a general duty to clarify during contractual negotiations exists without further request where the other party is reasonably (pursuant to the principle of good faith and generally accepted standards) entitled to expect a notification of facts, which are apparently evidential to the decision-making of that party.84 Especially, this applies to facts which could have a significant impact on the particular purpose of the contract. In addition, facts that could be of fundamental economic damage to the other party are to be considered as facts of

80  With regard to risks related to premature terminations of existing life insurance contracts and the conclusion of new life insurance contracts, cf Bundesgerichtshof, Versicherungsrecht (VersR) 2015, pp 107 to 109; cf Oberlandesgericht Hamm, Recht und Schaden (r+s) 2013, pp 523 to 524; Oberlandes­ gericht München, Versicherungsrecht (VersR) 2012, pp 1292 to 1295; Oberlandesgericht Hamm, Versicherungsrecht (VersR) 2016, pp 394 to 397 (Change of health insurance). Oberlandesgericht München, Versicherungsrecht (VersR) 2016, pp 318 to 320. With regard to risks resulting from underinsurance if a reduction of the respective sum insured is intended Oberlandesgericht Karlsruhe, Versicherungsrecht (VersR) 2013, pp 885 to 888; cf Bundesgerichtshof, Versicherungsrecht (VersR) 2014, pp 625 to 628. 81 Bundesgerichtshof, Versicherungsrecht (VersR) 2014, pp 240 to 247; affirmative Bundes­ gerichtshof, Versicherungsrecht (VersR) 2007, pp 1127 to 1129. 82 Bundesgerichtshof, Versicherungsrecht (VersR) 2014, pp 240 to 247; cf Bundesgerichtshof, Neue Juristische Wochenschrift (NJW) 2014, pp 2782 to 2784; cf Bundesgerichtshof, Versicherungsrecht (VersR) 2014, pp 1328 to 1331. 83 Bundesgerichtshof, Versicherungsrecht (VersR) 2015, pp 107 to 109. 84  Settled case law since Reichsgericht, Entscheidungen in Zivilsachen (RGZ) 111, pp 233 to 236; recently Bundesgerichtshof, Neue Juristische Wochenschrift (NJW) 2010, pp 3362 to 3363.

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significant impact. However, where the party itself is individually responsible with regard to these facts, the party is restricted from relying on the explained duty to pre-contractually advise.85 In its decisions of 11 July 2012, the Bundesgerichtshof ruled on life insurance contracts named ‘Wealthmaster Noble’ (single premium; Einmalbeitrag) and advertised in Germany from the late 1990s until late 2007 by the English insurer Clerical Medical Investment Group Ltd.86 In summary, the Bundesgerichtshof decided that customers were entitled to damages87 because the intermediary’s breaches of duties to clarify when concluding the contract were attributed to the insurer.88 According to its reasoning, the damage to the policyholder consisted of a disadvantageous contract.89 The insurer was obliged to clarify according to established principles of clarification in case of investment businesses (Anlagegeschäfte) because the conclusion of the life insurance contract in question was similar to an investment business from an economic perspective. In particular, the fact that the insurer had drawn a wrongful and far too optimistic picture of profits from the expected return of the life insurance contract amounted to the breach of its duty to clarify.90 A second breach of the contract resulted from the lack of adequate clarification in respect of the specifics of the so-called Glättungsverfahren (smoothing technique).91 c. Incorrect Advising: Application of the Former Customary Law of ‘Liability for Performance’? A controversial question, which has not been decided yet by the Bundesgerichtshof, affects the formerly recognised and case law-established92 liability for performance by customary93 insurance contract law. Before the VVG 2008 entered into force, German courts followed this approach alongside general principles on precontractual liability (culpa in contrahendo) or positive Vertragsverletzung (positive

85 Bundesgerichtshof, Neue

Juristische Wochenschrift (NJW) 2010, pp 3362 to 3363. Versicherungsrecht (VersR) 2012, pp 1237 to 1245; cf the substantially conforming decisions of the Bundesgerichtshof of 11 July 2012 (IV ZR 122/11, IV ZR 151/11, IV ZR 271/10). 87  In the alternative, the Bundesgerichtshof affirmed policyholder’s claims for performance with regard to regular payments expelled in the insurance certificate. 88 Bundesgerichtshof, Versicherungsrecht (VersR) 2012, pp 1237 to 1245 (para 52). 89  ibid 1237 to 1245 (paras 63 ff). 90  ibid 1237 to 1245 (para 54). 91  ibid 1237 to 1245 (para 57); cf Oberlandesgericht Düsseldorf, I-4 U 151/11, 4 U 151/11, para 16 and paras 73 ff. 92  The so-called Sturmflut-Fall (‘storm flood case’) is well-known, Reichsgericht, Entscheidungen in Zivilsachen (RGZ) 86, pp 128 to 135. 93  cf Bundesgerichtshof, Versicherungsrecht (VersR) 2010, pp 373 to 374; T Langheid in W Römer and T Langheid (eds), VVG Kommentar, 2nd edn (Munich, Verlag CH Beck, 2003) § 43 old VVG paras 38 ff. Criticised by H Kollhosser in E Prölss and A Martin (founders), VVG Kommentar, 27th edn (Munich, Verlag CH Beck, 2004), § 43 old VVG paras 35a f. 86 Bundesgerichtshof,

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infringement).94 The term ‘liability for performance’ originates from the legal consequence of incorrect advising and concerns the extent of the insurance cover: The insurer is obliged to adhere—in terms of performance—to the contract with the content the policyholder could reasonably expect as a result of the incorrect advising. However, this liability for performance dropped unsubstitutedly (­Alles-oder-nichts-Prinzip—principle of all-or-nothing) if the mistaken understanding of the policyholder was due to its own substantial fault.95 Some German courts and parts of doctrine considered the aforementioned ­liability for performance as applicable even after the VVG 2008 entered into force.96 Certainly, the opposite opinion97 is more convincing as the need for this approach dropped after the revision of the VVG. This dogmatically doubtful former construction (which in itself did not fit in with general principles and systematics of general contract law) is no longer tenable since the liability for damages is now expressly set out in statutory law, namely VVG sections 6(5), 63. Supporters of the continued application of this legal instrument (generated from customary law) argue as to the merit98 that cases in which the policyholder is promised insurance coverage which is otherwise not available in the market cannot be solved adequately by relying on VVG sections 6, 6399—albeit a reasoning that explains the inadequacy of the solution provided by the VVG is ­missing. VVG sections 6, 63 protect the incorrectly advised customer uncomplicatedly if the promised insurance cover is available in the market. Even in today’s rare and exceptional cases in which the insurance cover is unavailable in the market, the policyholder is protected inasmuch as he trusts the existing insurance cover and behaves riskily which he would not if there were no insurance coverage at all.

94  cf for the jurisprudence before commencement of the new VVG 2008: E-M Kieninger, Archiv für die civilistische Praxis (AcP) 199 (1999), pp 190 to 247 (pp 195 ff); H Heiss, Zeitschrift für die gesamte Versicherungswissenschaft (ZVersWiss) 2003, pp 339 to 374. 95 Bundesgerichtshof, Entscheidungen in Zivilsachen (BundesgerichtshofZ) 40, pp 22 to 28. 96  Oberlandesgericht Frankfurt, Versicherungsrecht (VersR) 2012, pp 342 to 344; LG Saarbrücken, Versicherungsrecht (VersR) 2014, pp 317 to 321; P Pohlmann in D Looschelders and P Pohlmann (eds), VVG Kommentar, 2nd edn (Cologne, Carl Heymanns, 2011), § 6 VVG para 15; W-T S­ chneider, Recht und Schaden (r+s) 2015, pp 477 to 489; P Schimikowski, Versicherungsvertragsrecht, 5th edn (Munich, Verlag CH Beck, 2014), para 134; P Koch, ‘Zum Stand der versicherungsrechtlichen Literatur in Deutschland’, in M Wandt et al, Versicherungsrecht, Haftungs- und Schadensrecht: Festschrift Lorenz (Karlsruhe, Verlag Versicherungswirtschaft, 2014) 199 to 257; Bruns (n 3) § 8 para 13. 97  cf Reiff (n 42) § 69 VVG paras 77 ff; P Reiff in R Beckmann and A Matusche-Beckmann (eds), Versicherungsrechts-Handbuch, 3rd edn (Munich, Verlag CH Beck, 2015) § 5 para 159; R Rixecker in T Langheid and M Wandt (eds), Münchener Kommentar zum VVG, vol 1, 2nd edn (Munich, Verlag CH Beck, 2016), § 49 VVG para 21; Rudy (n 75) § 6 VVG para 78; H-J Fricke, Versicherungsrecht (VersR) 2015, pp 1090 to 1094; E Lorenz, ‘Die „gewohnheitsrechtliche“ Erfüllungshaftung des Versicherers im bisherigen und im zukünftigen Versicherungsvertragsrecht’ in A Heldrich et al (eds), Festschrift Canaris, vol 1 (Munich, Verlag CH Beck, 2007) 757 to 776; C Armbrüster, Privatversicherungsrecht (Tubingen, Mohr Siebeck, 2013) para 780; Wandt (n 47) para 432. 98  Moreover, parts of doctrine argue that the legislator gave no indication as to his intention to abandon the approach developed by German courts. 99  W-T Schneider, Recht und Schaden (r+s) 2015, pp 477 to 489.

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With regard to evidentiary issues of casualty, the incorrectly advised policyholder, thereby, is granted with certain reductions of the burden of proof. A reason for an additional protection through liability of performance based on general principles of private law is, therefore, no longer obvious.

ii.  Intermediary’s Duties to Advise according to VVG Sections 60 ff The insurance intermediaries’ duties to advise are set out in the Insurance Mediation Directive 2002/92/EC of 9 December 2002 on insurance mediation and ­prescribed in VVG sections 61 ff. These stipulated duties are widely similar to the duties of the insurer laid down in VVG section 6. This is because the German legislator autonomously extended the guideline set out for intermediaries on the insurers themselves when drafting VVG section 6. An insurance intermediary is liable for breach of the duty to advise, simultaneously to the insurer, pursuant to VVG section 63. If an insurance intermediary breaches the duty then they and the insurer are both liable as joint debtors. On the contrary, the insurer and an insurance broker are not liable as joint debtors if the broker breaches the duty because the insurer is not obliged to advise where the insurance contract is mediated by a broker (according to VVG section 6[6]).

iii.  Forecast on the Implementation of the IDD in German Insurance Law As for now, the consequences of the implementation of the Insurance Distribution Directive 2016/97/EU of 1 February 2016 (IDD) can only be estimated. What is most striking is its contrast to VVG sections 6, 61 in that IDD Article 20 does not prescribe a duty to advise. Yet, any strengthening of the stipulations of the directive within the national implementation is expressly permitted (IDD Article 22 section 2) wherefore the directive does not demand a modification.100

IV. Conclusion The reformed VVG 2008 evidently improved the position of policyholders— except in the case of fraudulent intent of the policyholder. The former duty to (spontaneously) disclose all material circumstances is reduced to a duty to properly answer the insurer’s questions. Moreover, the legal consequences of a misrepresentation have been weakened tremendously depending on the culpability of the policyholder and on the question whether the insurer would have concluded the contract if it would have known the true answers to the questions. The insurer

100  For further advice on the implementation of the IDD in Germany, see P Reiff, Versicherungsrecht (VersR) 2016, pp 1533 to 1542.

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is entitled to avoid the contract solely in case of the policyholder’s intentional or grossly negligent misrepresentation of a risk factor, which would have moved the hypothetically informed insurer to not conclude the contract. In other cases, the insurer is entitled to terminate the contract unless it had concluded the contract with different terms had it known the unrevealed circumstance. In such a scenario, the insurer is entitled to contractual variation. In summary, the provisions of the VVG 2008 on the policyholder’s precontractual duty to inform provide a fair balance between policyholder and insurer. It is to be underlined that these provisions protect all policyholders equally including professionals but do not affect insurances of large (industrial) risks in the meaning of VVG section 210. With regard to the insurer’s duties, German insurance law stipulates a comprehensive catalogue of duties concerning standardised information to all insurance contracts as well as additional standardised information for life insurance and other kinds of personal insurances. For the first time, the VVG 2008 provides for an additional duty of the insurer (analogously to duties of the intermediary) to individually advise its policyholder if there is a discernible cause. The revised law promotes informed insurance choices more strongly than the old law. The protection of the policyholder against disadvantageous contracts caused by misinformation was strengthened evidently, especially by way of claims for damages against the insurer. Nonetheless, doubts and critics start to arise. Besides the existence of an eternal right to revoke if the standardised duties to inform are not fulfilled (for itself worth complaining), it is not possible to evaluate with certainty the practical impact of this new concept of information duties. This is due to the lack of empirical data analysing the efficiency with regard to the achievement (if so) of the intended purpose.101 One must recall that duties to inform aim to provide the prospective policyholder with fundamental information in order to make a decision—and, additionally, to provide him with a quickly accessible source of information postcontractually. It is, therefore, crucial in order to accomplish the purpose of the provision that the legislator limits information duties to fundamental information and ensures the transparency of this information to as many policyholders as possible. Thus, though lacking empirical data,102 considerable doubts as to the current concept are to be announced. From the perspective of cognitive science as well as from an economic perspective strong arguments speak in favour of the phrase: Less information might be more.103 Regarding the pre-contractual information, it might have been more

101 

Loacker (n 62) pp 275 f. Emphasising its necessity Loacker (n 62) pp 274 ff. cf Loacker (n 62) 271 ff, pp 285; M Wandt, Transparenz als allgemeines Prinzip des Versicherungs­ rechts in H-P Mansel, R Beckmann, A Matusche-Beckmann (eds), Weitsicht in Versicherung und Wirtschaft—Gedächtnisschrift für Ulrich Hübner (Munich, Verlag CF Müller, 2012) p 353. 102  103 

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e­ fficient to limit the product information sheet,104 and to stipulate proper granting of specific information in personal insurance, in addition to handing over GCI. In order to provide a policyholder with a quickly accessible source of fundamental information after the contract was concluded, a regulatory controlled optimisation of the contract design would have been more effective than the requirement to hand over additional information.105

104 This limitation has already been proposed before the revision of the VVG, see W Römer, ­Versicherungsrecht (VersR) 2007, pp 618 to 620. 105  See in this respect Loacker (n 62) pp 281 ff.

11 Pre-contractual Duties under the Japanese Insurance Law SATOSHI NAKAIDE

I. Introduction As in insurance laws in many other jurisdictions, the pre-contractual informational duty has been important in Japanese insurance law. The duty has become increasingly important, especially from the point of consumer protection in insurance law. To reinforce the protection of consumer policyholders and insureds and to modernise the law to reflect the changes in the practices in the insurance market, Japanese insurance law both on the policyholder’s duty of disclosure and the insurer’s duty of providing information have been largely revised in recent years. This is the immediate result of the Japanese Insurance Act 2008,1 whose entry into effect in 2010 means the Japanese insurance contract law has been standalone and no longer a part of the Japanese Commercial Code2 which was enacted in 1899 but has not been substantially revised since 1911. As a result of the Insurance Act 2008, the policyholder’s pre-contractual duty was altered from a duty of voluntary disclosure to a duty of disclosure upon insurer’s enquiry. In addition, the law on pre-contractual duties was revised in many other aspects. As to the pre-contractual duties of the seller of insurance products, they have been reinforced by the enactment of various laws on the sales of financial products, consumer contract law, as well as regulatory laws on insurance business. In particular, the Insurance Business Act, a regulatory law on the insurance ­business including sales of insurance, was largely revised in 2014 to reinforce more comprehensively the duties of the sellers of insurance products. Additionally, case law on tort has developed to allow a buyer of insurance to claim damages against sellers of insurance based on a breach of the duty of good faith where he or she was driven to a wrong decision because of the latter’s lack of adequate explanation of the insurance product in question. 1  2 

Act No 56 of 2008. Act No 48 of 1899.

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It will be seen in this chapter how the Japanese law tries to create a legal framework which works both to minimise disputes and to give adequate sanctions for breach.

II.  An Overview of Japanese (Insurance) Law and Good Faith A.  Carter v Boehm and the Japanese (Insurance) Law It is worth mentioning at the beginning of this chapter how Japanese law compares with the judgment of Lord Mansfield in Carter v Boehm.3 Not surprisingly, Japanese law does not recognise foreign case law as a source of law. Therefore, Carter v Boehm is not referred to in Japanese legal cases. However, it is cited when Japanese law academics make a comparative study of insurance law. The following points about this landmark English insurance law case can be made in comparison with Japanese insurance law. In this regard, Japanese insurance law has more similarities to than differences from the principles, doctrines and judicial reasoning in Carter v Boehm. First, Lord Mansfield described the contract of insurance as a contract based on ‘good faith’. He did not use the phrase ‘utmost good faith’. This means that he did not have two levels of good faith in mind, namely ‘good faith’ and ‘utmost good faith’. In addition, he did not state that good faith is required only for insurance. Japanese insurance law does not adopt the conception of ‘utmost good faith’; instead, consistent with what Lord Mansfield literally said about good faith, an insurance contract in Japan is based on ‘good faith’ rather than ‘utmost good faith’. Japanese law does not perceive two levels of good faith. However, good faith is not peculiar to insurance contracts under the Japanese law. As will be seen later in section II.C, it is a basic principle in the civil law and can be relied on in the interpretation of contract. It is also used as the basis to claim damages where there exists no appropriate provision on the duty in any Code or in an Act on contract. Its typical example is the duty of explanation or providing information for the sellers of financial services. Good faith works during the whole process of contractual transaction including pre-contractual stage. Of course, the degree and extent of good faith required varies on the character of the transaction. Second, Lord Mansfield held that the policyholder owed a duty of disclosure under an insurance contract. Under the Japanese Insurance Act, policyholders and the insured owe a pre-contractual duty to disclose. Japanese current law differs from the decision of Carter v Boehm in some respects. Prior to the introduction

3 

Carter v Boehm (1766) 3 Burr. 1905.

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of the Insurance Act in 2008, the Commercial Code provided a duty of voluntary disclosure. The Insurance Act 2008 has changed it into a duty to disclose upon insurer’s enquiry/request and the scope of the duty has been narrowed down. The third point is regarding the rationale of the duty. Lord Mansfield in his judgment explained the duty from good faith as well as by stating the peculiarity of the insurance transaction. In line with Lord Mansfield, most Japanese insurance law academics explain the duty of disclosure on the ground of the technical peculiarity of an insurance transaction. A minority view is to explain it from the good faith under the contract upon speculation. However, the difference lies just in the way of explanation and does not create any difference in the application of the principle. Fourth is in respect of the sanction for or the consequence for the breach of duty of disclosure. On this point, the Japanese insurance law is also the same with Lord Mansfield’s opinion, albeit with small differences. The sanction under the Japanese law is the cancellation of the contract for the future only. However, the insurer is relieved from paying for a loss that occurred prior to the cancellation unless the loss has no causal link with the fact undisclosed. Cancellation is a strong remedy for the insurer. Therefore, the Japanese law only allows a cancellation where the policyholder breached the duty intentionally or with gross negligence in respect of the material matters on the risk. Fifth, Lord Mansfield explained the avoidance by reference to the seriousness of the situation in which the risk was different from the insurer’s understanding thereof at the time of making a contract. In respect of sanction for non-disclosure, the Japanese Insurance Act targets the serious situation only and therefore gives a sanction of cancellation as the only available remedy. While the Act does not show the rationale for its sanction for non-disclosure, Lord Mansfield’s reasoned rationale of the consequence of non-disclosure sounds convincing to the Japanese insurance lawyers. While the above is the analysis by the author of this chapter, it is interesting to know that the Japanese insurance law has much in common with the decision of Lord Mansfield 250 years ago. This implies that the principle of good faith and duty of disclosure were very similar between the two jurisdictions at least at the initial stage of the development of their insurance law. Exploring into the old case law of 250 years ago from a comparative perspective will show us many implications.

B. Overview of the Japanese Insurance Contract Law and Insurance Business Law Japan adopts a civil law system. Statutes are the main source of law. Cases are not law. However, cases decided by the Japanese Supreme Court substantially influence subsequent judgments of lower courts. The legislation governing the contractual relationship of insurance is the Insurance Act, which is stand-alone

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and comprehensive legislation applicable to insurance contracts of any type, ­irrespective of the type of service or provider.4 Provisions on insurance contracts in the Commercial Code except marine insurance contracts were abolished. The Insurance Act and the Commercial Code both apply to marine insurance. At present, provisions on maritime commercial law including the marine insurance contract in the Commercial Code are under revision.5 The Insurance Act classifies insurance contracts into four types: non-life insurance contracts;6 life insurance contracts; accident and health fixed-sum insurance contracts; and accident and health indemnity insurance contracts and shows rules on the first three categories respectively. To the accident and health indemnity insurance contracts, provisions on the non-life insurance contracts equally apply. The Act is comprised of five Chapters: Chapter I, General Provisions; Chapter II, Non-life insurance; ­Chapter III, Life insurance; Chapter IV, Accident and health fixed-sum insurance; and Chapter V, Miscellaneous provisions. To strengthen the protection of policyholders and insured, mainly ­consumers,7 the Insurance Act introduced ‘unilaterally mandatory provisions’ meaning ­provisions which do not allow any agreement less favourable to the policyholder, insured or beneficiary than the rules of the Act. This does not apply to marine insurance, insurance on aircraft, air cargo or liability by air carrier, indemnity insurance on an atomic power facility or its liability and other non-life insurance to indemnify a loss arising from the business operation of a corporation, group or individual excluding injury or disease indemnity insurance.8 Articles not stated as unilaterally mandatory are either default rules that allow parties to depart from the provision of the articles or mandatory rules. The Insurance Act does not expressly state which of the articles are mandatory. This is construed by examining the nature of the rules. As will be seen later in this chapter, provisions in the Insurance Act on the pre-contractual duties on the policyholders/insured are all unilaterally mandatory except the provision on the time bar for cancellation of contract which is regarded as mandatory.

4  The Act applies equally to contracts provided by Kyôsai, mutually based insurance not named as insurance, if they are rightly regarded as insurance in substance. The Insurance Act does not define ‘insurance’. However, it describes the scope of the application of the Act by defining an ‘insurance contract’. The Act shows three elements required for an insurance contract. First, one party agrees to give an insurance benefit when a specified event occurs. Second, the other party agrees to pay premium for it. Third, the premium needs to be calculated by reference to the risk of occurrence of the uncertain event. 5  In October 2016, the cabinet decided to submit a bill on the revision of maritime law to the Diet. 6  A non-life insurance contract is defined in the Act as an insurance contract in which an insurer promises to indemnify the loss caused by a described fortuitous accident. 7  One of the purposes of the revision was the promotion of the protection of consumers. The Insurance Act achieved this by introducing a unilaterally mandatory provision. The Act specified the area of insurance where the parties are allowed to deviate from the rules. Therefore, the Act does not use a term of ‘consumer’ and does not contain any definition of it. 8  Art 36.

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In addition, the Consumer Contract Act 20009 applies to any type of insurance contract which is concluded with a consumer.10 The Consumer Contract Act gives the consumer the right to avoid a contract because of certain conduct of the seller and makes void any disadvantageous clause in the consumer contract. Contractual matters not stated in the Insurance Act are governed by the Civil Code enacted in 189611 that covers the law on contract including the principle of good faith.

i.  Insurance Business Law The Insurance Business Act (IBA)12 is the main law regulating insurance business in Japan.13 The IBA comprehensively covers various aspects of insurance business, including the solicitation and sale of insurance.14 The IBA rules on the sale of insurance were largely revised in 2014 and were implemented on 29 May 2016 to regulate the law in a comprehensive way and to strengthen the protection of consumer policyholders. The IBA also gives the Financial Services Agency (FSA) the power to supervise insurance companies and intermediaries. The IBA is supplemented and enforced by the Insurance Business Act Cabinet Ordinance ­(IBA-CO)15 and the Ministerial Regulation on Insurance Business Act ­(IBA-MR).16 In addition, the FSA makes available to the public various guidelines and ­manuals,17 which are not law but manifest the FSA’s supervisory and regulatory policies. Insurers, intermediaries and other related parties are expected to follow these guidelines generally. To conduct insurance business in Japan, a licence of the Prime Minister is ­necessary.18 To obtain a licence, an applicant needs to submit general insurance policy conditions in addition to other documents. In this authorisation of licence, provisions on the pre-contractual duty of the policyholder and the insured ­contained in the general clauses are reviewed by the regulator.19 9 

Law No 61 of 2000. defined as meaning an individual not for business purpose in Art 2(1). 11  Law No 89 of 1896. It was largely modernised in 2017. 12  Law No 105 of 1995. The Insurance Business Act (IBA) was first enacted in 1900 and largely revised in 1995, consolidating two other Acts on insurance. 13  Mutual aid insurance provided by various cooperatives called Kyôsai is also popular in Japan. Their services are insurance in substance but are not named as insurance. They are governed not by the IBA but by the respective Act governing the provider. 14  It applies to any type of insurance business if it is conducted as an insurance business. It does not apply to various Kyôsai operated on a corporative basis. Relevant Acts regulating Kyôsai apply equally to their activities. 15  Cabinet Ordinance No 425, 1995. 16  Regulation of Ministry of Finance, No 5, 1996. 17  Among them, Comprehensive Guidelines for Supervision of Insurance Companies show their policy in detail. The Guidelines are revised periodically. 18  For a relatively small insurance business categorized as ‘Small Amount and Short Term Insurance Providers’, a licence is not necessary but registration is necessary. 19  Insurers must obtain authorisation again when it alters the wordings of the general insurance clauses. 10  ‘Consumer’ is

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C.  Principle of Good Faith i.  General Mandatory Principle The Civil Code provides basic legal principles at its beginning. Article 1 states that (1) private rights must conform to the public welfare, that (2) the exercise of rights and performance of duties must be done in good faith, and that (3) no abuse of rights is permitted.20 This principle applies to any type of contract including insurance. It applies to the pre- and post-contractual process. It applies to the exercise of rights and the performance of duties. Article 1 is mandatory. It cannot be altered by agreement. The principle of good faith stated in Article 1(2) is used in several ways. It is used to permit a reasonable judgement when the actual wording of the contract would bring about an unjust result.21 It is also used to create a duty not clearly stated in the Civil Code or in any Act. A typical example is the duty to explain financial products. The Civil Code on contracts does not contain any provision on the duty of explanation or providing information at the time of effecting contracts. Courts held the sellers of financial products liable in damages in tort where the sellers breached the duty to explain the financial products. The duty was imposed because there existed a serious imbalance of information between the contractual parties. Courts relied on the principle of good faith to justify the duty the breach of which would lead to award of damages in tort.22 This ramification derived from the principle of good faith which will be discussed later in detail. As can be seen below, the principle of good faith is an interpretative principle as well as a principle creating an actionable duty. Under the Japanese law, there is no concept of ‘utmost good faith’. This does not necessarily mean that the Japanese law denies the concept of utmost good faith. It simply does not perceive any difference between ‘good faith’ and ‘utmost good faith’.

ii.  Application of the Principle of Good Faith to an Insurance Contract In the Japanese legal system, a special law has priority over a more general law in its application. As will be seen in Part III of this chapter, the duty of disclosure for a policyholder and an insured is explicitly stated in the Insurance Act. Therefore, there is no need to base this duty to rely on the principle of good faith under the Japanese Civil Code. Where the provision in the Insurance Act does

20  The author relies on the translation of the Japanese Law Translation of Ministry of Justice, Civil Code (Translation date 1 April 2009). ‘The Japanese Law Translation of Ministry of Justice’ is not official and is made to be used solely as reference materials to facilitate the understanding of Japanese law. 21  Supreme Court Decision, 5.7.1957. Minshû vol 11, No 7, 1193. 22  There are a number of cases on this. Decision of Tokyo High Court, 30.1.1996, Hanrei-jihô No 1580, 111 is the decision on insurance contract which held the liability on tort on the seller of insurance based on the principle of good faith.

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not afford a solution, judges may rely on and apply the Civil Code provisions such as ­Article 1(2) on good faith to arrive at their decision. On the other hand, the Insurance Act does not provide for the pre-contractual informational duty of an insurer, as will be seen in Part III of this chapter. Therefore, Article 1(2) of the Civil Code becomes as an important legal ground for creating a legal duty on the insurer to give material information to the policyholder. The Insurance Act does not contain any specific provision on the duty of good faith. During the process of drafting the Insurance Act, there was debate about whether or not to introduce a provision stating a general duty of cooperation on the parties to an insurance contract based on the principle of good faith. There was support from some academics to expressly include this principle in the Act. In addition, it was generally accepted that good faith plays an important role in insurance. Despite these, no provision on the general duty of good faith was introduced in the Insurance Act. Introducing a new provision meant creating a special rule in the context of the general rule of the Civil Code. A provision, if introduced, would need to create an actionable duty giving rise to a legal remedy different from the duty based on good faith in the Civil Code. From this difficulty, no provision was introduced on the general duty in the Act.23

III.  Policyholder’s Pre-contractual Duty A. Duty of Disclosure Under the Insurance Act: The Basic Character and the Nature In the Commercial Code before the enactment of the Insurance Act, a policyholder had a duty to disclose material facts voluntarily. The Insurance Act24 changed this principle by imposing on a policyholder or an insured (policyholder/insured) a duty to disclose ‘facts with regard to material matters concerning the risk’ upon insurer’s request for information.25 The main reason for this change is the protection of a policyholder/insured who may not know what fact is material to the risk. The duty is construed as including a duty not to make a false representation as to the material matters on the risk in relation to the requested disclosure.26

23  O Hagimoto (ed), Ichimon ittô hokenhô [Insurance law—one answer to one question] (Tokyo, Shojihomu, 2009) 37. 24  The author relied the translation of the Japanese Law Translation of Ministry of Justice, Insurance Act, Translation date 29 October 2009. 25  Arts 4, 37 and 55. There are three Articles for it, since the Act provides the rule separately for three classes of insurance contracts. While there exist slight differences in the description of the duty depending on the type of insurance policy in the three Chapters, the substance is identical. 26  This is not stated explicitly in the provision. Clearly, false representation does not amount to a disclosure.

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Provisions on the duty of disclosure are ‘unilaterally mandatory’.27 In other words, they do not allow any subsequent contract agreements that are less favourable to the policyholder, the insured or the beneficiary than these rules of the Act. There has been a long argument in Japan on the nature of the duty of disclosure as well. An insurer has no legal right to force the policyholder/insured to fulfil its duty. In addition, an insurer is not entitled to damages for the failure of the duty by a policyholder/insured. An insurer is allowed only to cancel the contract and be relieved from its liability on the condition of causation test. Thus, the duty is not a genuine duty. Some academics regard this duty as a type of pre-condition for the insured to claim for insurance,28 while others regard it as what the German law characterises as gesetzliche obliegenheit,29 an obligation the breach of which does not confer an enforceable claim for either performance or damages but leads to other specific legal consequences prescribed by law. However, the discussion on the nature of duty became a rather academic one. Some scholars regard the duty of disclosure as a type of duty of providing information at the initial stage of effecting a contract and the nature of its duty is regarded as having a characteristic of an incidental duty.30 Notwithstanding the arguments, this debate on the nature of the duty has not become a decisive element in the interpretation of the provisions of the Insurance Act.

B.  Who Owes the Duty of Disclosure The question of who owes the duty of disclosure is related to who are the two contractual parties to the insurance policy. Under the Insurance Act, a contract of insurance is to be effected between an insurer and a policyholder,31 who owes a duty to pay premium. Therefore, they are the parties to an insurance contract. On the other hand, an insured is a person who has an insurable interest32 and can claim insurance benefits under a non-life insurance contract or a natural person whose death, injury, disease or life is insured under a life insurance contract or an accident and health insurance contract. When a policyholder effects an i­ nsurance contract for its own interest or for its life or injury, the policyholder is also regarded as an insured. A party who owes a duty of disclosure is either a

27 

This is stated in Arts 7, 41 and 70 respectively. T Ômori, Hokenhô hoteiban [Insurance Law, Revised Version] (Tokyo, Yûhikaku, 1985) 117. 29  M Ishida, Hoken keiyakuhô no kihon mondai [Basic issues of insurance contract law] (Tokyo, Ichiryusha, 1977) 61. 30  T Yamashita, Hokenhô [Insurance Law] (Tokyo, Yûhikaku, 2005) 285. 31  In this article, ‘policyholder’ means a party who effects an insurance contract for it or for the insured. 32  Under the Insurance Act, it is understood that the insured needs to have an interest under the non-life insurance contract including the disease and nursery indemnity type insurance. There is no such requirement for a life insurance contract and disease and nursery fixed-sum insurance contract. 28 

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prospective policyholder or a prospective insured.33 If either person fulfils the duty, there is no breach of the duty of disclosure by either of them.34

C.  Rationale of the Duty of Disclosure In the academic study of Japanese insurance law from the 1920s until now, the rationale of the duty of disclosure has been a major topic. The peculiarity of the duty has stimulated researchers for its legal theory. In recent years, the duty with its function is also examined by using the theory of economics.35 However, it appears that no new argument has developed since the enactment of the Insurance Act. The majority view explains the duty of disclosure from the technical necessity of insurance, where the insurer needs to obtain information on the risk that rests on the policyholder/insured in order to assess the risk and calculate the insurance premium for it. This theory is referred to as ‘Gijutsu-setsu’ or ‘Kiken-sokutei-setsu’, meaning a theory of technical necessity or a theory on the assessment of risk. This theory was supported by a Supreme Court decision36 and thereafter followed by other courts. Another theory called ‘Shakô-keiyaku-setsu’ or ‘Zen-i-keiyaku-setsu’, meaning ‘a theory of contract based on fortuity’ or ‘a theory based on good faith’, explains this duty as deriving from good faith which originates from the very nature of a contract based on fortuity. Supporters of the latter theory argued that the traditional Gijutsu-setsu did not explain the ground creating ‘the duty’ on the policyholder/insured and that Gijutsu-setsu confined the application of the duty of disclosure to insurance, while admitting that Gijutsu-setsu explained the necessity of disclosure for the insurer. The latter theory argues that, while the technical aspect has elaborated the duty in the development of insurance technology, the very nature of the duty exists in the nature of the contract itself.37 The latter theory was developed along with the study on the nature of an insurance contract. Now, it is pointed out that the difference between the theories is found mainly in the way of explanation and does not produce any difference in the application of law.38 The majority view in the past court decisions as well as in the current academic view remains Gijutsu-setsu. In the author’s view, a peculiarity of the Japanese insurance law is, as will be seen later in this chapter, that it does not allow a remedy for the insurer even under the policyholder/insured’s intentional or grossly negligent breach if the accident does not relate to an undisclosed fact. It seems that ‘Shakô-keiyaku-setsu’ may not

33  Since the duty is before the formation of contract, the Insurance Act uses a phrase ‘A person that is to be a policyholder or an insured’. 34  T Yamashita and T Nagasawa (ed), Ronten taikei Hokenhô 1 [Insurance Law—Issues shown structured 1] (Tokyo, Daiichihôki, 2014) 70. 35  Yamashita (n 30) 283. 36  Dairenhandai 6.12.14, Minroku 23.2112. 37  Ômori (n 28) 118–21. 38  Yamashita (n 30) 283.

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explain this aspect of the rule well. Intentional breach or breach by gross negligence goes into the very core of the good faith in the contractual relationship. If the duty is to be construed as originating from it, its breach needs to afford a right to cancel or avoid the contract in such an event. For this reason, the author considers that Gijutsu-setsu explains the Japanese law better. Arguments on the ground for the duty of disclosure were mainly developed in the past. However, it may provide interesting material for an international comparative study.

D.  Facts that Must be Disclosed i.  Requirements by the Insurance Act There are two requirements as to the facts. First, facts are with regard to the material matter concerning ‘the risk’ under the insurance policy. Insurance Act defines ‘the risk’ as the likelihood of an occurrence of any loss to be compensated for under a non-life insurance contract,39 the likelihood of an occurrence of an insured event meaning death of an insured or an insured living at a certain point of time under a life insurance contract,40 or the likelihood of grounds for claim payment occurring, meaning medical treatment, death or any other event arising from an injury or illness specified under a fixed amount accident and health insurance contract.41 Second, facts are in regard to the matters in relation to which the insurer requests disclosure of. An insurer is not allowed to cancel a contract on the ground of non-disclosure of facts or false representation of facts on the matter which it has not requested the policyholder/insured to disclose.

ii. Materiality The Insurance Act does not set the test for materiality of facts. Whether a ­matter is material therefore needs to be judged by interpretation. This is the same as the position under the previous Commercial Code. It is generally understood that a fact is material when the insurer does not insure the risk at all or insures it on different conditions or at a higher premium if the insurer knows it.42 The ­Commercial Code stated just ‘material facts’. The Insurance Act changed that to ‘facts with regard to material matters concerning the risk’. It will be understand that ‘facts’ here means the actual facts known to the policyholder/insured, while ‘matters’ designates the area of information. The Insurance Act added the words of ‘concerning the risk’ to make the area of necessary information clear.43 39 

Art 4. Art 37. 41  Art 55. 42  Yamashita and Nagasawa (n 34) 72, Hagimoto (n 23) 42, 48. 43  The writer considers that this requirement of ‘concerning the risk’ reinforces the theory on the ground for the duty of disclosure under Japanese law, which explains the duty as a device to assess risk for underwriting insurance. 40 

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Before the enactment of the Insurance Act, there was a long dispute over how to judge materiality. One theory was that materiality must be judged objectively based on the insurance technology and be judged by an expert and the court (hereinafter referred to as ‘objective test’). This meant that the basis should be the same among insurers for the same type of insurance. Another theory was that materiality is to be judged by the basis which the actual insurer uses it in its underwriting (hereinafter referred to as ‘subjective test’). The Supreme Court of Japan adopted the objective test by stating that materiality was judged by the objective observation whether the fact affected the selection of risk.44 After this decision, judges generally adopted this objective test in their decisions.45 However, under the incrementally stronger influence of deregulation of insurance products starting from late 1990s, the subjective test has gathered stronger support by academics.46 The supporters of the subjective test point out that the underwriting and the calculation of premium is largely based on the business judgement of each insurance company. The objective test, in its argument, was introduced under the old market regime where insurance products and their premium rates were highly regulated and identical among insurers with respect to the same type of insurance.47 Because of the deregulation of insurance products, the materiality of risk for underwriting may differ among various products and insurers.48 The counter-argument was that the test of ‘prudent insurer’ was similar to the objective test adopted in jurisdictions where the freedom of products is widely observed.49 One concern over the subjective test was that an insurer who adopts a stricter test will be able to cancel contracts more easily. Against this, the supporter of the subjective test argues that this problem had been under controlled because insurers invariably disclose their questions by way of questionnaire document and by that document the basis adopted by the insurer is now open to public. This restricts insurers from adopting an unreasonable basis. It is also pointed out that the protection of the policyholder/insured will be secured by requiring a higher standard for intentional and grossly negligent breach of the duty where the insurer uses a stricter test.50 The above arguments were made mainly before the introduction of the Insurance Act. Now it is generally understood that the Insurance Act has adopted the subjective test,51 because it lays down a rule for policyholder/insured to disclose

44 

Judgement of Taishin-in 26.6.1915 (Minroku 21.1044). Yamashita (n 30) 294. 46  ibid, 294. 47  Before the deregulation of insurance products starting from the introduction of the IBA 1995, insurance conditions and premium rate were basically identical among insurers. 48  Exceptions are compulsory automobile liability insurance and earthquake insurance conducted on the basis of special law respectively. 49  Y Nagasaki, Eibeihôken niokeru kokuchigimu no saikôchiku [Rebuilding the duty of disclosure in the Common law jurisdiction] (2000) 571 Hokengaku zasshi 119. 50  Yamashita (n 30) 295. 51 ibid. 45 

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facts that the actual insurer requested to disclose.52 In any event, the onus is on the insurer to show that the fact was with regard to the material matters concerning the risk. In the author’s view, many of the ambiguities concerning materiality will be overcome by elaborating words and phrases used in the insurer’s document requesting disclosure. Insurers need to explain that the information asked in the questionnaire is material for the insurance cover in question. In addition, insurers need to use clear words so that policyholder/insured can understand the questions and disclose facts precisely. Notwithstanding the above arguments, different rules might apply where the insurer contracts out from the default rule of the Insurance Act and states that policyholder/insured must declare material facts voluntarily.53 This is often the case in marine insurance. For such an insurance, in the authors’ view, the test needs to be the standard used for that insurance business. Materiality under the marine insurance contract needs to be judged by the underwriting standards and practice in the marine insurance business. This means that the objective test based on the standard in the market will be supported for such insurances.54

iii.  Existence of Other Insurance Among various matters which insurers consider to be material is a matter concerning the arrangement of other insurances on the same risk by the same policyholder/insured. Insurers on non-life and accident insurance have long regarded it as a material fact which must be disclosed.55 There was a long debate on whether or not such a fact amounts to a material fact to be disclosed under the Commercial Code.56 Arrangement of multiple policies itself will not affect the risk of occurrence of accident. However, it increases a moral hazard by enabling the insured to obtain greater money especially where the sum is fixed for an accident i­ nsurance.57 The Insurance Act added the words of ‘concerning the risk’ and it became a crucial issue whether the existence of other insurance is regarded as ‘a material matter concerning the risk’. The majority view is that the fact of arrangement of multiple policies can be material ‘concerning the risk’ depending on the nature of insurance contract, such as an indemnity type of insurance.58 This means that the insurer will be entitled to cancel the contract if the policyholder/insured fails to disclose or makes a false 52  On this point, the author doubts if the wordings of the Article support subjective tests. Even under the jurisdiction that uses question-answer method, the test is not necessarily subjective. 53  Contracting out of the rule is only allowed for marine or other business insurance. 54  This is the view of the author. 55  Life insurers have not asked this question. 56  For various arguments, see Yamashita (n 30) 320–27. In indemnity type insurance, an insurer needs this information to apply the rules on double insurance. 57  In the personal accident policy of fixed-sum basis, the assured is allowed to recover the fixed sum irrespective of the amount of actual loss. 58  Hagimoto (n 23) 47.

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r­ epresentation to the enquiry from the insurer on the other insurance a­ rrangement. This helps an insurer to decline a new application or cancel the existing contract of insurance that can bring excessive insurance money. However, it will not help an insurer to decline a claim that occurred before the date of cancellation, since it will be difficult for the insurer to show that the insured event occurred relating to the arrangement of multiple policies. As will be seen below, an insurer is liable for a claim if there is no causal relationship between a claim and a fact in respect of which the duty of disclosure is breached. Where there exists a serious fear of moral hazard, insurers need to rely on the other article of the Insurance Act providing the right of cancellation on the ground of ‘a grave matter’: The insurer is entitled to cancel an insurance contract; (i) where the policyholder or the insured has caused or attempted to cause the insured loss to obtain insurance payment, (ii) where the insured has committed or attempted a fraud to claim an insurance payment or (iii) on other material ground which destroys the insurer’s trust in the policyholder or the insured and make it difficult to maintain the insurance contract.59

iv.  Facts Unknown to the Policyholder/Insured The issue here is whether the facts which the policyholder/insured needs to disclose is confined to those which the policyholder/insured actually knows and whether or not a policyholder/insured will be regarded as failing to fulfil the duty if it failed to investigate the facts by its gross negligence. This issue does not arise where the questionnaire provided by the insurer asks a policyholder/insured to state the facts ‘known to it’. However, a question may arise where the questionnaire or the policy condition does not state so. This issue was the subject of debate under the previous Commercial Code and the courts made divergent rulings.60 The Insurance Act does not add any guidance for this. It simply provides that a prospective policyholder/insured must disclose facts with regard to material matters concerning the risk. The majority view on this is that the duty is confined to the facts policyholder/insured actually knows.61

E. The Consequence of Non-disclosure: Insurer’s Cancellation of Contract i.  Cancellation, not Pro-rata Settlement An insurer’s only remedy under the Insurance Act is cancellation of the entire contract. In the process of drafting of the Insurance Act, there was a debate on introducing the remedy of a pro-rata settlement in the case of grossly negligent 59 

Arts 30, 57 and 86. See Hagimoto (n 23) 48. Yamashita (n 30) 297. 61  ibid, 298. It is pointed out that it is too severe for policyholder/insured to impose a duty to investigate. 60 

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non-disclosure. There was strong academic support for this. However, it was rejected eventually. The main reasons were: (a) gross negligence is a situation very akin to an intentional act and there is no need to respond with different sanctions for that, and (b) a pro-rata method would complicate the transaction greatly. It must be noted that under the previous Commercial Code, an insurer was allowed to cancel the contract only if the non-disclosure was intentional or grossly negligent. It was thought there was no need to give an insurer a right to cancel the contract in the case of non-disclosure due to simple negligence. Considering that the insurer’s right is confined to an intentional or by gross negligence case only, it was agreed not to introduce a remedy of pro-rata settlement. Notwithstanding the above, since this rule is unilaterally mandatory, parties to the contract are allowed to agree on a pro-rata method for a gross negligence case, since such an alteration will not be against the interest of the policyholder/insured or a beneficiary. In any event, an insurer for a business risk, such as marine insurance, etc, is allowed to deviate from this rule and use another remedy.

ii. The Premise of Cancellation: Non-disclosure with Intention or by Negligence Where a policyholder/insured breaches the duty intentionally or by gross negligence, an insurer is allowed to cancel the contract.62 There is no definition in the Insurance Act of ‘intentionally’ or ‘by gross negligence’. These meanings need to be interpreted in consistency with other private law.63 In the context of an insurance contract, it will be regarded as an intentional failure where (a) there exists a fact with regard to a material matter, (b) the insurer requires the fact to be disclosed and (c) the policyholder/insured knows that it is not disclosing the fact or stating a false fact.64 The onus of proof is on the insurer to show the intentional act or the gross negligence of the policyholder/insured.

iii.  Effect of Cancellation Generally, cancellation of an insurance contract is only for the future or prospective, not retrospective.65 When an insurer cancels a contract, the insurer is not liable for an insurance claim in respect of an event that occurs after the date of cancellation but is liable for a claim arising from the insured event happened prior to the date of cancellation. As to the insurance premium, the insurer is not obliged to refund the premium paid for the insurance period prior to the cancellation. Meanwhile, this legal position does not prevent an insurer from returning some premium to the policyholder. In some types of life insurance contract where the

62 

Arts 28(1), 55(1) and 84(1). These are unilaterally mandatory provisions. There is no statutory definition on these terms. 64  Yamashita (n 30) 303. 65  Arts 31(1), 59(1), 88(1). They are unilaterally mandatory. 63 

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premium includes a saving element, an insurer will return an amount of money which corresponds to the saving fund.66 Insurance Act altered this general position for a case of cancellation on the ground of the failure of the duty of disclosure. In such a case, the insurer is not liable for a claim in respect of an event that occurred before the date of cancellation either.67 However, there is a proviso that an insured event or a loss caused by an insured event has causal link with the failure of the duty of disclosure by the policyholder/insured.68 In other words, the insurer must pay for a claim occurred irrespective of the failure of duty. This issue on causation will be discussed later.

iv.  Situations Where an Insurer is not Allowed to Cancel the Contract However, in the following situations, the insurer is not allowed to cancel the contract despite the intentional or grossly negligent non-disclosure by the policyholder/insured.69 First is a situation where an insurer knew the fact or failed to know it due to its own negligence.70 This rule is identical with that in the previous Commercial Code.71 It is considered inequitable to protect the insurer in such a situation.72 The party claiming the insurance benefit has the onus of proving the insurer’s knowledge or failure.73 Now, under the Insurance Act, the duty of disclosure is a duty to disclose facts on the material matters concerning the risk and which the insurer requests disclosure of. An insurer is not allowed to cancel the contract when the policyholder/insured did not disclose facts on material matter, if the insurer did not request the matter to be disclosed. The second situation is where an intermediary who does not have the authority to conclude a contract has hindered a policyholder/insured from disclosing facts74 or recommended non-disclosure or false disclosure.75 Here, the terminology ‘intermediary’ covers sales persons employed by an insurance company, independent insurance agents entrusted to sell insurance by the insurance companies and insurance brokers. Insurance agents are normally given an authority to conclude insurance contracts by non-life insurer, but not by a life insurer.76 Where the intermediary is given an authority, being the case of insurance agent for non-life insurance normally, its act relating to insurance solicitation is regarded

66 

Yamashita (n 30) 306. Insurance Act: Arts 31(2), 59(2) and 88(2). 68 ibid. 69  Arts 28(2), 55(2) and 84(2). These are unilaterally mandatory provisions. 70  Arts 28(2)1, 55(2)1 and 84(2)1. 71  Arts 644(1), 678(1). 72  Yamashita (n 30) 311. 73  ibid, 312. 74  Article 28(2)2, 55(2)2 and 84(2)2. 75  Arts 28(2)3, 55(2)3 and 84(2)3. 76  Life insurance companies decide the acceptance of contract after obtaining the medical opinion of their in-house doctors. 67 

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as an act of the insurer legally,77 and any failure of the agent is regarded as the failure of its insurer. Therefore, it is clear that an insurer is not allowed to cancel a contract where its agent having authority hindered disclosure or recommended non-disclosure or false disclosure. However, difficulty arose where a contract was concluded by an intermediary who did not have an authority to conclude, because an intermediary not having an authority to conclude a contract for its insurer did not possess a right to accept or receive disclosure either. Therefore, it was possible for an insurer to argue that the insurer was allowed to cancel the contract even where its intermediary acted illegally on the ground that disclosure had never been made to the insurer. Various arguments were developed and judges made decisions in favour of the insured in such cases.78 To make it clear with legal certainty, the Insurance Act now states that an insurer is not allowed to cancel the contract in such a situation. Reasons for this rule are the protection of the policyholder/ insured and the consideration that an insurer is responsible for the intermediaries whom it must supervise. In any event, any conduct of an intermediary to hinder proper disclosure or to recommend non-disclosure or false disclosure is prohibited under the IBA.79 This aspect of regulation under IBA will be discussed later in this chapter. There exist various situations of non-disclosure where intermediaries intervene into the conduct of a policyholder/insured. It is necessary to examine each situation closely. In any event, once a fact of hindering disclosure or recommending non-disclosure or false disclosure is shown, the onus shifts to the insurer to show that the policyholder/insured would have behaved in the same manner irrespective of the conduct of the intermediary. Let us consider a situation, as an example, where a policyholder/insured disclosed material facts to the intermediary during the negotiation for a contract but at the later stage failed to fill in the questionnaire correctly. If there is no positive action of the intermediary, a mere acceptance of a document completed by a policyholder/insured will not amount to the state of ‘hinder’ of the disclosure or ‘recommendation’ of false disclosure and the insurer will be allowed to cancel the contract.80 This is the legal position under the Insurance Act. However, depending on the situation, there can be a case where an insurer will be held responsible for the conduct of an intermediary who failed in its duty to explain important matters when making a contract under the rules of the IBA. Generally, intermediaries owe a duty to explain the effects of the

77 

Art 101(1) of the Civil Code. An act of an agent will be regarded as an act of the insurer. Legal theory under such argument and decision may be classified into two types. One is an argument to protect the interest of policyholder/insured based on the principle of good faith under the Civil Code. Another is to protect a policyholder/insured based on the duty of the insurer to control the intermediary. 79  IBA 300(2)(3). 80  N Matsuzawa, ‘Kokuchigimu-ihan niyoru kaijo’ [Avoidance based on the breach of duty of disclosure], in K Amari and T Yamamoto (eds), Hokenhô no ronten to tenbô [Issues and Perspectives of Insurance Law] (Tokyo, Shojihomu, 2009) 39. 78 

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questionnaire on material facts, as well as the importance of answering it correctly. This obligation under the IBA will not affect the contractual rights of the parties to an insurance contract. However, if the policyholder/insured can prove negligence on the part of the intermediary, it will be able to claim damages based on tort against the intermediary under Article 709 of the Civil Code and against its insurer under Article 283 of the IBA. Nevertheless, an insurer is allowed to cancel the contract on the ground of non-disclosure where it is presumed that the policyholder/insured would not have disclosed the fact, or would have made false disclosure, even without the conduct of the intermediary.81 An example is where an intermediary committed misconduct with its relatives and made a false disclosure document for an insurance of its relatives.82 Another is where the policyholder/insured knows his serious illness himself and tells the intermediary of his non-serious symptoms but obtains a statement from the intermediary that it is not necessary for him to declare his illness. It is suggested that the insurer may cancel the contract legally in such a situation.83

v.  Time Bar An insurer loses its right to cancel an insurance contract on the ground of nondisclosure if the right is not exercised within one month after the insurer becomes aware of the existence of the grounds for cancellation.84 The right also extinguishes when five years have elapsed from the time the insurance contract is made. These rules on time bar are basically identical with those under the previous Commercial Code, and they are regarded as mandatory.85

F.  Liability for a Claim Unrelated to the Non-disclosure i.  Rules and the Rationale Under the Insurance Act, an insurer is not relieved from its liability for an insurance claim if the insured event occurred independently of the undisclosed fact.86 This means that a policyholder/insured is protected even where they conceal or make a false statement intentionally or by gross negligence as long as the nondisclosure is unrelated to the occurrence of the insured event.87 This rule was the same as that of the previous Commercial Code.88 The reason for this rule is the

81 

Arts 28(3), 37(3) and 55(3). They are unilaterally mandatory. Hagimoto (n 23) 55. Matsuzawa (n 80) 39. 84  Arts 28(4), 55(4) and 84(4). 85  Hagimoto (n 23) 223, 225 and 227. 86  Arts 31(2)(i), 59(2)(i) and 88(2)(i). 87  This will not prevent an insurer from claiming for the avoidance of contract on other grounds, such as fraud, mistake etc under the rules of Civil Code, depending on the facts in question. 88  Arts 645(2) and 678(2) of previous Commercial Code. 82  83 

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understanding that the policyholder needs to be protected for a claim occurred from the risks that were undertaken by the insurer irrespective of the undisclosed facts. This reasoning will be understood easily if we consider a situation, for example, where the insured intentionally did not disclose the fact that he suffers cancer and was later killed in a traffic accident.89 In these circumstances, the insurer is not relieved of liability because the risk of a traffic accident is not related to the risk the insurer requested to the prospective policyholder to disclose. For lawyers in other jurisdictions, especially for those in common law countries, this aspect of the Japanese insurance law appears to go too far to protect a policyholder/insured that has committed non-disclosure intentionally or due to gross negligence. Under the previous Commercial Code there was an argument for altering the law so as not to give any benefit to someone who would not have received any cover had it fulfilled the duty. Certainly, this rule might be a disincentive for honest disclosure. However, this criticism was not supported in the process of drafting the Insurance Act, hence the old rule remains as the current rule. Actually, this rule is not unique to Japanese law. It can also be found in Germany.90 In the author’s view, this legal position relates to the theory on the duty of disclosure in Japan, which regards it as originating from the need to assess risks and premium. Obviously, an intentional or grossly negligent non-disclosure is a serious violation. If we consider the ground for disclosure as originating from the principles of good faith, the other party should be allowed to cancel the contract and should not be held liable for any claim in case of serious failure by the other party. If we regard the ground of the duty of disclosure as a technique for assessing risk and fixing the premium, it will be accepted that the liability of the insurer should not be exempted for a claim arising from the risk which has no causal link to the risk undisclosed and for which the insurer earned premium. Notwithstanding the above, in the case of serious concealment that amounts to a grave situation for moral hazard, an insurer will be able to cancel the contract and deny liability under the provisions on the cancelation based on ‘grave matters’ in the Insurance Act explained earlier.91

ii.  Difficulties in Applying the Causation Test The law is clear: an insurer is liable for an insured event that does not relate to a non-disclosed or falsely disclosed fact. However, this causation test is in practice a difficult test to apply. It is often not easy to know if there is any causational link between the insured event and a non-disclosed or falsely disclosed fact. Provisions on the causation rule in the Insurance Act are unilaterally mandatory and a question arises whether an agreement to alter this causation rule 89 

Hagimoto (n 23) 58. Yamashita (n 30) 316. 91  Arts 30, 57 and 86. 90 

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is regarded as not detrimental to a policyholder/insured or beneficiary. In the process of drafting the Insurance Act, this became a serious issue for automobile insurers, which often in their agreement would discount premium for a driver holding a licence card with gold colour. Under the agreements it was stated that the false statement of the colour of card would allow the insurer to cancel the contract and not to pay for a claim. The issue was whether an agreement to that effect would be valid or not. In Japan, a driver’s licence card needs to be renewed periodically. A gold colour card is given to a driver who has not been involved in a traffic accident or violated traffic regulations in the past five years. Motor insurers charge a lower premium for a gold card holder. Insurers rely on the declaration by the policyholder and they do not necessarily check the colour of the licence card by simply asking to sight the original when making an insurance contract. Insurers have argued that the information on the colour is material to the risk for the underwriting and also that the risk of a traffic accident during the period of insurance relates to the colour of the card to some extent. It was taken for granted that the colour is a material matter to the risk. In fact, insurers charge a lower premium for gold card holders. The issue was whether it was rightly regarded that the accident covered under the automobile insurance related to the colour of the card. If the causation is denied and the insurer is not allowed to decline the claim, a policyholder/insured may not always declare the colour honestly. While the legal position under the Insurance Act is not crystal clear, it is understood that any agreement to reduce premium based on the colour of the licence card and not pay a claim when there is a false declaration of colour will not be regarded as a disadvantageous for the policyholder etc and therefore will be regarded as legitimate under the Insurance Act.92 For this argument, however, it is suggested that any case needs to be judged by its actual situation, including the situation at the time of effecting the contract and when the loss actually happened.93

G.  The Disclosure Process under the Insurance Business Act The Insurance Act lays down the duty of disclosure of the policyholder/insured and does not stipulate how the disclosure process should proceed in relation to the insurer and the insurance intermediary. The Insurance Business Act provides certain rules on the disclosure process to secure its proper transaction. Article 300 of the IBA prohibits an insurer and its intermediary from encouraging policyholders to make a false presentation94 or to hinder policyholders from making proper disclosure.95 In addition, the Japanese Financial Services Agency (FSA) has issued

92 

Hagimoto (n 23) 60. Matsuzawa (n 80) 42. 94  Art 300(1)(ii). 95  Art 300(1)(iii). 93 

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Comprehensive Guidelines for Supervision of Insurance Companies. The guidelines show allowable questions for disclosure and other matters for an insurer to observe with regard to disclosure.96 This guideline operates as a soft law for the insurance business. The FSA monitors the conduct of insurers and intermediaries closely and may order sanctions against them if the FSA finds it necessary.

IV.  Insurer’s Pre-contractual Duty A. Overview The Insurance Act governs the contractual relationship between the policyholder/insured and the insurer. However, it does not contain any provision on the pre-contractual informational duty of the insurer. Instead, several other legislations deal with the pre-contractual informational duty of the sellers of insurance. However, details of the rules and the scope of their application are not identical among them. This makes it difficult to grasp an overall picture of the law. In addition, the law in this regard is complex, since the basic legal concept, notion and terminology are still developing.97 The Act on Sales, etc of Financial Instruments imposes on an insurer a duty to explain certain risks. The failure of this duty gives the buyer of financial products a right to claim damages for its loss. However, the scope of this Act is limited to situations involving certain financial risks only. The Consumer Contract Act allows a consumer to rescind its offer or assent when the consumer made a misunderstanding because of certain conduct of the seller. However, this Act covers limited situations only and its remedy is limited to a right of rescission. On the other hand, the IBA provides a more comprehensive rule covering the duty of providing information for the seller of insurance. However, the IBA is basically a regulatory law and the breach of the duty in respect of the provision of information does not create in itself a legal liability of insurer, agent

96  Guideline II-3-3-2(8) [Items for disclosure, Disclosure Questionnaire] requires that the question be expressed so that the person to answer clearly understands what facts need to disclose. Guideline IV-1-5 [Items for Disclosure] shows the items for disclosure are confined to those an insurer needs to underwrite risks, not including items ambiguous to judge, such as a hobby. Guideline IV-1-7 [Period for cancellation based on the breach of duty of disclosure] enquires whether the period given for an insurer to cancel the contract is unreasonably long from the viewpoint of the protection of policyholder, etc. 97  In the past, academic arguments and court decisions on insurance disputes often referred to a ‘duty of explanation of material matters’. On the other hand, a concept of duty based on the principle of suitability has developed in the area of law on the selling of financial products. By the introduction of a broker system in 1996, a duty to advise was introduced, the breach of which was the basis of an insurance broker’s liability. Along with the development of law, now the term ‘duty of providing information in a wider meaning’—‘setsumei gimu’ in Japanese, but there is no legal definition of it—is often used to embrace various informational duties discussed in Part IV here.

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or other parties to the policyholder or the insured. In any event, each rule must be understood in the context of the legislation that imposes the relevant duty.

B.  The Insurance Business Act The Insurance Business Act, as revised in 2014 and implemented from 29 May 2016, now provides detailed rules on the pre-contractual duty of the sellers of insurance. It lays down various duties for the seller of insurance products, by stating what must be done and what must not be done. In addition, there are detailed regulations laid down by the Ordinance for Enforcement of the Insurance Business Act. FSA guidelines show its approaches to supervision based on the regulations in the said Ordinance.

i.  Prohibition of Certain Conduct The IBA prohibits certain conduct pertaining to the conclusion of an insurance contract. This rule applies to insurers, agents, brokers and their employees. Article 300 of the IBA enumerates various prohibited conducts. Below are those relating to informational duty:98 (a) Falsely informing the policyholder or the insured, or failing to disclose to them any important particular stipulated in the insurance contract which would affect the decision of the policyholder/insured;99 (b) encouraging the policyholder/insured to give false information about any important particular to an insurance company, etc;100 (c) preventing or discouraging the policyholder/insured from informing an insurance company, etc of a material fact;101 (d) inducing the policyholder/insured to apply for a new insurance contract without informing it of any fact that would work to its disadvantage in the termination of an already effected insurance contract, or terminating an already effected insurance contract by inducing the policyholder or the insured to apply for a new contract;102 (e) telling or indicating to the policyholder/insured, or any other unspecified person, a misleading message regarding the features of an insurance contract in comparison with other insurance contracts;103 (f) making a conclusive statement, or telling or indicating a misleading message to the policyholder, the insured, or an unspecified person so that it may believe that a certain amount of money will be obtained in the future as a dividend to policyholders, dividend of surplus to members or any other benefit whose amount is specified as uncertain by Cabinet Office Ordinance;104 (g) in addition to what is listed in 98  The writer relies on the translation of the Japanese Law Translation of Ministry of Justice, ­Insurance Business Act, Translation date 27 March 2015. 99  Art 300(1)(i). 100  Art 300(1)(ii). 101  Art 300(1)(iii). 102  Art 300(1)(iv). 103  Art 300(1)(vi). 104  Art 300(1) (vii).

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the preceding items, any other action specified by a Cabinet Office Ordinance as ­posing a risk to the protection of policyholders, etc.105 Among them, (b) and (c) are in respect of the duty of disclosure by the policyholder/insured which are discussed in this chapter. Violation of (a), (b) or (c) will invite a criminal penalty of imprisonment with work for not more than one year or a fine of not more than one million yen, or both.106 Violation of others will not invite a criminal penalty but be the subject of the cancellation of registration as a seller, forced stoppage of business for six months.107 In addition, special rules in Article 300-2 of the IBA, being the same rules of the financial products under the Act on Sales, etc of Financial Instruments, apply to certain type of insurance, such as a variable insurance contract.

ii.  Duty of Providing Information108 Article 294(1) of the IBA makes it a duty for an insurer (and agent, broker, etc as well) to provide policyholders, etc with information on the contents of insurance contracts and any other information that should serve as reference for them to conclude an insurance contract, pursuant to the provisions of the Cabinet Office Ordinance. The information necessary to provide are classified into three types:109 (a) an outline of the insurance contract necessary for a policyholder to understand the insurance contract, such as the condition of insurance payment, period of insurance cover, matters on premium and amount of insurance; (b) information to alert a policyholder to information such as the duty of disclosure, starting time for insurance cover, major exclusions, cancellation and return of premium; and (c) other important information such as incidental services to insurance.110 Article 227-2 of the Ordinance for Enforcement of Insurance Business Act and Guidelines of FSA111 provides necessary particulars as well as the method in detail. Provision of information is necessary for insurances on large risks as well. However, flexibility is allowed as to its method.112

iii.  Duty of Ascertaining Customer’s Intention, etc113 Article 294-2 of the IBA makes it a duty for the insurer (and agent, broker, etc as well), when they are to conclude an insurance contract, to: (a) ascertain the

105 

Art 300(1) (viv). Art 317-2(7). 107  Art 307(1). 108  This duty was introduced in the 2014 revision. 109  This classification is for the purpose of explanation only. The Act does not classify information. 110  An example is a road rescue service under an automobile insurance policy. 111 Comprehensive Guideline for Supervision of Insurance Companies, September, 2016 (in Japanese). 112  IBA ER 227-2(3-3) 113  This duty was introduced in the 2014 revision. 106 

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c­ ustomer’s intention; (b) propose to conclude an insurance contract etc in line with such intention; (c) explain the contents of the relevant insurance contract to the customer; and (d) provide the customer with the opportunity to confirm that the customer’s intention at the time of the conclusion of an insurance contract etc is in accord with the contents of the relevant insurance contract. This duty does not apply to insurance on a business risk, such as marine insurance or compulsory insurance. The FSA shows in its Guideline detailed procedures required to fulfil this legal obligation. In addition, the IBA makes it a duty for the insurer, agent or broker to take measures to ensure sound and appropriate operation of the business of insurance solicitations.114 The FSA shows in its Guideline measures necessary to fulfil this legal obligation.

iv.  Additional Duty for an Insurance Agent Acting for Multiple Insurers115 The IBA imposes an additional duty on an insurance agent entrusted with agency business from more than one insurance company. When this type of agent is recommending a product of a certain insurance company among various products of different insurance companies it handles, it must provide its customer with the information of alternative products so that the customer may understand them and must explain how and why it chose such a product.116 In addition, IBA makes it a duty for such an insurance agent to create a management system to secure proper comparison.117

v.  Sanction under the IBA for Breach of Duty The IBA lays down rules on the conduct of the parties involved in the insurance business. It offers a wide range of authority to the Prime Minister and the FSA. Violation of the rules of the Act may allow the FSA to make an order against the violating party for it to improve its operation, to suspend certain business, or to strike down the licence for it to do insurance business in Japan. Violation of certain articles in the Act, including the prohibition of false explanation on material facts, will attract a criminal sanction as is stated above. Violation of the rules by the insurer etc on the informational pre-contractual duty under the IBA will not in itself give any remedy for the policyholders etc under the insurance contract or any right for damages in tort. However, the fact of violation of the duty under the IBA may be used as evidence of negligence when the policyholder pursues its claim for damages under the Civil Code.

114  Art 294-3. This duty was introduced in the 2014 revision. Prior to the 2014 revision, insurance companies only owed this duty. 115  This duty was introduced in the 2014 revision to the IBA. 116  IBA Art 294, IBA ER 227-2(3-4). 117  IBA 294-3, IBA ER 227-14.

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C.  The Act on Sales, etc of Financial Instruments The Act on Sales, etc of Financial Instruments118 was enacted in 2000 to protect customers of the financial products by making it a duty for the seller to explain to its customer material matters about the products. This Act applies to a wide range of financial instruments, including insurance. Pursuant to this Act, sellers of financial instruments must explain ‘important matters’ to their customers at or before the time of sale. ‘Important matters’ as prescribed in the Act are: the risk of incurring a loss or deficit in the initial principal amount; the indicator and material mechanism causing such a loss if the product involves such a risk of loss; the risk of loss of the initial principal amount directly caused by changes in the status of the business or property of the provider of financial products; and the period of execution of right under the contract or the cancellation if it is restricted.119 The explanation of important matters needs to be provided in a manner and to the extent necessary for the customer to understand, in light of its knowledge and experience or the extent of possession of asset or the purpose of concluding a ­contract.120 In addition, the seller is prohibited from providing any conclusive evaluation of uncertain matters or with information that misleads the customer into believing the certainty of such.121 In cases where the seller fails to explain the important matters to the customer pursuant to the provisions of the Act or provides a conclusive evaluation of uncertain matters etc in violation of the Act, the seller shall be liable for the amount of loss suffered by the customer as a result.122 Under this Act, the loss is presumed to be the principal amount paid by the customer.123 It must be noted that although the Act applies to a wide range of financial products, the ‘important matters’ necessary for explanation are confined to certain financial risks only. Incidentally, the Financial Instruments and Exchange Act124 also applies to the investment type of insurance and a seller of financial products must comply with the regulations laid down by it, including a duty to provide a document describing the material matters.125

118  Law No 101 of 2000. The author relies on the translation of the Japanese Law Translation of the Ministry of Justice, Act on Sales, etc of Financial Instruments, translation dated 25 June 2010. 119  Art 3(1). 120  Art 3(2). 121  Art 4. 122  Art 5. 123  Art 6. 124  Law No 25 of 1948. It is revised thereafter. 125  IBA 300-2 is a provision incorporating the duty imposed by the Financial Instruments and Exchange Act into the solicitation of insurance.

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D.  The Consumer Contract Act The Consumer Contract Act126 was enacted in 2000 to protect the interests of consumers, ie individual natural persons.127 The Act applies to any type of consumer contract concluded between a consumer and a business operator, excluding a labour contract.128 It applies to any type of insurance contract with a consumer. The Act lays down various provisions to protect the interests of consumers, including a provision on the informational pre-contractual duty.129 The Act allows consumers to avoid its offer or acceptance to the contract where the consumer misunderstood because of (a) a misrepresentation as to an important matter or (b) the provision of conclusive evaluations of future prices, amounts of money that a consumer should receive in the future and other uncertain issues which may change with respect to goods, rights, services and other matters that are to be the subject of a consumer contract.130 The Act also provides that a consumer may revoke its manifestation of intention to offer or accept a consumer contract if a business operator, when soliciting the consumer to enter into the contract, represents only the advantages of an important matter or a matter related thereto but intentionally omits its disadvantages, and hence causing the consumer to mistakenly believe the non-existence of such facts.131 The term ‘important matter’ in the above means following matters that, if included in a consumer contract, would normally affect a consumer’s decision as to whether to conclude such consumer contract:132 (a) Quality, purpose of use and other details of the objects of a consumer contract, such as goods, rights and services; and (b) price and other conditions of a transaction involving the objects of a consumer contract, such as goods, rights and services.

E.  The Civil Code Legal liability of a person who is engaged in conduct that amounts to a violation of the duty imposed by the IBA needs to be judged under the general private law contained in the Civil Code. Under the Civil Code, remedies pursued when a policyholder/insured suffers a loss resulting from a pre-contractual informational issue are rescission or avoidance of the contract based on mistake, deceit or violation of 126  Law No 61 of 2000. The Act was revised largely in 2009 to introduce a right to demand an injunction by qualified consumer organisations. 127  ‘Consumer’ is defined as meaning an individual not for business purpose in Art 2(1). 128  Art 48. 129  The writer relies on the translation of the Japanese Law Translation of Ministry of Justice, ­Consumer Contract Act, translation date 4 June 2011. 130  Art 4(1). 131  Art 4(2). 132  Art 4(4).

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public policy, and/or a claim for damages in tort caused by the breach of the duty of explanation or negligence in the process of making a contract. The legal basis for a claim varies depending with the type of insurance, the facts surrounding its sale as well as the nature of the loss.

i.  Avoidance of Contract Based on Mistake In a number of actions brought by policyholders who bought variable life insurance products using money borrowed from a bank but suffered substantial loss of the principal amount after the fall of the valuation of the financial products in the market, avoidance of contract ab initio was the main remedy pursued. The reason why the avoidance of contract was preferred was that the claimant wanted to recover the premium paid to the insurer. In contrast, under the law of tort, a claimant may not always be able to recover in full if the claimant is held to be negligent. As to the avoidance of contract, Article 95 of Civil Code states that manifestation of intention has no effect when there is a mistake in any element of the juristic act in question, provided, however, that the person who has made the manifestation of intention may not assert such nullity by himself/herself if he/she was grossly negligent.133 To allege ‘a mistake in the motive of contracting’ under the Civil Code, it is necessary for the plaintiff to prove that the intention was manifested at the time of making the contract. However, in the case of illegal solicitation by insurer, agent or other persons engaged in the sales of insurance products, it is generally understood that the manifestation of the intention is not necessary because such an act of the insurer etc actually caused the mistake of the policyholder etc.134 Decisions of the cases vary depending on the facts of the case; however in some actions, allegations based on mistake in motive were upheld and the policyholders were allowed to recover their payment in full.135 It must be noted that even where the policyholder successfully rescinds the contract and recovers his premium, there comes another issue: whether any amount needs to be deducted from the premium in relation to which the insurer owed liability, by virtue of the prevention of unjust enrichment, for any potential insured event.136

ii.  Legal Basis of the Claim for Damages in Tort The most common allegation against the insurer’s breach of a duty of providing information is a claim for damages in tort. Civil Code Article 709 provides that a person who has intentionally or negligently infringed any right of others, or legally

133  As to the Arts of Civil Code, the writer relies on the translation of the Japanese Law Translation of Ministry of Justice, Civil Code, translation date 1 April, 2009. 134  Yamashita and Nagasawa (n 34) 43. 135  ibid, 43. 136  ibid, 45. Because the insured in fact enjoyed the insurance coverage for that period and would have obtained insurance money if there was an insured event.

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protected interest of others, shall be liable to compensate any damages resulting in consequence.137 To claim damages in tort, the burden of proof is on the claimant to show the existence of the intentional or negligent act, infringement of the right of others or of legally protected interest of others, existence of loss/damage and the causation between the act and the loss. As has been described, Article 300(1)(i) of the IBA prohibits an act of falsely informing the policyholder/insured, or an act of failing to disclose thereto any important particular stipulated in the insurance contract which would affect the decision of the policyholder/insured. Its violation attracts a criminal penalty. While the violation does not necessarily create legal liability in tort, the fact of the breach under the regulatory law will be used as an evidence to show the negligence on the side of the seller. In addition, it is now generally understood that an insurer or its agent, etc selling insurance products owes a duty of explanation under the principle of good faith stated in the Civil Code. This is because the explanation by the insurer etc greatly influences the decision of the policyholders etc. In addition, while the courts are cautious in interpreting Article 709 to cover a wider duty, academics are arguing to interpret Article 709 as covering a duty of advice in certain situations.138 In the author’s view, while the duty under the IBA does not necessarily coincide with the duty of explanation derived from the principle of good faith, the scope and concept of duty of explanation under the Civil Code will be affected by the duty under the IBA which is evolving in the development of insurance products and protections of policyholders etc. The revision of the IBA in 2014 which was implemented in 2016 has altered the law required for the sellers of insurance to cover various informational duties including the duty of confirming intention of policyholder etc. The enhanced duty under the new regulatory law will most likely influence the standard for the duty of the seller of insurance in general law.

iii.  Quantifying the Damages in Tort In insurance disputes, a claim for damages in tort will be either (a) a claim for damages calculated as if it had not effected a contract at all or (b) a claim for damages calculated as if it had effected an intended contract had the information been provided properly. The former is a claim for repayment of premium paid to the insurer on the ground that the policyholder would not have concluded a contract if there was no breach of the duty of explanation. This was the basis of the claim alleged in the actions under the variable insurance products. There are conflicting theories as to the calculation of loss in this context. The majority view is ‘Sagaku-setsu’ (theory of calculating loss based on difference), which regards the difference of amount 137  138 

Based on the translation of Ministry of Justice (n 20). Yamashita and Nagasawa (n 34) 40.

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derived from deducing refund money from the paid premium as the loss. Another, and minority, view is the ‘Shishutsu-setsu’ (theory of calculating loss based on the payment), which regards the actual payment of premium as the loss caused by the negligent act. Under the theory of Sagaku-setsu, the amount of damages is calculated based on the actual loss caused by the cancellation of the contract. There is an argument whether the claimant is allowed to claim damages without cancelling the contract. The majority view and the decisions of the courts do not allow such a situation where the claimant is still enjoying the policy coverage or expecting the possibility of an increase of refundable money.139 In their view, the claimant is required to rescind the contract and make it clear the amount of its loss. Under a variable insurance, a policyholder is allowed to determine the time of cancellation which affects the amount of recoveries and can even expect to obtain profits from the insurance if the investment of the insurance company brings a better performance resulting from the rise in the prices in the financial market. However, the majority view is that such an issue of elective conduct of the policyholder can be dealt with as mitigation of loss and that this aspect does not weaken the theory of Sagaku-setsu. The second type of claim is the claim for damages for the failure to meet with the expected performance in line with the policyholder’s intention. If the policyholder can establish that it would have made a different contract if it was properly explained, it will be allowed to claim for the loss calculated under the assumption that it lost the opportunity to receive benefit. Situations for this type of claim may be various. In any event, it is necessary to show that there existed in fact such an option of insurance coverage available for the claimant. In addition, it needs to be proved that the policyholder would have chosen that option. Another issue in calculating the amount of damages is whether it is necessary to consider the interest or benefit which the policyholder or insured enjoyed from the insurance cover. If there had been any insured event, the insured or beneficiary would have received insurance money for it. Such a benefit may vary depending on the type of insurance. It is necessary to deduct the amount of any benefits the claimant actually enjoyed from the amount of damages. In addition, the amount of damages in tort may be reduced by the contributory negligence of the claimer. The degree of contributory negligence is decided by the judge based on the facts in question.

iv.  Compensations Based on Breach of Contract There has been an argument whether the liability for the breach of duty of explanation based on good faith allows a claim for compensation based on breach of contract, in addition to damages in tort. There is a difference in the time bar

139 

ibid, 45.

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between a claim in tort, ie three years, and a claim based on breach of contract, ie 10 years.140 The Supreme Court has held that a breach of the duty of explanation is not a breach in contract, since the duty of explanation arises not from the contract itself but from the conduct before effecting contract.141

V. Conclusion In Japan, laws on the duty of disclosure and the duty of providing information have been largely revised in recent years to reinforce the protection of consumers and to modernise the law reflecting the changes in the market practice. How are they evaluated? As to the duty of disclosure, the main points of the Japanese law are: The duty is to disclose facts on the material matters concerning the risk which were requested to be disclosed by the insurer. Insurers can only ask about material matters of the risks for that insurance.142 An insurer is allowed to cancel a contract only where the breach is made intentionally or by gross negligence. Even where there is an intentional breach or a failure by gross negligence, the insurer must pay a claim not attributable to the non-disclosed fact or the falsely disclosed information. These rules are unilaterally mandatory for consumer insurance. Judging from these features, Japanese law on the duty of disclosure will be regarded as ­consumer-friendly. It is hoped that the regime provided by the Insurance Act helps consumer policyholders to avoid any misunderstanding at the contractual stage. In this respect, in the writer’s view, it is of vital importance to elaborate wordings of the questionnaire and facilitate communications between the policyholder and the seller. As to insurer’s pre-contractual duty, the Japanese did not take a direction to include such a duty in the Insurance Act. The existence of such a duty and the solution of issues concerning such a duty are guided by the IBA, a regulatory law, and other laws on the financial instruments and consumer contracts, together with a general private law under the Civil Code. In 2014, the IBA was largely revised to provide a comprehensive legal regime on the pre-contractual duty of the seller of insurance. Now, the new regime embraces various duties, including provision of necessary information, confirmation of customer’s intention, an offering of product that matches the intention and so on. The FSA, the responsible supervisory body, publishes detailed guidelines for these rules.

140  The law on the period of time bar under the Civil Code will be different after the enforcement of the revision of the Civil Code. 141  Supreme Court Decision 22 April, 2011. Kinyû shôji hanrei No 1372, 30. The case is in respect of an investment; not a case of an insurance contract. 142  Insurers are not prohibited to ask about non-material matters. However, the policyholders etc are not in breach if they do not answer or give incorrect answers to the questions.

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As the IBA rules were implemented in May 2016, it is too early to evaluate the operation of the new rules at this stage. However, it will be acknowledged that the revision was made to reinforce the protection of the consumers. The scheme using the regulatory law on insurance business will be effective to lead sound operations in the market. However, it must be borne in mind that the detailed regulations on the process of solicitation may create more procedural complications in the contractual stage, thus causing more time and money for making a contract. In addition, the duty under the regulatory law is in itself different from the duty in private law. While the law on the pre-contractual informational issue based on good faith under the Civil Code has been developing in recent years in Japan to allow a claim for damages in tort, it is still too early to see how the change of the duty under the IBA will affect the actionable duty of the seller under the tort law.

(This work was supported by MEXT/JSPS KAKENHI Grant Number 15K03745.)

12 Pre-contractual Duties under the Swiss Insurance Law ANDREA STÄUBLI

I. Introduction The Swiss insurance contract law is codified in the Insurance Contract Act1 (ICA) which was enacted in 1908. For some years, there has been an ongoing legislative project to revise the Insurance Contract Act. In 2012/13, the Swiss Parliament rejected a draft for a complete amendment to the Insurance Contract Act and instead instructed the Swiss Federal Council (Bundesrat) to prepare a proposal for a partial amendment.2 On 28 June 2017 the Federal Council adopted the explanatory report on the draft for a partial amendment of the Insurance Contract Act.3 In this chapter this draft will be addressed as far as it is relevant to the subject matter to be discussed. While the Insurance Contract Act is undoubtedly the most important source of insurance contract law in Switzerland,4 it is not the only one. Insofar as the Insurance Contract Act does not contain any provisions on a subject matter, the Code of Obligations (CO)5 and the Civil Code (CC)6 apply, according to ­article 100 1  Federal Act on Insurance Contracts of 2 April 1908, SR 221.229.1. The Systematic Compilation of the Federal Law (Systematische Sammlung, SR) contains every Swiss legal act which is currently in force and is available online at www.admin.ch/gov/de/start/bundesrecht/systematische-sammlung.html. As every legal act is assigned a specific reference number (eg SR 221.229.1 for the Insurance Contract Act) all federal legislation may be found by entering either the name abbreviation or reference number into the search engine. 2  See AB 2012 N 2203-2213 and AB 2013 S 261-265. The parliamentary debates are published in full in the Official Bulletin of the Federal Assembly (Amtliches Bulletin, AB) which is available online at www.parlament.ch/de/ratsbetrieb/amtliches-bulletin. The abbreviations S and N which are used in the citation of the Official Bulletin stand for the two chambers of parliament, the Ständerat (Council of States) and the Nationalrat (National Council). 3  The draft as well as the explanatory report are available online at https://www.admin.ch/gov/de/ start/dokumentation/medienmitteilungen.msg-id-67372.html. 4  See, eg, Stephan Fuhrer, Schweizerisches Privatversicherungsrecht (Zürich, Schulthess, 2011) no 2.2. 5  Federal Act on the Amendment of the Swiss Civil Code (Part Five: The Code of Obligations) of 13 March 1911, SR 220. An English translation is available in the Systematic Compilation of the Federal Law (for further details see n 1). 6  Swiss Civil Code of 10 December 1907, SR 210. An English translation is available in the Systematic Compilation of the Federal Law (for further details see n 1).

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­ aragraph 1 ICA.7 The Introductory Part of the Civil Code (articles 1–9 CC) is p of particular relevance to this chapter as article 2 paragraph 1 CC establishes the general principle of good faith. In regard to the sources of insurance law and/or of other law in Switzerland, a few general points are noteworthy here, because they will relate to our discussion in the following sub-chapters. All Swiss federal ­legislation is published in a German, French and Italian version which are of equal authority.8 For some legal acts an English translation is available for information ­purposes only and has no legal force. The other two sources of law are customary law, in accordance with which the court shall decide in the absence of a provision in the written law (article 1 paragraph 2 half sentence 1 CC), and case law, as the court shall decide in accordance with ‘the rule that it would establish as legislator’ in the absence of a provision in written and customary law (­article 1­ paragraph 2 CC).9 However, also of great importance, though not sources of law, are the established doctrines (bewährte Lehre) of legal scholars, and tradition (Überlieferung), ie the practice of courts and public authorities, which a court shall ‘follow’ when applying the law (article 3 paragraph 3 CC).10 And, last but not least, it should be noted that Switzerland is not a Member State of the European Union. Thus, the law of the European Union is not applicable. Nonetheless, Swiss law is in general strongly influenced by European Law.11

II.  Overview of Pre-contractual (Utmost) Good Faith A.  Pre-contractual Good Faith in Contract Law in General12 In regard to the pre-contractual stage, settled case law13 and legal (academic) ­doctrine14 have long recognised a general obligation of all parties in contract

7  Though art 100 para 1 ICA only mentions the Code of Obligations explicitly, it is generally acknowledged that this reference includes the Civil Code as well, see, eg, Rolf Nebel, in Heinrich Honsell, Nedim Peter Vogt and Anton K Schnyder (eds), Kommentar zum Schweizerischen Privatrecht ­Bundesgesetz über den Versicherungsvertrag (VVG) (Basel, Helbling & Lichtenhahn, 2001) art 100 no 4 with further references. 8 See, eg Joseph Voyame, ‘Introduction’ in François Dessemontet and Tuğrul Ansay (eds), ­Introduction to Swiss Law, 3rd edn (The Hague, Kluwer Law International, 2004) 11. See also Markus ­Müller-Chen, Christoph Müller and Corinne Widmer Lüchinger (eds), Comparative Private Law (Zürich, Dike, 2015) no 576. 9  For more details see, eg, Voyame (n 8) 6ff. 10  Peter Forstmoser and Hans-Ueli Vogt, Einführung in das Recht 5th edn (Bern, Stämpfli, 2012) 529. 11  ibid 352. 12  Numerous aspects of both the obligation to act in good faith as well as the liability arising from a breach of said obligation are being discussed controversially. Therefore, only a rough overview will be provided here. For more detailed information see, eg, Peter Gauch and others, Schweizerisches Obligationenrecht Allgemeiner Teil vol 1, 10th edn (Zürich, Schulthess 2014) no 948ff. 13  See, eg, decisions of the Swiss Federal Supreme Court BGE 121 III 350 consideration 6c p 354 with further references; 4C.98/2007 of 29 April 2008 consideration 3.2.2. 14  See, eg, Gauch and others (n 12) no 948 with further references.

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negotiations to act in good faith. The legal basis of this obligation is the principle of good faith established by article 2 paragraph 1 CC15 (Civil Code).16 From this general obligation to act in good faith a number of specific duties of conduct have been derived by case law.17 One of these is the duty to inform the other party, to some degree, of facts relevant to its decision to conclude the contract and on what terms.18 According to case law the extent of this duty to inform cannot be determined in a general manner, but instead depends on the circumstances of the individual case, in particular the nature of the contract, the manner in which the contract negations proceeded, as well as the intentions and knowledge of the parties.19 However, some generally applicable principles have been established by case law. According to case law the duty to inform does not extend to facts which are known or should have been known to the other party.20 But the parties are obligated to clear up any misconceptions of the other relating to a fact which is or should be known to them.21 If one party intentionally or negligently22 breaches this duty to inform, the other can claim compensation for loss suffered.23 However, it is important to note that if the claimant is at fault as well, this will lead to a reduction of the ­compensation.24 This liability arising from the breach of a pre-contractual duty is generally referred to as culpa in contrahendo.25 It must be pointed out, though, that in recent case law the term Vertrauenshaftung is used as an umbrella term for both culpa in ­contrahendo and other cases of liability of similar nature.26

15  Art 2 para 1 CC provides that every person must act in good faith in the exercise of his or her rights and in the performance of his or her obligations. 16  See, eg, decision of the Swiss Federal Supreme Court 4C.98/2007 of 29 April 2008 consideration 3.2.2. 17  Vincent Brulhart, Droit des assurances privées (Bern, Stämpfli, 2008) no 318. For an overview of these duties see, eg, Brulhart, Droit des assurances (n 17) no 318ff; Gauch and others (n 12) no 948ff. 18  See, eg, decisions of the Swiss Federal Supreme Court BGE 90 II 449 consideration 4 p 455 and 5C.267/2004 of 1 June 2005 consideration 5.2. For legal doctrine see, eg, Alfred Maurer, Schweizerisches Privatversicherungsrecht 3rd edn (Bern, Stämpfli, 1995) 258. 19  See, eg, decision of the Swiss Federal Supreme Court 4A_316/2008 of 3 October 2008 consideration 2.1 with further references. 20  See, eg, decision of the Swiss Federal Supreme Court BGE 90 II 449 consideration 4 p 456 with a further reference. 21  See, eg, decision of the Swiss Federal Supreme Court BGE 90 II 449 consideration 4 p 456. For legal doctrine see, eg, Gerhard Stoessel, in Heinrich Honsell, Nedim Peter Vogt and Anton K Schnyder (eds), Kommentar zum Schweizerischen Privatrecht Bundesgesetz über den Versicherungsvertrag (VVG) (Basel, Helbling & Lichtenhahn, 2001) art 1 no 42. 22  See, eg, decision of the Swiss Federal Supreme Court 4C.98/2007 of 29 April 2008 consideration 3.2.2. 23  See, eg, decision of the Swiss Federal Supreme Court BGE 90 II 449 consideration 6 p 458. For legal doctrine see Maurer (n 18) 258 f; Stoessel (n 21) art 1 no 42; Nebel (n 7) art 100 no 20. 24  See, eg, decision of the Swiss Federal Supreme Court BGE 90 II 449 consideration 6 pp 458f in which the compensation was cut by a third. 25  See, eg, decision of the Swiss Federal Supreme Court 5C.267/2004 of 1 June 2005 consideration 5.2 with references to the legal doctrine. 26  See, eg, decision of the Swiss Federal Supreme Court 5C.267/2004 of 1 June 2005 consideration 5.2 with further references.

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B.  Pre-contractual Good Faith in Insurance Law In general, the aforementioned principles derived from the Civil Code apply to the insurance contract as well.27 Especially the principle of good faith as established by article 2 paragraph 1 CC itself is of great importance for the insurance contract.28 It is, amongst other things, the legal foundation of several general principles for the interpretation of contract terms, and such interpretive principles are also applicable to the insurance contract.29 Furthermore, various statutory information duties in the Insurance Contract Act result from the principle of good faith.30 It therefore follows that in Swiss insurance law good faith is not limited to the pre-contractual stage: it also governs the contracting parties’ relationship after the conclusion of the contract. However, in regard to the contracting parties pre-contractual information duties the legal situation in insurance law differs from the one described above for contract law in general, at least as far as the primary insurance sector is c­ oncerned.31 Under current law, the Insurance Contract Act contains specific rules on both the insurers’ and the policyholders’ pre-contractual information duties as well as on the sanctions for a breach of such duties. Consequently, additional pre-contractual duties to inform derived from the general obligation to act in good faith can only exist insofar as the statutory rules under the ICA are not deemed to be exhaustive, because the latter would otherwise preclude the former. Therefore, the question arises of whether and to which extent the ICA statutory rules are exhaustive. As this issue is being controversially discussed, especially in regard to the insurers’ duties, it will be examined in detail in the respective subchapters on each party’s duties. It must be noted that, for pre-contractual duties in insurance law, the landmark English case Carter v Boehm is not relevant in the discussion of Swiss insurance contract law, at least as far as the primary insurance sector is concerned. This is most likely due to the fact that in Swiss law the principle of good faith is a general statutory principle from which pre-contractual information duties can be directly derived. It is, most likely, for the same reason that in Switzerland the concept of utmost good faith was never recognised by either case law or prevailing legal ­doctrine; it is simply not necessary.

27  See, eg, decision of the Swiss Federal Supreme Court 4C.98/2007 of 29 April 2008 consideration 3.2.2 with further references. 28  See, eg, Nebel (n 7) art 100 no 8 with further references. 29  For more details on the interpretation of insurance contracts see, eg, Brulhart (n 17) no 275ff. 30  See, eg, Nebel (n 7) art 100 no 8. 31  In the reinsurance sector the situation is different, as according to art 101 para 1 number 1 ICA reinsurance contracts are excluded from the scope of the Insurance Contract Act.

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III.  Policyholder’s Pre-contractual Duty of Disclosure When the Federal Insurance Contract Act was enacted in 1908,32 it introduced into Federal law the rules on the policyholder’s pre-contractual duty of disclosure (Anzeigepflicht)33 in its articles 4–8 and 75. These provisions apply to both consumer policyholders and non-consumer policyholders. The rules on the ­policyholder’s duty of disclosure remained unchanged for almost a century. In 2004, they were partially revised34 and the revised provisions entered into force on 1 January 2006.35 The revision of the duty of disclosure was limited to articles 6 and 8 ICA, which regulate the sanctions for a breach of duty and the exemptions from these sanctions respectively.

A.  Scope of Application The Insurance Contract Act applies to all insurance contracts in the primary insurance sector,36 with the exception of the legal relationships between insurance companies which are excluded from insurance supervision and their insured.37 Articles 4–8 ICA form part of the general provisions of the Insurance Contract Act (articles 1–47a ICA) and therefore also apply to all insurance contracts in the primary insurance sector with the abovementioned exception.38 The duty of disclosure is a pre-contractual obligation,39 but its scope of application is not restricted to the conclusion of new insurance contracts as it also extends 32  See BBl (Bundesblatt, Federal Gazette) 1908 II 138. All editions of the Federal Gazette are available online at www.admin.ch/gov/de/start/bundesrecht/bundesblatt.html. 33  The term Anzeigepflicht, which translates to duty of disclosure or duty to disclose, is somewhat misleading as the duty only extends to answering questions of the insurer according to prevailing opinion, see text to nn 48–49. 34  See Act on the Amendment of the Insurance Contract Act of 17 December 2004, AS (Amtliche Sammlung, Official Collection of Federal Legislation) 2005 5246f. The newer editions of the Official Collection of Federal Legislation are available online at www.admin.ch/gov/de/start/bundesrecht/ amtliche-sammlung.html. 35  AS 2005 5251 (for further information on the Official Collection of Federal Legislation see n 34). 36  According to art 101 para 1 number 1 ICA reinsurance contracts are excluded from the scope of the Insurance Contract Act. 37  According to art 101 para 1 number 2 ICA the Insurance Contract Act does not apply to the private legal relationships between insurance companies which are not subject to insurance supervision (art 2 para 2 ISA, Insurance Supervision Act) and their insured, with the exception of any relationships for whose execution the insurance companies are subject to insurance supervision. Translation by Martin K Eckert and Moritz W Kuhn, Schweizerisches Bundesgesetz über den Versicherungsvertrag (­Versicherungsvertragsgesetz, VVG) Swiss Federal Act on Insurance Contracts (Insurance Contract Act, ICA) Loi fédérale Suisse sur le contrat d’assurance (Loi sur le contrat d’assurance, LCA) (Zürich, Schulthess, 2006) 106. 38  For more details on the material scope of application see Urs Ch Nef, in Heinrich Honsell, Nedim Peter Vogt and Anton K Schnyder (eds), Kommentar zum Schweizerischen Privatrecht Bundesgesetz über den Versicherungsvertrag (VVG) (Basel, Helbling & Lichtenhahn, 2001) art 4 no 9ff. 39  See, eg, Nef, ibid art 4 no 7.

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to the renewal or modification of existing contracts.40 The disclosure normally is part of the policyholder’s application.41 However, according to settled case law42 and prevailing legal doctrine43 the duty remains in effect until the insurance contract has been concluded. If a material fact affecting the risk changes between the time the application is submitted and the contract is concluded, the policyholder is obligated to inform the insurer of this change (so called Nachmeldepflicht).44 This has been subject to some criticism as most policyholders are not aware of this fact.45 The draft for a revised Insurance Contract Act addresses this problem by proposing a revision of article 6 ICA. According to the proposed article 6 paragraph 1 ICA the point in time in which the policyholder answers the questions according to article 4 paragraph 1 ICA would be relevant for the assessment of whether the duty of disclosure has been breached. Consequently, the policyholder would not be obligated to inform the insurer of any later changes.46

B.  Scope of the Duty The content of the duty of disclosure is specified in article 4 paragraph 1 ICA. The provision provides that the applicant, ie the policyholder,47 must disclose to the insurer, on the basis of a questionnaire or any other written questions, all facts which are material for the assessment of the risk, as far as they are known or ought to be known to him or her when concluding the contract. Under article 4 paragraph 1 ICA a duty of disclosure therefore only exists if the following statutory requirements are all met: (1) Written question by the insurer (2) r­ elating to a s­o-called Gefahrstatsache (fact affecting the risk) (3) which is material for the assessment of the risk and (4) which is known or ought to be known to the ­policyholder when concluding the contract.

40 

See, eg, Nef, ibid, art 4 no 5 with further references; Brulhart (n 17) no 471 p 212. See, eg, Willy Koenig, Schweizerisches Privatversicherungsrecht: System des Versicherungsvertrages und der einzelnen Versicherungsarten 3rd edn (Bern, Herbert Lang & CIE, 1967) 174; Moritz W Kuhn, R Luka Müller-Studer and Martin K Eckert, Privatversicherungsrecht 3rd edn (Zürich, Schulthess, 2010) no 739. 42  See, eg, decisions of the Swiss Federal Supreme Court BGE 134 III 511 consideration 3.3.2 p 514; BGE 116 V 218 consideration 5a p 227. 43  See, eg, Koenig (n 41) 174; Maurer (n 18) 251 n 546; Nef (n 38) art 4 no 7; Brulhart (n 17) no 473 fn 479; Kuhn, Müller-Studer and Eckert (n 41) no 739 and 751. 44  See, eg, decisions of the Swiss Federal Supreme Court BGE 134 III 511 consideration 3.3.2 p 514; BGE 116 V 218 consideration 5a p 227. For legal doctrine see, eg, Nef (n 38) art 4 no 7; Brulhart (n 17) no 471 p 211; Kuhn, Müller-Studer and Eckert (n 41) no 739. 45  See, eg, Fuhrer (n 4) no 6.117. 46  See explanatory report on the Amendment of the Federal Act on Insurance Contracts of 28 June 2017, BBl 2017 5089, 5112 (for more details on the Federal Gazette see n 32). 47  The use of the term applicant is somewhat misleading as it refers to the person applying for an insurance contract which, in practice, can be either the future policyholder or the insurer. However, applicant within the meaning of art 4 para 1 ICA is always the future policyholder, even in the case that the insurer applies for the contract, see, eg, Nef (n 38) art 4 no 3 with further references; Brulhart (n 17) no 471 p 211. 41 

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i.  Written Question Article 4 paragraph 1 ICA requires the policyholder to make a disclosure ‘on the basis of a questionnaire or any other written questions’. According to settled case law48 and prevailing legal doctrine49 the duty of disclosure is therefore limited to those facts covered by the written questions of the insurer. Under article 4 ICA the scope of the duty of disclosure thus depends on the questions of the insurer. The question arises of whether an additional duty to inform derived from the general obligation to act in good faith50 exists, which could obligate the policyholder to disclose facts spontaneously. Settled case law51 and prevailing legal doctrine52 are of the opinion that the policyholder is under no obligation to disclose facts affecting the risk spontaneously which are not covered by the insurer’s questions. It can therefore be said that according to prevailing opinion article 4 ICA regulates the policyholder’s pre-contractual duty of disclosure exhaustively in regard to facts affecting the risk (Gefahrstatsachen),53 thus precluding any additional duty to disclose such facts spontaneously based on the obligation to act in good faith. In regard to all facts not qualified as Gefahrstatsachen, on the other hand, the policyholder is subject to the duty to inform based on the obligation to act in good faith, since it is generally acknowledged that articles 4–8 ICA apply exclusively to facts affecting the risk.54 As to the form of the questions, according to article 4 paragraph 1 ICA they can take the form of a questionnaire or any other written question. It is generally acknowledged that while oral questions are therefore insufficient,55 written form according to articles 13–15 CO (Code of Obligations) is not required.56 The draft for a revised Insurance Contract Act proposes to clarify this issue by allowing the insurer to either use written form within the meaning of articles 13 ff CO or ‘any other form evidenced in the form of text’.57,58 The explanatory report on the draft

48 See, eg, decisions of the Swiss Federal Supreme Court 4A_150/2015 of 29 October 2015 c­ onsideration 4; 4A_134/2013 of 11 September 2013 consideration 4.1; 9C_194/2008 of 6 October 2008 consideration 3.1.2; BGE 134 III 511 consideration 3.3.2 p 513. 49 See, eg, Koenig (n 41) 175; Nef (n 38) art 4 no 23; Brulhart (n 17) no 471 p 212; Kuhn, ­Müller-Studer and Eckert (n 41) no 740; Fuhrer (n 4) no 6.131. 50  For more details on this duty see above text to nn 16ff. 51 See, eg, decisions of the Swiss Federal Supreme Court 4A_134/2013 of 11 September 2013 ­consideration 4.1; 9C_194/2008 of 6 October 2008 consideration 3.1.2; BGE 134 III 511 consideration 3.3.2 p 513. 52  See, eg, Maurer (n 18) 251; Nef (n 38) art 4 no 23; Brulhart (n 17) no 471 p 212. 53  For more details on the term Gefahrstatsache see text to nn 60ff. 54 See, eg, decisions of the Swiss Federal Supreme Court 4A_112/2013 of 20 August 2013 ­consideration 3.5.1; BGE 90 II 449 consideration 2 p 454 with further references. For legal doctrine see, eg, Fuhrer (n 4) no 6.109 and 6.113. 55  See, eg, Nef (n 38) art 4 no 21; Kuhn, Müller-Studer and Eckert (n 41) no 740. 56  See, eg, Nef (n 38) art 4 no 21; Kuhn, Müller-Studer and Eckert (n 41) no 740 n 994; Fuhrer (n 4) no 3.73 and 6.19. 57  Art 4 para 1 sent 2 revICA. 58  Explanatory report draft ICA (n 46) 5089, 5112.

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elaborates that this would include telefax messages, emails, telegrams and even text messages.59

ii.  Gefahrstatsache Under article 4 ICA only facts affecting the risk, so-called Gefahrstatsachen, need to be disclosed.60 The legislator did not define the term Gefahrstatsache. According to settled case law, it includes ‘all facts which can be taken into consideration for the assessment of the risk and which can therefore enlighten the insurer as to the extent of the risk to be covered’.61,62 Settled case law63 and legal doctrine64 furthermore acknowledge that the term also includes the so-called indizierenden Umstände (indicating circumstances), ie facts which allow conclusions to be drawn as to the existence of facts affecting the risk.65

iii. Materiality According to article 4 paragraph 1 ICA the duty of disclosure only covers facts which are ‘material for the assessment of the risk’. Article 4 paragraph 2 ICA defines as material those facts affecting the risk which are capable of influencing the insurer’s decision to conclude the contract at all or to conclude it on the terms agreed upon. The burden of proof for the materiality of a fact lies with the insurer.66 However, according to article 4 paragraph 3 ICA facts affecting the risk which are the subject of precise and unambiguous written questions by the insurer are presumed to be material. This statutory presumption can be rebutted by the policyholder.67 Settled case law68 and prevailing legal doctrine69 consider the view of the insurer in the individual case to be relevant for the materiality test. In contrast, the­

59 

ibid 5089, 5098. See Nef (n 38) art 4 no 12. 61  See, eg, decisions of the Swiss Federal Supreme Court BGE 134 III 511 consideration 3.3.2 p 513; BGE 116 II 338 consideration 1a p 339; BGE 108 II 143 consideration 1 p 146. 62  For more details on the term see, eg, Koenig (n 41) 170ff. 63  See, eg, decisions of the Swiss Federal Supreme Court 4A_150/2015 of 29 October 2015 consideration 4 and 7.5; BGE 134 III 511 consideration 3.3.2 p 513; BGE 116 II 338 consideration 1a p 339; BGE 108 II 143 consideration 1 p 146. 64  See, eg, Maurer (n 18) 249; Brulhart (n 17) no 500 pp 226f; Kuhn, Müller-Studer and Eckert (n 41) no 749; Fuhrer (n 4) no 6.122. 65  See, eg, decision of the Swiss Federal Supreme Court BGE 134 III 511 consideration 3.3.2 p 513. 66  See, eg, Koenig (n 41) 176; Brulhart (n 17) no 471 p 213; Kuhn, Müller-Studer and Eckert (n 41) no 750. 67  See, eg, decisions of the Swiss Federal Supreme Court 4A_150/2015 of 29 October 2015 consideration 4; BGE 136 III 334 consideration 2.4 pp 337f; BGE 134 III 511 consideration 3.3.4 p 515. For legal doctrine see, eg, Brulhart (n 17) no 471 p 213; Fuhrer (n 4) no 6.130. 68  See, eg, decisions of the Swiss Federal Supreme Court BGE 99 II 67 consideration 4e p 82; BGE 92 II 342 consideration 5 pp 352f; BGE 75 II 158 consideration 3 p 163 and consideration 5 p 165. 69  See, eg, Koenig (n 41) 176; Maurer (n 18) 252f; Nef (n 38) art 4 no 54; Kuhn, Müller-Studer and Eckert (n 41) no 749 fn 1008; Fuhrer (n 4) no 6.128. 60 

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practice of other insurers70 and the opinion of experts71 is not relevant. In a recent decision, the Swiss Federal Supreme Court made the following statement in regard to the materiality test: Taking into consideration all the circumstances of the present case and carrying out an objective assessment based on the principle of good faith, it must be asked if the insurer, under the assumption that it had been told the truth, would not have concluded the ­contract or would not have concluded the contract on the same terms.72

iv. Knowledge Under article 4 paragraph 1 ICA facts affecting the risk must only be disclosed as far as and such as they are known or ought to be known to the policyholder when concluding the contract. A fact is known to the policyholder when he or she is consciously aware of it,73 ie when he or she has actual knowledge of it. The policyholder is also obligated to disclose facts which ‘ought to be known’ to him or her. According to settled case law this includes all facts ‘which cannot escape him or her if he or she seriously reflects on the questions of the insurer’.74 To determine if the policyholder ought to have known a fact, the circumstances of the individual case must be taken into account, in particular the personal characteristics (such as intelligence, level of education and experience) and personal circumstances of the policyholder.75 According to the general rule provided by article 4 ICA, only the knowledge of the policyholder is relevant. Article 5 ICA specifies under which circumstances the knowledge of third parties has to be disclosed as well. Article 5 paragraph 1 ICA stipulates that if an insurance contract is concluded by an agent, both the material facts affecting the risk which are known or ought to be known to the principal as well as those which are known or ought to be known to the agent must be disclosed. The provision’s objective is to prevent a policyholder from evading his or her duty of disclosure, as well as the legal consequences attached to it, by letting an agent conclude the contract in his or her stead and profiting from its ignorance.76 In case of insurance for the account of another (Versicherung für fremde ­Rechnung), article 5 paragraph 2 ICA provides that facts affecting the risk which are known or ought to be known to the insured third party or its agent must also be disclosed, unless the contract is concluded without the knowledge of these 70 

See, eg, Kuhn, Müller-Studer and Eckert (n 41) no 749 fn 1008. See decision of the Swiss Federal Supreme Court BGE 92 II 342 consideration 5 pp 352f. 72  Decision of the Swiss Federal Supreme Court BGE 136 III 334 consideration 2.4 p 338. 73  Maurer (n 18) 254. Similar Nef (n 38) art 4 no 26; Brulhart (n 17) no 473. 74  See, eg, decisions of the Swiss Federal Supreme Court BGE 136 III 334 consideration 2.3 p 337; BGE 134 III 511 consideration 3.3.3 p 514; BGE 118 II 333 consideration 2b p 337; BGE 109 II 60 consideration 3c p 63. 75 See, eg, decisions of the Swiss Federal Supreme Court BGE 134 III 511 consideration 3.3.3 p 514; BGE 118 II 333 consideration 2b p 337. For legal doctrine see, eg, Nef (n 38) art 4 no 26; Kuhn, ­Müller-Studer and Eckert (n 41) no 748. 76  Brulhart (n 17) no 471 p 211. See also Nef (n 38) art 5 no 2 with further references. 71 

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­ ersons or a timely notification of the applicant is not possible. The provision thus p obligates the policyholder to collect the necessary information from the insured third party and its agent.77

C.  Form of the Required Information Article 4 paragraph 1 ICA specifies that the disclosure must be made in writing (‘schriftlich mitteilen’). According to case law78 and prevailing legal doctrine79 written form according to articles 13–15 CO (Code of Obligations) is required. The draft for a revised Insurance Contract Act proposes to give the policyholder the option to either use written form within the meaning of articles 13 ff CO or ‘any other form evidenced in the form of text’.80,81

D.  Termination of Contract for Non-disclosure i.  Right of Termination Article 6 paragraph 1 ICA in its revised version82 grants the insurer a right of termination if the policyholder83 incorrectly disclosed or withheld, when concluding the insurance contract,84 a material fact affecting the risk which he or she knew or ought to have known and about which he or she was questioned in writing.85 According to case law86 and prevailing legal doctrine87 it is not required 77 

Nef (n 38) art 5 no 14. See, eg, decision of the Swiss Federal Supreme Court 4A_285/2009 of 22 October 2009 consideration 2.1 with a further reference. 79  See, eg, Nef (n 38) art 4 no 29 with further references; Brulhart (n 17) no 471 p 213; Urs Ch Nef and Clemens von Zedtwitz, in Heinrich Honsell and others (eds), Basler Kommentar Versicherungsvertragsgesetz Nachführungsband (Basel, Helbling & Lichtenhahn, 2012) art 4 ad no 29. Of different opinion Kuhn, Müller-Studer and Eckert (n 41) no 742; Fuhrer (n 4) no 3.74 and 6.19 according to whom text form is sufficient. 80  Art 4 para 1 sent 2 revICA. 81  For more details see explanatory report draft ICA (n 46) 5089, 5098 and 5112. 82  Under art 6 ICA old version, the sanction for a breach of duty consisted of a right to avoid the contract which led to the policyholder losing all insurance coverage while the insurer retained any premiums paid and was even entitled to the premium for the ongoing insurance period in its entirety, see, eg, Peter Gauch, ‘Das Kündigungsrecht des Versicherers bei verletzter Anzeigepflicht des ­Antragstellers—Ein Kurzkommentar zu den am 1. Januar 2006 in Kraftgetretenen Änderungen der Art. 6 und 8 VVG’ (2006) Zeitschrift des Bernischen Juristenvereins 361, 362. 83  See above text to n 47. 84  As previously discussed, under current law the duty of disclosure remains in effect until the insurance contract has been concluded. For more details see above text to nn 39ff. 85  See art 6 para 1 sent 1 ICA. 86 See, eg, decisions of the Swiss Federal Supreme Court 4A_134/2013 of 11 September 2013 ­consideration 5; 9C_194/2008 of 6 October 2008 consideration 3.1.3; BGE 134 III 511 consideration 3.3.3 p 514. 87  See, eg, Gauch (n 82) 361, 365; Brulhart (n 17) no 477; Kuhn, Müller-Studer and Eckert (n 41) no 748 fn 1007 and no 754. Of different opinion, eg, Fuhrer (n 4) no 6.137f and 6.141ff. 78 

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that the policyholder is at fault for the breach. Thus, the only requirement for the right of termination is a breach of the duty of disclosure as defined by article 6 paragraph 1 sentence 1 ICA.

ii.  Modalities of the Termination According to article 6 paragraph 1 sentence 1 ICA the right of termination has to be exercised by ‘written notice’. This is generally acknowledged to mean that ­written form according to articles 13–15 CO (Code of Obligations) is required.88 As to the content of the notice of termination, the law does not contain any requirements. In particular, the insurer is not required to inform the policyholder of the legal consequences of the termination. However, according to case law,89 as a general rule, the insurer’s notice is only deemed to be effective if it explicitly states which facts have been incorrectly disclosed or withheld and which questions were not answered correctly. According to article 6 paragraph 2 ICA, the right of termination expires four weeks after the breach of the duty of disclosure becomes known to the insurer. If the insurer does not give notice in a timely manner, it forfeits its right90 and the contract remains in force as agreed.91 Unlike the right of termination of the policyholder for a breach of the insurer’s pre-contractual information duty under ­article 3 ICA which expires at the latest one year after the breach of duty92 the insurer’s right of termination does not have such a fixed expiration date. This ­discrepancy is criticised by some authors.93

iii.  Legal Consequences of the Termination According to article 6 paragraph 1 sentence 2 ICA the termination becomes effective upon the policyholder’s receiving the insurer’s written notice of ­termination.94 This does not affect the validity of the contract in the past.95 The insurance coverage as well as the policyholder’s obligation to pay premium only end once the

88  See, eg, Gauch (n 82) 361, 363; Brulhart (n 17) no 474; Fuhrer (n 4) no 6.19 and 6.146; Urs Ch Nef and Clemens von Zedtwitz, in Heinrich Honsell and others (eds), Basler Kommentar Versicherungsvertragsgesetz Nachführungsband (Basel, Helbling & Lichtenhahn, 2012) art 6 ad no 17. 89  See, eg, decisions of the Swiss Federal Supreme Court 9C_208/2010 of 20 May 2010 consideration 3.1; 4A_488/2007 of 5 February 2008 consideration 3.1; 5C.134/2006 of 21 November 2006 consideration 2.1; 5C.106/2005 of 6 September 2005 consideration 2; BGE 129 III 713 consideration 2.1 p 714. For more details see Brulhart (n 17) no 474; Fuhrer (n 4) no 6.146. 90  See, eg, Gauch (n 82) 361, 367; Fuhrer (n 4) no 6.147. 91  See, eg, Gauch (n 82) 361, 367; Fuhrer (n 4) no 6.145; Nef and von Zedtwitz (n 88) art 6 ad no 16. 92  See art 3a para 2 half sent 2 ICA. 93  See, eg, Gauch (n 82) 361, 366 fn 18; Fuhrer (n 4) no 6.150. 94  For more details see, eg, Gauch (n 82) 361, 362 fn 6; Kuhn, Müller-Studer and Eckert (n 41) no 759. 95  See, eg, Gauch (n 82) 361, 362; Brulhart (n 17) no 499; Nef and von Zedtwitz (n 88) art 6 ad no 31/32.

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termination becomes effective.96 As a general rule, both parties’ rights and obligations remain unchanged for the whole duration of the contract.97 However, in regard to insurance coverage, article 6 paragraph 3 ICA contains an exception to this rule.98 Article 6 paragraph 3 sentence 1 ICA provides that if an insurance contract is terminated according to article 6 paragraph 1 ICA, the insurer is released99 from its obligation to provide indemnification for damage already occurred, ‘the occurrence or extent of which was influenced100 by the fact affecting the risk incorrectly disclosed or withheld’. According to article 6 paragraph 3 sentence 2 ICA the insurer is entitled to restitution insofar as the obligation to provide indemnification has already been fulfilled. Under article 6 paragraph 3 ICA, the insurer is granted a full release from its obligation to provide indemnification even if the fact incorrectly disclosed or withheld was only partially causal.101 In this regard Swiss law therefore still adheres to the all-or-nothing principle,102 which has been subject to some criticism.103 In regard to the policyholder’s obligation to pay premium, on the other hand, the termination has no retroactive effect. If a contract is terminated according to article 6 paragraph 1 ICA, this constitutes a ‘premature termination of the contract’ within the meaning of article 24 paragraph 1 ICA.104 Article 24 paragraph 1 ICA provides that in such a case, the insurer is only entitled to the premium due until the termination takes effect.105 Finally, it must be noted that according to article 6 paragraph 4 ICA if a life insurance contract which may be surrendered according to article 90 paragraph 2 ICA is terminated, the insurer must provide the benefits due in case of surrender. For group insurance, the legal effect of a termination according to article 6 p ­ aragraph 1 ICA is provided for in article 7.106 Article 7 ICA provides that

96 

See, eg, Kuhn, Müller-Studer and Eckert (n 41) no 759. See also Gauch (n 82) 361, 363. See, eg, Nef and von Zedtwitz (n 88) art 6 ad no 31/32 with further references. See Gauch (n 82) 361, 368. 99  This release is a direct legal consequence of the termination, a separate notice of the insurer is not required, see, eg, Gauch (n 82) 361, 368 fn 23. 100  The meaning of this term is being discussed controversially because a rigid interpretation in the sense that a causal link is required would mean that a good number of circumstances relevant for the assessment of the risk (such as previous damages or existing insurance contracts) would not satisfy the causation requirement. For an overview of the different views see, eg, Nef and von Zedtwitz (n 88) art 6 ad no 5. The Swiss Supreme Court has not yet conclusively ruled on this issue. In the decision 4A_150/2015 of 29 October 2015 consideration 7 it ruled that in motor vehicle insurance a prior accident of the driver can fulfil the requirement, but did not rule on the question whether this applies to all so-called indicating circumstances. 101  See, eg, Gauch (n 82) 361, 370; Fuhrer (n 4) no 6.153; Nef and von Zedtwitz (n 88) art 6 ad no 31/32. 102  See, eg, Gauch (n 82) 361, 370; Brulhart (n 17) no 500 p 226. 103  See, eg, Gauch (n 82) 361, 370f; Fuhrer (n 4) no 6.156. 104  See, eg, Fuhrer (n 4) no 6.164. 105  See art 24 para 1 sent 1 ICA. For more details see Nef and von Zedtwitz (n 88) art 6 ad no 33; Gauch (n 82) 361, 363f. 106  For more details on this provision see Nef (n 38) art 7 no 1ff. 97  98 

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if a ­contract covers several objects or persons and the duty of disclosure is only breached in respect to a part of these objects or persons, the insurance remains in effect for the other part if it results from the circumstances that the insurer would have insured this part by itself on the same terms. An example for such a contract would be an employer who insures itself as well as its employees against accidents and sickness.107

iv.  Exceptions to Termination (Article 8 ICA) Article 8 ICA stipulates six exceptions in which the insurer is not entitled to ­terminate the contract according to article 6 paragraph 1 ICA despite a breach of the duty of disclosure by the policyholder. Because the release from the obligation to provide indemnification under article 6 paragraph 3 ICA is conditional on a prior termination, article 6 paragraph 3 ICA does not apply either.108 Therefore, the insurance contract remains in force as agreed if one of the exceptions applies. According to prevailing opinion109 the burden of proof lies with the policyholder. The first exception is cases in which the withheld or incorrectly disclosed fact ceased to exist before the insured event occurred.110 One example given by the doctrine is a policyholder who declares that his mountain lodge has a roof made of sheet metal when in fact it is a thatched roof, but before the house burns down the thatched roof is replaced by one made of sheet metal.111 According to article 8 number 2 ICA the insurer is not entitled to terminate the contract if it prompted the non-disclosure or incorrect disclosure.112 This is, for example, the case if the insurer supplied the policyholder with incorrect information on which the latter legitimately relied upon.113 Article 8 number 3 and 4 ICA address the situation where the withheld or incorrectly disclosed fact was already known or ought to have been known to the insurer. This is, for instance, the case if the fact in question was disclosed to the insurer at the time of the conclusion of a prior insurance contract with the same policyholder.114 Naturally, the insurer is furthermore no longer entitled to terminate the contract if it waived said right.115 The right of termination can be waived either implicitly or by explicit statement.116 An example for the former would be if an insurer offers

107 

Maurer (n 18) 258. See, eg, Gauch (n 82) 361, 373. 109  See, eg, Nef (n 38) art 8 no 37 with further references; Brulhart (n 17) no 479. 110  See art 8 number 1 ICA. For more details see Nef (n 38) art 8 no 4ff. 111  Maurer (n 18) 256f. 112  For more details see Nef (n 38) art 8 no 10ff. 113  See, eg, Koenig (n 41) 180; Brulhart (n 17) no 481. 114  See, eg, decision of the Swiss Federal Supreme Court BGE 111 II 388 consideration 3bb p 396. For legal doctrine see Maurer (n 18) 257; Nef (n 38) art 8 no 23. 115  See art 8 number 5 ICA. 116  See, eg, Koenig (n 41) 181; Nef (n 38) art 8 no 30. 108 

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the policyholder a contract extension despite being aware of a breach of the duty of disclosure.117 And last but not least, the insurer may not terminate the contract if the policyholder did not reply to one of the insurer’s questions and the insurer still concluded the contract.118 However, according to article 8 number 6 sentence 2 ICA this exception does not apply if the question must be considered to be answered in a certain sense on the basis of the other communications of the obligated party, and if this answer constitutes a breach of the duty of disclosure.119

E.  Other Private Law Sanctions for Non-disclosure?120 The question arises of whether articles 4 ff ICA regulate the sanctions for a breach of the duty of disclosure exhaustively or whether other private law sanctions are also available to the insurer. Of particular interest are the following two aspects of this question: First, can the insurer rely on any of the rights derived from the general rules on the vices of consent according to articles 24 ff CO? Second, can a breach of the duty of disclosure give rise to a claim for compensation against the policyholder for damages caused by the breach of duty (liability under culpa in contrahendo121) ? The first question was not addressed by the legislator and is therefore open to interpretation. Settled case law122 and prevailing legal doctrine123 firmly take the view that articles 4 ff ICA regulate the policyholder’s duty of disclosure as well as the sanctions for its breach exhaustively, thus precluding the general provisions of the Code of Obligations in general and the rules on the vices of consent in particular. However, there is a small minority124 which is of the opinion that at least article 28 CO which regulates fraud is complementary to articles 4 ff ICA. As to the second question: Under previous law, article 27 ICA, now repealed, explicitly reserved the policyholder’s liability for damages if he or she was at fault for the breach of the duty of disclosure.125 Under current law the question is being controversially discussed. While some authors126 argue that the insurer may also

117 

See Nef (n 38) art 8 no 30. See art 8 number 6 ICA. For more details see Nef (n 38) art 8 no 33ff. 120  The relationship between arts 4 ff ICA and the general rules of private law is the subject of the author’s PhD thesis. 121  For an overview on the liability under culpa in contrahendo see text to nn 22ff. 122  See, eg, decisions of the Swiss Federal Supreme Court 4A_112/2013 of 20 August 2013 consideration 3.5.1; BGE 118 II 333 consideration 3d p 341; BGE 61 II 281 consideration 1 p 284. 123  See, eg, Koenig (n 41) 185; Nef (n 38) art 6 no 27 with further references; Gauch (n 82) 361, 370 fn 35; Brulhart (n 17) no 488. 124  See, eg, Fuhrer (n 4) no 6.110ff. 125  For more details see Nef (n 38) art 6 no 35 with further references. 126  See, eg, Gauch (n 82) 361, 363 fn 9; Nef and von Zedtwitz (n 88) art 6 ad no 35. 118  119 

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demand compensation for the damages suffered under culpa in contrahendo, ­others127 oppose this view.

IV.  Insurer’s Pre-contractual Information Duties A.  The Insurer’s Duty to Inform under Articles 3–3a ICA When the Federal Insurance Contract Act was first enacted in 1908,128 it did not contain any ‘genuine’ information duty of the insurer. The insurer’s only precontractual obligation concerning information was the requirement to either incorporate the general conditions of insurance in its insurance application form or to provide them to the policyholder prior to the submission of the insurance application form.129 It was only in 2004 that a genuine information duty of the insurer was introduced into the Insurance Contract Act,130 obliging it to provide every policyholder with a standardised set of information on its identity, the insurance product offered and the handling of the personal data of the policyholder.131 The relevant provisions, articles 3 and 3a ICA which stipulate the duty to inform and the sanctions for a breach of the duty respectively, entered into force on 1 January 2007.132

i.  Ratio Legis Even prior to the revision of 2004, insurers generally provided the policyholder voluntarily with information on the content of the insurance contract.133 The introduction of the duty of information was nonetheless considered necessary to ensure compatibility of the Swiss law with the European law,134 in particular

127 

See, eg, Fuhrer (n 4) no 6.14. BBl (Bundesblatt, Federal Gazette) 1908 II 138 (for more details on the Federal Gazette see n 32). 129  See art 3 para 1 ICA old version. 130  See Act on the Amendment of the Insurance Contract Act of 17 December 2004, AS (­Amtliche Sammlung, Official Collection of Federal Legislation) 2005 5245 (for further information on the ­Official Collection of Federal Legislation see n 34). 131  See art 3 para 1 ICA. 132 AS (Amtliche Sammlung, Official Collection of Federal Legislation) 2005 5251 (for further ­information on the Official Collection of Federal Legislation see n 34). 133  Explanatory Report on the Federal Act on the Supervision of Insurance Companies (Insurance Supervision Act, ISA) and the Amendment of the Federal Act on Insurance Contracts of 9 May 2003, BBl 2003 3789, 3854 (for more details on the Federal Gazette see n 32). Concurring Franz ­Hasenböhler, ‘Vorvertragliche Informationspflichten des Versicherungsunternehmens’ in Anton K Schnyder and Stephan Weber (eds), Totalrevision VVG: ein Wurf für die nächsten 100 Jahre? (Zürich, Schulthess, 2006) 32 who stresses, though, that since there was no legal obligation, the extent and the content of the information was at the discretion of the insurer; Brulhart (n 17) no 335. 134  Explanatory report partial revision ICA 2004 (n 133) 3789, 3854. 128  See

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the third generation of directives on insurance law.135 Legal doctrine furthermore emphasises that the establishment of the duty serves, amongst other objectives,136 to increase the transparency of insurance products on offer in the market.137 This enables the policyholder to make an ‘informed choice’, ie decide on whether or not to take out insurance in full knowledge of the key aspects of the product offered.138

ii.  Scope of Application The duty to inform applies to all private insurance in the primary insurance ­sector.139,140 Furthermore, the law makes no distinction as to whether the policyholder is a natural person or a legal entity and whether the insurance contract is for business or private purposes.141 The legislator’s aim was to achieve comprehensive protection for all insured persons.142 This lack of differentiation between distinct categories of policyholders has been subject to some criticism by legal scholars.143 Some even take the view that the duty to inform does in fact not extend to all policyholders to the same degree. Süsskind, for example, argues that toward an experienced policyholder, eg large corporations, the duty is restricted to those aspects of the contract not already known to the policyholder.144 Fuhrer holds the view that if a policyholder is represented by an insurance broker, the insurer normally does not have to provide the information required under article 3 ICA.145 He reasons that an insurance broker needs to know the standard market products and because the broker is an agent

135  See Stoessel (n 21) art 3 no 35; Roland Schaer, Modernes Versicherungsrecht (Bern, Stämpfli, 2007) 361. 136  For more details see Marcel Süsskind, ‘Die vorvertragliche Informationspflicht des Versicherers gemäss Art. 3 des revidierten Versicherungsvertragsgesetzes’ (2006) Haftung und Versicherung 15, 15f. 137  Süsskind, ibid 15. See also Franz Hasenböhler, ‘Vorvertragliche Informationspflichten im Lichte des revidierten Versicherungsrechts’ in Ernst A Kramer, Peter Nobel and Robert Waldburger (eds), ­Festschrift für Peter Böckli zum 70. Geburtstag (Zürich, Schulthess, 2006) 637; Brulhart (n 17) no 337ff and ‘Le devoir d’information précontractuelle de l’assureur’ in Christine Chappuis and Bénédict ­Winiger (eds), La responsabilité pour l’information fournie à titre professionnel (Zürich, Schulthess, 2009) 207; Moritz W Kuhn and Alexandra Geiger-Steiger, in Heinrich Honsell and others (eds), Basler Kommentar Versicherungsvertragsgesetz Nachführungsband (Basel, Helbling & Lichtenhahn, 2012) art 3 no 1. 138  See Süsskind (n 136) 15, 15; Kuhn and Geiger-Steiger, ibid art 3 no 1. See also Franz Werro and Anne-Catherine Hahn, ‘La révision de la loi sur le contrat d’assurance: quelques problèmes ­choisis’ [2003] Haftung und Versicherung 91, 92; Franz Hasenböhler, ‘Schwerpunkte des teilrevidierten ­Versicherungsvertragsgesetzes (VVG)’ (2006) Aktuelle Juristische Praxis 833, 834. 139  According to art 101 para 1 number 1 ICA reinsurance contracts are excluded from the scope of the Insurance Contract Act. 140  Süsskind (n 136) 15, 17; Hasenböhler (n 138) 833, 835. 141  Süsskind (n 136) 15, 16f. See also Hasenböhler (n 138) 833, 834; Fuhrer (n 4) no 6.68ff; Kuhn and Geiger-Steiger (n 137) art 3 no 3. 142  See Süsskind (n 136) 15, 17. Concurring Kuhn and Geiger-Steiger (n 137) art 3 no 3. 143  See Süsskind (n 136) 15, 17; Hasenböhler (n 138) 833, 835; Fuhrer (n 4) no 6.68ff. 144  See Süsskind (n 136) 15, 25. 145  Fuhrer (n 4) no 6.69f. Similar Süsskind (n 136) 15, 25 who does not deny the duty itself, but instead assumes that a breach of the duty has no legal consequences.

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(Stellvertreter) of the policyholder his knowledge is deemed to be that of the latter. Because of the general principle that there is no duty to inform someone of facts already known to him or her, this would mean that the insurer does not need to provide product information in most cases.146 It would be advisable for the legislator to either exempt some categories of ­policyholders from the scope of application of the duty to inform or to at least let the parties decide whether they want to contract out of the obligation and to what extent by making articles 3 and 3a ICA non-mandatory for some categories of policyholders. The latter approach is taken by the draft for a revised Insurance Contract Act and will be discussed below.147 As to the situation de lege lata, it would be inequitable if a policyholder could invoke the non-disclosure of information already known to him. In my opinion, this cannot be avoided by restricting the scope of application of the duty, because this solution is not compatible with the wording of the law. Instead, the policyholder should not be permitted to rely on any rights derived from a breach of the duty of information if the nondisclosed information was known to him.148 This restriction of the policyholder’s rights can be based on article 2 paragraph 2 CC (Civil Code) which prohibits the abuse of a right.149 This solution would also ensure equal treatment of the parties as according to article 8 number 3 and 4 ICA the insurer may not terminate the contract despite a breach of the policyholder’s pre-contractual duty of disclosure if the non-disclosed facts were known or should have been known to the insurer or if the incorrectly disclosed facts were known correctly to the insurer or should have been correctly known to it.

iii.  Semi-mandatory Character Article 3 and 3a ICA are of a semi-mandatory character150 which means that the provisions may not be modified to the disadvantage of the policyholder or the beneficiary (article 98 paragraph 1 ICA). Consequently, the information duties of the insurer and the right of termination in case of a breach of duty cannot be waived.151 The only exception is transport insurance, because article 98 paragraph 1 ICA does not apply to it.152 The draft for a revised Insurance Contract Act introduces further exemptions. According to the new article 98a revICA articles 97 (provisions with mandatory character) and 98 (provisions with semi-mandatory character) will not apply to

146 

Fuhrer (n 4) no 6.69. See text to nn 153f. Of the same view Süsskind (n 136) 15, 25 in regard to policyholders represented by an insurance broker. 149  Of different opinion Süsskind (n 136) 15, 25 who wants to apply art 8 number 3 and 4 ICA by analogy. 150  Süsskind (n 136) 15, 25; Kuhn and Geiger-Steiger (n 137) art 3 no 40. 151  Süsskind (n 136) 15, 25. See also Kuhn and Geiger-Steiger (n 137) art 3 no 40. 152  See art 98 para 2 ICA. 147  148 

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credit insurance, guarantee and bonding insurance as well as transport insurance if professional or commercial risks are insured and to all insurance contracts ­concluded with ‘professional policyholders’.153 The reasoning given for these exemptions is that in these cases the policyholders usually have internal structures in place, eg a legal department, to sufficiently safeguard their own interests.154

iv.  General Duty to Inform: The Scope The content of the duty to inform is specified in article 3 paragraph 1 ICA with article 3 paragraph 2 sentence 2 ICA clarifying that in addition to this the insurer is furthermore obligated to provide the policyholder with its general conditions of insurance.155 According to article 3 paragraph 1 sentence 1 ICA the insurer has to inform the policyholder about ‘its identity and the essential content of the insurance contract’. By using the term ‘essential’, the legislator expresses its intention that the information to be provided under article 3 ICA should include only the key aspects of the contract.156 Legal doctrine approves as too much information could easily overwhelm the policyholder.157 In article 3 paragraph 1 lit a–g ICA the legislator enumerates which aspects of the insurance contract it considers to be essential.158 Even a cursory glance at this list shows that this ‘essential content’ is not restricted to the essentialia negotii (essential terms) of the insurance contract, such as the insured risks (lit a) or the premiums due (lit c).159,160 The term also includes information in regard to surplus profits (lit e) and surrender and paid-up values (lit f) for life insurance as well as information on the handling of personal data (lit g). According to prevailing legal doctrine,161 the list in article 3 paragraph 1 lit a–g ICA is exhaustive. As this corresponds with comments made during the parliamentary discussion,162 this opinion proves to be accurate. The explanatory report on the draft for a revised Insurance Contract Act shares this view as well.163 153  Art 98a para 2 lit a–g revICA lists the types of policyholders which the legislator considers to be professional. 154  Explanatory report draft ICA (n 46) 5089, 5133f. 155  Under previous law, this duty was already established in article 3 para 1 ICA old version, but it was only applicable if the policyholder was the one to make the offer for an insurance contract, see, eg, Stoessel (n 21) art 3 no 2f. 156  Süsskind (n 136) 15, 15. Concurring Kuhn and Geiger-Steiger (n 137) art 3 no 5. 157  See Hasenböhler (n 137) 638 and (n 138) 833, 834. See also Süsskind (n 136) 15, 15; Brulhart (n 17) no 336 and (n 137) 207. 158  For further details on the information required by art 3 para 1 lit a—g ICA see Süsskind (n 136) 15, 17ff and 21f; Hasenböhler (n 138) 833, 834f; Brulhart (n 17) no 341 and (n 137) 208ff; Fuhrer (n 4) no 6.74ff; Kuhn and Geiger-Steiger (n 137) art 3 no 7ff. 159  See Hasenböhler (n 137) 637. 160  Süsskind (n 136) 15, 17; Kuhn and Geiger-Steiger (n 137) art 3 no 8. 161  Hasenböhler (n 137) 638; Kuhn, Müller-Studer and Eckert (n 41) no 351; Kuhn and GeigerSteiger (n 137) art 3 no 6. Of different opinion Süsskind (n 136) 15, 19f and Schaer (n 135) 377 and 378. 162  See statements made by Eugen David, AB 2003 S 1234f and 1235 and Susanne Leutenegger Oberholzer, AB 2004 N 403 (for more details on this source see n 2). 163  See explanatory report draft ICA (n 46) 5089, 5110.

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­ urthermore, a precise and therefore exhaustive statutory description of the scope F of the duty is, in my opinion, vital to ensure that the aim of the provision can be achieved. If the list were indeed non-exhaustive, insurers would most likely react by providing information on all other aspects of the contract which might be considered even slightly relevant to the policyholder, to ensure their compliance with the law. Most policyholders would be overwhelmed with such a barrage of information. A non-exhaustive list would, thus, not help them, but in fact hinder them in making an informed choice. It is important to note, however, that despite the fact that the list in article 3 paragraph 1 ICA is exhaustive, there can be further information requirements provided by statutory provisions which are not specific to insurance contracts164 and there might be further demand for information based on the general obligation to act in good faith.165 The draft for a revised Insurance Contract Act adheres to the exhaustive enumeration,166 but extends the list of required information and partially amends article 3 paragraph 1 ICA.

v.  General Duty to Inform: Modalities of Providing Information Article 3 paragraph 2 sentence 1 ICA specifies that the information must be given to the policyholder in a manner which enables him or her to know it ‘when ­applying for or accepting an insurance contract’. This is interpreted to mean that the policyholder has to receive the information before making a binding declaration of its intent to conclude the contract.167 This follows from the rationale of the law as well. As the duty serves to enable the policyholder to make an informed choice, he or she needs to receive the information at a time when it can still influence his or her decision.168 In regard to the language and transparency of the information provided by the insurer, article 3 paragraph 1 sentence 1 ICA stipulates that it must be given ‘in a comprehensible manner’. This is understood to mean that the information should not be in legal jargon, full of actuarial terms, but in everyday language, even if this causes it to be less precise.169 In regard to form, article 3 ICA does not explicitly lay down any requirements. But most legal scholars170 are of the opinion that text form (Textform) is required. It has to be noted, though, that the understanding of the term text form seems to differ as there is no generally applicable statutory definition. There is agreement,

164 

See below text to nn 220. See below text to nn 201ff. Explanatory report draft ICA (n 46) 5089, 5110. 167  Werro and Hahn (n 138) 91, 93; Süsskind (n 136) 15, 22; Hasenböhler (n 137) 638; Fuhrer (n 4) no 6.83f. 168  See Hasenböhler (n 137) 638. Concurring Kuhn and Geiger-Steiger (n 137) art 3 no 31. 169  Süsskind (n 136) 15, 16. See also Kuhn and Geiger-Steiger (n 137) art 3 no 5. 170  Süsskind (n 136) 15, 22; Hasenböhler (n 137) 638 and (n 138) 833, 836; Fuhrer (n 4) no 6.18f. Similar Brulhart (n 17) no 343 and (n 137) 211. 165  166 

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however, that while written form according to articles 13ff CO (Code of Obligations) is not required, oral communication is not sufficient.171 This is c­ onsistent with comments made by the legislator in the explanatory report where it was pointed out that while the insurer usually hands over a document containing the required information it is nevertheless permitted to send the document to the policyholder by electronic means, but that on the other hand it is not permissible to conclude an insurance contract on the phone without prior contact.172 Legal doctrine agrees that is permissible to create standardised product information for all contracts of the same type which includes references to other ­documents, eg the individual offer, for data relating to the individual contract such as the premium due.173 In practice insurers either incorporate the required product information into the same document as the general conditions of insurance, prefacing the latter,174 or provide the policyholder with a separate document entitled ‘Product Information’.175

vi.  Additional Duty in Regard to Group Insurance In regard to Group Insurance, article 3 paragraph 3 ICA establishes an additional obligation of the insurer. However, the provision primarily imposes a duty on the policyholder: For group insurance contracts conferring a direct claim for performance to persons other than the policyholder, the policyholder is obligated to inform these persons about the essential content,176 the modification and the termination of the contract (article 3 paragraph 3 sentence 1 ICA). To ensure the policyholder’s compliance with this duty,177 the legislator has the insurer provide the policyholder with the necessary documentation (article 3 paragraph 3 sentence 2 ICA). The documentation can take the form of a separate pamphlet or information sheet, but the information may also be incorporated into the insurance policy, a copy of which can be handed to the insured person.178 The scope of application of article 3 paragraph 3 ICA is being discussed controversially. The wording of the law seems to imply that all insurance for the account of another (Versicherung für fremde Rechnung) is included,179 but the legislator only mentioned occupational pension schemes (berufliche Vorsorge) in its explanatory report.180 Most legal scholars agree that article 3 paragraph 3 ICA mainly

171  See Süsskind (n 136) 15, 22; Brulhart (n 17) no 343 and (n 137) 211; Kuhn and Geiger-Steiger (n 137) art 3 no 31. 172  Explanatory report partial revision ICA 2004 (n 133) 3789, 3855. 173  See Süsskind (n 136) 15, 23; Fuhrer (n 4) no 6.66f. 174  Brulhart (n 17) no 344, 361 and (n 137) 211; Fuhrer (n 4) no 6.66. 175  Brulhart (n 17) no 361. 176  For more details on the information required see Süsskind (n 136) 15, 24; Fuhrer (n 4) no 6.93; Kuhn and Geiger-Steiger (n 137) art 3 no 37. 177  Kuhn, Müller-Studer and Eckert (n 41) no 545; Kuhn and Geiger-Steiger (n 137) art 3 no 38. 178  Süsskind (n 136) 15, 24. Concurring Kuhn and Geiger-Steiger (n 137) art 3 no 38. 179  Fuhrer (n 4) no 6.87. 180  See explanatory report partial revision ICA 2004 (n 133) 3789, 3855.

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applies to occupational group insurance (betriebliche Kollektivversicherungen), such as daily benefits insurance (Krankentaggeldversicherung) and supplementary accident insurance (Unfallzusatzversicherung).181 Furthermore, there seems to be agreement that article 3 paragraph 3 ICA does in fact not apply to occupational pension schemes, because employees only have a claim against the pension institution and not against the life insurer.182 The draft for a revised Insurance Contract Act addresses this issue and clarifies the scope of application183 by restricting it to occupational group insurance of persons (betriebliche kollektive Personenversicherungen).184

vii.  Contract Termination as a Remedy for the Breach The insurer’s pre-contractual duty to inform according to article 3 ICA is the counterpart of the policyholder’s duty of disclosure according to article 4 ICA.185 Consequently, the legislator was of the opinion that a breach of the duty to inform must also186 result in private law sanctions.187 Therefore, article 3a paragraph 1 ICA grants the policyholder a right of termination if the insurer is in breach of its duty to inform according to article 3. According to legal doctrine188 article 3a ICA only applies to breaches of the duty to inform established by article 3 paragraph 1 ICA. Thus, a breach of the insurer’s obligation according to article 3 paragraph 3 ICA does not grant the policyholder a right of termination, but according to legal doctrine189 it can give rise to a claim for compensation for damages suffered by the policyholder. This view is consistent with comments made during the parliamentary discussion.190 The right of termination has to be exercised by written notice to the insurer (article 3a paragraph 1 sentence 1 ICA) which means that written form according to articles 13–15 CO (Code of Obligations) is required.191 The termination becomes effective only upon receipt of the written notice by the insurer (­article 3a paragraph 1 sentence 2 ICA). The contract—and thus the i­nsurance

181  See Süsskind (n 136) 15, 24; Hasenböhler (n 137) 638 and (n 138) 833, 836; Schaer (n 135) 373; Kuhn and Geiger-Steiger (n 137) art 3 no 34. 182  Süsskind (n 136) 15, 24; Kuhn, Müller-Studer and Eckert (n 41) no 545; Kuhn and Geiger-Steiger (n 137) art 3 no 35. Hasenböhler (n 137) 638 and (n 138) 833, 836 seems to be of different opinion, because he names occupational pension schemes as one of the fields of application. 183  Explanatory report draft ICA (n 46) 5098, 5111. 184  See art 3 para 3 revICA. 185  Explanatory report partial revision ICA 2004 (n 133) 3789, 3856. Concurring Werro and Hahn (n 138) 91, 92; Süsskind (n 136) 15, 25; Hasenböhler (n 137) 639; Fuhrer (n 4) no 6.150. 186  For details on the sanctions for a breach of the policyholder’s duty of disclosure see above text to nn 83ff. 187  Explanatory report partial revision ICA 2004 (n 133) 3789, 3856. 188  See Süsskind (n 136) 15, 25; Fuhrer (n 4) no 6.94; Kuhn and Geiger-Steiger (n 137) art 3a no 8. 189  See Fuhrer (n 4) no 6.94. See also Süsskind (n 136) 15, 25; Kuhn and Geiger-Steiger (n 137) art 3a no 8. 190  See statements made by Eugen David, AB 2003 S 1235 (for more details on this source see n 2). 191  See Hasenböhler (n 138) 833, 836; Brulhart (n 17) no 348; Fuhrer (n 4) no 6.19.

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c­ overage—remains in effect up to that time.192 According to article 3a paragraph 2 ICA the right to terminate the contract expires four weeks after both the breach of duty and the withheld information become known to the policyholder. At the latest, the right expires one year after the breach of duty occurred (article 3a ­paragraph 2 half sentence 2 ICA). This expiration after one year is criticised by some authors,193 because the corresponding right of termination of the insurer for a breach of the policyholder’s pre-contractual duty of disclosure knows no such restriction. The policyholder is entitled to terminate the contract irrespective of whether he would have concluded the contract had he known the withheld information.194 However, as previously discussed,195 in my opinion the policyholder cannot rely on any rights derived from a breach of the duty to inform if the non-disclosed information was known to him since this constitutes an abuse of a right which is prohibited by article 2 paragraph 2 CC (Civil Code).

viii.  Other Sanctions and Remedies In legal doctrine there is some criticism as to the usefulness of the right of termination as a sanction in some situations.196 If, for example, damages occur during the term of the contract for which there is no insurance coverage and the insurer did not provide the policyholder with the necessary information on this point (see article 3 paragraph 1 lit b ICA), then the right to terminate the contract will not help the policyholder to recover the damage suffered.197 Some authors198 therefore raise the question if the breach of the duty to inform according to article 3 paragraph 1 ICA can give rise to a claim for compensation against the insurer for damages caused by the breach of duty. This issue will be addressed below.199 Under certain circumstances, the breach of the duty of information can also lead to regulatory sanctions. If an insurer systematically breaches its duty to inform the policyholders, this constitutes an abuse (Missbrauch) under article 46 paragraph 1 lit f ISA (Insurance Supervision Act) and the Supervisory Authority can intervene if the interests of the insured parties are endangered (article 46 paragraph 1 lit g ISA).200

192 

See Werro and Hahn (n 138) 91, 94. See, eg, Fuhrer (n 4) no 6.85, 6.150. 194  Süsskind (n 136) 15, 25. Concurring Kuhn and Geiger-Steiger (n 137) art 3a no 5. See also Schaer (n 135) 360. 195  See above text to nn 148f. 196  See Schaer (n 135) 360; Brulhart (n 17) no 350f and (n 137) 214. 197  See examples given by Brulhart (n 17) no 350f and (n 137) 214. 198  See, eg, Brulhart (n 17) no 350ff and (n 137) 214f. 199  See text to nn 212ff. 200  Süsskind (n 136) 15, 25. Concurring Kuhn and Geiger-Steiger (n 137) art 3a no 7. See also Schaer (n 135) 373. 193 

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B.  Insurer’s Duty to Inform as Derived from Good Faith The fact that the statutory informational duty under article 3 ICA was only introduced in 2004 does not mean that the insurer was not required to provide any information to the policyholder before its introduction. On the contrary, as ­previously pointed out, prevailing opinion acknowledges a general obligation of all parties involved in contract negotiations to act in good faith from which a duty to inform the other party, to some degree, has been derived. The breach of this duty can give rise to claims for compensation by the other party.201 In principle, this duty applies to the insurance contract as well.202

i.  Content and Scope of the Duty Before articles 3–3a ICA were applicable, the Swiss Federal Supreme Court affirmed such a pre-contractual duty of the insurer to inform the policyholder in a number of cases,203 two of which are representative and will be briefly ­summarised to give an understanding of the content and the scope of the duty: —— BGE 90 II 449: A policyholder bought a new lorry destined to replace an old one. He wanted the new vehicle to be insured but the vehicle named in the application and in the insurance policy was in fact the old vehicle. The old vehicle had been insured against civil liability by the same insurer, but was no longer in circulation at the time of the conclusion of the insurance contract and the insurer had been previously informed of that fact by the Road ­Traffic Authority. When the new vehicle was later damaged, the insurer refused to pay because it was not insured. It was judged that under these specific ­circumstances the insurer had breached its duty to inform the policyholder by not clearing up the misconception of the policyholder. —— Decision of the Swiss Federal Supreme Court 4C.98/2007: A doctor who was arranging for his retirement provision wanted a combined life insurance product with both endowment and death benefits. The statements made in the application form, which was signed by the insurance agent, were contradictory in regard to the type of life insurance. The policy deviated from the application form in a way which resulted in only the risk of death being insured. After the contract term expired, the policyholder made a claim for payment of the endowment benefits which the insurer refused because it was not part of the contract. It was judged that under these specific circumstances the insurer had breached its duty to inform the policyholder by not

201 

See above text to nn 22ff. See, eg, decision of the Swiss Federal Supreme Court 4C.98/2007 of 29 April 2008 consideration 3.2.2 with further references. 203  See, eg, decisions of the Swiss Federal Supreme Court BGE 90 II 449; 5C.45/2004 of 9 July 2004; 5C.85/2004 of 11 November 2004; 5C.267/2004 of 1 June 2005; 4C.98/2007 of 29 April 2008. 202 

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These cases clearly demonstrate that the duty to inform as established by case law is always a situational one—dependent on the circumstances of the individual case. There is no general duty to inform the policyholder of all facts relevant to his decision to conclude the contract and on what terms. Without a specific cause in the individual case, the insurer has no duties to inform beyond those stipulated by article 3 ICA. Fuhrer holds the same view in regard to the older case law204 and other authors, while not explicitly voicing an opinion, at least tend to favour a restrictive scope of the duty.205 The decision 4C.98/2007 of 29 April 2008 seems to contradict this view as it is stated there that the insurer has to provide full information on the content of the contract, in particular on the insurance coverage.206 However, this is then followed by the statement that the insurer is notably obliged to bring discrepancies between the policy and previous agreements between the parties to the policyholder’s attention.207 This can only be understood to mean that the Federal Supreme Court requires a specific cause for the information duty to arise after all.

ii.  Relation to Articles 3 and 3a ICA With the introduction of articles 3 and 3a ICA the question arose if these provisions regulate the insurer’s pre-contractual information duty exhaustively, therefore precluding an additional pre-contractual duty to inform derived from the obligation to act in good faith. The other question that arose is whether article 3a ICA regulates the sanctions for a breach of the duty as provided by article 3 ICA exhaustively or whether the policyholder may also demand compensation for the damages suffered (liability under culpa in contrahendo). Both questions seem to not have been answered yet or even addressed by the courts. In the decisions cited above, these issues did not arise as the newly introduced articles 3 and 3a ICA were not applicable to the specific cases. Answering these questions is a matter of the interpretation of the law. Legal doctrine will also be taken into consideration, though only a few authors have voiced an opinion so far. As to the first question—if article 3 ICA regulates the insurer’s ­pre-contractual information duty exhaustively—only Werro and Hahn seem to explicitly voice an opinion. According to them the statutory duty to inform introduced by­ article 3 ICA exists next to the principle of good faith stipulated in article 2 CC (Civil Code) and consequently article 3 ICA does not preclude the application

204  205 

Fuhrer (n 4) no 6.42. See, eg, Maurer (n 18) 258; Stoessel (n 21) art 1 no 41; Brulhart (n 17) no 324ff. decision of the Swiss Federal Supreme Court 4C.98/2007 of 29 April 2008 consideration

206  See

3.2.2. 207 ibid.

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of that principle.208 A judge may therefore affirm a duty to inform which goes beyond the statutory requirements of article 3 ICA.209 In my view, this opinion has to be endorsed for the following reasons. As ­previously discussed, the purpose of article 3 ICA is, among other things, to enable the policyholder to make an informed choice by providing him or her with standardised information on the insurance product offered.210 If the provision were exhaustive, the insurer would not be obligated to clear up a misconception of the policyholder on the content of the contract as long as it provided the latter with the standardised information. Thus, the policyholder would not be put into a position where he or she can make an informed choice and the aim of article 3 ICA would not be achieved. Therefore, the purpose of article 3 ICA supports the interpretation that the provision does not exclude the application of the principle of good faith. Moreover, there is no indication that the legislator wanted to exclude the application of the duty to inform derived from the principle of good faith by introducing article 3 ICA. Neither does the letter of the law prohibit a concurrent application of article 2 CC. Systematic interpretation does not speak against such an interpretation either. The interpretation of article 3 ICA thus shows that the provision does not regulate the duty to inform exhaustively and that the principle of good faith is consequently applicable as well. Depending on the circumstances of the individual case, a situational duty to inform can exist next to the standardised statutory duty according to 3 ICA. If, for example, the policyholder is ­mistaken about what insurance benefits he or she is entitled to under the contract to be concluded, the insurer is obligated to clear up this misconception irrespective of whether the fact the policyholder errs on is included in the list of article 3 paragraph 1 ICA or not.211 However, article 3 ICA regulates the scope of the standardised duty exhaustively. Hence, in my view, the breach of a situational duty to inform that does not constitute a violation of article 3 ICA can only result in a claim for damages suffered, but never give rise to a right of termination as established by article 3a ICA. The second question—if article 3a ICA regulates the sanctions for a breach of the duty as provided by article 3 ICA exhaustively—has been addressed by several authors.212 These authors agree that article 3a ICA does not regulate the sanctions for a breach of the duty as provided by article 3 ICA exhaustively and that the policyholder may therefore also demand compensation for damages suffered according to the rules of culpa in contrahendo.213 The reasoning given for this view,

208 

Werro and Hahn (n 138) 91, 92. ibid 92. 210  See text to nn 136ff. 211  Werro and Hahn (n 138) 91, 92. 212  See Werro and Hahn (n 138) 91, 92 and 94 fn 31; Schaer (n 135) 360; Brulhart (n 17) no 350ff and (n 137) 214f; Fuhrer (n 4) no 6.12ff. 213  See Werro and Hahn (n 138) 91, 92 and 94 fn 31; Schaer (n 135) 360; Brulhart (n 17) no 352 and (n 137) 214f; Fuhrer (n 4) no 6.12, 6.14. 209 

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if any, is mostly that the provisions of the Insurance Contract Act in general and articles 3 and 3a ICA in particular do not exclude the application of the principle of good faith stipulated by article 2 CC.214 The author of this chapter shares this opinion for the following reasons. The wording of the law does not offer any clues, therefore neither speaking for nor against article 3a ICA being exhaustive. The same is true for the systematic interpretation and historical interpretation as the legislator did not address this ­question, neither in the explanatory report nor during the parliamentary discussion. However, the teleological interpretation of articles 3 and 3a ICA leads to the c­ onclusion that article 3a ICA does not regulate the sanctions for a breach of the duty according to article 3 ICA exhaustively. For if article 2 CC were complementary to article 3a ICA, the insurer would have to pay for damages caused by a breach of the duty which in turn could cause the insurer quite a loss and therefore strongly motivate it to fulfil its duty. Whereas if article 3a ICA were exhaustive, the policyholder could only terminate the contract for the future and the only loss which could occur to the insurer would be acquisition costs not yet fully covered by the premium paid and a possible loss of profit for future insurance periods. Therefore, the insurer would not have a strong incentive to fulfil its duty. Thus, the aim of the duty to inform—to enable the policyholder to make an informed choice—is more likely to be achieved if article 2 CC is complementary to article 3a ICA. The interpretation of the law hence shows that article 3a ICA does not regulate the sanctions for a breach of the duty according to article 3 ICA exhaustively. As a result, the policyholder may also demand compensation for the damages ­suffered under culpa in contrahendo.

C.  No Duty to Advise There are no statutory provisions in insurance law which oblige the insurer to advise the policyholder during the course of contract negotiations.215 Some authors,216 however, see such a duty established by case law. This is doubtful, as the decisions these authors refer to concerned situations in which the insurer had to set right a misconception of the policyholder based on its obligation to act in good faith.217 The two cases mentioned earlier furthermore demonstrate that the

214 

Werro and Hahn (n 138) 91, 94 fn 31; Brulhart (n 137) 214. The same holds true for insurance intermediaries as in this regard the European legislation was not adopted. Insurance brokers are nevertheless obligated to advise their clients based on the agency contract concluded with the policyholders, see Schaer (n 135) 378; Fuhrer (n 4) no 6.41. 216  See Schaer (n 135) 364f; Brulhart (n 137) 227. See also Fuhrer (n 4) no 6.44 according to whom the decision of the Swiss Federal Supreme Court 4C.98/2007 of 29 April 2008 might indicate that the Supreme Court does now acknowledge a duty to advise. 217  Schaer (n 135) 364 refers to the decision of the Swiss Federal Supreme Court 5C.267/2004 of 1 June 2005 and Fuhrer (n 4) no 6.44 to the decision of the Swiss Federal Supreme Court 4C.98/2007 of 29 April 2008. 215 

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duty to inform in fact does not extend to an obligation to advise the policyholder on the insurance product offered.218 In the case law, the duty always consists of offering correct information on the content of the contract to prevent or clear up misconceptions of the policyholder.219 In addition, the Federal Court itself does not speak of a duty to advise either, instead it mostly uses the terms ‘renseigner’ (to give information) and ‘aufklären’ (to enlighten someone).

D.  Other Sources of Informational Duty Although the Insurance Contract Act does not impose any other pre-contractual information duties on the insurer, further demands for information can arise from other statutory provisions not specific to insurance contracts. For unit-linked life insurance contracts, the insurer has to provide additional information relating to the underlying collective investment scheme according to article 20 paragraph 1 lit c and article 23 CISA220 in conjunction with article 34 CISO.221,222 Moreover, there is an ongoing legislative project to introduce, amongst other things, a Financial Services Act which might establish information duties for financial services that may, at least partly, apply to insurers as well.223

V. Conclusion Under current law, both the insurer and the policyholder are subject to pre-­ contractual information duties, which are predominantly regulated by the Insurance Contract Act. The policyholder’s foremost duty is to answer the written questions of the insurer on all material facts affecting the risk (Gefahrstatsachen), as far as they are known or ought to be known to him or her. According to prevailing opinion there is no additional duty to disclose such facts spontaneously based on the general obligation to act in good faith. The sanctions for a breach of duty are relatively moderate. The insurers’ sole statutory remedy is a right to terminate

218 Of different opinion Schaer (n 135) 364f and Brulhart (n 137) 227. See also Fuhrer (n 4) no 6.44 according to whom the decision of the Swiss Federal Supreme Court 4C.98/2007 of 29 April 2008 might indicate that the Supreme Court does now acknowledge a duty to advise. 219  See, eg, decisions of the Swiss Federal Supreme Court BGE 90 II 449; 5C.45/2004 of 9 July 2004; 5C.85/2004 of 11 November 2004; 5C.267/2004 of 1 June 2005; 4C.98/2007 of 29 April 2008. 220  Federal Act on Collective Investment Schemes of 23 June 2006, SR 951.31. An English translation is available in the Systematic Compilation of the Federal Law (for further details see n 1). 221  Collective Investment Schemes Ordinance of 22 November 2006, SR 951.311. An English translation is available in the Systematic Compilation of the Federal Law (for further details see n 1). 222  See Fuhrer (n 4) no 6.82. 223  More information on the project can be found in the Curia Vista, the online database of parliamentary proceedings, under the item number 15.073 at www.parlament.ch/en/ratsbetrieb/curia-vista.

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the contract and it is only released from its obligation to provide indemnification for damages already occurred, the occurrence or extent of which was influenced by the fact affecting the risk incorrectly disclosed or withheld. According to prevailing opinion articles 4 ff ICA regulate the policyholder’s duty of disclosure as well as the sanctions for its breach exhaustively, thus precluding the rules on the vices of consent. However, it is being controversially discussed whether the insurer may also demand compensation for the damages suffered under culpa in contrahendo. The insurer’s foremost duty in regard to pre-contractual information is the one according to article 3 paragraph 1 ICA, which obliges it to provide every policyholder with a standardised set of information on its identity, the insurance product offered and the handling of the personal data of the policyholder without being asked to. In certain cases of Group Insurance, the insurer is furthermore obligated to put a documentation of the necessary information at the policyholder’s disposal so the latter can in turn inform the other persons who have a direct claim for performance against the insurer. It has been shown that a situational duty to provide additional information derived from the general obligation to act in good faith may arise under certain circumstances and that the breach of such a duty can give rise to a liability of the insurer. However, it has been demonstrated that this situational duty is limited to providing information on the content of the contract to prevent or clear up misconceptions of the policyholder and that it does not extend to an obligation to advise the policyholder on the insurance product offered. Since the statutory law prescribes no duty to advise either, Swiss law currently knows no such duty of the insurer. The policyholder’s sole statutory remedy for a breach of the duty to inform according to article 3 ICA is likewise a right of termination. It has, however, been shown that the policyholder may also demand compensation for the damages suffered under culpa in contrahendo. Lastly, a breach of duty may under certain circumstances also lead to regulatory sanctions by the Insurance Supervisory Authority.

Part IV

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13 Good Faith and Pre-contractual Duties under South African Insurance Law BIRGIT KUSCHKE ‘Our law of insurance has no need for uberrima fides and the time has come to jettison it.’1

I. Introduction In 1652 the Dutch East India Company, a similar company to the British East India Company involved in the case of Carter v Boehm,2 set up a refreshment station in the Cape of Good Hope. This marked the beginning of European settlement in the country now known as the Republic of South Africa.3 With these settlers came the Roman-Dutch law, which was and still is seen as the common law of the general South African contract law.4 During the nineteenth century however during the British occupation of the land, the courts over time introduced English law, specifically English insurance law, into the jurisprudence of the country. In 1879 and in 1902 two provinces even enacted legislation to entrench the English law as the common law pertaining to insurance.5 Even though not obliged to do so by legislation, the judiciary in the other provinces often followed suit.

1 

Mutual & Federal Insurance v Oudtshoorn Municipality 1985 (1) SA 419 (A) 433 E–F. Carter v Boehm (1766) 3 Burr 1905. 3 http://www.sahistory.org.za. 4  JP Van Niekerk, The development of the Principles of Insurance Law in the Netherlands from 1500 to 1800 (Juta Publishers, Cape Town, 1998) Vol I. 5  In the Cape Province, according to the Algemene Regswysigingswet 8 van 1879 (K); and subsequently in the Free State in accordance with the Algemene Regswysigingsordonnansie 1902 (Ord 5 van 1902 O). 2 

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These statutes were revoked in 1977 to ensure uniformity in the Union,6 in an attempt to reinstate Roman-Dutch insurance law as the common law. In practice no great distinction could be drawn between the Roman-Dutch insurance law and the English insurance law, as they both trace their roots back to the Lex mercatoria.7 Yet some English legal concepts and principles grasped a firm foothold in the country’s jurisprudence, which created the hybrid system of laws that applies to insurance to this day. Although some branches of insurance business are regulated by legislation, the general insurance contract law is not. No specific insurance contract law or legislation (such as the German Insurance Contract Act of 2008 or the English Consumer Insurance (Disclosure and Representations) Act 2012) is in force. This means that insurance contracts remain subject to the common law that governs the general law of all contracts.8 Insurance in South Africa (insurance contracts, the regulation and supervision of the insurance industry and of intermediaries and advisors) are specifically regulated by only the following statues: the Long-term Insurance Act9 (LTIA)10 and the Policyholder Protection Rules for long-term insurance;11 the Short-term Insurance Act12 (STIA)13 and the Policyholder Protection Rules for short-term insurance14 (‘PPR’); and the Financial Advisory and Intermediary Services Act15 (‘FAIS Act’).

6  Hersieningswet van die Voor-Uniewette 43 van 1977. The Union of South Africa was founded on 31 May 1910; and subsequently the Republic of South Africa on 31 May 1961. 7 See Mutual & Federal Insurance v Oudtshoorn Municipality (n 1) 430–31. 8  For the conclusion of a valid contract, there must be consensus, specifically on the essential elements for an insurance contract: contractual capacity of the parties; legality in that the agreement must not contravene statutory law, public policy or good morals; physical possibility and formalities (as prescribed by either statute or the parties). In South African law, writing is not a general formality requirement. See in general in D Hutchison and CJ Pretorius (eds), The Law of Contract in South Africa (Oxford, Oxford University Press: Southern Africa, 2012) chs 1–8. 9  Act 52 of 1998. 10  Long-term insurance business ‘means the business of providing or undertaking to provide policy benefits under long-term policies’, which are defined as ‘an assistance policy, a disability policy, fund policy, health policy, life policy or sinking fund policy, or a contract comprising a combination of any of those policies; and includes a contract whereby any such contract is varied’. All these policies are defined individually in greater detail in the Act (sec1). These long-term contracts provide policy ­benefits and are issued for defined longer time periods, usually exceeding one year. 11  The long-term PPR 2010 came into operation on 1 January 2011, and are in the process of reform. 12  Act 53 of 1998. The PPR for both the long-term and short-term insurance industries are issued and amended by the FSB and published in the Government Gazette and enjoy legislative power. 13  Short-term insurance ‘means the business of providing or undertaking to provide policy benefits under short-term policies’, which include an engineering policy, guarantee policy, liability policy, miscellaneous policy, motor policy, accident and health policy, property policy or transportation policy or a contract comprising a combination of any of those policies; and includes a policy whereby any such contract is varied. All these policies are defined individually in greater detail in the Act (s 1). 14  The short-term PPR 2010 also came into operation on 1 January 2011 and are in the process of reform. 15  Act 37 of 2002.

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II.  Overview of Good Faith and Pre-contractual Duty of Disclosure in South African Contract Law A.  Introduction: Degrees of Good Faith? Under English law and the laws of some other common law jurisdictions, the proposer owes a duty of utmost good faith (uberrimae fidei) to the insurer to disclose all facts material to the risk. The same cannot be said for the conclusion of insurance contracts under South African law. This is because, as afore-mentioned, insurance contracts remain subject to the South African common law that governs the general law of all contracts. In essence, to serve as a brief introduction, the limited role of good faith is ­summarised briefly as follows: Although good faith is one of the cornerstones of contract law,16 it is not a validity requirement for pre-contractual negotiations, or for the conclusion or amendment of a contract. Furthermore, the presence of good faith is not acknowledged as an essential element or essentialia of nominate contracts such as insurance. The role of good faith in general contract law is discussed below, followed by its application in the context of pre contractual disclosures. Thereafter the scope narrows to the duty of disclosure in insurance contract law. Good faith is recognised only as a valuable standard underlying the law of ­contract. It is regarded as ‘an ethical value or controlling principle based on ­community standards of decency and fairness that underlies and informs the substantive law of contract’.17 It finds expression in rules and doctrines yet cannot be seen as an independent, ‘free-floating’ requirement that any contractual term must adhere to.18 The mere absence of ‘good faith’ is not one of the factors on which a contract or any provisions of it can be set aside. Although one would in principle appreciate the ability to rescind a contract that creates a greatly inequitable, or oppressive or unconscionable result,19

16  As are freedom of contract, sanctity of contract and privity of contract. See further Hutchison and Pretorius (n 7) para 1.8. 17  D Hutchison, ‘Non-variation clauses in contract: any escape from the Shifren straitjacket?’ 2001 (118) South African Law Journal 720 at 743–44; Brisley v Drotsky 2002 (4) SA 1 (HHA) para 22; and J Barnard, ‘Death, mourning and melancholia in postmodern contract: a call for (re) establishing ­contract’s connection with the ethical’ (2006) 17(3) Stellenbosch Law Review 386. 18  Brisley v Drotsky, ibid 22–23; Hutchison, ibid at 743; Hutchison claims that in certain cases courts do apply good faith indirectly to strike down contracts; he argues ‘the influence of good faith in the law of contract is merely of an indirect nature, in that the concept is usually if not always mediated by some other, more technical doctrinal device. Thus, for example, while good faith does not empower a court directly to supplement the terms of a contract, or to limit their operation, it might in appropriate cases enable the court to achieve these same results indirectly, through the use of devices such as implied terms and the public policy rule.’ 19  Extel Industrial (Pty) Ltd and another v Crown Mills (Pty) Ltd 1999 (2) SA 719 (SCA).

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South ­African courts have chosen to avoid the application of open-ended and more uncertain considerations such as unconscionability20 and equity.21 In the ground breaking judgment delivered in the case of Mutual & Federal Insurance v Oudtshoorn Municipality specifically on insurance law the court held that ‘[t]he duty of disclosure is imposed ex lege. It is not based upon an implied term of the contract of insurance. Nor does it flow from the requirement of bona fides.’22 Furthermore on the concept of utmost good faith, the court recognised that the Roman law distinguished only between good faith and bad faith. Whether the law in the case of insurance required utmost good faith or uberrima fides the issue was swiftly dealt with by the majority in the words of Joubert AJ: Moreover, there is no magic in the expression uberrima fides. There are no degrees of good faith. It is entirely inconceivable that there could be a little, more or most (utmost) good faith. The distinction is between good faith and bad faith. There is no room for uberrima fides as a third category of faith in our law. … Uberrima fides is not a juristic terms with a precise connotation. It cannot be used as a yardstick with a precise legal meaning. … In my opinion uberrima fides is an alien, vague, useless expression without any particular meaning in law. As I have indicated, it cannot be used in our law for the purpose of explaining the juristic basis of the duty to disclose a material fact before the conclusion of a contract of insurance. Our law of insurance has no need for uberrima fides and the time has come to jettison it.23

In his minority judgment Miller AJ on the other hand held the opposing view, in that the term has over time entrenched itself into our law of insurance and that as it is not misleading one does not have to do away with it. In subsequent judgments on the role of good faith, any distinction between good faith and utmost good faith did not surface again, and courts focussed only on the role of good faith.

B. The Role of Good Faith and Public Policy in South African Contract Law In the South African law, rules-based principles are from a positivistic point of view favoured as their application facilitates legal certainty and encourages less

20  See the discussion further below on the fact that insurance is excluded from general consumer protection law. The Consumer Protection Act 68 of 2008 introduced the concept of unconscionability for all other consumer contracts into our law on 31 March 2011, yet only for consumer contracts, with the specific exclusion of insurance contracts. 21  Magna Alloys & Research (SA) Pty Ltd v Ellis 1984 (4) SA 874 (A) 875; Sasfin v Beukes 1989 (1) SA (A) 1–18. 22  Mutual & Federal Insurance v Oudtshoorn Municipality (n 1) 433A. 23  ibid 433 E–F.

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interference by courts.24 Courts aim as far as possible to enforce mainly principles that are determined, non-ambiguous or specifically codified. Policy considerations are utilised if necessary in the absence of, or to adapt the existing commonlaw rules.25 Various principles and doctrines that might be open-ended apply to the law of contract. In the pursuit of legal certainty their ultimate interpretation often requires the intervention by courts.26 There is no unanimity on the definition of public policy, nor on the definition of good faith. In the recent case of Nyandeni Local Municipality v MEC for Local Government and Traditional Affairs and Another the court recognised that ‘[b]ona fides may not be the peg on which to hang public policy’,27 but that public policy required many considerations where public interest justifies a departure from legal rules such as the pacta sunt servanda principle. In addition to fraud or deceitful conduct, there may be other circumstances that offend public interest under which a contract will not be enforced. The role and reach of good faith has, in the words of Nortje ‘waxed and waned over the years.’28 The general exceptio doli generalis,29 known as the defence against unconscionability or absence of good faith, was initially recognised in South African law as a defence based on equity. It allowed a defendant to resist a claim for performance under a contract due to the unconscionable conduct of the plaintiff

24  President of the Republic of South Africa and Another v Hugo 1997 (4) SA 1 (CC) para [102] r­ eiterates that ‘The need for accessibility, precision and general application flow from the concept of the rule of law. A person should be able to know of the law, and be able to conform his or her conduct to the law.’ 25  Smalberger AR in Sasfin v Beukes 1989 (1) SA 1 (A) at 9, Afrox Healthcare v Strydom 2002 (6) SA 21 (SCA) at 32; SA Sentrale Ko-op Graanmaatskappy Beperk v Shifren en andere 1964 (4) SA 760 (A) at 767. 26 Examples of such open-ended principles include public policy, materiality, reasonableness, ­justice, distributive justice and also good faith. 27  Nyandeni Local Municipality v MEC for Local Government and Traditional Affairs and Another 2010 (4) SA 261 (ECM) The principle entails that any amendment of a contract that contains a nonvariation clause that prohibits informal variation, is invalid and not binding if the amendment is done informally. See also Robinson v Randfontein Estates GM Co 1925 AD 172. 28  M Nortje, ‘Pre-contractual duties of disclosure in the South African common law (Part 2)’ 2015 Tydskrif vir die Suid-Afrikaanse Reg 567 at 571. 29 L Hawthorne, PHJ Thomas PHJ, ‘The exceptio doli—Bank of Lisbon and South Africa Ltd v De Ornelas’ 1989 (22) De Jure 143, referring to the judgment of Joubert J in Bank of Lisbon 1988 (3) SA 580 (A) 582–84, explain the development as follows: ‘The Roman ius civile was characterised by strict adherence to formalities to ensure legal certainty. The stringent rules left little space for discretion in the interpretation of a case that often led to inequitable solutions. An exception had to be expressly inserted in the contract for it to apply in protecting parties against the strict formalities that could result in inequities. This gave rise to the exceptio doli generalis, which ultimately led to the incorporation of the requirement of good faith in the stipulatio.’ See also R Zimmermann and S Whittaker (eds), Good faith in European contract law (Cambridge, Cambridge University Press, 2000) 65; F Viljoen, ‘The exceptio doli: its origin and application in South African law’ (1981) De Rebus 173; and AJ Barnard, ‘A critical legal argument for contractual justice in the South African Law of Contract’ (2006) http://upetd.up.ac.za/thesis.

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seeking to enforce a contract or a part thereof.30 It was recognised as a legal standard rather than a rule. Whether the conduct was seen as contrary to good faith (in bad faith or unconscionable as set out above) or not, depended on the specific facts and circumstances of each case.31 The application of the exception assisted the courts by justifying a finding based on general fairness whether a contract or any part of it was enforceable or not.32 The long journey in redefining the modern role of good faith and its current application in South African law commenced in earnest in the judgment delivered in Bank of Lisbon v De Ornelas.33 The highest court of appeal in the country confirmed that the post-classical Roman legal defence of the absence of good faith or unconscionability—also known as the exceptio doli generalis—was abolished as a ‘superfluous, defunct anachronism’ that could not provide a substantive defence on the grounds of inequity or unfairness.34 This decision was lauded as the exceptio was often criticised for being an unnecessarily ‘wide articulated defence’35 that was inconsistent with the formal approach in contract law. This approach is that a court should refrain from interfering in the interpretation contracts to settle disputes concerning the fairness and equity of the contractual terms that the parties freely agreed to. Zimmermann supported this decision in that the exceptio doli can only be a distinctive principle if it is possible to apply it without reference to associated principles such as estoppel, error, fraud and duress.36 In South African contract law, the factors that do influence the element of consensus include error (where no contractual obligations is recognised due to the absence of a meeting of the minds); misrepresentation (as discussed at length further below); duress or force; undue influence, and economic bribery. Rectification of a contract is also available to the objecting party.37

30  Although the replicatio doli and the exceptio doli were procedurally different, they applied in ­similar circumstances and that no distinction existed between their purpose of denying liability. 31  G Glover, ‘Lazarus in the Constitutional Court: an exhumation of the exceptio doli generalis?’ 2007 (124) South African Law Journal 449. 32 See Zuurbekom Ltd v Union Corporation Ltd 1947 (1) SA 514 (A) at 525; Meskin v Anglo-American Corporation of SA 1968 (4) SA 793 (W) 802; Paddock Motors (Pty) Ltd v Igesund 1976 (3) SA 16 (A) at 27; Rand Bank Ltd v Rubinstein 1981 (2) SA 207 (W) 214–18; and Soteriou v Recto Poynton’s (Pty) Ltd 1985 (2) SA 922 (A) at 932. 33  Bank of Lisbon v De Ornelas 1988 3 SA 580 (A). 34  Bank of Lisbon v De Ornelas, ibid at 607B in the majority judgment delivered by Jansen JA on behalf of Rabie ACJ, Joubert JA, Hefer JA and Grosskopf JA.In his minority judgment Jansen JA in disagreed that the exceptio doli should not form part of our law. See also MA Lambiris, ‘The exceptio doli generalis: an obituary’ 1988 (105) South African Law Journal 644. 35  Glover (n 31) 450. See also SWJ Van der Merwe, GF Lubbe and LF Van Huysteen, ‘The exceptio doli generalis: requiescat in pace—vivat aequitas’ (1989) 106 South African Law Journal 235; CJ P ­ retorius, ‘Individualism, Collectivism and the limits of good faith’ (2003) 66 Tydskrif vir die Hedendaags Romeins-Hollandse Reg 638. 36  In R Zimmermann, The Law of Obligations (Oxford, Clarendon Press, 1996) at 233 Zimmermann advocates that ‘estoppel, the defence of rectification and misrepresentation cover much of the ground claimed by the exceptio doli’. 37  See in general Hutchison and Pretorius (n 8) chs 3, 4 and 11.

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A few months after the decision in De Ornelas the court endorsed this approach in Sasfin v Beukes38 and found that good faith itself was not completely abolished, but found its application in the requirement of legality that applies to all contracts. All contractual obligations must comply with statute, public policy and good ­morals.39 The principle of good faith was recognised to play an important role in law of contract during the existence and performance of the contract, but cannot be considered as a requirement for the creation or enforceability of contracts. Whether a contract is reasonable or unreasonable and meets the criteria of ­public policy depends on whether it harms ‘the interests of the community’ or ‘the public’.40 The requirement of legality and public policy are pliable and can accommodate the ‘changing convictions of society of what is just and fair’. In its ­evaluation the individual interests must also be taken into account when determining the requirements of public policy. The facts and circumstances of the ­specific situation and the personal circumstances of the contracting parties must still be taken into consideration.41 The court reiterated the oft-quoted statement from the judgment in the early case of Jajbay v Cassim42 that ‘public policy should properly take into account the doing of simple justice between man and man’.43 In the High Court, Davis J cautioned already in Mort NO v Henry Shields-Chiat:44 Like the concept of boni mores in our law of delict, the concept of good faith is shaped by the legal convictions of the community. While Roman-Dutch law may well supply the conceptual apparatus for our law, the content with which concepts are filled depends on an examination of the legal conviction of the community—a far more difficult task.

It requires careful consideration of the existence of our constitutional community, based as it is upon principles of freedom, equality and dignity. This is indeed still the position, also pertaining to the role of good faith in insurance contracts. In a contentious minority judgment of the High Court of Appeal in the case of Eerste Nasionale Bank v Saayman45 Olivier AJ refused to enforce a contract because of a lack of bona fides, equity and good faith.46 The doctrine of bona fides was used as the foundation for articulating a specific rule that prevented a contract from being unenforced by an unscrupulous service provider against a hapless consumer. It was suggested that good faith should be considered as an independent

38 

Sasfin v Beukes 1989 1 SA 1 (A) 8. An early judgment in the Transvaal Supreme court that recognised public policy and good morals as existing factors that affect the legality of a contract is Eastwood v Shepstone 1902 TS 294 at 302: ‘Now this Court has the power to treat as void and to refuse in any way to recognise contracts and transactions which are against public policy or contrary to good morals.’ 40  Sasfin v Beukes (n 38) at 9. 41  See specifically Coetzee v Comitis 2001 (1) SA 1254 (C) 1264–65 that referred to the circumstances of the particular parties and how this may influence the fairness of a contract. 42  Jajbay v Cassim 1939 AD 537. 43  Sasfin v Beukes (n 38) at 544. 44  Mort NO v Henry Shields-Chiat 2001 (1) SA 464 (C). 45  Eerste Nasionale Bank v Saayman 1997 (4) SA 302 (SCA). 46  ibid at 326. 39 

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validity requirement, as well as a direct ground to determine whether the contract in question is enforceable or not.47 The judge argued that ‘the doctrine of bona fides was invoked to entitle a respondent to rescind a contract in circumstances where actions based upon misrepresentation, duress and undue influence could not be used.’48 In his judgment he advocated that the doctrine of bona fides serves as a substitute for the exceptio doli generalis remedy that has fallen away by stating that ‘Since all contracts in our law are negotiated bona fide, it must therefore automatically comply with the dictates of good faith.’49 Although the majority held the contract to be unenforceable on other grounds,50 this approach by the single minority judge could, due to the doctrine of stare decisis and judicial precedent, not be followed by other courts who are obliged to follow the majority judgment.51 At this stage the Constitution of the Republic of South Africa, 1996 began to infuse the private law concerning contractual relationships between individuals with constitutional values.52 The Constitution is applied horizontally yet indirectly to the private affairs of contracting parties. The Constitution has furthermore bestowed an important task on the courts, namely when developing the common law of contract or any legislation, to promote the spirit, purport and objects of the Bill of Rights.53 It is in this context that subsequent judgments are required to take constitutional values into consideration.54 In Afrox Healthcare Bpk v Strydom55 the court in 2002 reiterated the view of the majority in the Saayman case, in that the Constitution represents a value system and is not a compilation of ultimate binding rules.56 It enforced the principle that the Constitution has not abolished the doctrine of stare decisis, obliging courts of the same or lower jurisdiction to follow judgments of higher courts to ultimately facilitate legal certainty.57

47 

ibid at 318. G Glover, ‘Good faith and procedural unfairness in contract—Eerste Nasionale Bank v Saayman NO’ (1998) 61 Tydskrif vir die Hedendaags Romeins-Hollandse Reg 330 at 333. 49  Eerste Nasionale Bank van Suidelike Afrika Bpk v Saayman NO (n 45) at 322. 50  The lack of contractual capacity of the surety allowed the court to deny enforcement of the contract. 51  E Kahn, ‘The rules of precedent applied in South African courts’ (1967) 84 South African Law Journal 43–55, 175–93, 308–30. 52  L Hawthorne, ‘The principle of equality in the law of contract’ 1995 (58) Tydskrif vir Hedendaags Romeins-Hollandse Reg 157 at 160. 53  s 39(2). 54  See also s 39(3) that ‘The Bill of Rights does not deny the existence of any other rights or freedoms that are recognised or conferred by common law, customary law or legislation, to the extent that they are consistent with the Bill.’ In the Everfresh case (para 39) it was confirmed that ‘in my view, the issue of whether a duty to negotiate in good faith is imposed by a contract and whether that obligation has been imposed by a particular contract is or should be enforceable does raise, by necessary implication, issues of public policy. And issues of public policy in turn cannot be considered without reference to section 39(2).’ 55  Afrox Healthcare Bpk v Strydom 2002 (6) SA 21 (SCA). 56  ibid para 30. 57  ibid paras 38–39. 48 

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Also in 2002 the Supreme Court of Appeal had another bite at the cherry in the case of Brisley v Drotsky,58 where the Court—also refusing to recognise the minority judgment in the Saayman case—provided more clarity and certainty on the position in our law pertaining to the role of good faith. The majority in the Brisley case held that there can be no ‘general equitable discretion on the strength of which a court could decide not to enforce a clause merely because it was unconscionable or against good faith.’59 It is unnecessary to apply good faith as an independent ground to invalidate contracts based only on a judge’s point of view and his own opinion of public interest. A court does not have the discretion to base decisions on abstract ideas as they prefer, and members of the bench could often differ in their conception of good faith in respective case law. According to the majority the suggested application of good faith in the Saayman case as a substitute for the previously known remedy the exceptio doli generalis should not stand. The remedy was, with good reason, abolished because it opened the door to legal uncertainty. The majority in Brisley supported the view that existing contractual values should be adapted to incorporate constitutional values and norms,60 but that the Constitution could not be said to invalidate contractual obligations.61 In South African Forestry Co Ltd v York Timbers Ltd62 the Supreme Court of Appeal concisely explained the position as follows: Although abstract values such as good faith, reasonableness and fairness are fundamental to our law of contract, they do not constitute independent substantive rules that courts can employ to intervene in contractual relationships. These abstract values perform creative, informative and controlling functions through established rules of the law of contract. They cannot be acted upon by the courts directly. Acceptance of the notion that judges can refuse to enforce a contractual provision merely because it offends their personal sense of fairness and equity will give rise to legal and commercial uncertainty. After all, it has been said that fairness and justice, like beauty, often lie in the eyes of the beholder.63

This was subsequently quoted in many judgments in the lower courts. At last, in 2007, the Constitutional Court as the highest court in the country was provided with the opportunity to add its voice to our jurisprudence on this issue, specifically pertaining to the enforceability of a clause in an insurance contract.

58 

Brisley v Drotsky 2002 (4) SA (HHA) 1. ibid, 13–25. 60 A Cockrell, ‘Substance and form in the South African Law of Contract’ (1997) Acta Juridica 26 at 45. 61  Brisley v Drotksy (n 58) at 80. See also D Brand, ‘Freedom, constraint and (the) judging (of) Albie Sachs’ 2010 South African Public Law 25; H Botha, ‘Albie Sachs and the politics of interpretation’ 2010 South African Public Law 39; T Roux, ‘Transformative Constitutionalism and the best interpretation of the South African Constitution: distinction without a difference?’ (2009) 20 Stellenbosch Law Review 258. 62  South African Forestry Co Ltd v York Timbers Ltd 2005 3 SA 323 (SCA) paras 26–28. 63  ibid, para 27. 59 

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The contract in the case of Barkhuizen v Napier64 contained the following clause in favour of the insurer: ‘If we reject liability for any claim made under this policy we will be released from liability unless summons is served … within 90 days of repudiation.’65 The policyholder argued that this clause is contrary to public policy and, therefore, unenforceable.66 It was argued by counsel that current legal convictions have been codified in a binding set of constitutional values in Chapter 2 of the Constitution in the Bill of Rights.67 Section 34 of the Constitution specifically promotes the right of access to the courts.68 The effect of the contractual limitation clause, it was argued, denied the insured the right to due legal process and access to proper adjudication, and was thus an unreasonable and unjustified limitation and thus unconstitutional. Constitutional rights, however, may be limited in accordance with section 36 of the Constitution.69 Yet, as section 36(1) applies only to limitations created by ‘a law of general application’, this section did not apply to the case in point where the limitation was contractual. It was cautioned that although personal interests must be taken into account, the applicant’s personal attributes should not play the decisive role when determining if a clause is enforceable in the light of public policy.70 Moseneke DCJ explains that one may consider surrounding ­factors regarding a contracting party such as illiteracy, ignorance and inability to get access to professional advice, and whether these factors in fact prevented a party to comply with the contract.71 Irrespective of this, public policy remains an objective criterion and should not be ‘held ransom by the infinite variations to be found in any set of contracting parties.’72 It is clear from the judgment that all

64 

Barkhuizen v Napier 2007 (5) SA 323 (CC). ibid, paras 3 and 111. 66  ibid, para 19. 67  Ch 2 Bill of Rights in the Constitution. 68  ‘Everyone has the right to have any dispute that can be resolved by the application of law decided in a fair public hearing before a court or, where appropriate, another independent and impartial tribunal or forum.’ 69  s 36(1) The rights in the Bill of Rights may be limited only in terms of law of general application to the extent that the limitation is reasonable and justifiable in an open and democratic society based on human dignity, equality and freedom, taking into account all relevant factors, including: 65 

a) b) c) d) e)

the nature of the right; the importance of the purpose of the limitation; the nature and extent of the limitation; the relation between the limitation and its purpose; and less restrictive means to achieve the purpose

(2) Except as provided in subsection (1) or in any other provision of the Constitution, no law may limit any right entrenched in the Bill of Rights. 70  Barkhuizen v Napier (n 64) para 95. 71  ibid, paras 95–96. 72  ibid, para 98.

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law, including the common law of contract and pacta sunt servanda, is subject to constitutional control.73 In its conclusion, the court held that [The] proper approach to constitutional challenges to contractual terms is whether a term is contrary to public policy as evidenced by constitutional values. Notions of ­fairness, justice and equity inevitably play a role in the determination of public policy and cannot be distanced from it.74

The South African High Court of Appeal in a more recent judgment in the case of Everfresh Market Virginia (Pty) Ltd v Shoprite Checkers (Pty) Ltd had to decide whether there was a general duty in our common law to enter into bona fide precontractual negotiations with the purposes or expectation of the conclusion of a contract.75 In this case the failure to make a bona fide attempt to agree on a renewal frustrated the appellant’s expectation to renew the agreement. The Court rejected the duty to negotiate in good faith because the ‘promise is too illusory or too vague and uncertain to be enforceable’.76 The African concept of ubuntu77 again featured prominently in the application for leave to appeal.78 This term can be loosely translated as ‘humanity to o ­ thers’, and is a complex word from the Nguni language with several definitions. At the heart of each definition proposed, though, is the connectedness that exists or should exist between people. Ubuntu is best known outside of Africa as a humanist philosophy. It reflects the communal nature of society and ‘carries in it the

73 All law now enforced in South Africa and applied by the courts derives its force from the ­ onstitution; see s 2, s 8(1) and s 39(2) of the Constitution. In terms of s 173 of the Constitution, the C Constitutional Court has the power to develop the common law in constitutional matters within its jurisdiction. The power of this Court to develop the common law is also implicit in terms of s 8(3) of the Constitution, which deals with the application of the bill of rights to both natural and juristic persons. Although the common law remains relevant to this process, judicial review of the exercise of public power is a constitutional matter that takes place under the Constitution and in accordance with its provisions. S 167(3)(c) of the Constitution provides that the Constitutional Court makes the final decision whether a matter is a constitutional matter. see also Barkhuizen v Napier (n 64) paras 80–87; Glover (n 31) 449; J Barnard-Naude, ‘“Oh what a tangled web we weave”… hegemony, freedom of contract, good faith and transformation—towards a political friendship in the politics of contract’ (2008) 1 Constitutional Court Review 187; FDJ Brand, ‘The role of good faith, equity and fairness in the South African law of contract: The influence of the common law and the Constitution (2009) 126 South African Law Journal 71. 74  Barkhuizen v Napier (n 64) para 51. This was confirmed in 2010 in the case of Bredenkamp v Standard Bank of SA Ltd 2010 9 BCLR 892 (SCA) where the court conceded that ‘fairness remains a slippery concept’, that the validity of the law of contract depends on the Constitution and that every rule must pass constitutional muster. 75  Everfresh Market Virginia (Pty) Ltd v Shoprite Checkers (Pty) Ltd 2012 (1) SA 256 (CC). 76  Para 26 read with para 25 where the High Court relied on a passage from the Australian case of Coal Cliff Collieries Pty Ltd and Another v Sijehama Pty Ltd and Another (1991) 24 NSWLR 1, quoted with apparent approval by the Supreme Court of Appeal in Southernport Developments (Pty) Ltd v Transnet Ltd 2005 (2) SA 202 (SCA) at paras 15–16. 77  Loosely translated as compassion for one’s fellow man. 78  The concept was also raised in para [51] of the judgment in Barkhuizen v Napier.

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ideas of humaneness, social justice and fairness’79 and envelops ‘the key values of group solidarity, compassion, respect, human dignity, conformity to basic norms and collective unity’.80 It thus includes broad, yet open-ended concepts concerning humanity and morality. Recognition was given that values embraced by an appropriate appreciation of ubuntu are also relevant in the process of determining the spirit, purport and objects of the Constitution. The common law of contract regulates the environment within which trade and commerce such as insurance business take place. Its development should take cognisance of the ­values of the vast majority of people who are now able to take part without hindrance in trade and commerce. And it may well be that the approach of the majority of people in our country places a higher value on negotiating in good faith than would otherwise have been the case. Contract law cannot confine itself to colonial legal tradition alone.81

Lewis J enquires that should parties be required to negotiate in good faith, what content does one give to the term ‘good faith’? An exact definition of what it entails continues to elude us. A standard description of what good faith exactly entails is absent from our jurisprudence. In an attempt to draw from all its ­previous descriptions, Louw proposes the following definition that combines most ­ ­elements of previous attempts. It is: [A]n ethical standard of fair dealing between parties which encompasses notions trust, a moral basis for the enforcement of promises, reciprocity, a duty to act fairly, having regard for the legitimate interests of the other party, and to refrain from conduct that is commercially unacceptable to reasonable and honest people.

From the discussions above it remains a difficult exercise to attempt to delineate what good faith is and what it is not. In conclusion it is clear that the values of reasonableness, fairness and equity enjoy recognition in that they underlie our contract law and serve to shape its rules and principles.82 They are not seen as ‘general over-arching requirements’ for the conclusion or amendment of contracts, yet are part of the reasonableness criteria that are applied when determining whether a contract complies with the validity requirement of legality. 79  S v Makwanyane and Another [1995] ZACC 3; 1995 (3) SA 391 (CC); 1995 (6) BCLR 665 (CC) (Makwanyane) at para 237. 80  The Citizen 1978 (Pty) Ltd and Others v McBride (Johnstone and Others, Amici Curiae) 2011 (4) SA 191 (CC); Le Roux and Others v Dey (Freedom of Expression Institute and Restorative Justice ­Centre as Amici Curiae) 2011 (3) SA 274 (CC); Joseph and Others v City of Johannesburg and Others 2010 (4) SA 55 (CC) at para 46; Koyabe and Others v Minister for Home Affairs and Others ­(Lawyers for Human Rights as Amicus Curiae) 2010 (4) SA 327 (CC); Barkhuizen v Napier para 51; Dikoko v Mokhatla 2006 (6) SA 235 (CC) at paras 68– 9, 86, 112– 8 and 121; and finally South African Human Rights Commission and Another v President of the Republic of South Africa and Another [2004] ZACC 17; 2005 (1) SA 580 (CC) at paras 45 and 163; For academic articles see TW Bennett, ‘Ubuntu: An African Equity’ (2011) 14 (4) Potchefstroom Electronic Law Journal 29; CBN Gade, ‘The Historical Development of the Written Discourses on Ubuntu’ (2011) 30 South African Journal of Philosophy 303; and Y Mokgoro, ‘Ubuntu and the Law in South Africa’ (1998) 4 Buffalo Human Rights Law Review 15. 81  Barkhuizen v Napier (n 64) para 23. 82  Botha v Rich NO 2014 (4) SA 124 (CC) paras 45–46.

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The Constitution also requires the following in section 39(1): When interpreting the Bill of Rights, a court, and tribunal or forum (a) must promote the values that underlie an open and democratic society based on human dignity, equality and freedom; (b) must consider international law; and (c) may consider foreign law. It is in view of this provision that, for example English insurance law principles could be applied or at least could inform our jurisprudence where necessary.

C.  Good Faith and the Doctrine of Unconscionability Prior to 2011, the specific term ‘unconscionability’ was foreign to South African law and not seen as an independent criterion, alternative or synonym for ‘good faith’. During the recent era of increased consumer protection, the doctrine of unconscionability found its way into South African law for the first time in 2011, through the enactment of the Consumer Protection Act.83 The Act was the culmination of the South African Law Reform Commission Project on ‘Unreasonable Stipulations in Contracts and the Rectification of Contracts’. In its report, the Commission endorsed the courts’ interactive role, when developing the common law, of not only achieving legal certainty but also adapting to ever-changing and new circumstances in society.84 The SALRC recognised that public policy within a South African context was more sensitive to justice, fairness and equity than ever before.85 The policy principles that underlie the Consumer Protection Act aim to limit or remove unscrupulous conduct from the marketplace, to promote better and simple disclosure of information within the marketplace in order to ultimately facilitate the increase of well-informed market participants.86 It attempted for the first time in our law, to codify the open-ended concept of unconscionability or bad faith. Unconscionable conduct as described in the Act87 includes known common law concepts such as undue influence and duress, but introduces new concepts namely physical force against a consumer, coercion, pressure or unfair tactics or any other similar conduct.88 The content of a contract is also addressed by the Act.

83  Act 68 of 2008. This was the culmination of The South African Law Reform Commission stated in Discussion Paper 65 Project 47 ‘Unreasonable Stipulations in Contracts and the Rectification of Contracts’ 1996. 84  South African Law Reform Commission Discussion Paper, ibid 22–23 and 30. 85 ibid. 86  The Preamble of the Act; see also s 40 on the right to fair and honest dealing. 87  Part F s 40. 88  s 40 Unconscionable conduct: (1) A supplier or an agent of the supplier must not use physical force against a consumer, coercion, undue influence, pressure, duress or harassment, unfair tactics or any other similar conduct, in connection with any—(a) marketing of any goods or services; (b) supply of goods or service to a consumer; (c) negotiation, conclusion, execution or enforcement of an agreement to supply any goods or service to a consumer; (d) demand for, or collection of, payment for goods or service by a consumer; or (e) recovery of goods from a consumer. (2) In addition to any conduct contemplated in subsection (1), it is unconscionable for a supplier knowingly to take advantage of the

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In Part G a consumer has the right to fair, reasonable and just terms and conditions.89 It allows a broad defence against a claim where there is something unconscionable, unjust or unfair on the part of the plaintiff ’s conduct. Essentially the Act grants our courts broad power to declare agreements, in whole or in part, unfair or unconscionable.90 This innovative step does sadly not assist parties to an insurance contract, because insurance is excluded from the scope of the Consumer Protection Act. Insurance products and services have been exempted from the scope of the ­Consumer Protection Act from 28 February 2014 by the Financial Services Laws ­General Amendment Act,91 as the legislator deems it more beneficial that insurance contracts are regulated separately in accordance with specialised insurance consumer protection mechanisms and provisions. Insurance business and contracts are thus regulated only by the insurance legislation referred to in the Introduction, Part I above. Case law as discussed below will inform and provide clarity and legal certainty as to the nature and extent of the common law duties of the parties to an insurance contract. In view of this, the specific concept of ‘unconscionability’ as developed for our general consumer protection law is unknown in insurance jurisprudence.

III.  Insured/Policyholder’s Pre-contractual Duty (of Disclosure) A. The Ex Lege Common Law Disclosure Duty As no specialised insurance contract act has been enacted in South Africa, the common law pertaining to misrepresentations applies. Sufficient and correct information must be provided in a clear, comprehensible and unambiguous manner. This duty to give and right to receive information is reciprocal in nature, and disclosures of intermediaries such as agents and brokers may be attributed to the party on whose behalf they perform their duties.92 The duty to disclose only becomes a continuous one if this is provided for in the contract itself.93

act that a consumer was substantially unable to protect the consumer’s own interest because of physical or mental disability, illiteracy, ignorance, inability to understand the language of an agreement or any other similar factor. (3) s 51 applies to any court proceedings concerning this section. 89 

ss48–52 contained in Part G Ch 2 of the CPA. s 52(3)(a) of the CPA. 91  Act 45 of 2013. 92  Rabinowitz & another v Nedequity 1980 (1) SA 403 (W). 93  JP Van Niekerk, ‘The Insured’s Duties of Disclosure: Delictual and Contractual; Before the Conclusion and during the Currency of the Insurance Contract: Bruwer v Nova Risk Partners Ltd’ (2011) 23 South African Mercantile Law Journal 135. 90 

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Another pre-­contractual duty of disclosure is required whenever an existing ­policy is renewed, as the insurer must evaluate the risk afresh. As reiterated in the landmark judgment delivered in the case of Mutual & ­ Federal Insurance v Oudtshoorn Municipality, the court held that ‘[t]he duty of ­disclosure is imposed ex lege. It is not based upon an implied term of the contract of insurance. Nor does it flow from the requirement of bona fides.’94 A pre-contractual ex lege ‘duty to speak’ does not, however, apply in all circumstances. Such a duty will, for example, be recognised where there is: [A]n involuntary reliance of the one party on the frank disclosure of certain facts necessarily lying within the exclusive knowledge of the other such that, in fair dealing, the former’s right to have such information communicated to him would be mutually recognised by honest men in the circumstances.95

This common law right to receive information is statutorily enacted by the Promotion of Access to Information Act96 which in turn builds upon the constitutionally entrenched fundamental right of access to information in section 32 of the Constitution.97 Insurance business falls within the supervisory regime of the South African Financial Services Board.98 In order to give effect to fairness, an outcome based regulatory and supervisory approach called Treating Customers Fairly (TCF)99 was designed to ensure that specific, clearly articulated fairness outcomes for ­financial services consumers are delivered by regulated financial firms. It recognises that financial services consumers are particularly vulnerable because of

94 

Mutual & Federal Insurance v Oudtshoorn Municipality (n 1) 433A. In the words of MA Millner, ‘Fraudulent non-disclosure’ (1957) 74 South African Law Journal 177 at 189; also, ABSA Bank Ltd v Fouche 2003 (1) SA 176 (SCA). 96  Act 2 of 2000. 97  ‘(1) Everyone has the right of access to (a) any information held by the state; and (b) any information that is held by another person and that is required for the exercise or protection of any rights.’ In general consumer law, the right to disclosure of information and the right to fair and responsible marketing to encourage responsible and informed consumer choices and behaviour is entrenched in the Consumer Protection Act s 3(1)(e) and Part D, and the National Credit Act s 64; s 92. 98  The supervisory authority for insurance is the Financial Services Board or ‘FSB’. This corporate body was established by the Financial Services Board Act 97 of 1990. The Minister of Trade and Industry may empower or authorise another statutory body or person to enact statutory regulations. The Policyholder Protection Rules issued by the FSB for the insurance industry serve as an example. 99  Treating Customers Fairly: The Roadmap 31 March 2011 (last accessed at www.fsb.co.za). Firms are expected to demonstrate that they deliver the following 6 TCF Outcomes to their customers throughout the product life cycle, from product design and promotion, through advice and servicing, to complaints and claims handling—and throughout the product value chain: Customers can be confident they are dealing with firms where TCF is central to the corporate culture. Products and services marketed and sold in the retail market are designed to meet the needs of identified customer groups and are targeted accordingly. Customers are provided with clear information and kept appropriately informed before, during and after point of sale. Where advice is given, it is suitable and takes account of customer circumstances. Products perform as firms have led customers to expect, and service is of an acceptable standard and as they have been led to expect Customers do not face unreasonable post-sale barriers imposed by firms to change product, switch providers, submit a claim or make a complaint. 95 

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the asymmetry of information between retail financial services consumers and financial institutions, and that this leads to unfair treatment. ‘In South Africa, these challenges are exacerbated by low levels of both basic and financial literacy, increasing the risk of consumer exploitation.’100

B.  The Test for Materiality In accordance with the disclosure duty placed on all contracting parties, a ­pre-contractual duty of disclosure rests on the insurance proposer to disclose material and relevant information to the insurer that affects the latter’s decision to insure the risk or not. Factors that are to be taken into consideration could include the insured’s previous claims history. Regarding insurance, the court confirmed in Iscor Pension Fund v Marine and Trade Insurance Co Ltd101 that [t]he principles applicable to contracts of insurance do not differ in essence from those applicable to other kinds of contracts, but where one party has means of knowledge not accessible to the other party, and where from the nature of the contract the latter (as in the case of insurance) binds himself on the basis that all material facts have been ­communicated to him, the non-disclosure of such a fact is fatal.102

The test for materiality in South African law is an objective one. The materiality of any non-disclosure is as viewed through the lens of the reasonable man103 and not the insured nor the insurer.104 The courts have consistently rejected the idea that the criterion should be either the reasonable insurer or the reasonable insured.105 In terms of legislation, STIA section 53(1)(a) serves to limit an insurer’s right to repudiate a claim premised on a non-disclosure to instances where the failure to disclose ‘is such as to be likely to have materially affected the assessment of the risk under the policy concerned at the time of its issue or at the time of any renewal or variation thereof.’ Section 53(1)(b) of the Act provides that non-disclosure shall be regarded as material if a reasonable, prudent person would consider that the particular information constituting the representation or which was not

100 

Treating Customers Fairly: The Roadmap, ibid, 6. Iscor Pension Fund v Marine and Trade Insurance Co Ltd 1961 (1) SA 178 (T). 102  ibid, 185. 103  Or the ‘reasonable person test’—a name change proposed in view of equality laws and in order to avoid discriminatory reference. 104  See in this regard para [27] of the judgment a quo where reference is made to Mutual and Federal Insurance Co Ltd v Oudtshoorn Municipality 1985 (1) SA 419 (A) at 435F–I; Weber v Santam Versekeringsmaatskappy Bpk 1983 (1) SA 381 (A) at 410H–411D; President Versekeringsmaatskappy Bpk v Trust Bank van Afrika Bpk en ‘n Ander 1989 (1) SA 208 (A) at 216F; Commercial Union Insurance Co of SA Ltd v Lotter 1999 (2) SA 147 (SCA) at 154B. 105  Qilingile v SA Mutual Life Assurance Society Ltd 1991 (2) SA 399 (W); and on appeal Q ­ ilingile v SA Mutual Life Assurance Society Ltd 1993 (1) SA 69 (A); Liberty Life Association of Africa Ltd v De Waal 1999 (4) SA 1177 (SCA); Weber v Santam Versekeringsmaatskappy Bpk 1983 (1) SA 381 (A) at 410H–411D; President Versekeringsmaatskappy Bpk v Trust Bank van Afrika Bpk en ‘n Ander 1989 (1) SA 208 (A) at 216F; Commercial Union Insurance Co of SA Ltd v Lotter 1999 (2) SA 147 (SCA) at 154B. 101 

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disclosed, as the case may be, should have been correctly disclosed to the short-term insurer so that the insurer could form its own view as to the effect of such information on the assessment of the relevant risk.

A similar provision is found in the LTIA section 52(1)(b). It is clear that irrespective of the objective nature of the test, the reasonable person’ has to be placed in a particular context.106 One must ask what a reasonable person in the circumstances of the particular insured would have considered to be relevant to enable the insurer to assess the risk. The court in the appeal case of Jerrier v Outsurance Insurance Company107 supported the contextual approach. It found that the failure to disclose minor incidents that caused damage to an insured motor vehicle did not constitute a ‘material’ non-disclosure that would scuttle subsequent claims for damage caused in more serious accidents. A truly holistic approach requires that all relevant factors have to be considered. Although the wording of the policy itself would be of primary importance, one would also have to consider how it would be understood by the reasonable person in the position and situation of the particular insured. The background of the nature of the policy, how it was presented and how it would have been perceived, whether it was concluded telephonically or whether there was a broker involved, are all factors that must be considered. Crucial to the contract of insurance is the need for both the insurer and the insured to also comprehend the risk-based approach.108 The dominant view is that these pre-contractual duties of disclosure in South African law are confined to situations of involuntary reliance. Nortjé correctly ­recognises that this appears to be merely an extension of the materiality requirement for inducement.109 Other writers endorse that a misrepresentation is found to be material if it intended that the misrepresentee should act upon it, or where it was of such a nature that the reasonable person in the same position as the misrepresentee would have acted upon it.110 It does not necessarily have to be the decisive or dominant cause. Where the misrepresentee could reasonably have ascertained the information and did not have to rely on the misrepresentor to obtain it, the representation is not always recognised as one that renders the subsequent a­ greement voidable.111 106  JP Van Niekerk, ‘More on Insurance Misrepresentation, Materiality, Inducement and No-Claim Bonuses: Mahadeo v Dial Direct Insurance Ltd’ (2008) 20 South African Mercantile Law Journal 427. 107  Jerrier v Outsurance Insurance Company 2015 (5) SA 433 (KZP). 108 J Church, ‘Jerrier v Outsurance Insurance Company Ltd The duty to disclose: An ongoing ­problem?’ 2016 (49) De Jure 859. 109  Novick v Comair Holdings 1979 (2) SA 116 (W) at 149. The issue of inducement and materiality is discussed in greater detail in Hutchison and Pretorius (n 8) Ch 4 at 123. For a more historical perspective see PMA Hunt, ‘Innocent misrepresentation’ (1963) Annual Survey of South African Law 104 at 118. 110  Hutchison and Pretorius (n 8) 124; G Lubbe and C Murray, Farlam & Hathaway Contract Cases, Materials, Commentary (Cape Town, Juta Publishers, 1988) at 337–39 on whether the inducement is a subjective question in our law, and the role of whether the reasonable person who have been so induced or not. See also Schultz NO v Meyerson 1933 WLD 199. 111  In the appeal case of Jerrier v Outsurance Insurance Company (n 108) Chetty J in para [36] ­recognised: ‘how difficult it can be for a prospective client seeking insurance to determine either at the ­commencement of a contract or at any time thereafter, what a reasonable person would have considered to be material for the purpose of ascertaining the risk to be assumed by the insurer.’

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Often the insurer provides a specified list of the different types of information or data that must be disclosed by the insurance proposer.112 Care must however be taken by an insurer in view of the rule expressio unius est exclusio alterius. Where the insurance application or proposal contains a special reference to a particular thing, in this case set questions, it is prima facie assumed that the parties intended to exclude everything else, even that which would have been implied in the circumstances had it not been for the special reference.113 This is seen as an assumption of common sense rather than a formal rule of interpretation, which serves as a guide to determine the intention of the parties to a document which has been imperfectly expressed.114 It is unclear to what extent the specifics of the contractual duty of disclosure when making claims are influenced or overridden by a clause dealing with the general duty to disclose. This uncertainty may introduce ambiguity and vagueness to the extent that the insured fails to disclose information that the insurer assumes should be disclosed irrespective of the fact that it was not expressly asked for.115

C.  The Requirement of Inducement The requirement of inducement to contract does not automatically allow a person to escape liability where he through his own bad judgement, gullibility, lack of foresight or carelessness failed to inform himself properly.116 To reduce the rather stringent operation of such an approach, some factors are recognised that serve as justifications for the failure to inform oneself and allow for the escape from a contractual obligation concluded on the basis of the other party’s misrepresentation. One of these is fraudulent misrepresentation that induces consensus with the intention to defraud.117 Another is the inequality of bargaining power that is abused by the one party to induce the other to reach consensus. As discussed above, our courts and authors choose to deal with inequality under the requirement of legality, rather than under improper conduct aimed at achieving consensus.118

112  D Millard in ‘Jerrier v Outsurance Insurance Company Limited’ (2015) Juta’s Insurance Law ­Bulletin 18 cautions that in such a situation the insurer runs the risk of invoking the eiusdem generis rule. In terms of this rule, where a word or expression with a broad, general meaning is used in conjunction with words that denote species of the same genus, the meaning of the general word or phrase is limited to refer only to matters of the same genus. 113  R v Vlotman 1912 AD 136 at 141; Cargo Africa CC v Gilby’s Distillers and Vintners 1996 (2) SA 324 (C) at 329. 114  Poynton v Cran 1910 AD 205 at 222. 115  Bruwer v Nova Risk Partners Ltd 2011 (1) SA 234 (GSJ) para 32. 116  Nortjé (n 28) at 567. On the other hand, see Wiley v African Realty Trust 1908 TH 104 that the misrepresentee’s duty to determine the truth by reasonable diligence, or his gullibility, does not serve as a defence by the misrepresentor against a claim of misrepresentation. 117  The mere presence of a reprehensible motive of the misrepresentor does not automatically render the misrepresention legally wrongful. 118 See Barkhuizen v Napier (n 64) paras 8–14; 59; 65.

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D.  Consequences and Remedies for Breach In short, a failure to comply with the duty of disclosure can be by positive conduct or by omission. Irrespective of whether the false disclosure or non-disclosure was made intentionally or negligently, it is recognised as an actionable misrepresentation. Fault is thus not a requirement for voidability, yet materiality of the representation is required as discussed above.119 Where consensus is improperly obtained due to the misrepresentation, it should not be honoured. In South African law this renders the contract not void ab initio but merely voidable at the discretion of the misrepresentee—in this case the insurer.120 Where the misrepresentee elects to void the contract, the duty to give restitutio in integrum arises. In the context of insurance, a restitution of payments previously paid would prove to be problematic. In view of this, most policies contain provisions specifically providing for contractual remedies in such a situation. In most cases the insurer is entitled to repudiate the claim, and the insured simply does not enjoy cover for the claim brought under the policy, without risking the voiding of the entire policy. A penalty clause allowing for the forfeiture of premiums already paid is also a popular remedy.121 Where the duty to disclose has been couched as a contractual warranty, the remedies for breach of the contractual warranty such as cancellation, penalties and a contractual damages claim become available to the insurer. Where the misrepresentation is blameworthy in that it is made intentionally or negligently, a separate claim for additional delictual damages may also arise.122 It is possible, in South African law, to claim delictual damages for intentional as well as for negligent misrepresentations.123 The five requirements for such a damages claim are: conduct (by commission or omission);124 wrongfulness;125 fault 119 

Brink v Humphries & Jewell (Pty) Ltd 2005 (2) SA 419 (SCA) 421. 53 of the STIA. Also, Allen v Sixteen Stirling Investments (Pty) Ltd 1974 (4) SA 164 (D) 169; Fienstein v Nigli 1981 (2) SA 684 (A) 700. An example of a clause allowing the insurer to void the contract entirely was at issue in the case of Bruwer v Nova Risk Partners Ltd [2010] ZAGPJHC 96: ‘6. ­Disclosure You must inform the Company of all facts that are material to the acceptance of the insurance or the premium that is charged. If you fail to do this, the Company may, at its option, declare this policy void. As this also applies during the currency of this policy, any changes must be reported immediately.’ 121  As this qualifies as a penalty clause, it is subject to the Conventional Penalties Act 15 of 1962. In accordance with s3, a penalty may not exceed the actual prejudice suffered by the innocent party. 122  ABSA Bank Ltd v Fouché (n 96); a damages claim based on breach of contract and a damages claim based on delict are concurrent claims, although they each have their own unique requirements. See also Van Niekerk (n 94) 135. 123  Administrateur, Natal v Trust Bank van Afrika Bpk 1979 (3) SA 824 (A) at 832; Bayer South Africa (Pty) Ltd v Frost 1991 (4) SA 559 (A). 124  See in general J Neethling, JM Potgieter, Neethling-Potgieter-Visser Law of Delict (Durban, LexisNexis, 2015) Part II Ch 2 ‘An omission will only be recognised as actionable where a legal duty to act existed’. In other jurisdictions, this equates to the so-called ‘duty of care’; Mukheiber v Raath 1999 (3) SA 1065 (SCA) 1069. 125  See in general Neethlingand Potgieter, ibid Part II Ch 3; Part III Ch 5 at 315; Administrateur, Natal v Trust Bank van Afrika Bpk (n 124) 832; ABSA Bank Ltd v Fouche (n 96) 181. 120  s

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(intent, negligence, or no fault where a strict liability regime applies);126 causation (both factual and legal);127 and damages (suffering of harm, injury, damage or loss).128 To determine whether a misrepresentation was in fact wrongful, one must ask whether a subjective right was infringed upon or whether legal duty existed that was breached. For this purpose, the flexible boni mores test is applied.129 The breach thus of the ex lege or statutory duty of disclosure in insurance law is seen as wrongful for purposes of a separate delictual damages claim.130 In a nutshell, the remedies of the insurer are thus to maintain the insurance contract yet repudiate the claim, or elect to void the contract entirely. Irrespective of the choice made, the insurer remains entitled to institute a civil claim for delictual damages to cover additional losses suffered.

IV.  Insurer’s Pre-contractual Duty A. The Ex Lege Duty to Disclose A pre-contractual duty of disclosure rests on the insurer to disclose material and relevant information to the insured in accordance with the ex lege duty of disclosure of the insured/policyholder as discussed above. Failure to do so will result in improperly obtained consensus. This will constitute an actionable misrepresentation, provided that the misrepresentation was wrongful and material, that will render the contract voidable at the election of the insured who may claim ­restitutio in integrum. Fault (intent or negligence) is not a requirement for voidability, yet materiality of the representation remains a crucial requirement.131 Where the insured suffers additional damages, a delictual damages claim may be instituted as discussed above. Where statute regulates the nature and extent of information duties, failure to comply could also trigger statutory and regulatory sanctions.

126  See in general Neethling and Potgieter, ibid Part II ch 4; Part III chap 11; Suid-Afrikaanse Nasionale Lewensassuransiemaatskappy Bpk v Louw & Collins Afslaers (Edms) Bpk 1997 (1) SA 592 (A) 608. 127  See in general Neethling and Potgieter, ibid Part II Ch 5; Administrateur, Natal v Trust Bank van Afrika Bpk (n 124) 833; Bayer South Africa (Pty) Ltd v Frost (n 124) 575; International Shipping Co (Pty) Ltd v Bentley 1990 (1) SA 680 (A) 701. 128  See in general Neethling and Potgieter, ibid Part II Ch 6, Ch 7; Ch 9 at 322. Bayer South Africa (Pty) Ltd v Frost (n 124) 569. 129  Holtzhausen v ABSA Bank Ltd 2008 (5) 630 (SCA) 635. See in general Neethling and Potgieter, ibid 315–17. 130  Neethling and Potgieter, ibid 315; Mukheiber v Raath (n 125) 1075–76. 131  Mutual & Federal Insurance Co Ltd v Oudtshoorn Municipality 1985 (1) SA 419 (A); Anderson Shipping v Guardian National Insurance 1987 (3) SA 506 (A); Qilingele v SA Mutual Life Assurance Society Ltd 1993 (1) SA 69 (A); De Waal NO v Metropolitan Lewens Bpk 1994 (1) SA 818 (O); SA Eagle v Norman Welthagen Investments (Pty) Ltd 1994 (2) SA 122 (A); Commercial Union Insurance Co of South Africa Ltd v Lotter 1999 (2) SA 147 (SCA).

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B.  Statutory Disclosure Duties Statutory provisions on the duty of disclosure do not diminish the common law duty of disclosure, but aim to provide details of the nature and extent of the information duty for the sake of clarity. Both the LTIA and the STIA briefly address disclosure duties as discussed above.132 The FAIS Act that applies to all types of financial products and includes insurance expands on these. It expressly states that the Act must be construed as being in addition to any other law not inconsistent with its provisions and not as replacing any such law.133 The insurance laws are being revised and draft bills are currently serving for comment. The proposed new dispensation is discussed further below.134 In their attempt to provide legal certainty, regulators are increasingly setting the standards of the transparency required in law by statutory measures. Yet in the quest to attain increased levels of certainty, open-ended core values such as equality and fairness that could inform the general duty fade into obscurity. Disclosure duties commence from the time of first contact between insurer and insured or policyholder. This means that any ex lege duty to disclose already exists upon marketing or advertising of the insurance product,135 and continues until the insurance contract is concluded or renewed. Where specifically provided for in the agreement between the parties, this duty can be a continuous contractual duty. The general essential terms that must be disclosed from the insurer’s side include: (a) details of the cover to be provided (the nature and extent of cover of the product); (b) the name and legal status of the insurer; (c) the premium to be paid and payment details; (d) the effect of non-payment of the premium; and from the side of the insurer (e) special terms and conditions, exclusions, waiting periods, loadings, penalties, excesses, restrictions or circumstances in which benefits will not be provided. From the side of the insured all facts that (a) increase the risk or (b) reduce the risk, form essential elements which require proper disclosure to the insurer. Whereas some of these aspects are clearly circumscribed and thus limited, others remain open for interpretation in accordance with the core values of equality, ubuntu, fairness and social justice. In the quest for increased transparency pre-contractual information must be provided in a clear, comprehensible and unambiguous manner.136 The court in Jerrier noted that the policy should not only be couched in plain language but should be clear and specific.137 Insurance is inevitably more than a once-off

132 

LTIA s 52(1)(b); STIA s 53(1)(b). s 1(6). 134  See Part IV.E below. 135  Part X of the General Code of Conduct (‘GCC’) in terms of the FAIS Act provides strict rules for advertising in the financial industry. 136  D Millard and B Kuschke, ‘Transparency, Trust and Security: An evaluation of the insurer’s ­pre-contractual duties’ (2014) 17 Potchefstroom Electronic Review 2412. 137  Jerrier v Outsurance (n 108) para 22. 133 

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­ urchase as it entails longer-term commitments between the parties. To operate p fairly against all of the parties, sufficient information must be provided to allow for thorough consideration before entering into a binding legal obligation. To honour the national aim of attaining greater levels of equality, increased regulatory ­protection has been introduced to protect the more vulnerable insurance consumer.138 As recognised by the Financial Services Board, the asymmetry of information between retail financial services consumers and financial institutions means that financial services consumers are particularly vulnerable to unfair treatment. Typically, financial institutions have far more expertise and resources available to them in designing, distributing and servicing financial products than consumers have available to them in making decisions about financial transactions. The nature of financial products and services is such that, in many instances, the consequences of unfair treatment or poor decisions are only felt some time—in some cases many years—after transacting. Significant hardship can result. In South Africa, these challenges are exacerbated by low levels of both basic and financial literacy, increasing the risk of consumer exploitation.139 Regulations are contained primarily in the FAIS Act140 and in a lesser degree in some provisions of the LTIA and the STIA. Policyholder Protection Rules are issued for both long-term and short-term insurance business. The need for specific plain language disclosures is recognised in the Policyholder Protection Rules published in terms of both the STIA and the LTIA. In addition, the General Code of Conduct or ‘GCC’ that applies in the financial industry prescribes expressly that an advertisement by a provider must not contain any statement, promise or forecast which is fraudulent, untrue or ­misleading.141 Where any advertisement for insurance contains performance data it must in addition include references to the source and date of the data.142 The insurer must also emphasise that all performance forecasts are not guaranteed143 and where returns or benefits are dependent on the performance of underlying assets or other variable market factors such as investments, the advertisement must state that this is the case.144 Advertisements with forecasts must also prominently display a warning statement about risks involved in buying or selling a financial product,145 138  Even preceding the enactment of the CPA, and the subsequent exclusion of insurance from its scope, JP Van Niekerk advocated a reform in the duty of disclosure in view of the increased introduction of specific consumer protection measures in ‘Goodbye to the Duty of Disclosure in Insurance Law: Reasons to Rethink, Restrict, Reform or Repeal the Duty (Part 1)’ (2005) 17 South African ­Mercantile Law Journal 150; See also JP Van Niekerk, ‘Goodbye to the Duty of Disclosure in Insurance Law: Reasons to Rethink, Restrict, Reform or Repeal the Duty (Part 2)’ (2005) South Africa Mercantile Law Journal 323. 139  TCF 6. 140  Specifically, on this topic in s 16(2)(a) and (c). 141  s 14(1)(a). 142  s 14(1)(b)(i). 143  s 14(1)(b)(ii)(bb). 144  s 14(1)(b)(ii)(cc). 145  s 14(1)(b)(iii).

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and must contain an additional warning that past performances are not necessarily indicative of future performances, and that investment value is not guaranteed.146 In explaining the client’s monetary obligations during the term of coverage, an intermediary must also explain how payment should be made and how often,147 and what the consequences will be in the case of non-payment, as well as escalations or increases in premiums.148 Where a promotion by telephone, for example, does result in the rendering of a financial service, the insurer is obliged to provide full details to the client in writing and within 30 days as per sections 4(1)(a) and 4(1)(c) and 5(a) and (c) of the GCC.149 The PPR (Long-term insurance), Part III Rule 4.1, contains the basic rules of conduct for this type of direct marketing. These prescribe a general standard of conduct to render services honestly, fairly and with due skill, care and diligence. A direct marketer must also act honourably, professionally and with due regard to the convenience of the policyholder. Rule 4.1(c) specifically prescribes the content of representations made to the policyholder. Rule 4.3 contains an extensive list of particulars that must be disclosed to the policyholder. These provisions are the same as the corresponding prescriptions and provisions of the FAIS Act. The PPR (Short-term insurance) contains a similar provision.

C.  Disclosure Duties of Intermediaries No separate statute governs or regulates intermediary services. In addition to the definitions in the FAIS Act of ‘intermediary services’ and ‘advice’ in paragraph 1(b), the Act describes a representative as ‘any person who renders a financial service to a client for or on behalf of a financial services provider, in terms of conditions of employment or any other mandatory agreement …’.150 ‘Intermediary service’ denotes any act other than the furnishing of advice that is performed by a person for or on behalf of a client or product supplier that results in the client entering into or offering to enter into any transaction in respect of a financial product with a product supplier.151 Even if the client may enter into any such transaction in future, it means that an intermediary service had been rendered.152 The Act distinguishes intermediary services from ‘advice’, making it clear that ‘advice’ is broader, and includes any recommendation, guidance or proposal of

146 s14(1)(b)(iv);

and s 14(1)(c). In the GCC as above. 148  These provisions will be replaced and expanded in the proposed new PPRs referred to under Part IV.E below. 149  s 14(2)(c). 150  s 1(1) ‘representative’. 151  W Hattingh and D Millard, The FAIS Act explained (Durban, Lexis Nexis, 2010) chs 2, 5. 152  s 1 (1)(a) of the FAIS Act. 147 

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a financial nature furnished by any means or medium, to any client or group of clients.153 The advice must pertain to the purchase of any financial product or the investment in any financial product154 and includes any recommendation, guidance or proposal of a financial nature ‘on the conclusion of any other transaction, including a loan or cession, aimed at the incurring of any liability or the acquisition of any right or benefit in respect of any financial product.’155 The emphasis in the Act is therefore on both intermediary services and advice. An intermediary has an obligation to disclose to the client concise details of any special terms or conditions, such as exclusions of liability, cooling-off or waiting periods, loadings, penalties, excesses or restrictions. An intermediary must fully inform a client that all material facts must be accurately and properly disclosed by the client, and that the accuracy and completeness of all answers, statements or other information provided by or on behalf of the client, are the client’s own responsibility. Where the provider completes or submits any transaction requirement on behalf of the client, the client should be satisfied as to the accuracy and completeness of the details. Furthermore, a client should be informed of the ­possible consequences of the misrepresentation or non-disclosure of a material fact or the inclusion of incorrect information. Although some information could be exclusively within the insured’s domain, it could be the insurer who is generally in a better position to understand its effect on risk assessment and premium determination, and specifically request its disclosure. It would be the insurer who would understand why, for example, a continuous duty to disclose would be relevant in the specific circumstances. In the words of Church: ‘It should therefore be incumbent upon the insurer to communicate this clearly to the insured. This would be fair and in the interest of both the insured and the insurer.’156

D.  Remedies for Breach Any transgression of the GCC falls within the jurisdiction of the Financial Services Board (‘FSB’). In South Africa this will be the FSB’s Enforcement Committee.157 The matter can also be referred to the FAIS Ombud or to a court. A complainant can complain to the FAIS Ombud. A complaint can be a contravention of the FAIS Act, or failure to comply with a provision of the Act which leads to actual or future financial prejudice or damage.158 For purposes of adjudication by the FAIS

153 

s 1(1)(a) ‘advice’. s 1(1)(a) and (b). 155  s 1(i)(c). 156  Church (n 109) 859. 157  GCC s 14. 158  s 1(1)(a) ‘complaint’. ‘Financial prejudice’ or ‘damage’ all follow the specific meaning given in common law. 154 

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Ombud, actual loss or the possibility of suffering a prospective loss in future can found a case. However, if a policyholder wants to approach a court, it is necessary to prove that a contravention of the FAIS Act has already caused financial prejudice. Remedies include payment of damages or compensation, and payment of a penalty may be ordered.159 The Enforcement Committee of the FSB adjudicates alleged contraventions and may hear matters pertaining to all legislation administered by the FSB. The Committee may impose unlimited penalties, compensation orders and cost orders. Any such order is enforceable as if it was a judgment of the High Court of South Africa.160 In addition to penalties, the FSB may pursue a variety of other enforcement actions such as the debarment of persons who no longer meet the personal characteristics or qualities of honesty and integrity.161 The Registrar of the FSB is furthermore entitled to suspend or withdraw any licence of an insurer or financial service provider found guilty of contravention of statutory duties.162

E.  Proposed Statutory Changes The South African insurance industry is being transformed by new laws. These include The Financial Sector Regulation Act 2017163 that provides for a Financial Sector Conduct Authority that will be responsible to ensure fair treatment, integrity and to supervise services performed in relation to financial ­products.164 The Insurance Bill 2016 aims to replace certain parts of the ­Long-term Insurance Act, 1998, and the Short-term Insurance Act, 1998, and to provide for matters connected therewith. Pending the promulgation of the Insurance Bill, the legislature intends to introduce further changes to the current Policyholder Protection Rules issued in terms of both the STIA and the LTIA.165 It must be noted that these amendments are not in force and remain under discussion.166 In view of the fact that they are far from final, only some of the most important

159  See the FSB Treating Customers Fairly: A discussion paper prepared for the Financial Services Board (May 2010) 12 (accessed at www.fsb.co.za): ‘Credence goods and services, on the other hand, are those where quality can be ascertained only at some cost after purchase. A frequent characteristic of these goods and services is that the value of the purchase is either spread over a long period of time, or emerges only after a considerable lapse of time. Reversal of such a purchase usually involves considerable loss, both in terms of actual costs and benefits foregone of selecting some alternative.’ 160  This Committee functions in accordance with s 10 of the Financial Services Board Act 97 of 1990 www.fsb.co.za. It may address any issue regarding the transgression of statutory measures pertaining to financial service providers that fall under the jurisdiction of the FSB. 161  s 14(a). 162  s 9. 163  Hereinafter the ‘FSR Act’. 164  Cl 3 of the FSR Act. See also Hattingh and Millard (n 152) 6–9. 165 Proposed replacement of Policyholder Protection Rules under the Long-term Insurance Act, 1998 and Short-term Insurance Act, 1998, dated December 2016. 166  Enactment is expected not before 2019.

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rules are highlighted below in an attempt to highlight the approach that the legislator and regulator aimed to take to amplify legal certainty. Draft Rules that attempt to refine the insurer’s disclosure duties include the Rules in Chapter 2 dealing with the Fair Treatment of Policyholders. Specifically Rule 1.3(c) would as an overarching rule require ‘that policyholders are given clear information and are kept appropriately informed before, during and after the time of entering into a policy.’ On the time of disclosure, the Rules state that disclosure must be made at point of entering into the policy.167 An extensive list of aspects that relate to the nature, extent and timing of disclosures are included under this rule. Rule 13 focusses specifically on the fact that information must be factually correct and not misleading, furthermore that it must be clear and fair, and disclosed in plain and simple language. The format of communications will be extensively dealt with in Rule 14. Innovative terminology is introduced by the proposals. In determining the extent and level of disclosure, the insurer must inter alia consider the knowledge and experience of a typical policyholder for the policy in question, and whether the advice is suitable and takes account of their specific circumstances. In view of the insurer’s duty of disclosure to a new criterion namely the typical policyholder, the rules prescribe that where policyholders receive advice, the advice must be suitable and must take their specific circumstances into account. The insurer must take reasonable steps to ensure that a policyholder is given appropriate information about a policy in good time so that the policyholder can make an informed decision about the policy prior to inception as well as throughout the duration of the policy.168 For clarity on what is intended by the wording, the rules prescribe that the insurer must consider the importance of the ­information to the policyholder’s decision-making process at the point at which the information may be most useful for the policyholder.169 Onerous terms, such as significant or unusual exclusions or limitations require ‘prominent’ disclosure as prescribed in detail in the rules.170 A significant exclusion or limitation is one that would tend to affect the decision of consumers generally to enter into the policy. An unusual exclusion or limitation is one that is not normally found in comparable policies and includes matters such as deferred payment periods; exclusions from cover; time limits and waiting periods; cover limits; time limits for the payment of benefits; and restrictions on eligibility to claim such as age, residence, employment or other activities.

167 

Rule 14.2. Continuing disclosure duties during the existence of the contract after date of conclusion currently depend on agreement between the parties, but will be covered by statute in Rule 14.4 should the proposed rules be accepted. 169  Rule 14.1.3. 170  Rule 14.2.1. 168 

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The Rules contain detailed specific prescriptions. Information will, for example, be regarded as ‘prominently’ displayed if it is appropriate for the target audience of the advertisement, brochure or similar communication, and take the likely information needs of the average recipient or target market into account. Cosmetic aspects such as the positioning of the text and audibility and speed of speech or recordings or telephone communications, the duration of displays of key information, as well as the background, font size, type styles and even the colour used will all be considered.171 Some of the terminology proposed is foreign to South African law and will have to be tested by our Insurance Ombud and in the country’s courts. It must be noted that these draft rules have not been finally promulgated.

V. Conclusion In conclusion, it is clear that good faith in our law serves to govern the performance of existing contractual obligations. A contractual duty implies that one must conduct oneself in a particular way during the existence of the contract. The duty of acting in good faith does not precede the contractual obligation, but exists once the parties have entered into the contract with each other. Failure to comply with this duty will lead to a breach of contractual duties, for which the remedies of specific performance, cancellation and/or damages as well as specifically negotiated or bespoke remedies become available.172 The ex lege common law duty of disclosure, which rests on all parties involved in the conclusion of insurance contracts,173 will no doubt continue to be developed by our courts in accordance with the flexible criteria of public policy. It seems that conduct that benefits society as a whole will be the preferred yardstick by which disclosures are measured, rather than by the reintroduction of a general pre-contractual duty of good faith. The on-going statutory and regulatory ­development of the extent and scope of pre-contractual disclosure duties in South African insurance jurisprudence remain on-going in an attempt to attain more legal certainty.174

171 

Rule 13.15.1. See in general Hutchison and Pretorius (n 8) chs 12–13. 173  This includes the insurer, all intermediaries and policyholders/insureds. 174  The duty of disclosure will not be the target of a complete statutory overhaul in the near future. The current Insurance Bill 1 of 2016 forms part of the so-called Twin Peaks reforms, which seeks to significantly enhance South Africa’s financial regulatory and supervisory framework. The Bill provides a consolidated legal framework for the prudential supervision of the insurance sector that is consistent with international standards for insurance regulation and supervision. It also seeks to replace and consolidate substantial parts of the Long-term Insurance Act, No 52 of 1998 and the Short-term Insurance Act, No 53 of 1998 relating to prudential supervision, but does not replace or contribute to 172 

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The disclosure duty of the insurer has to date furthermore been regulated by statutes, rules and principles such as TCF that do not identify a comprehensive list of specific aspects that merit disclosure. The current laws set a general broad standard of ­conduct that requires disclosures for the sake of transparency and fair dealing, failing which statutory remedies apply. Proposed new Policyholder Protection Rules aim to extensively specify more detailed aspects that the insurer must disclose, with a specific focus on prominently disclosing onerous terms. What is abundantly clear from the discussion in this chapter is that the struggle to define and incorporate the standard of mere good faith in South African contract and insurance contract law does not render the possibility of refining and reintroducing a higher degree thereof, such as utmost good faith, a viable reality.

disclosure duties. The issue of new PPRs might embellish on specific aspects that require disclosure by the insurer and intermediaries to the insured. The Bill seeks to promote the maintenance of a fair, safe and stable insurance market by establishing a legal framework for insurance business and to align the industry with international standards. The Bill will give effect to the outcomes of a number of policy projects undertaken over the past few years such as the Solvency Assessment and Management (‘SAM’) framework, and also aims to give effect to the National Treasury’s Micro-insurance Policy Document. It does not aim to directly regulate insurance contract law or the duties of disclosures of the parties involved in insurance contract conclusion.

14 Pre-contractual Duties in European Insurance Contract Law HELMUT HEISS AND ULRIKE MÖNNICH

I.  Introduction to European Insurance Contract Law The current level of harmonisation of insurance contract law appears to be meagre when compared to other areas such as supervisory law or private international law in matters relating to insurance. In addition to a few rules in the Solvency II Directive and the provisions in the Consolidated Motor Insurance Directive,1 directives on consumer protection play an important role, as some of these, eg the Unfair Contract Terms Directive2 and the Distance Marketing Directive,3 also apply to consumer insurance. For the most part, duties to inform and advise policyholders have been imposed by the European legislature on insurers and insurance distributors. In effect, these duties operate similarly to provisions of private (contract) law, whether or not they have been implemented into national contract or supervisory law, as they have to be fulfilled by insurers and insurance distributors towards customers. A great number of such information duties have been created by the European­ legislature.4 In contrast, there are no legal rules in force which regulate the applicant’s pre-contractual disclosure duties. However, such rules have been drafted at the EU level by the Project Group on a ‘Restatement of European Insurance Contract Law’ in its ‘Principles of European Insurance Contract Law (PEICL) 2016’.5 1  Directive of the European Parliament and of the Council of 16 September 2009 relating to insurance against civil liability in respect of the use of motor vehicles, and the enforcement of the obligation to insure against such liability [2009] OJ L263/11. 2 Council Directive 93/13/EEC of 5 April 1993 on unfair terms in consumer contracts [1993] OJ L095/29. 3  Directive 2002/65/EC of the European Parliament and of the Council of 23 September 2002 concerning the distance marketing of consumer financial services and amending Council Directive 90/619/EEC and Directives 97/7/EC and 98/27/EC [2002] OJ L271/16. 4  See also Helmut Heiss, ‘European Insurance Law: Quo Vadis?’ (2017)1 Diritto del mercato assicurativo e finanziario 1 ff. 5 Jürgen Basedow, John Birds, Malcolm A Clarke, Herman Cousy, Helmut Heiss and Leander D Loacker (eds), Principles of European Insurance Contract Law (PEICL) 2nd edn (Otto Schmidt, 2016) (PEICL 2016); see .

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Therefore, as far as the disclosure duty of the applicant is concerned, this article will refer to the PEICL only.

II.  Preliminary Remarks on the PEICL A.  The Need for the PEICL The Principles of European Insurance Contract Law (PEICL) are the result of over 15 years of academic research, culminating in the publication of the first edition in 2009 and the second edition in 2016.6 The work presents the P ­ rinciples (‘Rules’) along with Comments and Notes. The Project Group viewed its task as a ­Restatement,7 ie attempting to reflect the current status of insurance law in Europe.8 At the same time, the PEICL are intended to serve as a model for a ­European insurance contract law.9 For the realisation of the internal insurance market, the Project Group believes that a uniform European insurance contract law by means of a European regulation is required.10 A uniform European insurance contract law is needed due to the differences between national insurance contract laws creating barriers to the internal market, for example hindering the free provision of insurance services.11 Under conflict of laws in the EU, the rules governing jurisdiction and the law applicable generally favour policyholders, with reference being made to a policyholder’s domicile or (habitual) residence, as applicable, rather than to the insurer’s head office or establishment.12 For insurers wishing to carry on business cross-border, this means that they must adapt the insurance contracts to the law of each target country, thereby hindering market entry into various Member States due to the additional costs involved in contract adaptations.13 The fact that national insurance contract laws contain mandatory provisions preventing any deviation from these provisions, especially where such deviation would be to the detriment of policyholders, makes it more difficult for insurers to carry on cross-border business. At the same time, it largely prevents potential policyholders from enquiring into foreign products. Summing up, differences in mandatory rules of national insurance contract law build a barrier to the cross-border sale of insurance.

6 

Helmut Heiss, ‘Introduction’ in Basedow, Birds, Clarke, Cousy, Heiss and Loacker, ibid. more detailed information about the idea behind the research project, see Helmut Heiss, ‘Introduction’ in Basedow, Birds, Clarke, Cousy, Heiss and Loacker (n 5). 8  See Heiss, ibid, para I7. 9  See ibid, para I8. 10  For details see ibid, para I31. 11  This issue is discussed in more detail by Heiss, ibid, paras I2 ff. 12  See ibid, para I2. 13  Similarly, ibid para I4. 7  For

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B.  ‘Optional’ European Insurance Contract Law In working towards removing the barriers to the internal insurance market, it is necessary to find an approach which continues to provide policyholders with a high standard of protection, currently provided by the mandatory national provisions. Two approaches have been discussed in this respect.14 One approach would be to create a uniform European insurance contract law which would supersede national law. The other would be to create a uniform European insurance contract law which does not supersede national law, but would oust its application if so chosen by the contracting parties. The latter would constitute an ‘optional instrument’, which would be more politically feasible and efficient than the former, because it would not affect national laws or any companies and policyholders wishing to act nationally only.15 The PEICL represent a model law for a European regulation introducing an ‘optional instrument’16 of European insurance contract law. If the PEICL were adopted as a European regulation, their application would depend completely on a choice of law by the contracting parties pursuant to Article 1:102.17 A choice of law in favour of the PEICL would not be affected by any conflictof-law rules. Where such a choice is made, no recourse to national law is permitted under Article 1:105(1), unless there are no special rules in the PEICL for certain branches of insurance to which mandatory national laws apply.18 Where specific branches of insurance governed in the PEICL are concerned,19 insurers would no longer need to adapt an insurance product before distributing it to any EU/EEA Member State. The introduction of such an optional instrument is currently being debated within the European Union. The European Economic and Social Committee supported the idea in principle.20 The European Parliament requested just such an optional European insurance contract law in its Resolution of 8 June 2011 on policy options for progress towards a European Contract Law for consumers 14 

For more details about the possible approaches available, see ibid, paras I34 ff. For detailed analysis of the advantages of an optional instrument, see ibid, para I36. See the own-initiative Opinion of the European Economic and Social Committee (EESC) on ‘The 28th regime – an alternative allowing less lawmaking at Community level’ [2011] OJ C21/26 (EESC Opinion on ‘The 28th Regime’). 17  Art 1:102 Optional Application: The PEICL shall apply when the parties, notwithstanding any limitations of choice of law rules under private international law, have agreed that their contract shall be governed by them. Subject to Article 1:103, the PEICL shall apply as a whole and no exclusion of particular provisions shall be allowed. 18 Art 1:105 National Law and General Principles: (1) No recourse to national law, whether to restrict or to supplement the PEICL, shall be permitted. This does not apply to mandatory national laws specifically enacted for branches of insurance which are not covered by special rules contained in the PEICL. 19  See below s II.C. 20 See its own-initiative Opinion of the European Economic and Social Committee on ‘The ­European Insurance Contract Law’ [2005] OJ C157/1 and the EESC Opinion on ‘The 28th Regime’ (n 16). 15  16 

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and businesses21 and explicitly mentioned the model of the PEICL. Commissioner Viviane Reding met with leading figures of the European insurance industry and discussed with them the feasibility of such an optional instrument.22 Finally, the Commission has set up an Expert Group on European Insurance Contract Law in 2013 which finished its work and delivered its Final Report in 2014.23 So far, however, no proposal for an EU Regulation has been presented.

C.  Scope of Application The second expanded edition of the PEICL contains both general rules of insurance contract law and rules on specific branches.24 The general part includes rules governing all types of indemnity insurance and all types of insurance of fixed sums. The special part contains rules governing liability insurance,25 life insurance26 and group insurance.27 However, the scope of the PEICL’s application is not restricted to the branches expressly governed. The PEICL govern all types of insurance with the exception of reinsurance.28 This means that insurance covering special risks, such as marine and aviation insurance, and large-risk insurance fall within the scope of the PEICL, albeit with an unfettered freedom to contract provided to the parties in such cases under Article 1:103(2).29 It should, however, be noted that the PEICL do not govern every aspect concerning insurance contracts.30 They do not, for example, govern issues of general contract law. As recourse to national law is prohibited under the first sentence of Article 1:105(1), the second paragraph provides that the Principles of European Contract Law (PECL)31 will apply in such cases.32 The PECL thereby become the 21  European Parliament, ‘Resolution on policy options for progress towards a European Contract Law for consumers and businesses’, 8 June 2011, P7_TA-PROV(2011)0262. 22  See the Press Release ‘EU Justice Commissioner Viviane Reding meets with leaders of Europe’s insurance industry’ of 21 September 2011, MEMO/11/624. 23  Final Report of the Commission Expert Group on European Insurance Contract Law (24 January 2014) http://ec.europa.eu/justice/contract/files/expert_groups/insurance/final_report.pdf. 24  See Heiss (n 7) para I13. 25  Arts 14:101ff. 26  Arts 17:101ff. 27  Arts 18:101ff. 28  See art 1:101. For more details see Fritz Reichert-Facilides and Helmut Heiss, ‘Comments on Article 1:101’ in Basedow, Birds, Clarke, Cousy, Heiss and Loacker (n 5). 29 See Monika Stahl, The Principles of European Insurance Contract Law (PEICL) and Their ­Application to Insurance Contracts for Large Risks, Veröffentlichungen aus dem LL.M.-Studiengang Internationales Wirtschaftsrecht der Universität Zürich und des Europa Instituts an der Universität Zürich, vol. 71 (Schulthess 2013). 30  See Heiss (n 7) para I14. 31  Ole Lando and Hugh Beale (eds), Principles of European Contract Law, Parts I and II (Alphen aan den Rijn, Kluwer Law International, 2000) and Ole Lando, Eric Clive, André Prüm and Reinhard Zimmermann (eds), Principles of European Contract Law, Part III (Alphen Aan den Rijn, Kluwer Law International, 2003). 32  Art 1:105 National Law and General Principles: (2) Questions arising from the insurance contract, which are not expressly settled in the PEICL, are to be settled in conformity with the Principles of European Contract Law (PECL) and, in the absence of relevant rules in that instrument, in accordance with the general principles common to the laws of the Member States.

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lex generalis to the PEICL, a choice made by the Project Group early on in its work.33 The PEICL have consistently been drafted in light of the PECL both in respect of terminology and to avoid duplicate provisions. Despite the fact that no PEICL rule was created where a sufficient PECL rule existed in relation to insurance, the Project Group had to transfer some of the PECL into the PEICL. This is because the PECL are non-mandatory rules, yet the Project Group identified situations in which the provisions should be mandatory in relation to insurance. In transferring such provisions into the PEICL, they were subsequently made mandatory by virtue of Article 1:103(2).34 There may be cases where an issue is not governed by PEICL or the PECL. In such situations, there is a reference in Article 1:105(2) to the ‘principles common to the laws of the Member States’. Consequently, such cases must be solved using comparative law methods.35 Finally, there will be situations where individual branches of insurance not governed by the PEICL are concerned. Preventing recourse to national law in such cases would clearly undermine policyholder protection.36 In order to avoid this result, mandatory rules of national law may be applied to such branches of insurance which are not governed by special PEICL rules.37 As the PEICL already govern liability, life and group insurance, no recourse may be had to national law in respect of these branches.38 The opposite is true where compulsory liability insurance is concerned. Due to the variety of compulsory insurance, Article 16:101(2) provides that such contracts must comply with the ‘specific provisions imposing the obligation’. This means that the specific national or EU provisions will take precedence over the PEICL.39

D.  Mandatory Provisions Due to the fact that the proper functioning of the internal insurance market is hindered by mandatory rules of national insurance contract law, the PEICL have generally been drafted as mandatory so that they are capable of substituting national mandatory law.40 The mandatory nature of the provisions can be distinguished into two types. First, there are ‘absolutely’ mandatory rules as listed under the first sentence of Article 1:103(1), from which parties may not derogate at all

33 

For the reasons behind this choice, see Heiss (n 7) para I15. for example, Jürgen Basedow, ‘The Optional Application of the Principles of European ­Insurance Contract Law’ in Angelika Fuchs (ed), European Contract Law—ERA Forum Special Issue 2008 (ERA Forum scripta iuris europaei), vol 9 (Berlin, Springer, 2008) 111, 114 f. 35  See Heiss (n 7) para I16. For more details see Jürgen Basedow, ‘Comments on Article 1:105’ in Basedow, Birds, Clarke, Cousy, Heiss and Loacker (n 5) C7. 36  See Heiss (n 7) para I17. 37  See the second sentence of Art 1:105(1). 38  See Heiss (n 7) para I17. 39  See ibid para I18. 40  See ibid para I19. 34 See,

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by ­agreement.41 Second, there are ‘semi-mandatory’ provisions,42 which are any other provisions not listed as absolutely mandatory, for which derogation is possible insofar as it is not the detriment the policyholder, insured or beneficiary.43 There are, however, also non-mandatory rules. This is the case where no protection of the policyholder, insured and beneficiary as the weaker parties is required, for example in relation to large-risk insurance.44 Large risks are defined in Article 1:103(3) in line with the existing acquis communautaire: Article 13(27)45 of the Solvency II.46 This, in turn, means that the semi-mandatory nature of the PEICL applies to all types of mass risk insurance and is not restricted to consumer contracts.47

E.  Interplay with the Existing Acquis Communautaire In general, the existing acquis communautaire was adhered to as closely as possible in the drafting of the PEICL. Exceptions were made where shortcomings could be identified. Therefore, a number of directives, for example the insurance acquis, have been taken into account in the PEICL.48 As a result of the ECJ judgment in the ‘Test Achats’ case,49 there is an amended reference to the Gender Directive,50 which prohibits the use of gender as a factor in calculating premiums and benefits.51

41  See Fritz Reichert-Facilides and Helmut Heiss, ‘Comments on Article 1:103’ in Basedow, Birds, Clarke, Cousy, Heiss and Loacker (n 5) C4. 42  See Heiss (n 7) para I21. 43  See Art 1:103(2). 44  See Heiss (n 7) para I22. 45  This provision corresponds to its predecessor, Art 5 of the First Council Directive 73/239/EEC of 24 July 1973 on the coordination of laws, regulations and administrative provisions relating to the taking-up and pursuit of the business of direct insurance other than life assurance [1973] OJ L228/3 (First Non-Life Insurance Directive). See also the references to the same definition in Art 16(5) of Regulation (EU) No 1215/2012 of the European Parliament and of the Council of 12 December 2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (recast) [2012] OJ L351/1; and Art 7(2) of Regulation (EC) No 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations (Rome I) [2008] OJ L177/6 (Rome I Regulation). 46  Directive 2009/138/EC of the European Parliament and of the Council of 25 November 2009 on the taking-up and pursuit of the business of Insurance and Reinsurance (Text with EEA relevance) (Solvency II) [2009] OJ L335/1 (Solvency II). 47  See Heiss (n 7) para I22. 48  See ibid para I23. 49  Case C-236/09 Association Belge des Consommateurs Test-Achats ASBL and Others v Conseil des ministres [2011] ECR I-773. 50  Council Directive 2004/113/EC of 13 December 2004 implementing the principle of equal treatment between men and women in the access to and supply of goods and services [2004] OJ L373/37 (Gender Directive). 51  See Heiss (n 7) para I24.

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It should be noted that certain directives have not been adopted in the second expanded edition of the PEICL. While the Insurance Mediation ­Directive,52 as amended, was considered, it was never transposed into the PEICL, which do not govern intermediaries’ professional duties.53 The same is true of more recent legislation, such as MiFID II,54 the new Insurance Distribution Directive (IDD)55 and the PRIIPs Regulation.56 This was in part due to the timing of the publication.57 Where, however, the PRIIPs Regulation is concerned, it will produce immediately applicable EU law and can therefore be applied in addition to the PEICL.58

III.  The PEICL: Policyholder’s Pre-contractual Disclosure A.  Provisions in the PEICL The policyholder’s pre-contractual duty to notify the insurer about elements of the risk to be covered forms a core element of insurance contract law in Europe. Despite all of the differences in relation to specific issues, all of the European legal systems recognise such a duty.59 The logic behind such a duty appears to be evident: the insurer needs the information covered by the pre-contractual disclosure duty in order to come to a proper decision regarding the extent of the risk cover to be provided and the correct tariff.60 In line with the ‘caveat emptor’ principle, an insurer would have to procure the information itself.61 However, the­

52  Directive 2002/92/EC of the European Parliament and of the Council of 9 December 2002 on insurance mediation [2003] OJ L9/3. 53  See Heiss (n 7) para I25. 54  Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU (Text with EEA relevance) [2014] OJ L173/349 (MiFID II). 55  Directive (EU) 2016/97 of the European Parliament and of the Council of 20 January 2016 on insurance distribution (recast) [2016] OJ L26/19 (IDD). 56  Regulation (EU) No 1286/2014 of the European Parliament and of the Council of 26 November 2014 on key information documents for packaged retail and insurance-based investment products (PRIIPs) (Text with EEA relevance) [2014] OJ L352/1 (PRIIPs Regulation). 57  See Heiss (n 7) para I26. 58  For a detailed discussion of the impact of these new legislative acts, see Heiss, ibid para I26. 59  See, for example, Basedow, Birds, Clarke, Cousy, Heiss and Loacker (n 5) Art 2:101 N1. 60  See also Helmut Heiss, ‘Informationspflichten des Versicherungsnehmers’ in Anton K ­Schnyder (ed), Internationales Forum zum Privatversicherungsrecht 2008 (Zurich, Schulthess, 2009) 49, 50; ­Malcolm A Clarke and Bernhard Rudisch, ‘Comments on Article 2:101’ in Basedow, Birds, Clarke, Cousy, Heiss and Loacker (n 5) C1. 61  See also Heiss, ibid 49, 50.

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circumstances surrounding the risk are usually known to the policyholder,62 whereas it is only partially possible for the insurer to obtain this information and would generally entail higher costs than provision by the policyholder.63 It is an almost archetypal case of information asymmetry, due to which one party, the policyholder, must inform the other party about the circumstances relevant to the contract at the pre-contractual stage. It is therefore only a matter of course that the pre-contractual disclosure duty is also thoroughly governed in the PEICL. The main basis of the rule is embodied in Articles 2:101–2:106. Other provisions are also relevant: this is especially true of Article 1:208 governing genetic tests; Article 4:201 governing the aggravation of risk; Article 17:201, which makes special modifications in relation to life insurance; and not least Article 18:301(2) governing elective group insurance.

B.  Application of the PEICL A particular problem is raised by the question of whether or how the PEICL can govern the pre-contractual duties when their applicability depends on a choice of law by the parties. This choice is usually agreed upon in the contract itself, not at the pre-contractual stage. However, this should not cause any problems here. The question as to whether an applicant has fulfilled his pre-contractual information duties will generally only arise once the contract has actually been concluded. If the contract contains a choice in favour of the PEICL’s application, there is no reason against subjecting the contractual negotiations to this regime, especially since the parties will negotiate the contract with the PEICL in mind. This also corresponds to the solution preferred in European conflicts of law. Pursuant to Article 12 of the Rome II Regulation,64 the law applicable to the contract applies to questions arising in relation to the pre-contractual relationship. In the European Union (with the exception of Denmark), this law is determined in accordance with the Rome I Regulation65 and, in particular, Article 7 thereof. Insofar as insurance contracts falling within the scope of Article 7 of the Rome I Regulation are concerned,66 the Rome I Regulation also applies in Denmark and the EEA Contracting States of Iceland, Liechtenstein and ­Norway pursuant to Article 178 of the Solvency II. Where the parties have effectively agreed to the application of the PEICL, these will also govern the pre-contractual relationship in accordance with European conflict law. 62 

See, for example, Clarke and Rudisch (n 60) C1. See also Heiss, ibid 49, 52. See also Heiss, ibid 49, 52. Regulation (EC) No 864/2007 of the European Parliament and of the Council of 11 July 2007 on the law applicable to non-contractual obligations (Rome II) [2007] OJ L199/40. 65  See n 47 above. 66  Pursuant to Art 7(1) of the Rome I Regulation, this concerns all insurance contracts covering large risks (Art 7(2)) and insurance contracts covering mass risks which are situated in one of the Member States (Art 7(3)). Reinsurance contracts are expressly excluded from the scope of application of Art. 7 of the Rome I Regulation (see the second sentence of Art 7(1)). 63  64 

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C.  Features of the Duty of Disclosure (Article 2:101) i.  General Remarks The applicant’s duty of disclosure is established in Article 2:101(1). At the same time, this provision limits the scope of the duty. Article 2:101(1), in particular, lists various conditions which must be satisfied in order for the duty of disclosure to apply to the applicant: the duty to inform is thus limited to circumstances about which the insurer has asked in a clear and precise manner and of which the applicant is or ought to be aware. In terms of time, the duty to disclose is restricted to the contract conclusion phase. Any change in circumstances after contract conclusion does not establish a further duty to provide information.67 However, circumstances which change after contract conclusion may constitute an aggravation of risk for the purposes of Articles 4:201–4:203.68

ii.  The Insurer’s Questions The rules in the PEICL governing the duty of disclosure follow the so-called ‘questionnaire model” and therefore limit an applicant’s duty to answer questions.69 Consequently, applicants are not under a duty to disclose at their own initiative, ie ‘spontaneously’, all the circumstances which might be relevant to the insurer’s decision to conclude the contract, whether at all or under certain conditions.70 However, an applicant is not prohibited from disclosing relevant circumstances about which the insurer has not asked. As a rule, an applicant will disclose such circumstances which indicate the existence of a lesser risk, such as the presence of specific risk prevention measures (lightning protection, alarm systems, commissioning of alarm services, etc).71 It is conceivable that, on the basis of such disclosure, an insurer may conclude the contract on terms more favourable to the customer, even though it has not asked questions in this regard. In such cases of voluntary pre-contractual disclosure,72 Article 2:105 provides for an application of the same sanctions as in the case of breach of the general duty to disclose.73 The questionnaire model is already in force in some European countries.74 In the other Member States, applicants are under a statutory duty of spontaneous

67 

For more details on the duration of the obligation, see s III.C.v. below. more details on the rules on the aggravation of risk see, for example, Hermann Cousy, ‘The Principles of European Insurance Contract Law: The Duty of Disclosure and the Aggravation of Risk’ (2008) 9 ERA Forum 119, 130ff. 69  See, for example, Heiss (n 60) 49, 53. See also Cousy, ibid 119, 126; Clarke and Rudisch (n 60) C3. 70  See also Malcolm A Clarke and Bernhard Rudisch, ‘Comment on Article 2:105’ in Basedow, Birds, Clarke, Cousy, Heiss and Loacker (n 5). 71  See also Heiss (n 60) 49, 54. 72  See Clarke and Rudisch (n 70). 73  See Arts 2:102 to 2:104; see also s IV.D below. 74  In s 22 of the Finnish Insurance Contract Act (Vakuutussopimuslaki); Art L113-2(2) of the French Insurance Contract Act (Codes des assurances: le contrat); § 19(1) of the German Insurance Contract Act 68 For

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disclosure, but practice in these countries also shows that insurers do not rely on spontaneous disclosure by their customers and instead use questionnaires.75 To this extent, Article 2:101(1) only codifies existing contract practice in Europe. In comparison to the spontaneous disclosure duty, the questionnaire model represents the more balanced solution. While it is true that applicants are usually better informed about the existence of certain circumstances concerning them than the insurer, this does not mean that policyholders are also able to recognise the relevance of individual circumstances to the insurer’s decision to conclude the contract. Only individuals who know and understand the underwriting practice of insurers are in a position to recognise the relevance. This is not usually the case for applicants. Conversely, due to their claims regulation practice, insurers are aware of the circumstances on which they base their decision to conclude a contract and therefore have to ask the applicant. It is therefore reasonable to require them to create a questionnaire in which the information needed by them reflects their own underwriting practice. These considerations may no longer fully apply in relation to large-risk insurance. First, large policyholders sometimes have their own departments for their insurance business. The expertise available in such departments includes knowledge of insurers’ underwriting practices. Second, large companies sometimes find themselves in unchartered territory in terms of their product development and therefore in areas in which even specialised insurers have no reliable empirical data. In such cases, it may be appropriate to require the applicant to disclose circumstances beyond those requested by the insurer.76 This route is not closed by Article 2:101(1), particularly as this provision is not mandatory in relation to large-risk insurance pursuant to Article 1:103(3).77 It is therefore possible for the parties to enter into an agreement deviating from Article 2:101(1) for the contract negotiation stage. In accordance with the general principles of contract interpretation, the questions which the insurer poses to the applicant must be interpreted on the basis of a reasonable applicant’s understanding. Therefore, a question posed takes the meaning which the applicant reasonably must have understood.78 If the ­wording

(Versicherungsvertragsgesetz); Art 815(1) of the Polish Civil Code (Ustawa z dnia 23 kwietnia 1964 r. Kodeks Cywilny); Art 10 of the Spanish Insurance Contract Act (Ley 50/1980, de 8 de octubre, de ­Contrato de Seguro); Art 4(1) of the Swiss Insurance Contract Act (Versicherungsvertragsgesetz) and in the United Kingdom in regard to consumer insurance (Consumer Insurance (Disclosure and ­Representations) Act 2012, ss 2 and 3). 75  See Clarke and Rudisch (n 60) C3. Likewise in regard to consumer contracts, Jürgen Basedow and Till Fock, ‘Rechtsvergleich’ in Jürgen Basedow and Till Fock (eds), Europäisches Versicherungsvertragsrecht, vol I (Tübingen, Mohr Siebeck, 2002) 71. 76  Similarly in regard to commercial risks Basedow and Fock, ibid 71. 77  For more details on Art 1:103, see s II.D above. 78  For more details on the interpretation of documents provided by the insurer see, for example, Jürgen Basedow and Helmut Heiss, ‘Comments on Article 1:203 PEICL’ in Basedow, Birds, Clarke, Cousy, Heiss and Loacker (n 5) C1–C2.

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of a question gives rise to doubts as to its content, the interpretation more favourable to the applicant must in principle be chosen.79 Moreover, pursuant to Article 2:101(1), the questions must be ‘clear and precise’. Questions which are incomprehensible to the applicant do not constitute a duty to disclose from the outset.80

iii.  Knowledge of the Circumstances Requested The questions posed by the insurer will trigger the applicant’s duty to provide an honest answer.81 Pursuant to the wording of Article 2:101(1), this duty to respond is limited to the disclosure of the circumstances of which the applicant is or ought to be aware. The inclusion of circumstances which should be known to a certain extent imposes an obligation to investigate on the applicant.82 However, this must remain very narrow.83 Imposing a duty of disclosure on applicants is only justified where the information can be obtained by them quickly and cost-effectively. If this is not the case, there is no reason to shift the cost of procuring information from insurers to applicants. In the comments to Article 2:101(1), reference is, therefore, made to sources of information which are in the applicant’s possession or readily available.84 An applicant is thus particularly obliged to examine existing and relevant documents, including electronic documents.85 In principle, the reference made in Article 2:101(1) is to the knowledge of the applicant. In different situations, the PEICL also provide for the imputation of knowledge to the applicant. This applies generally to the knowledge of the insured person86 in relation to insurance on behalf of a third party and to the knowledge of the so-called person at risk in life insurance,87 ie the person on whose life a policy is taken out.88 In addition, the PEICL contain a general rule on the imputation of knowledge.89 Accordingly, an applicant is attributed with the knowledge of those persons who have been entrusted with tasks which are essential for the conclusion of the insurance contract. These are persons who play a significant role in the contract negotiations with the knowledge and the intention of the applicant.90

79 

See Art 1:203(2). Similarly Cousy (n 68) 119, 126. 81  ibid 119, 126. 82  See Clarke and Rudisch (n 60) C7. 83  ibid C7 mentions ‘reasonable enquiries’. 84  ibid C7. 85  ibid C7. 86  See Art 2:101(2). For more details on this provision, see Clarke and Rudisch, ibid C8. 87  See Art 17:201(1). 88  For more details see Hermann Cousy, ‘Comments on Article 17:201’ in Basedow, Birds, Clarke, Cousy, Heiss and Loacker (n 5). 89  See Art 1:206. 90  For more details, see Malcolm A Clarke, ‘Comments on Article 1:206’ in Basedow, Birds, Clarke, Cousy, Heiss and Loacker (n 5) C3–C5. 80 

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iv.  Information Exempted from the Duty Knowledge or constructive knowledge usually exists, in particular, in respect of health information which results from genetic tests actually carried out. Under the general rule in Article 2:101(1), the results of genetic tests may form the basis of a question posed by the insurer and therefore trigger the duty of disclosure. ­However, a limited exception is made by virtue of Article 2:10691 together with Article 1:208(1), in order to safeguard the applicant’s rights to personal p ­ rivacy and data privacy.92 Consequently, an applicant is not required to disclose the results of a completed genetic test even if an insurer requests these. Pursuant to Article 1:208(1), insurers are not even allowed to ask about genetic tests. They are all the less entitled to require a genetic test to be carried out.93 However, it is conceivable that an applicant whose genetic test has provided particularly good results voluntarily discloses the results in order to receive benefits. Pursuant to Article 1:208, the insurer is also barred from using any results reported voluntarily.94 Under Article 1:208, the protection of privacy must, however, be weighed against the risk of an adverse selection. In relation to life insurance, in particular, it is necessary to correct false incentives which give rise to an applicant’s information advantage. In accordance with paragraph 2 of the provision, an insurer may require the carrying out or disclosure of a genetic test if the insurance sum of a personal insurance exceeds the amount of €300,000 or the annual amount of insurance money exceeds €30,000 and the person at risk is 18 years of age or more.95 In effect, the same applies under Article 1:207(1) to questions concerning the applicant’s sex, an existing pregnancy, maternity, nationality or racial or ethnic origin. Unlike in the case of genetic tests, Article 1:207(1) does not contain an express prohibition on asking about such circumstances, but for reasons of nondiscrimination96 these circumstances may not affect the individual premiums and individual conditions of the contract. Thus, Article 1:207(1) transposes E ­ uropean principles of non-discrimination97 and especially the ECJ’s judgment in the Test Achats case98 in the insurance sector. This ECJ judgment, in particular, has 91  Art 2:106 Genetic Information: This Section shall not apply to the results of genetic tests which are subject to Art 1:208(1). 92  See also Martin Schauer, ‘Comments on Article 1:208’ in Basedow, Birds, Clarke, Cousy, Heiss and Loacker (n 5) C1. 93  See Art 1:208(1). 94  See also Schauer (n 92) C4. 95  For more details see ibid C5–C6. 96  See in detail Jürgen Basedow, ‘Comments on Article 1:207’ in Basedow, Birds, Clarke, Cousy, Heiss and Loacker (n 5) C1–C7. 97  Art 18 of the Consolidated version of the Treaty on the Functioning of the European Union [2010] OJ C83/47 (non-discrimination on the grounds of nationality); Council Directive 2000/43/EC of 29 June 2000 implementing the principle of equal treatment between persons irrespective of racial or ethnic origin [2000] OJ L180/22; Gender Directive (n 50). 98 See n 51 above. An analysis from a German perspective is presented in Mönnich, Unisex: ‘Die EuGH-Entscheidung vom 1.3.2011 und die möglichen Folgen’ (2011) VersR 1092–103.

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triggered major debates amongst European insurance law academics. In particular, concerns were raised as to whether there are still effective possibilities for risk differentiation following Test Achats. In essence, it is about the fact that individualised distinguishing features must be used instead of the existing differentiation on the basis of sex which only serves as a ‘proxy’.99 In the future, it will no longer be possible to assume that a female policyholder will live longer than her male counterpart. Instead, the risk factors involved in the statistically earlier death of men in comparison to women must be analysed (carrying out preventative examinations, convalescence stays, smoking and drinking behaviour, etc).

v.  Duration of the Duty of Disclosure: ‘Upon Contract Conclusion’ Under Article 2:101(1), the duration of the obligation to provide information is determined in line with the contract conclusion period. The fulfilment of the duty to disclose is, therefore, not an isolated, one-time event, which is completed after filling in the insurer’s questionnaire, but rather encompasses any conduct until the formal conclusion of the contract.100 If, therefore, further circumstances become known or change after completion of the questionnaire but before formal conclusion of the contract, the applicant shall still be obliged to make a disclosure.101

D. Consequences for Breach of the Duty of Disclosure (Article 2:102) i.  The Breach The legal consequences of a breach of the duty to disclose are governed in Article 2:102. The provision is based on a breach of the disclosure duty set out in Article 2:101, but does not define it in any way whatsoever. Considering the fact that the PEICL follow the questionnaire model, not responding to questions and providing incorrect answers may both constitute a breach. Non-responses are regularly constituted in such a way that the applicant leaves a question in the questionnaire unanswered. Providing incorrect answer includes both cases where untrue information is stated and cases where true information is omitted. Therefore, it can be said that the PEICL, in principle, make no difference between unanswered questions (non-disclosure) and inaccurately answered questions (misrepresentation).102 In practice, however, only incorrect answers will usually trigger legal consequences. In cases where an applicant leaves a question as a whole unanswered, the legal consequences of the breach are excluded under Article 2:103(a). In such 99  An analysis from a German perspective is presented in Mönnich, Unisex: ‘Die EuGH-Entscheidung vom 1. 3. 2011 und die möglichen Folgen’, VersR 2011, 1092–1103. 100  See also Clarke and Rudisch (n 60) C2. 101  See also ibid C2. 102  See also Cousy (n 68) 119, 126; Clarke and Rudisch (n 60) C2.

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cases, the insurer will have concluded the contract without requesting the missing information by means of a corresponding enquiry with the applicant. In such a case, the information omitted was obviously not material to the insurer’s decision regarding whether or not to conclude the contract or on which conditions.103 For this reason, the insurer should also not be able to derive any legal consequences from the breach of the duty of disclosure.104 In this respect, cases of incorrect or incomplete answers are fundamentally different. In view of the fact that the insurer is not under any duty to verify,105 it can and must generally assume that the questions have been answered correctly and completely. If it later emerges that the information provided by the applicant is untrue or incomplete, it must be assumed that the insurer’s decision was subject to a mistake, because it was based on incorrect disclosures by the policyholder. This will not apply only if the information provided by the applicant is manifestly incomplete or incorrect. In such situations, too, it is deemed reasonable under Article 2:103(a) to require an insurer to recognise the manifest incompleteness or inaccuracy in the course of the processing of the application and to rectify it through enquiries directed at the applicant. If, on the other hand, an insurer concludes the contract without correcting or supplementing the disclosures, it will not have recourse to the legal remedies available in case of breach of the disclosure duty.106

ii.  Sanctions: Outcomes for the Contract The incorrect disclosure of material circumstances means that the insurer agrees to a contract which it either would not have concluded or not on the same terms. It is therefore necessary to grant the insurer a right to terminate the contract. In this context, two main questions of legal policy arise: (1) To what extent should an insurer still be permitted to terminate the contract as a whole if he would have concluded the contract on the basis of the correct and complete information, albeit on other conditions?; (2) To what extent does the termination of the contract have retroactive effect to the date of conclusion of the contract? The PEICL provide different answers to the two questions posed. In principle, it is assumed that an amendment to the contract will generally affect the policyholder’s interests to a lesser degree than a termination of the contract. Nevertheless, insurers are generally given the option of terminating or continuing the contract.107 This option is, however, limited in the case of a breach of the disclosure duty without fault. In this case, an insurer will have a right to terminate the 103  Similarly Cousy (n 68) 119, 126; Malcolm A Clarke and Bernhard Rudisch, ‘Comments on ­Article 2:103’ in Basedow, Birds, Clarke, Cousy, Heiss and Loacker (n 5) C1. 104  For more details on the effect of the exception see Clarke and Rudisch, ibid C6. 105  See also Heiss (n 60) 49, 52. 106  For more details on the effect of the exception see Clarke and Rudisch (n 103) C6. 107  See the first sentence of Art 2:102(1).

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contract only if knowledge of the circumstances to be disclosed would have led to the contract not being concluded at all.108 If, on the other hand, the policyholder is at fault, the insurer may choose to terminate the contract. Alternatively, the insurer may propose a ‘reasonable’ contract amendment to the policyholder.109 The options in such cases include adjusting the premiums or excluding certain risks. If the insurer chooses this route, the policyholder is free to accept the proposed amendment and thereby maintain the insurance contract or to reject it.110 In case of rejection, the insurer will again have a right to terminate the contract pursuant to the second sentence of Article 2:102(2).111 The termination or amendment of the contract in principle only affects the future and thus leaves both the insurance cover and the duty of premium payment for the past unaffected.112 With regard to the premium payment duty, the principle of the divisibility of the premium in accordance with Article 5:104 must in particular be pointed out: if the insurer terminates the insurance contract in accordance with Article 2:102 before the end of an ongoing insurance period, it is only entitled to payment of the premium due until contract termination and thus only pro rata.113 The opposite is true, however, in the case of fraudulent breach of the disclosure duty. If a policyholder acts fraudulently, Article 2:104 grants the insurer a right to avoid the contract. This has retroactive effect to the start of the contract,114 so that the insurer will be relieved of its obligations. Contrary to general contract law, the insurer may, in cases of fraud, also retain the premiums up to the time of avoidance.115

iii.  Insurer’s Release from Obligation Any amendments to the contract and any termination of the contract within the meaning of Article 2:102 will have prospective effect. Pursuant to the first sentence of Article 2:102(4), contract termination will take effect one month after receipt by the policyholder of the insurer’s written declaration. Under the second sentence of Article 2:102(4), the effect of an amendment is, however, subject to an agreement by the parties.

108 

Art 2:102(3). First sentence of Art 2:102(1). 110  For more details see Malcolm A Clarke and Bernhard Rudisch, ‘Comments on Article 2:102’ in Basedow, Birds, Clarke, Cousy, Heiss and Loacker (n 5) C3. 111  For more details see s III.D.i. 112  Similarly Clarke and Rudisch (n 110) C2 and C3. 113  For more details on the principle of divisibility, see Helmut Heiss, ‘Comments and Notes on Article 5:104’ in Basedow, Birds, Clarke, Cousy, Heiss and Loacker (n 5). 114  See also Malcolm A Clarke and Bernhard Rudisch, ‘Comments on Article 2:104’ in Basedow, Birds, Clarke, Cousy, Heiss and Loacker (n 5) C5. 115  See first sentence of Art 2:104. For the reasons behind this choice, see Clarke and Rudisch (n 114) C5. 109 

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As a result, the contract remains unaltered in respect of the past. The policyholder therefore has insurance cover for any insurance claims which have occurred before contract amendment or termination of the contract. The only exception is provided in Article 2:102(5) for cases where the undisclosed or falsely disclosed risk factor has caused the insured event.116 This is because it is only in relation to such insurance claims that the insurer has concluded an insurance contract which it might otherwise not have concluded at all or concluded under other conditions if the circumstances surrounding the risk had been disclosed correctly. With regard to other circumstances surrounding the risk, the insurer remains fully bound to the contract in respect of the past. The exemption from full contract performance set out in Article 2:102(5) is linked to further requirements. First, the insurer’s obligation to perform remains unaffected in cases where the policyholder is not at fault for the breach of duty even if the undisclosed or incorrectly disclosed circumstance has caused the insured event.117 Where the policyholder is at fault, a distinction is made in Article 2:102(5) depending on the effects of the breach of disclosure duty on the insurer’s decision to contract. If, having knowledge of the true circumstances, the contract would not have been concluded at all, the insurer will be released from its obligation entirely.118 If, however, the insurer would have concluded the contract at a higher premium or on different terms, it shall remain partially liable.119 If, having knowledge of the true circumstances, the insurer would have demanded double premiums, it will have to pay the insurance money at the same ratio of the premiums paid to the hypothetically owed premiums, that is to say half will not be payable, while the other half will be payable. If, on the other hand, the insurer would have concluded the contract on other terms, the insurer’s obligation to perform will be governed by these other terms.120 This may also lead to a total exclusion of benefits if the insurer would have excluded the misrepresented circumstances from the insurance cover entirely.121 At this juncture, it should be noted that the PEICL also impose this type of sanction in the event of an aggravation of risk after the conclusion of the contract.122

iv.  Right to Amend or Terminate the Contract The exercise of the insurer’s rights is subject to various time limits and formalities. The first, particularly important, period begins with the insurer’s knowledge

116  See first sentence of Art 2:102(5). For more details on the causality requirement in general and in the PEICL, see Hermann Cousy, ‘About Sanctions and the Hybrid Nature of Modern Insurance Contract Law’ (2012) 5 EraLaw 123, 128f. 117  See also Clarke and Rudisch (n 110) C2 and C3. 118  See sentence 1 of Art 2:102(5). 119  See sentence 2 of Art 2:102(5). 120  See the second sentence of Art 2:102(5). For more details see Heiss (n 60) 49, 58. 121  See also Heiss, ibid 49, 58. 122  See in more detail Art 4:203(3).

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or constructive knowledge of breach of the duty of disclosure.123 This point in time may be difficult to determine in individual cases. The time period will not begin for as long as the insurer only has vague indications for a breach of duty to disclose. Conversely, it is not necessary for the insurer to be absolutely sure of the breach of the disclosure duty and for all the evidence to be available before the time period begins. Essentially, reference will be made to the date on which the insurer has received information on the basis of which it must assume a specific breach of the duty of disclosure. Within one month of this point, the insurer is obliged to give notice of its decision in writing.124 The written notice must contain either the proposal of a reasonable contract amendment or termination of the contract. Pursuant to the second sentence of Article 2:102(1) it must also state the legal consequences attached to the offer for contract amendment or termination set out in Article 2:102. In cases where the insurer offers a contract amendment, the contract will continue on the basis of the amended conditions.125 Pursuant to the first sentence of Article 2:102(2), express acceptance by the policyholder is not required. However, if the policyholder rejects the proposed amendment within one month of receipt of the notice, the amendment will not take effect. In such cases, the insurer will have the option to continue the contract under the conditions applicable or to terminate it. The right to terminate set out in the second sentence of ­Article 2:102(2) must be exercised within one month of receipt of the written notice of the ­policyholder’s rejection.126 Under the second sentence of Article 2:104, a different time period applies in case of fraudulent conduct.127 The insurer must give the policyholder notice in writing and within two months of becoming aware of the fraudulent conduct.

v.  Exception: No Legal Consequences Despite the existence of a breach of duty of disclosure, Article 2:103 sets out certain situations in which no sanctions will be applied to the breach of duty to disclose. This includes cases in which the breach of duty was not relevant to the insurer128 or the insurer was responsible for the breach of the disclosure duty.129 This applies, first, to cases in which the insurer has concluded the contract even though a question was left unanswered130 or an answer was obviously incomplete or incorrect.131 Second, this is also the case when the insurer asks questions about

123 

See the second sentence of Art 2:102(1). See the second sentence of Art 2:102(1). See the first sentence of Art 2:102(2). 126  Second sentence of Art 2:102(2). 127  For the reasons behind this choice, see Clarke and Rudisch (n 114) C6. 128  See Art 2:103(b). 129  See Art 2:103(c). 130  See the first alternative of Art 2:103(a). For more details, see s III.D.i. above. 131  See the second alternative of Art 2:103(a). For more details, see s III.D.i.above. 124  125 

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circumstances which would not be material to a reasonable insurer’s decision to conclude the contract at all or on the given terms.132 Third, this applies if the insurer, for example through his agent, had allowed the policyholder to believe that a certain circumstance did not have to be disclosed.133 Lastly, this is the case in regard to information of which the insurer was or should have been aware.134

E.  Relationship to Sanctions Imposed by General Contract Law The PEICL does not expressly deal with the issue of whether the insurer can also apply for other remedies in the event of a breach of the policyholder’s duty to ­disclose. In this respect, avoidance due to mistake and liability arising from culpa in contrahendo in particular come to mind.135 However, the question is, in our opinion, to be answered in the negative. Permitting the insurer to have recourse to remedies of general contract law would severely undermine the protection afforded to the policyholder in Articles 2:101ff. It is therefore necessary to prohibit such recourse in order to maintain the meaning and purpose of these provisions, which are mandatory in favour of the policyholder in the case of mass risks.136 This, however, does not rule out alternative legal consequences agreed upon contractually. Insofar as insurance contracts covering mass risks are concerned and the rules are thus mandatory for the benefit of the policyholder, it is only possible to consider sanctions which are not to the detriment of the ­policyholder’s legal position. In the case of the insurance of large risks, harsher legal consequences can be agreed upon.

F.  Indisputability in Life Insurance Life insurance is generally concluded on a long-term basis.137 It can be perceived as unnecessarily severe to grant an insurer the right to terminate the contract on the basis of a breach of the duty of disclosure a long time after conclusion of the contract. This applies especially to life insurance taken out for the purposes of retirement provision.138 In contract practice in various countries, life insurance policies contain so-called ‘incontestability clauses’ preventing an insurer from

132 

See Art 2:103(b). For more details, see Cousy (n 68) 119, 129; Clarke and Rudisch (n 103) C2–C3. See Art 2:103(c). For more details, see Cousy (n 68) 119, 129; Clarke and Rudisch (n 103) C4. See Art 2:103(d). For more details, see Cousy (n 68) 119, 129f; Clarke and Rudisch (n 103) C5. 135  For an overview of the legal situation in selected European countries see, for example, Basedow and Fock (n 75) 77. 136  See Art 1:103. For more details on Art 1:103, see s II.D above. Of the same opinion, albeit with different reasoning, Basedow and Fock (n 75) 77f. 137  See, for example, Cousy (n 88) C5. 138  See also ibid C5. 133  134 

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bringing an action against the policyholder for breach of duty of disclosure after the lapse of a certain period of time.139 In some countries, this principle has been incorporated into legislation.140 This approach has also been taken in relation to the PEICL in Article 17:201(2). Under this rule, the sanctions for a breach of the disclosure duties provided under Articles 2:102, 2:103 and 2:105 will not be available if five years have elapsed since the conclusion of the contract. Such a limitation is, however, only justified insofar as the policyholder has not acted fraudulently. Where fraudulent behaviour is involved, the PEICL follow the principle of fraus omnia corrumpit. In such cases, the insurer may invoke the right to avoid the contract and to retain all premiums even after a lapse of five years.141 The right to retain the premium does not, however, concern the saving components therein. If a life insurance policy has a surrender value, it must be paid out to the policyholder in accordance with Article 17:602(2), even in the event of avoidance due to fraudulent behaviour pursuant to Article 2:104.142 The surrender value will be calculated as set out in Article 17:603.143

G.  Special Case: Group Insurance Life insurance is often used in the form of group insurance. Consequently, the rules set out in Part Six,144 which governs group insurance in general and thus also in respect of life insurance, apply. A group insurance contract is defined in Article 1:201(7) as a contract concluded between an insurer and a group organiser to the benefit of group members and, where appropriate, their family members. In order to be regarded as a group, the members must share a common characteristic.145 This may be the case, for example, where they work for the same employer or belong to the same sports club.146 In respect of group insurance, a distinction is made in the PEICL between so-called accessory group insurance and elective group insurance as defined by ­Article 1:201(8) and (9). Accessory insurance is characterised by the fact that every member of the group is insured without the requirement of special acceptance and without the option of rejecting the insurance cover.147 In these cases, the

139 

See, for example, ibid C4. See also Cousy (n 68) 119, 122. See the overview provided by Cousy (n 88) C4 fn 57. 141  See Art 17:201(2). See also Cousy (n 88) C7. 142  See Art 17:602(2). 143  For more details see Anton K Schnyder, ‘Comments on Article 17:603’ in Basedow, Birds, Clarke, Cousy, Heiss and Loacker (n 5). 144  Arts 18:101–18:303. 145  See first sentence of Art 1:201(7). 146  For more details see Péter Takáts, ‘Comments on Article 18:101’ in Basedow, Birds, Clarke, Cousy, Heiss and Loacker (n 5) C2. 147  See Art 1:201(8). 140 

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group organiser is the policyholder148 and typically makes the premium payment. Elective group insurance, on the other hand, involves a group member choosing to join the group insurance policy.149 In these cases, the group member must usually reimburse the group organiser for the premiums paid on a pro rata basis. In such group insurance arrangements, the individual members of the group functionally resemble a policyholder very closely: their decision to join the group insurance and their duty to pay the premium on a pro rata basis places them in a position close to that of a policyholder. In respect of elective group insurance, PEICL treats the agreement concluded between the group organiser and the insurer as a pure framework contract and the relationship between the individual insured and the insurer as an individual contractual relationship.150 Group life insurance is particularly often taken out as elective group insurance. This means that each insured person is treated as having entered into an individual insurance contract with the insurer. By these means, the rules governing the pre-contractual disclosure duty apply to each insured person separately. An insurer may, therefore, choose to issue a relevant questionnaire within the meaning of Article 2:101(1), thereby triggering a duty of disclosure for each insured person. In the event that an individual group member breaches this duty to disclose, the insurer will have recourse to the sanctions set out in Articles 2:102 ff. The sanctions will therefore only be imposed on the individual group member who has breached the disclosure duty. A group insurer will often also or sometimes even only pose questions to the group organiser. Where the information provided is incorrect, the issue of imposing sanctions must be distinguished. Under Article 18:301(1), the relationship between the organiser of elective group insurance and the group insurer is regarded as a pure framework contract relationship and not as an insurance relationship governed by the PEICL.151 Therefore, the framework contract will be subject to the law applicable as determined in accordance with the general conflict-of-law rules. The law applicable must consequently also be referred to for the sanctions for breach of information duties, such as compensation for d ­ amages. In contrast, it is essential for the group members that the individual insurance contracts between the group members and the insurer are maintained under ­Article 18:303, even if the framework agreement between group organiser and insurer is terminated. This also applies to a termination of the contract as a result of a breach of pre-contractual information duties.

148  See Jaana Norio-Timonen, ‘Comments on Article 18:201’ in Basedow, Birds, Clarke, Cousy, Heiss and Loacker (n 5) C3. 149  See Art 1:201(9). 150  See Art 18:301(1). 151  See Art 18:301(2).

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IV.  Information Duties of Insurers A.  Harmonisation of Pre-contractual Information Duties The EU has to a certain degree responded to the needs of applicants for pre-­ contractual information. A duty to provide applicants with pre-contractual information has been imposed on insurers in various directives on insurance law. These information duties have been slightly amended and codified in Articles 183, 184 and 185 of the Solvency II. Articles 183 and 184 impose specific information duties in non-life insurance, and Article 185 for life insurance. These rules entered into force on 1 January 2016, thereby replacing previous directives on insurance law.152

B.  Information Duties under the Solvency II: Non-life Insurance For non-life insurance, the first set of information duties imposed on i­nsurers address the specific needs of applicants. The information required includes: (a) the law applicable to the insurance contract or, where parties have the option to choose the law, the law proposed by the insurer;153 (b) the arrangements for handling complaints made by policyholders concerning contracts, where appropriate, including the existence of a complaints body;154 (c) if the contract is concluded under the right of establishment or the freedom to provide services, the Member State in which the head office or, where appropriate, the branch with which the contract is to be concluded is situated.155 Clearly, the European legislature is mainly concerned with problems arising from cross-border business. Information about the law applicable, the head office of the insurer and complaint mechanisms is of great interest to the applicant, especially when he takes out insurance with a foreign insurer. In contrast, the E ­ uropean legislature does not require any information to be given about the insurance product offered. Given the increased variety of insurance products being offered on European insurance markets following their integration and deregulation, the lack of product-related information duties must be considered a shortcoming. The information duties as described do not apply to all contracts of non-life insurance. Instead, the information requirements (concerning the law applicable and the complaint mechanisms) provided for under Article 183 of the Solvency II are limited to contracts concluded with policyholders who are natural persons.

152 

See Arts 309 and 310 of the Solvency II. Art 183(1)(a) and (b) of the Solvency II. 154  The second para of Art 183(1) of the Solvency II. 155  Art 184 of the Solvency II. 153 

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It follows that policyholders who are legal entities will never be entitled to such information. In contrast, natural persons will be entitled to information even if they conclude the insurance contract for business purposes or even if the insurance covers a large risk, such as a marine insurance policy for instance. On the other hand, the information (concerning the Member State in which the head office and, where applicable, the branch of the insurer is situated) required under Article 184 of the Solvency II must be given to all policyholders, irrespective of whether they are natural persons or legal entities. However, contracts of insurance covering large risks are excluded from the scope of this article.156 There is no explanation in the articles or in the recitals of the Directive for this differentiation. There is also no apparent reason for it. It must simply be accepted as black letter law. In contrast to the provision on life insurance (Article 185(6) of the Solvency II), Articles 183 and 184 contain no specific requirements as to form, language and transparency of the information. Article 183(3) of the Solvency II entrusts the Member State in which the risk is situated157 with laying down detailed rules for implementing Article 183(1) and (2). This enables Member States to require information to be given ‘in a clear and accurate manner, in writing’ and in their official language.158 However, no such power is granted to Member States under Article 184 of the Solvency II. It is doubtful as to what extent national legislatures may cope with the shortcomings of Articles 183 and 184 of the Solvency II by requiring additional information to be provided by insurers in non-life insurance. The second paragraph of Article 184(2) only provides a very limited scope for information requirements to be extended by national law. Whereas Article 185(7) of the Solvency II allows for additional information requirements to be imposed by national law ‘if it is necessary for a proper understanding by the policyholder of the essential elements of the commitment’ in life insurance, such a clause is missing in Articles 183 and 184 with regard to non-life insurance.

C.  Information Duties under the Solvency II: Life Insurance For life insurance, the information to be provided to the applicant by the insurer falls into two types. The first relates to the information about the insurer’s identity, as stipulated in Article 185(2) of the Solvency II. Such identity information includes the name and the legal form of the insurer’s undertaking, its Member

156 

Third para of Art 184(1) of the Solvency II. Pursuant to Art 13(13) of the Solvency II, this will in most cases be the Member State in which the policyholder has his residence. 158  See Art 185(6) of the Solvency II. 157 

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State or that of the branch concluding the contract, the business address; and in particular the life insurer shall provide a concrete reference to the report on the solvency and financial condition as laid down in Article 51 of the Solvency II to allow the policyholder to have easy access to this information. The second type of information to be provided by life insurers concerns the life insurance product per se and it is stipulated in Article 185(3)–(5) of the Solvency II. Under Article 185(3), a life insurer shall communicate to the policyholder: 3. … : (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k) (l)

(m)

the definition of each benefit and each option; the term of the contract; the means of terminating the contract; the means of payment of premiums and duration of payments; the means of calculation and distribution of bonuses; an indication of surrender and paid-up values and the extent to which they are guaranteed; information on the premiums for each benefit, both main benefits and supplementary benefits, where appropriate; for unit-linked policies, the definition of the units to which the benefits are linked; an indication of the nature of the underlying assets for unit-linked policies; arrangements for application of the cooling-off period; general information on the tax arrangements applicable to the type of policy; the arrangements for handling complaints concerning contracts by policy holders, lives assured or beneficiaries under contracts including, where appropriate, the existence of a complaints body, without prejudice to the right to take legal proceedings; the law applicable to the contract where the parties do not have a free choice or, where the parties are free to choose the law applicable, the law the life insurance undertaking proposes to choose.

According to Article 185(4), ‘In addition, specific information shall be supplied in order to provide a proper understanding of the risks underlying the contract which are assumed by the policy holder.’ Apart from being subject to those requirements, ‘throughout the term of the contract’159 of life insurance, the insurer shall inform its policyholder of any change concerning information prescribed under the first paragraph of Article 185(5). This means the life insurer’s pre-contractual duty of information partly extends post-contractually. For with-profits or participating policies, the pre-contractual and post-contractual duty is specifically broader: the insurer shall inform, incorporating the profit participation, the policyholder annually in writing of the status of the claims of the policyholder and shall inform the policyholder of differences between the actual development and the data or

159 

The first para of Art 185(5) of the Solvency II.

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figures provided initially by the insurer about the potential future development of the profit participation.160 It is common practice for life insurers with a view to make an offer for or to conclude a life insurance contract to provide figures relating to the amount of potential payments above and beyond the contractually agreed payments. In such scenarios, with the exception of term insurances, the insurer shall provide the policy holder with a specimen calculation whereby the potential maturity payment is set out applying the basis for the premium calculation using three different rates of interest. … [and] shall inform the policy holder in a clear and comprehensible manner that the specimen calculation is only a model of computation based on notional assumptions, and that the policy holder shall not derive any contractual claims from the specimen calculation.161

There are several differences as compared with the information duties imposed for non-life insurance. One difference is that the provision governing information duties in non-life insurance is much more comprehensive. Under Article 185 of the Solvency II, the information concerned must be provided ‘in a clear and accurate manner, in writing, in an official language of the Member State of the commitment’ (paragraph 6),162 additional information duties may be imposed by Member States, if necessary, (paragraph 7) and the Member State of the commitment163 is granted the power to impose ‘detailed rules for implementing paragraphs 1 to 7’ (paragraph 8). Finally, the scope of the information duty is not limited to natural persons; it applies in all cases of life insurance. The major difference concerns the contents-related function of the information duties. Clearly, the information requirements concerning life insurance represent an attempt to place an applicant in a position to make an ‘informed choice’ regarding whether or not to take out a particular life insurance policy.164 Following a decision held by the ECJ,165 the Court of Justice of the European Free Trade Association States (EFTA Court) recently strongly emphasised that information duties serve to ensure that consumers receive ‘clear and accurate information on the essential characteristics of assurance products offered’166 to them. In its reasoning, the EFTA Court explained that consumers ‘must be

160 

The third para of Art 185(5) of the Solvency II. The second para of Art 185(5) of the Solvency II. A limited exception to the language requirement can be found in the second para of Art 185(6) of the Solvency II. 163  Pursuant to Art 13(14) of the Solvency II, this will in most cases be the Member State in which the policyholder has his residence. 164  See Recital 79 of the Solvency II; as to previous Directives’ law, see Case C-386/00 Axa ­Royale Belge SA v Georges Ochoa and Stratégie Finance SPRL [2002] ECR I-02209, para 20; Case E-11/12 ­Beatrix Susanne Koch, Lothar Hummel and Stefan Müller v Swiss Life (Liechtenstein) AG [2013] EFTA Ct Rep 272, paras 62 ff; see also Case E-1/05 EFTA Surveillance Authority v The Kingdom of Norway [2005] EFTA Ct Rep 234, para 42. 165  Case C-386/00 (n 164) para 20. 166  Case E-11/12 (n 164) para 64. 161 

162 

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provided with whatever information is necessary to enable them to choose the contract best suited to their needs’167 in order for them to profit fully from a wider, more varied range of contracts. However, in fulfilling the duties to provide information, an insurance undertaking is not required to provide advice prior to contract conclusion.168 Under the IDD,169 only distributors owe such advice; it should be noted that insurers making direct sales are also distributors. Moreover, the EFTA Court held that complete information may be communicated to a policyholder by a third party, eg an insurance intermediary.170 In respect of remedies for breach of an obligation to communicate information, the EFTA Court took the view that, under the Directive, Member States are free to provide for administrative complaint procedures or civil actions. A legal requirement for a Member State to impose private law sanctions may, however, follow from the general principle of EU law according to which each Member State must impose remedies which are ‘effective’ and at least ‘equivalent’ to the remedies granted in respect of violations of comparable rules of national law.171 Furthermore, as the EFTA Court clarified in another case,172 a life insurer is under no duty to provide information to a person acquiring a ‘second-hand life assurance policy’, ie a life insurance policy from a policyholder.173

D. Additional and Overlapping Information Duties under the Distance Marketing Directive For insurers, a duty to inform the applicant about relevant facts may also arise under European consumer law, as laid down in several directives. Among the consumer law directives, relevant to insurance is the Distance Marketing Directive174 governing distance contracts for consumer financial services including insurance. ‘Distance contracts’ means any contract concerning financial services concluded between a supplier and a consumer under an organised distance sales or serviceprovision scheme run by the supplier, who, for the purpose of that contract, makes exclusive use of one or more means of distance communication up to and including the time at which the contract is concluded.175 The Distance ­Marketing

167 

ibid, para 62. ibid, para 78. 169  See n 55 above. 170  Case E-11/12 (n 164) para 109. 171  ibid, paras 111 ff. 172  Joined Cases E-15/15 and E-16/15 Franz-Josef Hagedorn v Vienna-Life Lebensversicherung AG and Rainer Armbruster v Swiss Life (Liechtenstein) AG [2016]. 173  See also Heiss (n 4). 174  Directive 2002/65/EC of the European Parliament and of the Council of 23 September 2002 concerning the distance marketing of consumer financial services and amending Council Directive 90/619/EEC and Directives 97/7/EC and 98/27/EC [2002] OJ L271/16 (Distance Marketing Directive). 175  Art 2(a) of the Distance Marketing Directive. 168 

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Directive requires information to be provided (a) concerning the supplier,176 (b) concerning the financial service,177 (c) concerning the distance contract178 and (d) concerning redress mechanisms.179 The contents of information stipulated in the Distance Marketing Directive exceed far beyond what is required under the Solvency II for non-life insurance and also life insurance in general. Some of the information listed is, however, covered by both the Solvency II and the Distance Marketing Directives. The European legislature was well aware of the overlapping information requirements. Therefore, Article 4(1) of the Distance Marketing Directive provides that: [w]here there are provisions in the Community legislation governing financial services which contain prior information requirements additional to those listed in article 3(1), these requirements shall continue to apply.

This means that the insurer has to comply with both Articles 183–185 of the Solvency II and Article 3(1) of the Distance Marketing Directive in case of distance marketing of consumer insurance products. The scope of application of Article 3(1) of the Distance Marketing Directive is also different from that of Articles 183–185 of the Solvency II. Article 3(1) of the Distance Marketing ­Directive is restricted to cases of distance marketing and consumer contracts. ‘Consumer’ is defined in Article 2(d) of the Distance Marketing Directive as ‘any natural person who, in distance contracts covered by this Directive, is acting for purposes which are outside his trade, business or profession’. Under Article 3(2) of the Distance Marketing Directive, it is required that information ‘shall be provided in a clear and comprehensible manner in any way appropriate to the means of distance communication used’. Pursuant to Article 4(2) of the Distance Marketing Directive, ‘Member States may maintain or introduce more stringent provisions on prior information requirements when the provisions are in conformity with Community law’.

E.  Pre-contractual Documents ‘Re-loaded’: PRIIPs and IDD The European legislator has noticed the shortcomings of the pre-­contractual documents as described. Following the financial crisis of 2008 the ­legislator tried to improve the protection of customers by strengthening the information duties. According to the PRIIPs Regulation,180 which came into force

176 

Art 3(1)(1) of the Distance Marketing Directive. Art 3(1)(2) of the Distance Marketing Directive. 178  Art 3(1)(3) of the Distance Marketing Directive. 179  Art 3(1)(4) of the Distance Marketing Directive. See also, however, the less stringent information duties in cases of marketing by voice telephone conversation under Art 3(3) of the Distance Marketing Directive. 180  See n 56 above. 177 

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on 1 January 2018, an insurer offering so-called ‘insurance-based investment ­products’181 has to draft a key information document (‘KID’) which must be a ‘stand-alone document, clearly separate from marketing materials’,182 short (a maximum of three pages)183 as well as ‘accurate, fair, clear and not m ­ isleading’.184 Articles 8(1), 8(2) and 8(3) of the PRIIPs Regulation prescribe in detail the mode of presentation and the contents of the KID. A parallel obligation to hand out an ‘insurance product information document’ is provided for non-life insurance in Article 20(8) of IDD,185 which must be transposed by the Member States by 23 February 2018 (this time limit could be extended by the EU legislator). The ‘insurance product information document’ shall be provided in what is a reader-friendly, accurate and non-misleading manner that is required in Article 20(7) of the IDD. The extension of information duties under the PRIIPs Regulation and the IDD underscores the great significance attributed by the European legislature to market transparency in favour of policyholders. These information documents must contain concise, easy to read and comprehensible information and therefore serve the important purpose of ensuring product transparency. Yet, it is unlikely that this goal can be achieved by the European legislature through its current policy of requiring the provision of key information documents or product information documents on the one hand and maintaining varying (overlapping or extended) information duties under other legislative acts, in particular the Solvency II, on the other. By requiring insurers to provide increasing amounts of information, the intended purpose may be undermined. The task of providing information will become more cumbersome, while there is a real danger that policyholders will be unable to identify key points (‘information overload’).186

F.  Insurance Distributor’s Duties to Advise EU law requires insurers to provide standard information to an applicant, but not to individually advise an applicant. It would seem that the European legislature does not consider advice to be owed by an insurer in general.187 Rather, the European legislature assigns duties to give advice to insurance distributors. An insurer will be considered a distributor if it markets its insurance contracts

181 

This covers various types of life insurance; see in detail Art 4(2) of the PRIIPs Regulation. Art 4(2) of the PRIIPs Regulation. 183  Art 6(4) of the PRIIPs Regulation. 184  Art 6(1) of the PRIIPs Regulation. 185  Directive (EU) 2016/97 (n 55). 186  See also Heiss (n 4). 187  Affirmed by Case E-11/12 Beatrix Susanne Koch, Lothar Hummel and Stefan Müller v Swiss Life (Liechtenstein) AG [2013] EFTA Ct Rep 272, paras 67 ff. 182 

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by direct sales. In other and regular cases, the distributor will be an intermediary (agent or broker). The IDD imposes on insurance distributors general duties to inform customers but also duties to give advice. The degree of advice to be provided depends on the promise of the distributor. Articles 20(1), 20(2) and 20(3) of the IDD state: 1. Prior to the conclusion of an insurance contract, the insurance distributor shall ­specify, on the basis of information obtained from the customer, the demands and the needs of that customer and shall provide the customer with objective information about the insurance product in a comprehensible form to allow that customer to make an informed decision. Any contract proposed shall be consistent with the customer’s insurance demands and needs. Where advice is provided prior to the conclusion of any specific contract, the insurance distributor shall provide the customer with a personalised recommendation explaining why a particular product would best meet the customer’s demands and needs. 2. The details referred to in paragraph 1 shall be modulated according to the complexity of the insurance product being proposed and the type of customer. 3. Where an insurance intermediary informs the customer that it gives its advice on the basis of a fair and personal analysis, it shall give that advice on the basis of an analysis of a sufficiently large number of insurance contracts available on the market to enable it to make a personal recommendation, in accordance with professional criteria, regarding which insurance contract would be adequate to meet the customer’s needs.

The duties to give advice are increased when insurance based investment products are marketed. In this case, further information duties must be fulfilled in accordance with Article 29 IDD. Moreover, the suitability or appropriateness, as the case may be, of a product offered must be assessed in accordance with Article 30 of the IDD. This assessment resembles to a certain extent the duties of investment firms under MiFID II.188

G.  Insurer’s Pre-contractual Duties under the PEICL i.  Pre-contractual Documents: General Insurance and Life Insurance The PEICL Article 2:201, which applies to all contracts of insurance covered by the PEICL, lists pre-contractual information to be provided by the insurer. Article 2:201 PEICL is the result of an attempt on the part of its drafters to provide a rule on pre-contractual information which, first of all, applies a high standard of policyholder’s protection. Second, the rule represents an attempt to combine all of the information requirements imposed by various EU directives into one provision, which applies to all insurance contracts (including those concluded by distance marketing), but is not mandatory in cases of large risks. The rule is e­ xhaustive 188 

MiFID II (n 54).

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and forbids Member States to introduce more stringent information requirements. It governs the time at which information must be provided189 as well as the formal requirements.190 However, it leaves the governing of sanctions for noncompliance to general contract law (eg damages) and supervisory law. In life insurance, the pre-contractual document must contain further information under Article 17:202. The information must be provided to the future policyholder. In principle, this applies even in group insurance. Thus, in case of ‘accessory’191 group insurance, the insurer will provide the pre-contractual documents to the group organiser only and it will be a personal duty of the group organiser to inform the individual group members in accordance with Article 18:202.192 However, ‘elective’ group insurance is deemed to be ‘a combination of a ­framework contract between the insurer and the group organiser and individual insurance contracts concluded within such a framework by the insurer and the group members’ according to Article 18:301(1) PEICL.193 As a consequence, an insurer has to provide information to each and every group member. This may be accomplished through the group organiser, in which case the insurer will be held liable for any negligence committed by the group organiser.

ii.  Articles 2:202 and 2:203 PEICL: Duties to ‘Warn’ Although the PEICL do not impose on insurers a general duty to give advice, they go beyond the existing acquis communautaire and oblige insurers to warn policyholders in cases where the cover offered is less than expected. This applies when a policyholder expects certain risks to be covered, but these are not dealt with in the general insurance contract terms of the insurer (Article 2:202 PEICL) as well as when an applicant believes that the cover will begin immediately, whereas, in reality, the cover will only start after the contract is concluded and, if applicable, the first or single premium has been paid (Article 2:203 PEICL). If the insurer breaches this duty to warn, it shall indemnify the policyholder against all losses resulting from the breach of this duty to warn unless the insurer acted without fault,194 and policyholder shall be entitled to terminate the contract by written notice given within two months after the breach becomes known thereto.195

189 

See Art 2:201(2) PEICL. Art 2:201 PEICL requires a ‘document’; use of electronic communication (‘e-mail’) is permitted. ‘“Accessory group insurance” means group insurance under which group members are automatically insured by belonging to the group and without being able to refuse the insurance’ (Art 1:201(8) PEICL). 192  This information covers (a) the existence of the insurance contract, (b) the extent of cover, (c) any precautionary measures and any other requirements for preserving cover, and (d) the claims procedure. 193  ‘“Elective group insurance” means group insurance under which group members are automatically insured by belonging to the group and without being able to refuse the insurance’ (Art 1:201(9) PEICL). 194  Art 2:202(2)(a) PEICL and the last sentence of Art 2:203 PEICL. 195  Art 2:202(2)(b) PEICL. 190  191 

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V. Conclusion The PEICL are a model law for a European optional instrument in insurance contract law. They are particularly intended to increase the range of cross-border insurance services and, in doing so, to contribute to the proper functioning of the internal insurance market. The PEICL rules cover both the general parts of insurance contract law and certain special branches, ie liability insurance, life insurance and group insurance. They therefore also govern questions regarding applicants’ pre-contractual duty of disclosure. Considering that the PEICL are essentially a Restatement of European insurance contract law, the content of the rules in general and that of the pre-contractual duty to disclose in particular has taken into account the developments in national insurance contract laws. The rules in the PEICL have been enriched through reference to particularly important and current developments. For example, the concept that group insurance is particularly important in the field of life insurance has been included as an express rule in only a few national legal systems. In this respect, the PEICL have also created a model rule. The PEICL also address particularly topical issues, such as the principle of non-discrimination or the protection of genetic data. What is striking is the complexity of the rules on insurer’s pre-contractual information duties within the EU. Part of the complexity stems from the fact that the various duties to provide information have different scopes of application. Information duties are at times restricted to contracts concluded with natural persons, at times to insurance other than large risk insurance and yet at other times to distance contracts concluded with consumers, despite there being no obvious justification for all of these differences in scope. The complexity is increased further by the fact that Member States may to a certain extent broaden the range of information to be provided by insurers. This prevents insurers from using the same documents to provide information throughout the European Union and, thus, forms an obstacle196 to the functioning of the internal insurance market.197 Overall, in our view, the duty imposed on insurers to give pre-contractual information still requires harmonisation both among the laws of the Member States as well as in the EU directives.

196  According to the ECJ’s case law, any measures of a Member State which ‘increase the cost of … service in the state in which they are provided, in particular where the insurer conducts business in that state only occasionally’ are ‘restrictions’ (obstacles) of the basic freedoms. Likewise it has been held by the ECJ that ‘all measures which prohibit, impede or render less attractive the freedom of establishment or the freedom to provide services’ are restrictions to the relevant freedoms; see Case 205/84 Commission of the European Communities v Federal Republic of Germany [1986] ECR 3755 para 28 and Case C-518/06 Commission of the European Communities v Italian Republic [2009] ECR I-3491 para 62; see also Case E-1/05 EFTA Surveillance Authority v The Kingdom of Norway [2005] EFTA Ct Rep 234. 197  Final Report of the Commission Expert Group on European Insurance Contract Law (n 23) 35.

15 Pre-contractual Utmost Good Faith of the Reinsured JEFFREY W STEMPEL

I. Introduction Although it is a perhaps a truism, insurance and reinsurance agreements are ­contracts, even though both have factors that distinguish them from what might be termed ‘ordinary’ contracts for the purchase of goods or services. ­Consequently, contract law provides a baseline for determining the respective rights and ­obligations of reinsurers and reinsureds.1 But that said, insurance contracts, like all agreements, operate in context—both the general context of spreading risk and the more precise context of a particular risks and types of coverage. This has implications for the conduct expected of contracting parties. As one moves away from these immediate cash-and-carry for tangible goods scenarios things get more complex.

1  Joseph M Perillo, Contracts 7th edn (St Pauls MN, West Academic, 2014); E Allan Farnsworth, Contracts 4th edn (New York, Aspen, 2004). See also International Institute for the Unification of ­Private Law, ‘UNIDROIT Principles of International Commercial Contracts’ (2010). Regarding insurance contract law, see generally the Principles of International Commercial Contracts (PICC) and the Principles of European Insurance Contract Law (PEICL). See also Helmut Heiss (Chair, Project Group, Restatement of European Insurance Contract Law) and others (eds), Principles of European Insurance Contract Law (Munich, Sellier European Law Publishers, 2009). Also in progress is a set of Principles of Reinsurance Contract Law (PRICL) that will among other things address the duties owed by reinsureds and reinsurers. Although the PRICL is not yet finalised, it is likely to adopt the traditional strong view of (utmost) good faith duties for parties to a reinsurance contract but also likely to depart somewhat from the common law by making remedies for breach of the duty proportional to the harm caused by the breach rather than nullifying the contract whenever there has been a breach of the duty. Contract rules are often distinguished according to whether they are immutable and may not be changed (eg, an illegal contract is not enforceable) or whether they are ‘default’ rules that may be altered by the consent of the parties. PICC, art 1.1 (Freedom of contract) (‘The parties are free to enter into a contract and to determine its content’). The PRICL, like most statutes governing contracts, will largely set forth default rules that can be varied by specific agreement of the contracting parties. It appears, however, that as a matter of industry custom, reinsurers and reinsureds seldom seek to alter their respective duties of good faith.

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One of the ways in which insurance is different is its degree of asymmetry and uncertainty, both as to information and risk. Historically, the prospective insured was thought to have an informational advantage over the insurer that, combined with concerns about adverse selection, required disclosure of material information to the prospective insurer. This situation prompted courts to impose a stringent standard upon those seeking insurance greater than that imposed upon most contracting parties. This information asymmetry was considered particularly ­pronounced in cases of marine insurance because the situs of the risk was so often far removed from the situs of contracting, making it impracticable or even impossible for the insurer to conduct a close inspection of the risk prior to contracting. And because marine insurance and its land-based counterparts2 were the first major types of insurance, an informal law merchant and then a legal regime grew ­requiring a higher standard of behaviour.3 Over time, the legal landscape of duty shifted. Improvements in technology, communication and information-gathering reduced the informational ­asymmetry, making insurers less vulnerable. In particular, insurers selling coverage for land-based property or providing liability coverage were less likely to be disadvantaged by information asymmetry. Life insurers, armed with actuarial tables and the law of large numbers, perhaps even held an informational a­ dvantage over any ­applicants not actively engaged in fraud.4 This in turn prompted some relaxation of the policyholder’s duties of good faith in the context of insurance, first in the United States where since mid-twentieth ­century prospective policyholders have largely not been required to volunteer materials information but only to answer truthfully questions ­propounded by the insurer.5 2  Insurance is generally viewed as taking modern form with the commerce of the Renaissance, much of which involved shipping, particularly in Venice and maturing with the ocean-born commerce of England and the development of Lloyd’s. Jeffrey W Stempel and Erik S Knutsen, Stempel and Knutsen on Insurance Coverage 4th edn (New York, Wolters Kluwer Law and Business, 2016) s 1.02; Jeffrey W Stempel, Peter N Swisher and Erik S Knutsen, Principles of Insurance Law 4th edn (Albany NY, LexisNexis, 2011) 9. 3  However, one under-appreciated aspect of both consumer and commercial law is the degree to which courts resolving contract disputes seek to vindicate the objectively reasonable expectations of the parties when contract text is unclear and sometimes even when the text seems to provide for different results. Yong Qiang Han, Policyholder’s Reasonable Expectations (Oxford, Hart Publishing, 2016) ch 2 (noting significant application of reasonable expectations principle in commercial contracts, even in England, which is generally perceived as more resistant to the concept than US courts). 4  But this hardly means that fraud did not occasionally succeed. AMEX Life Assurance v. Superior Court, 930 P 2d 1264 (CA 1997) (HIV-positive life insurance applicant sends imposter to provide blood sample to insurer that subsequently issues policy). 5  In non-marine insurance matters in most United States jurisdictions (insurance law in the US is largely state-centred rather than national), an applicant or policyholder usually is required only to answer questions truthfully and generally need not volunteer adverse information unless this amounts to impermissible concealment. Stempel, Swisher, and Knutsen (n 2) 478. (‘Under American law, except for marine insurance, a concealment will permit the insurer to void the contract only if the applicant, in refraining from disclosure, had a fraudulent intent.’). However, individual states may by statute impose more stringent requirements. For example, Calif Ins Code s 332 requires all parties to any insurance contract to communicate ‘all material facts within its knowledge’; s 330 provides that ‘concealment, whether intentional or unintentional’ justifies insurance contract rescission; however, concealment law

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England resisted this trend longer but ultimately adopted a similar approach by legislation,6 with particular force in consumer situations.7 But reinsurance has resisted this trend and continues to have a robust duty of utmost good faith,8 an unsurprising result in light of the manner in which reinsurance resembles classic marine insurance in terms of information asymmetry favouring the reinsured and the degree of the reinsurer’s dependence on the reinsured for information. In addition, the nature of reinsurance supported continued use of the higher ‘utmost’ good faith standard in that reinsurance is premised on streamlined acceptance of the risk without the more intensive underwriting effort—and attendant expense—surrounding issuance of an insurance policy. For treaty reinsurance in particular, the reinsurer’s obligation to accept risk is essentially automatic and supports requiring more disclosure by the prospective reinsured without saddling the reinsurer with the burden of intense scrutiny of the reinsured operations. The duty of utmost good faith is generally described as connoting honesty and transparency and fairly taking into account the interests of the other party. In discussing the concept of good faith, there can be something of a ‘Tower of Babel’ effect in that various jurisdictions use slightly different nomenclature to describe the same essential concept or because jurisdictions may differ according to the type of conduct owed one another by contracting parties. While all jurisdictions appear to generally view contractual obligations as containing a corresponding covenant of good faith and fair dealing, they differ as to what the covenant entails and whether it applies in the same way regarding different types of contracts.9 in the US arguably requires an element of scienter beyond failure to exercise the ‘utmost’ good faith in making disclosures. For non-marine insurance, particularly in the United States, an applicant is generally required only to answer truthfully the inquiries of a prospective policyholder and is not obligated to make affirmative disclosures of information material to the risk. Stempel and Knutsen (n 2) ss 3.07–3.11. With passage of the Insurance Act of 2015, England has now apparently moved closer to the US approach in that the duty of utmost good faith has been the specifically removed from consumer insurance contracts and weakened in the marine context. 6 

The Insurance Act 2015 (UK). The English Act makes the new approach mandatory for consumer insurance policies but is only a ‘default’ rule regarding commercial insurance and permits a business and an insurer to agree to the more stringent regime of utmost good faith. 8  See text and accompanying nn 17–22 and 29–42. 9  Perhaps the most extreme example of this is in the United States, where for contracts involving the sale of goods mere ‘honesty in fact’ is usually considered sufficient good faith. Uniform Commercial Code art 1-304 (‘Every contract or duty within [the Code] imposes an obligation of good faith in its performance and enforcement.’); ibid art 1-201(20) (defining good faith as ‘honesty in fact and the observance of reasonable commercial standards of fair dealing.’). An arguable recurring error of the US judiciary is de-emphasis on the second part of the definition, which requires ‘the observance of reasonable commercial standards of fair dealing.’ United States common law is somewhat broader regarding the duty of good faith but in practice the covenant is not widely enforced outside the insurance context. See also American Law Institute, Restatement (Second) of the Law of Contracts, s 205 (‘Every contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement.’) and Comment A (‘The phrase “good faith” is used in a variety of contexts, and its meaning varies somewhat with the context. Good faith performance or enforcement of a contract emphasizes faithfulness to an agreed common purpose and consistency with the justified expectations of the other 7 

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There appears to be global agreement that contracts carry with them an obligation of good faith, even though the rigour of the requirement varies among countries and contexts. The term ‘utmost good faith’ is one largely associated with English-speaking jurisdictions and is well-established regarding marine insurance and reinsurance in the United Kingdom and the United States, and to some degree in nations that were formerly British colonies (eg, India, Singapore). In other industrial nations, there appears to be a tendency to refer simply to ‘good faith’ without use of the ‘utmost’ modifier.10 Both concepts have of course been influenced by Carter v Boehm, the famous English case most associated with the concept of a stringent duty of good faith and the topic of the volume.11 But even in those jurisdictions eschewing the use of the ‘utmost’ label, the prevailing concept of ‘good faith’ requires conduct akin to that of countries with an utmost good faith standard. In addition, some of these nations, like England, historically appear to have applied this standard of good faith not only to marine insurance and reinsurance but also to primary insurance as well.12

party; it excludes a variety of types of conduct characterized as involving ‘bad faith’ because they violate ­community standards of decency, fairness or reasonableness.’). 10  International Bar Association (IBA) Insurance Committee, ‘The Duty of Utmost Good Faith’ (2014) (reviewing use of term and good faith standard in Argentina, Belgium, Brazil, China, Costa Rica, Denmark, France, Germany, Hungary, Italy, the Netherlands, Nigeria, Poland, Spain, Sweden, ­Switzerland, Thailand and Turkey as well as the UK, the US (States of California, Illinois, Massachusetts, New Jersey, New York and Ohio), Australia, Canada, India, Ireland, Malaysia, Malta and Singapore). 11  The US, because of its highly state-centred approach to insurance in which each of its 50 states and territorial jurisdictions controls substantive law, creates additional variance in the use of the terms ‘good faith’ and ‘utmost good faith.’ But for the most part, US law, however divided among the states on other issues, is fairly consistent in finding having a relatively weak concept of good faith in ­non-insurance contracts and requiring only basic ‘good faith’ in the formation of primary insurance contracts but in requiring ‘utmost good faith’ that includes an affirmative duty of disclosure in ­contracting for marine insurance and reinsurance. 12  See IBA (n 10) 23 (in Belgium, ‘the insured must disclose to the insurer all known circumstances which he reasonably considers to be of influence on the risk assessment of the insurer’ and insured may not provide false or incomplete information in order to influence the insurer’s risk assessment); ibid 26 (in Brazil, Art 765 of the Civil Code requires that if the insured ‘makes inaccurate statements or omits circumstances that could influence acceptance of the application or the premium rate,’ the insurer may deny coverage or assess additional premium; the insured is also required to inform the insurer of factors increasing the risk assumed); ibid 56 (disclosure is treated like an affirmative misrepresentation); ibid 65 (in France, pursuant to Art L 113-2 of the French Insurance Code, the insured is required to affirmatively disclose ‘new circumstances that have the effect of either increasing the risk or creating new risks’ if they make inaccurate prior information provided to the insurer); ibid 115 (in the ­Netherlands, ordinary duty of good faith applicable to all insurance contracts imposes a duty to disclose material facts regardless of lack of insurer inquiry). See also Swiss Commercial Code art 2 para 1 (party negotiating prospective contract must disclose material information that the other party could not reasonably be expected to procure for itself); IBA (n 10) 72 (Germany does not follow English approach to duty of utmost good faith in reinsurance); ibid 96 (in Italy, basic duty of good faith imposes substantial duties of fairness in contract performance but not enhanced duties of disclosure or utmost good faith for primary insurance, only for reinsurance). Brazilian insurance law will soon be subject to a new stand-alone insurance act expected to take effect in 2018.

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II.  Overview: A Strong Duty of Good Faith for Reinsurance Contracts A. The Differentiating Features of Insurance and Reinsurance Contracts Although reinsurance agreements are contracts, like other insurance agreements, they have some distinct differences from what might be termed ‘ordinary’ contracts. Unlike the ordinary contract, both insurance and reinsurance agreements are ‘aleatory’—meaning that the contract will not necessarily be one of equal exchange in monetary terms.13 The insured/reinsured pays substantial sums but may never make a claim. Conversely, an insurer or reinsurer may receive only a single premium and then be faced with a large loss. The aleatory and uncertain nature of both insurance and reinsurance is the inevitable result of the fact that these contracts deal with risk and uncertainty. In return for a set premium or a share of the premiums collected by the reinsured, the reinsurer assumes the risk regarding the frequency and magnitude of covered matters. Because the reinsurer faces such risks, the longstanding custom, practice and law has been to require that a prospective reinsured make full disclosure of material information and data regarding risks so that the reinsurer can make an adequately informed decision whether to accept the risk and can set premiums accordingly as well as perhaps adding specific provisions to the resulting reinsurance agreement.14 The duty of utmost good faith applies to both quantitative and qualitative information material to the risk. Notwithstanding that these and other authorities often refer to all insurance contracts as subject to a duty of utmost good faith, the doctrine has always had more force in matters of marine insurance and reinsurance, where courts are much more likely to require affirmative disclosure by a prospective marine ­policyholder or reinsured.15 13  Although an outside observer may view a particular contract as a ‘bad deal’ for one of the p ­ arties, economists view most contracts as providing for an equal exchange of value based on the preferences of the contracting parties. Each party to the transaction knows exactly what it is getting—and will get—at the time of contracting. In contrast, because losses may not be predicted with certainty, ­parties to an insurance or reinsurance agreement cannot know exactly what an insured or reinsured will receive in return for premiums paid. 14  Mark S Dorfman and David A Cather, Introduction to Risk Management and Insurance 10th edn (Upper Saddle River NJ, Pearson/Prentice Hall, 2013) 445; See also George E Rejda, Principles of Risk Management and Insurance 9th edn (Boston MA, Addison-Wesley, 2005) 95 (‘An insurance contact is based on the principle of utmost good faith—that is, a higher degree of honesty is imposed on both parties to an insurance contract than is imposed on parties to other contracts.’) (emphasis in original). Professor Rejda’s assessment is to some extent an overstatement in terms of US law, where the ‘utmost’ good faith label is generally applied only to reinsurance and marine insurance and not to insurance generally). 15  Fireman’s Fund Ins Co v Wilburn Boat Co 300 F2d 631 (5th Cir. 1962) (applying federal maritime law)(marine insurance applicant is strictly liable for failure to disclose known material facts; intent to

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B. The Development of the ‘Utmost Good Faith’ Standard and Terminology in Reinsurance According to one scholar, the principle of utmost good faith ‘has its historical roots in ocean marine insurance’ due to the fact that ‘[a]n ocean marine underwriter had to place great faith in statements made by the applicant’ since the insured property often could not be visually inspected and was far away from the location of contracting, requiring a ‘high degree of honesty on the applicant for insurance.’16 The nature of reinsurance provides a compelling case for imposing a duty of utmost good faith, which likely accounts for the fact that jurisdictions that may not require this high a standard for primary insurance (eg, the United States) require utmost good faith in the context of reinsurance.17 As one US court noted: [r]einsurers rely on their common interests with the ceding insurers and on an industry custom of utmost good faith, including the sharing of information … Reinsurers depend on ceding insurers to provide information concerning potential liability on the underlying policies.18

As another US court observed: reinsurers are dependent on their ceding insurers for prompt and full disclosure of information concerning pertinent interests … [R]einsurers cannot duplicate the costly but necessary efforts of the primary insurer in evaluating risks and handling claims … They are protected, however, by a large area of common interest with ceding insurers and by the tradition of utmost good faith, particularly in the sharing of information.19

Regardless of the differing treatment of non-marine insurance among jurisdictions and regardless of the nomenclature used, reinsurance agreements logically

deceive not required); See also King v Allstate Ins Co 806 F2d 1537 (11th Cir. 1990) (applying Louisiana law rather than federal maritime law to a case involving a boat sunk in the Gulf of Mexico because the policy stated that it would be ‘void if you intentionally conceal or misrepresent any material fact or circumstance, before or after a loss,’ which the court construed as contracting out of the uberrimae fidei rule of maritime law and selecting the Louisiana law of misrepresentation, which required intentional misstatement to abrogate coverage) (emphasis added); See also Stempel and Knutsen (n 2) ch 17. 16  Rejda (n 14) 95. See also John Duer, The Law and Practice of Marine Insurance, vol 2 (New York, JS Voorhies, 1846) 380 (tracing principle to Roman law). 17  For example, China does not label the duties owed in an insurance or reinsurance contracts as duties of ‘utmost’ good faith, but the duty is stringent and on a par with the duties covering reinsurance in the UK and US. 18  Travelers Indem Co v Scor Reinsurance Co 62 F3d 74, 76 (2d Cir 1995) (applying New York law). 19  Unigard Sec Ins Co, Inc v North River Ins Co 4 F3d 1049, 1054 (2d Cir 1993) (applying New York law). Like Carter v Boehm, Unigard v North River illustrates that even though the rhetoric surrounding the duty of utmost good faith is strong, it is not in practice a standard that uniformly results in a reinsurer avoiding coverage obligations. In Unigard, the reinsured did not give notice to the reinsurer or obtain its permission before entering into the ‘Wellington Agreement’ that provided a means of alternative dispute resolution concerning insurance coverage for asbestos claims. The court found this did not breach the duty of good faith because this action did not materially alter the risk assumed by the reinsurer.

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should be subject to a high degree of good faith because of the different circumstances of reinsurance underwriting, particularly as respects the prospective ­reinsured’s disclosure obligations.20

C. Defining and Differentiating Good Faith and ‘Utmost’ Good Faith in US Law Good faith itself has proved somewhat elusive to define. Many sources of contract law, despite mandating the concept, do not specifically define it.21 However, even terse definitions can provide useful guidance. In addition, contract sources such as the commentary to the UNIDROIT Principles and the ALI Restatement of Contracts serve to flesh out the concept of good faith, as does case law and commentary.22 Statutory requirements applicable to insurance, such as consumer ­protection legislation or unfair claims practices statutes, may also provide guidance. For example, Comment (a) to Restatement §205 states that good faith ‘emphasizes faithfulness to an agreed common purpose and consistency with the justified expectations of the other party’ and ‘excludes a variety of types of conduct’ that are commonly characterised as bad faith ‘because they violate community standards of decency, fairness or reasonableness.’23 Illustration No 3 to UNIDROIT

20 Robert L Carter, Leslie D Lucas and Nigel Ralph, Reinsurance 4th edn (London, Reactions ­ ublishing Group, 2000) ch 3 (Principles and Practice of Reinsurance), ch 4 (Legal Principles Applying P to Reinsurance Contracts) (utmost good faith discussed at 121); Colin Edelman and Andrew Burns, The Law of Reinsurance 2nd edn (Oxford, Oxford University Press, 2013) ss 4.01–4.93 (discussing obligations of the reinsurer, including follow-the-fortunes principle) ss 6.01–6.51 (discussing duty of utmost good faith); Graydon S Staring and Dean Hansell, Law of Reinsurance (New York, Clark Boardman Callaghan, 2013) ch 8 (discussing duty of utmost good faith) and chs 9–11 (addressing duties in contract formation generally); Robert W Hammesfahr and Scott W Wright, The Law of Reinsurance Claims (Chicago, Andrews Professional Books, 1994) ch 4 (Utmost Good Faith, Nondisclosure, ­Misrepresentation, and Concealment), ch 5 (Requirement to Notify the Reinsurer of Losses); Robert Kiln and Stephen Kiln, Reinsurance Underwriting 2nd edn (London, Lloyd’s of London Press, 1996); Robert Kiln and Stephen Kiln, Reinsurance in Practice 4th edn (Livingston, Witherby, 2001); PT O’Neill and JW Woloniecki, The Law of Reinsurance in England and Bermuda 2nd edn (London, Sweet & Maxwell, 2004) ch 3 (Formation of the Reinsurance Contract) ch 6 (The Reinsurer’s Grounds for Denying Liability) (discussing scope of duty of utmost good faith); Barry R Ostrager and Mary Kay Vyskocil, Modern Reinsurance Law and Practice 2d edn (Little Falls, N.J., Glasser LegalWorks, 2000) ss 3.01–3.04; Robert Strain (ed), Reinsurance Rev edn (Athens TX, Strain Publishing and Seminars, 1997) 24; S­ teven C Schwartz, Reinsurance Law: An Analytic Approach (New York, Law Journal Press, 2009) s 5.02 (­discussing duty of utmost good faith) s 8.02 (discussing ‘Reporting by the Cedent’) s 8.04 (Access to the Cedent’s Records), s 8.05 (Implications of Access) s 9.04 (Late Notice); Thomas F Segalla, Reinsurance Professional’s Deskbook: A Practical Guide (Eagan, MN, Thomson Reuters, 2015–16 edn) ch 14 (Utmost Good Faith and Fair Dealing). 21  UNIDROIT art 1.7; ALI Restatement s 205. See also UCC art 1-201(20) (good faith ‘means ­honesty in fact and the observance of reasonable commercial standards of fair dealing.’). 22  See above n 10. 23  In addition, Comment (d) for s 205 notes that ‘[s]ubterfuges and evasions violate the obligation of good faith in performance’ and that the following have been ‘recognized in judicial decisions’

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­ rticle 1.7 provides another illustration focusing on the need for contracting A ­parties to act reasonably.24 Using reasonableness as the touchstone for determining good faith is consistent with the law across jurisdictions. In addition, the various jurisdictions maintain a consistent focus on not thwarting the purpose of a contract.25 Common working definitions of good faith state that one contracting party should not deprive another of the benefit of the bargain or take opportunistic advantage of another or adopt unjustified constructions of a contract. In addition, at the primary insurance level, insurers are required to observe certain protocols regarding claims processing and decisions. While many jurisdictions require intentional misconduct for a finding of bad faith, other jurisdictions (including states within the US) divide somewhat over whether unreasonable conduct or positions alone violate the duty of good faith or whether the insurer must know that its behaviour is unreasonable in order for it to constitute bad faith.26 Consequently, a distinguishing feature of the ‘utmost’ good faith (and good faith standards that are on a par even if not using the word ‘utmost’) rather than what might be termed ordinary good faith—particularly as regards pre-contract disclosure—is that the latter is often considered not to be breached unless the allegedly breaching activity was done intentionally. By contrast, the duty of utmost good faith can be breached when a marine insurance or reinsurance applicant is merely negligent in neglecting to inform the marine insurer or reinsurer about material information. Where the duty of utmost good faith attaches, the policyholder or reinsured shoulders a greater affirmative burden and must be ­proactive in informing the insurer or reinsurer rather than merely answering questions without deceit.

D.  The Role of Carter v Boehm in the Development of US Law As is well-described earlier in this book, a key case in developing the AngloAmerican concept of utmost good faith is Carter v Boehm.27 Carter v Boehm as violating the duty of good faith: ‘evasion of the spirit of the bargain, lack of diligence and slacking off; willful rendering of imperfect performance, abuse of a power to specific terms, and interference with or failure to cooperate in the other party’s performance.’ 24 ‘A, an agent, undertakes on behalf of B, the principal, to promote the sale of B’s goods in a given area. Under the contract A’s right to compensation arises only after B’s approval of the contracts ­procured by A. While B is free to decide whether or not to approve the contracts procured by A, a systematic and unjustified refusal to approve any contract procured by A would be against good faith.’ 25  See above n 10. 26  ALI Restatement of the Law of Liability Insurance (Preliminary Draft No 3, 12 Sept 2016) s 51 (adopting view that unreasonable behavior by insurer must be knowingly unreasonable or reckless to constitute bad faith) (‘An insurer is subject to liability for insurance bad faith when it fails to perform its duties under a liability insurance policy without a reasonable basis for its conduct and with ­knowledge or in reckless disregard of its obligation to perform.’). 27  Carter v Boehm [1766] 3 Burr 1905, [1766] 97 ER 1162, [1746-1779] 1 Black W 593, [1766] 96 ER 342.

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was of course actually an insurance case rather than a reinsurance case—a distinction without a difference in 1766 but a distinction that today has significance for the reasons previously discussed. In similarly ironic fashion, the case is one associated with its strong language in favour of stringent duties, particularly duties of disclosure. What is often forgotten is that the court found no breach of that duty. The court ruled that the policyholder had not fallen short of the duty of utmost good faith. One might therefore describe Carter v Boehm as a case in which the insurance industry lost the ‘battle’ (the case itself) but won the ‘war’ in that the decision set forth in strong language a substantial duty of disclosure that provided and ­continues to provide substantial protection for reinsurers. As famously enunciated by Lord Mansfield, a reinsured may lose the benefits of purchased insurance when it has provided materially inaccurate information or failed to provide material information even though the suppression should happen through mistake, without any fraudulent intention, yet still the underwriter is deceived and the policy is void, because the risqué run is really different from the risqué understood and intended to be run at the time of the ­agreement  …28

The strong language used by Lord Mansfield became widely cited to describe the duty of utmost good faith surrounding both insurance and reinsurance—and helped to establish a heightened duty of good faith for both insurance policies and reinsurance certificates and treaties. It remains a widely cited decision in spite of its age, particularly in Commonwealth jurisdictions. In the US, however, the case has been cited less as American law has shifted so that the duty in ordinary ­insurance has become one of only ‘good’ faith rather than ‘utmost’ good faith.29 It also became and remained a standard-setter for marine insurance, where even

28  Carter v Boehm [1766] 3 Burr 1905, 1909. See also Rozanes v Bowen [1928] 32 LI L Rep 98, 102 (AC) (insured must make full disclosure ‘without being asked of all material circumstances because the underwriter knows nothing and the assured knows everything’; this duty is a hallmark of the utmost good faith principle). 29  The US Supreme Court embraced the good faith concept of Carter v Boehm in Hodgson v Marine Ins Co, 9 US 100 (1809) but, as in the Carter v Boehm case itself, ruled for the policyholders, finding that information not provided the insurer was not material. Boehm was cited nine other times by 1816, an additional 35 times by 1865, 67 times more by 1915 for a total of 112 citations by the time World War I. But then its authority seemed to wane as the American states relaxed the disclosure duties of prospective policyholders and the case was cited in only 10 cases between 1915 and 1956 but had something of a resurgence, being cited another 22 times from 1956 to the present, most likely because of the increased litigation of reinsurance disputes during the past 50 years. (Search conducted through the LexisNexis omnibus database as of 8 April 2016). Interestingly, Carter v Boehm was essentially invisible in American law reviews prior to the latter half of the twentieth century, a fact I attribute not only to the proliferation of law schools and legal periodicals during that time as well as increased reinsurance litigation (case decisions draw interest) but also because of increased attention to insurance and reinsurance generally during this period. Eric H Franklin, ‘Mandating Precontractual Disclosure’ (2013) 67 University of Miami Law Review 553; Thomas J Schoenbaum, ‘The Duty of Utmost Good Faith in Marine Insurance ‘Law: A Comparative Analysis of American and English Law’ (1998) 29 Journal of Maritime Law and Commerce 1.

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the US continued largely to follow the English approach although US common law of disclosure and good faith was relaxed for land-based insurance contracts.30 Although the duty of utmost good faith is primarily stated in terms of duties of disclosure imposed upon a prospective reinsured, the duty applies throughout all aspects and stages of a reinsurance agreement.31 Although most discussion of the duty of utmost good faith in judicial decisions involves alleged breach by the reinsured, the duty is reciprocal and applies to reinsurers as well as reinsureds, even if the circumstances in which breach by the reinsurer is alleged may be comparatively less frequent than situations in which it is alleged that the reinsured failed to provide required information during the contracting process.

III.  Requirement of (Utmost) Good Faith for the Reinsured A.  The Reinsured’s Duty in Practice As summarised by one commentator, the ‘practical effect of the principle of utmost good faith today lies in the requirement that the applicant for insurance must make full and fair disclosure of the risk to the agent and the company.’ ­Consequently, ‘[i]f the insured intentionally fails to inform the insurer of any facts that would influence the issue of the policy or the rate at which it would be issued, the insurer may have grounds for avoiding coverage.’32 Similar requirements are set forth in the law of Australia,33 Canada,34 Ireland,35 Malaysia36 and Singapore.37 Non-insurance contract law is often quite 30 

Stempel, Swisher and Knutsen (n 2) 1200–10. See also King v Allstate (n 15). F Cohen, Timothy E DeMasi and Aaron Krauss, ‘Uberrimae Fidei and Reinsurance Rescission: Does a Gentlemen’s Agreement Have a Place in Today’s Commercial Market?’ (1994) 29 Tort and Insurance Law Journal 602, 603 (‘[t]he doctrine of uberrimae fidei imposes a duty of utmost good faith on the parties to a reinsurance contract.’) (emphasis added); Clyde & Co LLP, Reinsurance Practice and the Law (London, Informa, 2013) s 1.74 (section on ‘Utmost Good Faith and the Duty of Disclosure’)(citing UK Marine Insurance Act of 1906 s 18(1) (applicant for insurance or reinsurance must disclose prior to formation of contract ‘every material circumstance which is known’ to the applicant). The Marine Insurance Act has been significantly revised, with s 18 repealed effective 12 August 2016. These and other changes legislated in the Insurance Act of 2015 tend to make breach of warranty and failure to disclose less likely to defeat coverage. 32  Emmett J Vaughn and Therese Vaughn, Fundamentals of Risk and Insurance 8th edn (Oxford, Wiley, 1999) 168. See also Knight v US Fire Ins Co 804 F2d 10 (2d Cir 1986). 33  Insurance Contracts Act (AU); Seaton v Heath, 1 QB 782, 792 (1989) (prospective insured must disclose material facts affecting the risk). 34 702535 Ontario Inc v Lloyd’s London, Non-Marine Underwriters (2000), 184 DLR (4th) 687 (ONCA) [702535] (primary insurance contracts are subject to duty of utmost good faith). 35  Manor Park Homebuilders Ltd v AIRG Europe (Ireland) Ltd [2009] 1 ILRM 190 (in Ireland, all insurance contracts subject to duty of utmost good faith). 36  National Ins Co Ltd v S Joseph [1973] 2 MLJ 195 (in Malaysia, all insurance contracts subject to duty of utmost good faith). 37  IBA (n 10) 131 (Singapore follows English common law of applying duty of utmost good faith to all insurance contracts). 31  Deborah

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to the ­contrary. For example, even in the United States, which is often regarded as a ­jurisdiction more protective of consumers or contracting parties with weaker bargaining leverage, a party negotiating a contract that does not involve reinsurance is entitled to make full use of an information advantage and need not inform the other negotiating party of information that might be of value.38 Although jurisdictions vary regarding the use of the term ‘utmost’ good faith and many do not impose the same affirmative duty of disclosure found in the UK and in the US for marine insurance and reinsurance, it appears that the clear majority of nations endorse a duty of good faith and that this duty is applied not only to pre-contract activity but to the entire performance of the contract.39 In light of the different terminology regarding good faith, it is useful to emphasise that under any lexicon, a duty of ‘utmost’ good faith logically requires more than ordinary good faith. As an example, it is generally agreed that ordinary good faith requires a prospective contracting party to answer honestly inquiries posed by another prospective contracting party. Even if there were not a good faith

38  Laidlaw v Organ 15 US 178, 195 (1817) (tobacco merchant may take advantage of other party by declining to inform him of US victory in Battle of New Orleans that vastly changes economics of cotton trade) (‘The question in this case is, whether the intelligence of extrinsic circumstances, which might influence the price of the commodity, and which was exclusively within the knowledge of the vendee, ought to have been communicated by him to the vendor? The court is of opinion that he was not bound to communicate it.’). However, in matters of reinsurance, information about the risks for which the reinsured is responsible are normally not ‘equally accessible to both parties’ as is often the case in commercial transactions where either party has essentially the same access to information about world events, climate, economics, or other factors affecting risk. 39  Bolivia Commercial Code art 993 (reinsured required to report increase of hazard to reinsurer); Brazil Commercial Code art 422 (‘both at the execution and performance of any agreement, the contracting parties should be subject to the principles of probity and good faith.’); People’s Republic of China Insurance Law art 5 (‘[t]he parties to insurance activities shall follow the principle of good faith in their exercise of rights and performance of obligations’); Whiten v Pilot Ins Co 2002 SCC 18 at 650 (in Canada, duty of good faith applies to claims and contract administration as well as contract formation); Columbia Civil Code art 1603 (‘agreements should be performed in good faith, so that the source of obligations lies not only on the terms therefor but also on things that are precisely inherent in the nature of obligation itself ’); Ecuador Civil Code art 1562 (contracts ‘should be performed in good faith, so that the source of obligations lies not only on the explicit terms thereof, but also on things that are precisely inherent to the nature of obligation itself, or that are pertaining to it under the law or under the customs’); Cheong Heng Loong Goldsmiths (KL) Sdn Bhd & Anor v Capital Insurance Bhd and Another Appeal [2004] 1 MLJ 353; Whiten v Pilot Insurance Co [2002] DLR (4th) 257 (duty to act in utmost good faith is a continuous duty and includes claims handling as well as purchase of insurance); Ontario (Canada) Insurance Act s 18 mandates that automobile insurance policyholders must inform insurer of change in risk after contract formed; Swiss Civil Code art 2, para 1 (reinsured must act in good faith when allocating claims); Swiss Civil Code art 2, para 2 (abuse of contract rights in performance violate duty of good faith). See also IBA (n 10) 8 (in Argentina, duty of good faith applies to adjustment of loss as well as application for insurance); ibid 13 (in Australia, duty of good faith applies after formation of contract as well as to pre-contract negotiations); ibid 23 (Belgium), ibid 35 (in Canada, duty of good faith ‘present during every state of the claims process’ and includes Quebec (which follows civil law based on the French system) as well as English-speaking provinces with common law systems); ibid 116 (Netherlands). See also UNIDROIT art 1.7, Comment 1 (‘the parties’ behavior throughout the life of the contract, including the negotiation process, must conform to good faith and fair dealing.’).

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­ bligation, the fraud and misrepresentation law of many jurisdictions requires o that communications between prospective and ongoing contract parties at least not be false. Utmost good faith, however, requires something more. For example, a reinsurer might ask a prospective reinsured: ‘Did anyone call you about any risks not previously discussed?’ The reinsured answers ‘No’ and it is a technically correct answer because no one called the reinsured regarding this ­matter. But this clever answer would violate the duties of the reinsured if the reinsured had in fact itself made a call and during the call was informed about ­additional risks that were not disclosed to the reinsurer. Because the reinsured’s answer is technically correct (it made the call but was not called), most jurisdictions would find no fraud or misrepresentation. But this sort of tricky but ­hyper-literal answer that evades the essence of the inquiry clearly constitutes a failure to act in utmost good faith and would provide a basis for rescinding a reinsurance contract. Applied to the reinsured in the contract solicitation process, the duty of utmost good faith ‘requires the reinsured to disclose all facts that are material to the risks being ceded’, even if the reinsurer has not inquired about those risks.40 However, the right of a reinsurer to receive information regarding material developments affecting the reinsurance agreement is limited to information that is actually known by the reinsured or which should have been known to a reinsured ­meeting the industry standard of care for reasonable diligence. The reinsured is not required to be omniscient or clairvoyant in its ability to foresee emerging risks and predict outcomes. A reinsured’s obligation of disclosure does not require it to disclose information of which the reinsurer is already aware or that the reinsured would ordinarily expect the reinsurer to know.41

B.  Determining Materiality What constitutes material information may vary according to the type of risk reinsured. However, the reinsured is charged with having an appreciation of the information material to the reinsurer that would be apparent to a reasonable reinsured purchasing reinsurance of the type sought.42 In its form prior to the 2015 40 

See above Cohen, DeMasi and Krauss (n 31) 603; IBA (n 10). Compagnie de Reassurance d’Ile de France v New England Reins Corp 57 F3d 56, 80 (1st Cir 1995), cert denied, 516 US 1009 (applying Massachusetts law) (‘courts recognize that the insured need not disclose “what the insurer already knows or ought to know”’) (citing 9 Couch on Insurance s 38:15); Puritan Ins Co v Eagle SS Co, SA 779 F2d 866, 871 (2d Cir 1985) (applying New York law) (reinsured not obligated to make ‘minute disclosure of every material circumstance’); Sumitomo Marine & Fire Ins Co v Cologne Reins Co of Am 75 NY 2d 295, 330 (NY 1990) (the ‘reinsured ordinarily has no obligation to disclose the terms upon which insurance has been granted where those terms are generally found in policies of that nature, for the reinsurer ought to be aware of such standard terms.’). 42  For example, if a commercial property insurer that does business nationally across the United States has a high concentration of its policies along the Gulf Coast (which is prone to hurricanes) or in California near the San Andreas Fault, the reinsured must inform the reinsurer. The reinsurer might otherwise reasonably assume that the large property insurer’s risk pool is evenly distributed across the US and therefore not at any undue risk of hurricane or earthquake claims when the opposite is true in 41 

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Amendment, §18(2) of England’s Marine Act provided that a matter is material if it ‘would influence the judgment of a prudent insurer in fixing the premium or determining whether he will take the risk.’43 The objective definition of materiality that dominates in the United States (and in my view, the UK, although some commentators construe England and other jurisdictions as using a subjective approach) appears superior to a subjective ­definition of materiality. An omission is material if it would have affected the decision of a reasonable reinsurer regarding making the agreement, including the pricing and terms of the reinsurance in question.44 However, as detailed in a leading ­English decision,45 it is the reinsurer’s burden to prove the materiality of a non-disclosed or misrepresented fact. As summarised by one leading treatise: The effect of the decision is that a reinsurer can avoid the contract for non-disclosure and/or misrepresentation of material facts if it can prove: (a) that the mind of prudent underwriter would have been influenced although it need not be shown that it would be decisively influenced [and that] a prudent underwriter would have taken the matter into account but would not necessarily have acted any differently (for the purposes of establishing the attitude of a prudent underwriter reference is usually made to the evidence of an independent expert underwriter); and (b) that the non-disclosure induced the actual underwriter to write the reinsurance on the terms which he did. In the event that the actual underwriter is not available to (or cannot give evidence), there is a presumption of inducement, i.e., it is presumed that in the event of a material non-disclosure, the reinsurer relied on it. It is up to the reinsured to prove that the reinsurer did not. This is a difficult presumption to rebut.46 view of the concentrated nature of the risk pool. The degree to which the reinsured’s policies contain earth movement, flood, storm surge or other exclusions may also be relevant. 43  This approach to materiality is consistent with statutes and case law in the majority of jurisdictions. See, eg, Penn Mut Life Ins Co v Mechanics’ Savings Bank & Trust Co 72 F 413, 430 (6th Cir 1896) (applying Ohio law) (opinion by future US President and Supreme Court Justice William Howard Taft) (framing the materiality inquiry as whether a reasonably prudent insurer would have ‘enhanced the premium to be charged’ or whether there would have been a ‘rejection of the risk?’); cf Cal Ins Code s 334 (materiality is determined by ‘the probable and reasonable influence of the facts upon the party to whom the communication is due, in forming his estimate of the disadvantages of the proposed contract, or in making his inquiries’, a subjective standard that is at odds with the generally prevailing objective ‘reasonable insurer’ standard used to define materiality). See also Nappier v Allstate Ins Co 961 F2d 168, 170 (11th Cir 1992) (applying Georgia law). 44  Pan Atlantic Ins Co Ltd v Pinetop Insurance Co [1994] 2 Lloyd’s Rep. 427 (SC HL); Brotherton v Aseguradora Colseguros SA (No 2) [2003] 2 All Eng Rept (Comm) 298 (AC). See also Assicurazioni Generali SpA v Arab Insurance Group (BSC) [2002] EWCA Civ 1642 (AC) (misrepresentation or nondisclosure must be effective cause of entering into agreement but need not be sole cause; but if reinsurer would have made agreement on the same terms even if accurately informed by reinsured, the information is not sufficiently material to justify rescission or denial of coverage). 45  Pan Atlantic Ins Co Ltd v Pinetop Insurance Co [1994] 2 Lloyd’s Rep. 427 (SC HL); Brotherton v Aseguradora Colseguros SA (No 2) [2003] 2 All Eng. Rept (Comm) 298 (AC). 46  See above Clyde & Co LLP (n 31) s 1.77 at 1–16. The requirement of ‘inducement’ created by a material omission is also part of the English contract law of misrepresentation and in appears to have merged with the insurance law concept of misrepresentation, most likely because the two defenses to contract enforcement are so often pleaded together, even though the concepts are distinct.

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English law thus can be construed as defining materiality according to both an objective standard (would a prudent/reasonable reinsurer have made this particular agreement if the true facts were known) and a subjective standard (would this particular reinsurer have made this particular policy if the true facts were known), enhancing the subjective prong of inquiry by creating a presumption of reliance based on the objective standard if the particular underwriter is not available to provide evidence.47

C.  The Advantages of an Objective Standard of Materiality A completely objective approach to disclosure is superior to a subjective approach or a mixed approach in that it provides better and fairer notice to insurers seeking to purchase reinsurance. Applicants must consider whether a reasonably ­prudent insurer would want to be informed of certain facts known to the applicant. ­Prospective reinsureds are, of course, insurers that are in the business of risk management. They can fairly be charged with knowing what information would impact the decisions of a reasonable reinsurer. But it is unfair to ask prospective reinsureds to read the subjective mind of the reinsurer and calculate what information it might consider material beyond that which would be material to an ordinary reasonable reinsurer. Adopting the objective approach—with no subjective component—provides clearer guidance to the parties considering entering into a reinsurance agreement. The objective standard—with no subjective component—also improves resolution of reinsurance disputes. Under a subjective approach, the particular mindset of a particular insurer is a question of fact that logically requires fact finding through trial, which in the United States means impanelling a jury of laypersons unfamiliar with the insurance/reinsurance business who are governed by restrictive rules of evidence. This makes for a cumbersome, time-consuming and costly process that may easily result in error if jurors are swayed by false testimony (eg, the insurer that asserts that it would not have entered into the contract if it had known that the reinsured’s claims personnel wore uniforms while on the job) or wrongly disbelieve reasonable testimony (eg, the insurer that asserts it would not have made the agreement if it had known that the insurer issued its large life insurance policies without requiring a physical examination). A tribunal will often be able to apply the objective standard of materiality as a matter of law because in many cases, there will be no dispute regarding whether a reasonable and prudent reinsurer would find an omitted fact sufficiently­

47  ibid ss 10.25–10.48. As previously noted, the objective standard is the majority rule in the United States but there are several states (most prominently California) that apply a subjective approach. See above Staring and Hansell (n 20) s 10:3.

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important to affect underwriting decisions. For example, if the top managers of the prospective reinsured had recently been convicted of wire fraud, there would be no doubt that this constitutes material information. In other cases, there may be sufficient dispute regarding the response of a reasonable and prudent reinsurer to information or its absence to require a hearing and further fact-finding by the tribunal.

D.  The Reinsured’s Typically Required Disclosures The reinsured’s duty of disclosure ordinarily requires that the reinsured: (a) ­provide accurate loss information that presents a fair picture of the risk to be assumed by the reinsurer; (b) update all information in the event of significant change during the negotiations; (c) respond frankly to reinsurer inquiries; (d) raise potential issues affecting the risk that are material even if not raised by the ­reinsurer; (e) outline the structure of the reinsurance programme and cover sought; (f) identify any other applicable reinsurance that may cover the risks in question. Additional examples of information material to reinsurance underwriting include claims experience, loss information, information regarding significant risk exposures, and financial information concerning the capital and surplus of reinsured and reinsurer, including any significant regulatory matters affecting them. The obligations imposed by the duty of utmost good faith set forth minimum obligations regarding disclosure. Additional disclosure obligations can be created by specific questions propounded by the reinsurer as part of the contracting process. For example, the reinsurer may ask the reinsured to furnish copies of all policies and endorsements subject to the proposed reinsurance. As another example, a reinsurer might ask for detailed numbers from the reinsured regarding the percentage of its policies sold to residents of a particular jurisdiction known for large awards to bodily injury plaintiffs. If asked in a sufficiently clear fashion by the reinsurer, the reinsured is obligated to provide sufficiently complete and truthful answers. Alternatively, a prospective reinsured may refuse to answer a question on the ground that it does not have the information readily available and does not want to invest resources obtaining the information. A candid response of this type does not violate the duty of utmost good faith—although it of course may make the reinsurer unwilling to enter into an agreement with the prospective reinsured. In addition, the prospective reinsured may in some instances be able to impose duties of disclosure upon the prospective reinsurer through sufficiently specific inquiry even though the prospective reinsured does not propound an application to the prospective reinsurer. For example, the prospective reinsured may ask questions about the financial stability of the prospective reinsurer. Although the reinsurer is not required to answer any of these questions and may decline, the answering reinsurer is obligated to provide sufficiently complete and truthful

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answers if it responds to the questions.48 If a reinsurer asserts that the reinsured failed to disclose information material to the risk reinsured, the reinsurer bears the burden of persuasion to demonstrate by a preponderance of evidence not only that the information was not provided but also that the undisclosed information was material. In assessing what a reinsured ‘knows’, the reinsured is viewed as an entity. The entity must have actual knowledge of the information in question—but the entity is deemed to have actual knowledge of what its employees and agents actually know. For example, if claims personnel or legal personnel of the reinsured know that recent court decisions have removed certain defences to liability or that a product previously deemed safe has been held to be defective and dangerous, that knowledge is imputed to the reinsured. In similar fashion, the reinsured as an entity is responsible for errors in reporting material information, even if the errors were not fraudulently or recklessly made. A reinsured is held accountable to what it tells the reinsurer, even if the error is unintentional. In any event, whatever information is deemed material must be disclosed to the reinsurer.49 Case law provides examples of information considered material.50

IV. Conclusion Although the influence of Carter v Boehm and its strong statement of the duties imposed on contracting parties may have waned regarding insurance, it remains

48  For example, a reinsured might ask about the reinsurer’s investment in equity stocks. If a r ­ einsurer with 25 per cent of its investment portfolio in equities responded that the amount of its investment in equities was ‘very low’, this may constitute a misrepresentation if this degree of concentration in equity stocks creates more than an incidental risk exposure for the reinsurer that may imperil the reinsurer’s ability to pay claims. 49  See above Staring and Hansell (n 20) s 10:3[5] (collecting US and UK cases on materiality); See also A/S Ivarans Rederei v Puerto Rico Ports Authority, 617 F2d 903 (1st Cir 1980) (applying ­maritime law) (insured’s failure to disclose two prior incidents of damage to vessels due to defect in dock precludes insurance coverage for injury to third vessel); Merchants’ & Shippers’ Ins Co v St Paul Fire & Marine Ins Co, 219 AD 636, 220 NYS 514 (1st Dept 1927, aff ’d, 246 NY 616, 159 NE 674 (1927) (insured’s failure to declare that vessel carrying insured cargo had already sailed and suffered injury causing delay en route was material omission barring coverage); Wise Underwriting Agency v Grupo Nacional Provincial SA [2004] 14 Mealey’s Reins Rep No 23, A (QB 2003), rev’d on other grounds, [2004] 15 Mealey’s Reins Rep No 7 a (CA 2004) (reinsured’s description of cargo of Rolex watches as ‘clocks’ due to mistranslation from Spanish is a material misstatement that even if innocent precludes coverage). 50  The following cases provide useful examples of omitted material information that should have been disclosed to the reinsurer during the contracting process. See also Sun Mutual Ins Co v Ocean Ins Co, 107 US 485 (1883)(failure to disclose other applicable insurance is material omission violating duty of utmost good faith); M’Lanahan v Universal Ins Co 26 US 170 (1928) (failure to provide date of vessel’s sailing is material omission violating duty of utmost good faith); Security Mutual Casualty

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an authoritative opinion that continues to set forth the standard of care (utmost good faith) applicable to reinsurance and retrocession, in both Anglo-American jurisdictions and those more influenced by the law of continental Europe.51 In the United States, concerns over the aleatory nature and complexity of insurance policies combined with desire for consumer protection have induced most American States to eventually reject a requirement of a strict affirmative duty of disclosure for insureds. For the most part, an American applicant for insurance (consumer or commercial) need only answer truthfully questions asked by the underwriter. However, even though reinsurance contracts are also aleatory, the prevailing view in the US was that the sophistication of commercial insurers seeking reinsurance justified application of the stricter utmost good faith standard imposing an affirmative duty of disclosure. In particular, US courts were influenced by the informational disadvantage of reinsurers, who were often far removed geographically from the risks they were asked to accept. In applying this higher standard of disclosure, US courts expect insurers to disclose to a prospective or renewing reinsurer all information ‘material’ to the underwriting risk, with materiality generally determined according to an objective test that asks what a reasonably prudent reinsurance underwriter would want to know prior to accepting or pricing the risk. However, a number of US courts have applied a less useful subjective test in determining whether undisclosed information was material. Notwithstanding this occasional inconsistency of approach, the vast bulk of US case law insists that a prospective reinsured provide substantial information to the reinsurer that includes accurate information about losses, other insurance or reinsurance, and events or situations that pose a clear potential for future claims. In operation, US law regarding the reinsured’s duty of disclosure is not ‘materially’ different than the traditional approach of UK countries.

Co v Affiliated FM Ins Co 471 F2d 238, 241 (8th Cir 1972) (applying Minnesota law) (failure to inform ­reinsurer that tenant of building covered by property reinsured used highly flammable l­iquids for leatherworking is material omissions violating duty of utmost good faith even if not made with fraudulent intent); Carlingford Australia Gen’l Ins Ltd v St Paul Fire & Marine Ins Co 722 F Supp 48 (SDNY 1989) (reinsured’s failure to inform reinsurer of arrangement that guaranteed profit and remove or lessened incentive to investigate claims was material omission violating duty of utmost good faith); Sumitomo Marine & Fire Ins Co v Cologne Reinsurance Co 552 NE2d 139 (NY 1990) (failure of reinsured to disclose that its policy for steel mill covered radioactive contamination loss was material and violated duty of utmost good faith). But see Christiana General Ins Corp v Great American Ins Co 979 F2d 268, 279–80 (2d Cir 1992) (applying New York law) (affirming 745 F Supp 150 (SDNY 1990)) (noting existence of duty of utmost good faith in reinsurance but finding reinsured’s failure to disclose that it covered Honda All-Terrain Vehicles (ATVs) as well as Honda automobiles found not material). 51 For example, the in-progress Principles of Reinsurance Contract Law (PRICL) (See above (n 1)) as currently drafted follows the rationale of Carter v Boehm and endorses heightened duties in the reinsurance relationship.

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16 Placement of Insurance and the Role of Brokers ROB MERKIN

I.  The Significance of Brokers The role of intermediaries in the placement process has changed over the years and still to some extent varies as between different jurisdictions. In England, insurers at one time used commission agents to solicit insurance agreements and thereafter to assist the applicant in the completion of any proposal form. That practice produced a series of irreconcilable cases, leaving it uncertain whether information disclosed to the insurer’s agent had been validly communicated to the insurer itself where the proposal form had been completed by the agent in that the agent was in some decisions treated as having metamorphosed into the amanuensis of the assured for that limited purpose.1 This line of authority is no longer of much significance in England: agents of that type have largely disappeared from the consumer market,2 with the bulk of business being placed online directly with insurers, very commonly through the use of online aggregators; the Consumer Insurance (Disclosure and Representations) Act 2012 has abolished any duty of disclosure and replaced it with a duty to give honest answers; and insurers’ agents where they are used are under the 2012 Act deemed to be representatives of the insurers so that anything said to them is treated as having been said to the underwriting department directly. It has also been reversed by legislation in

1  Biggar v Rock Life Assurance Co [1902] 1 KB 516; Hough v Guardian Fire and Life Assurance Co Ltd (1902) 18 TLR 273; Newsholme Brothers v Road Transport and General Insurance Co Ltd [1929] 2 KB 356; Paxman v Union Assurance Society Ltd (1923) 39 TLR 424; Dunn v Ocean Accident and Guarantee Corp Ltd (1933) 50 TLR 32; Facer v Vehicle and General Insurance Co Ltd [1956] 1 Lloyd’s Rep 113; Stone v Reliance Mutual Insurance Association [1972] 1 Lloyd’s Rep 469. 2  Although note the authority given by insurers to banks to sell payment protection insurance to customers seeking bank loans. The mis-selling of such policies, to persons who were unaware that they were buying it and who in any event for the most part did not need it, has led to a major regulatory investigation requiring banks to repay billions to misled customers. That saga is worthy of an article in its own right.

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New Zealand, under section 10 of the Insurance Law Reform Act 1977 whereby information known to the insurer’s agent is deemed to have been disclosed to the insurer itself. In Australia, a rather broader measure, section 12 of the Insurance (Brokers and Agents) Act 1984, deemed insurance intermediaries employed by insurers to be their agents for all purposes and not simply for placement. That measure has now been repealed and replaced by a complex regime for the regulation of financial intermediaries contained in the Corporations Act 2001 following amendments by the Financial Services Reform Act 2001, but to the same effect. The most important class of agents in the placement process has historically been—and remains—the independent broker. In England, the use of insurance brokers is as old as the London marine insurance market itself. The seventeenth century definition of ‘brokers’ was unflattering: they were described in an Act of 1601 as individuals responsible for encouraging ‘all kinds of lewd and bad persons to rob and steal’.3 Merchants writing insurance as underwriters would as early as the beginning of the eighteenth century do so through the intervention of brokers.4 Their role was enhanced by the practices of the Lloyd’s Coffee House, which began writing insurance in 1720 and secured something around 95 per cent of the marine market by 1812. The only competition was in the form of two companies, Royal Exchange Insurance and London Assurance, authorised to offer marine insurance by Royal Charter granted in 1720, but both were too risk-averse and uncompetitive to do so effectively. In this formative period brokers were not held in high regard by all: John Weskett, one of the earliest authors on marine insurance, writing in 1748, referred to their ‘ignorance and ill-breeding’,5 although ­Weskett was hardly any more flattering about underwriters themselves. By the time the Lloyd’s quasi-monopoly was broken by Parliament in 1825 in the repeal of the Bubble Act 1720 and insurance companies could lawfully be formed, the use of brokers had become ingrained in the system. Commercial risks of any size placed today are regularly subscribed to by both Lloyd’s Syndicates and insurance companies, with the placement for both being conducted through brokers. Thus: the vast bulk of commercial insurance placed in England is directed through brokers; reinsurance is virtually always arranged by brokers; and foreign risks are brought into the London market by overseas producing brokers and London placing brokers.6 Most London underwriters will sooner or later—varying with the degree of intake of alcohol—be happy to admit that London is a ‘broker market”. That is perhaps less true of other common law jurisdictions, whose markets are less favoured for insurance and international placements, but the present author has heard the phrase ‘broker market’ from

3 

DEW Gibb, Lloyd’s of London (London, MacMillan and Co, 1957) 19. C Wright and CE Fayle, A History of Lloyd’s (London, MacMillan and Co, 1938) 39–40, refer to a broker named Hatton who offered clients the service of obtaining marine insurance at a commission of 16 per cent. 5  Wright and Fayle, ibid 160. 6  The two sets of brokers may well be associated companies in the same group. 4 

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insurance sources in each of New Zealand, Australia and Hong Kong. The question addressed in this paper is the allocation of responsibility as between assured and insurer for errors by brokers in the placement process, be they errors of commission (misrepresentation) or omission (non-disclosure). The starting point for the analysis is the proposition that the broker is the agent of the assured and not the agent of the insurer. That simple statement is often difficult to reconcile with what goes on in practice, for two reasons. First, the rule that the broker is the agent of the assured is not easily reconcilable with the established common law principle—based on the custom of the market—that a broker is paid by underwriters for finding business for them, and that the amount of commission payable to a broker is agreed with the underwriter and not the assured. Indeed, at common law the broker is under no duty to disclose the commission rate to the assured unless the amount paid is in some way unusual.7 While there are regulatory modifications to this rule, it retains common law ramifications. Second, the role of brokers has developed over the years. Initial placement is just one of the functions that brokers perform. In practice brokers perform all manner of functions for both sides to the transaction,8 and many regard themselves as ‘servants of the market’9 rather than tied to one or other party. Thus, as far as an insurer is concerned, a broker may: operate as a back-office for the insurer, ­holding all relevant placement and claims documents;10 be empowered under a binding authority from an insurer to grant cover to qualifying applicants;11 procure reinsurance for an insurer, often in advance of having first placed the direct ­insurance;12 and undertake claims investigations.13 As far as the assured is concerned, the broker may: search the market for appropriate coverage;14 draft the policy wording;15 advise on the assured’s placement obligations in respect of the presentation and disclosure of information;16 secure renewals;17 and assist with claims.18 The ­post-placement

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Hobbins v Royal Skandia Life Assurance Ltd [2012] HKCFI 10. Which became painfully apparent in HIH Casualty and General Insurance Co v JLT Risk Solutions [2007] Lloyd’s Rep IR 717. 9  The phrase of Hobhouse J in General Accident v Tanter, The Zephyr [1984] 1 Lloyd’s Rep 58. 10  Goshawk Dedicated Ltd v Tyser & Co Ltd [2007] Lloyd’s Rep IR 224. 11  Empress Assurance Corp Ltd v Bowring & Co Ltd (1905) 11 Com Cas 107; Glasgow Assurance Corp Ltd v William Symondson & Co (1911) 16 Com Cas 109; Aneco v Johnson & Higgins [2002] 1 Lloyd’s Rep 157; Sphere Drake v European International Underwriting [2004] Lloyd’s Rep IR 525; Bonner v Cox Dedicated Corporate Member Ltd [2006] Lloyd’s Rep IR 385. 12  HIH Casualty and General Insurance Ltd v JLT Risk Solutions Ltd (n 8). 13  North & South Trust Co v Berkeley [1971] 1 All ER 980; Anglo-African Merchants Ltd v Bayley [1970] 1 QB 311; Eagle Star Insurance Co v Spratt [1971] 2 Lloyd’s Rep.116. 14  Horsell International Pty Ltd v Dive Two Pty Ltd [2013] NSWCA 368. 15  Charman v Gordian Run-Off Ltd [2003] Lloyd’s Rep IR 337. 16  Jones v Environcom Ltd (No 2) [2010] EWHC 759 (Comm); Synergy Health (UK) Ltd v CGU Insurance Plc [2010] EWHC 2583 (Comm). 17  Frost v James Finlay Bank Ltd [2002] Lloyd’s Rep IR 503; Ground Gilbey Ltd v Jardine Lloyd Thompson UK Ltd [2011] EWHC 124 (Comm). 18  Grace v Leslie & Godwin Financial Services Ltd [1995] LRLR 472; Aon New Zealand Ltd v AttorneyGeneral (2009) 15 ANZ Insurance Cases 61–800; Ocean Finance & Mortgages Ltd v Oval Insurance Broking Ltd [2016] EWHC 160 (Comm). 8 

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role of a broker creates a theoretical problem, in that—based on the rule that the broker is paid by the insurer for securing business—there is simply no consideration moving from the assured for subsequent activities. The point has been noted in English decisions,19 but long gone are the days when a lack of consideration has been capable of disrupting what is otherwise a valid commercial relationship:20 the problem can be overcome by finding an assumption of responsibility by the broker, giving rise to liability in tort.21 Conflicts of interest can easily be overcome by full disclosure and approval, but neither is commonly found, and in its absence the primary duty is owed to the assured.22

II.  Placement and Presentation of the Risk: The Issues Having found an appropriate insurer, the broker’s role in the placement process is generally to present the risk to the insurers. Assuming that the assured has been properly advised as to what information is disclosable to the insurers and has communicated that information to the broker accurately, the issue that arises is whether the broker’s failure to communicate that information to the insurer is the responsibility of the assured or the insurer. Three different situations might arise in relation to facts relevant to the risk. First, the broker may have misstated relevant information to the insurer. Second, the broker may have received the information but failed to disclose it to the insurer. Third, the broker may himself be in possession of relevant information not known to the assured and has failed to disclose it to the insurer. Each of these scenarios raises different issues. Surprisingly, there has been little attempt to legislate on these matters. The Principles of European Insurance Contract Law make no mention of placement by an intermediary. Article 2:101(1) requires the applicant to inform the insurer of circumstances which he is or ought to be aware if there are clear and precise questions. Article 2:101(2) amplifies this slightly, by stating that the circumstances include those ‘of which the person to be insured was or should have been aware.’ The pre-contractual duty of the insurer includes, under article 2:201(1)(c), provision of the ‘name and address of the insurance agent.’ The only other reference to insurance agents appears in Chapter 3. Article 3:101 provides, so far as relevant, that an insurance agent is authorised to perform all acts on behalf of an insurer that are according to current insurance industry practice within the scope of his employment; and Article 3.102 states that if an agent of the insurer purports to 19 

Involnert Management Inc v Aprilgrange Ltd [2015] EWHC 2225 (Comm). Carvill America Inc v Camperdown UK Ltd [2006] Lloyd’s Rep IR 1. Grace v Leslie & Godwin Financial Services Ltd (n 18); Ocean Finance & Mortgages Ltr v Oval Insurance Broking Ltd (n 18). 22  Aneco Reinsurance Underwriting Ltd v Johnson & Higgins Ltd [2002] Lloyd’s Rep IR 91. 20  21 

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be an independent intermediary and acts in breach of duties imposed on such an intermediary by law, the insurer shall be liable for such breach. Common law jurisdictions vary in their approach, and within each jurisdiction there are different regimes for the presentation in the risk. The common law itself—enshrined in marine insurance legislation framed in terms more or less identical to the UK Marine Insurance Act 1906—remains operative in Hong Kong,23 ­Singapore24 and—with one important but unintended ­modification—New ­Zealand,25 and also in the non-consumer marine insurance regime of Australia.26 In the UK, the relevant provisions of the 1906 Act have been repealed and replaced with two measures: the Consumer Insurance (Disclosure and Representations) Act 2012, for consumers; and the Insurance Act 2015, for businesses. In Australia the position outside marine insurance is, at best, labyrinthine. The general rules for presentation of the risk are found in sections 21–33 of the Insurance Contracts Act 1984.27 However, those rules are modified for: ‘eligible’ policies, mainly consumer contracts, where the duty is less onerous; life insurance, where there is a different regime of remedies; motor and workers’ compensation policies, which are regulated at state level; and reinsurance, which is excluded from the 1984 Act and may or may not fall within the principles set out in the marine insurance legislation.28 How, then, are the defaults of brokers dealt with in these various different regimes? It may be that there has merely been oversight on the part of the broker, or it may be that the broker believes that full disclosure would render the risk uninsurable or at best insurable on terms or at a premium likely to be unacceptable to the assured. The broker’s state of mind may well, as is seen below, have an impact on the rights of the insurers. It should also be added that if the broker’s negligent or fraudulent default leads to a loss of coverage, then the assured will have a claim against the broker for breach of duty. But our question here is, does such default lead to loss of coverage?

III. Misrepresentation The first situation is that in which the assured has properly disclosed information to the broker, but the broker has not passed on the information accurately and 23 

Marine Insurance Ordinance, cap 329, ss 18–20. Marine Insurance Ordinance, chapter 387, ss 18–20. 25  Marine Insurance Act 1908, ss 18–20. 26  Marine Insurance Act 1909, ss 24–26. Consumer marine policies are governed by the Insurance Contracts Act 1984. 27  As amended by the Insurance Contracts Amendment Act 2013. 28  In the absence of clear common law rules on reinsurance in Australia, the present author’s view is that English reinsurance decisions would be followed, and—given that the English courts have simply applied the Marine Insurance Act 1906 to reinsurance—the principles in the marine insurance legislation govern the position in Australia. But that view has yet to be tested. 24 

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there is misrepresentation of one or more material facts. All of the regimes agree on the basic principle here. The broker is the agent of the assured, and so any false statements made by the broker are necessarily made on behalf of the assured.29 However, at this point there is a divergence between the regimes as to the appropriate remedy open to the insurer. The common law operates an all or nothing approach, which is divorced from the representor’s state of mind and is concerned only whether the fact misstated was material and had an inducing effect on the making of the contract. The statutory regimes in Australia and the UK have opted for proportional remedies, and so the effect of a broker misrepresentation may be different. Turning first to Australia, section 28 of the Insurance Contracts Act 1984 applies, in accordance with section 28(1), where ‘the person who became the insured under a contract of general insurance … made a misrepresentation to the insurer before the contract was entered into’. By section 28(2), ‘If the failure was fraudulent or the misrepresentation was made fraudulently, the insurer may avoid the contract.’ In other cases, by section 28(3), ‘the liability of the insurer in respect of a claim is reduced to the amount that would place the insurer in a position in which the insurer would have been if … the misrepresentation had not been made.’ This applies to consumer and business insurance alike. In the case of life insurance, governed by section 29 of the 1984 Act, the main differences are that in the case of non-fraudulent misrepresentation the right to avoid is lost after three years and that the remedy for non-fraudulent misrepresentation rests upon a complex formula. There is nothing in the legislation, or indeed in the report of the ­Australian Law Reform Commission upon which the legislation was based,30 which considers the role of brokers in the placement process,31 and there are no authorities on the question of whether the sins of a broker in making statements to the insurer are visited on the assured. If it is right that the common law rule remains in place, and that misstatements by the broker are made by the assured, the question then becomes exactly how section 28 applies. On the basis that the assured is entirely innocent, in that he has done all that is required of him, it is arguable that section 28(3) always applies and the remedy is one based upon what would have happened had the truth been told. By contrast, it is equally arguable that the relevant state of mind is that of the broker and not the assured, so that whether section 28(2) or section 28(3) applies has to be tested by reference to the broker. Neither outcome is free of difficulty. If the former is correct, the insurer is to some extent taking responsibility for the conduct of the assured’s broker. If the latter is correct, the purpose of a proportionate remedy—to reflect the degree of the assured’s wrongdoing—is defeated. A further complication arises in

29 

A rule seemingly originating in Fitzherbert v Mather (1785) 1 TR 12. ALRC Report No 20, 1982. than s 71, which deems a broker to be the agent of the insurers for the purpose of the receipt of information required by the Act to be provided to the assured. It does not deal with the converse case of information that has to be provided to the insurer. 30 

31  Other

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the context of section 31(1) of the 1984 Act, under which the court may disallow avoidance for fraudulent misrepresentation ‘if it would be harsh and unfair not to do so’, subject to the considerations in section 31(2) that the prejudice to the insurer is minimal and in section 31(3)(a) that there is a need to deter fraud. But the key provision is in section 31(3(b), which requires that the court ‘shall weigh the extent of the culpability of the insured in the fraudulent conduct against the magnitude of the loss that would be suffered by the insured if the avoidance were not disregarded’. If there is fraud, the concept of a variable degree of culpability makes little sense unless it is referring to the assured’s responsibility for the misstatements of a broker or agent. It may be, therefore, that the position under the 1984 Act is that the broker’s misstatement is the responsibility of the assured, and that if the broker has been fraudulent the appropriate relief is to be found in the exercise of judicial discretion under section 31. The power under section 31 cannot in any event be exercised if there has been more than minimal prejudice to the insurer, so the insurer cannot by this means be required to bear the burden of the broker’s fraud. The position in the UK is less straightforward, largely because the two pieces of legislation make no provision equivalent to section 31 of the 1984 Australian legislation for the excusing of fraud. Section 2(2) of the Consumer Insurance Act 2012 states that it is the duty of the consumer to take reasonable care not to make a misrepresentation to the insurer. The concept of reasonable care is defined in section 3, things to be taken into account under section 3(2) including: (a) the type of consumer insurance contract in question, and its target market, (b) any relevant explanatory material or publicity produced or authorised by the insurer, (c) how clear, and how specific, the insurer’s questions were, (d) in the case of a failure to respond to the insurer’s questions in connection with the renewal or variation of a consumer insurance contract, how clearly the insurer communicated the importance of answering those questions (or the possible consequences of failing to do so), (e) whether or not an agent was acting for the consumer.

The problem arises at point (e). This could be read as confirming the common law rule that the assured is responsible for the acts of his agent, or it could be suggesting that reasonableness applies as between the assured and the agent. There are conflicting indications. Schedule 2 to the 2012 Act contains lengthy guidelines as to exactly when an intermediary is to be treated as the assured’s agent, and that would not be necessary if the assured did not bear responsibility for the defaults of such an agent.32 However, under section 5 of the 2012 Act—following section 28 of the Australian legislation—the remedy open to an insurer for breach of duty rests upon the assured’s state of mind: if there is fraud, the insurers can avoid, but

32  Other than in determining whether the person relied upon by the assured for the purposes of determining reasonableness was in fact the assured’s agent. But that seems a very limited function for such an elaborate definition.

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if there is no fraud then the insurers have a proportional remedy resting upon what they would have done had the statement been accurate. So the conundrum is whether the 2012 Act punishes the assured with the sanction of avoidance for fraud by his agent,33 or whether it is truly based upon the assured’s personal state of mind. All would have been well if the 2012 Act had incorporated the equivalent of section 31 of the Australian Insurance Contracts Act 1984, but that possibility was steadfastly opposed by the insurance industry and not seriously pursued in the reform process. Although the point awaits resolution, it might be thought that construing section 3(2)(e) as reversing the common law rule that an assured is responsible for the misstatements of his agent gives it a burden too heavy for it to bear.

IV.  Failure to Pass on Information Disclosed by the Assured The second situation is that in which the assured has properly disclosed information to the broker, but the broker has failed to communicate it to the insurer. Consistently with the overriding rule that the broker is the agent of the assured, the common law position is that information received by the broker is not deemed to have been received by the insurer.34 In its original form, section 19(b) of the UK Marine Insurance Act 1906, purporting to codify the common law, provided that ‘where an insurance is effected for the assured by an agent, the agent must disclose to the insurer … every material circumstance which the assured is bound to disclose, unless it come to his knowledge too late to communicate it to the agent.’ The duty of disclosure is that of the broker and not the assured, and it relates to information that the assured would have been obliged to disclose but for the use of a broker: the concluding words refer back to eighteenth and nineteenth century conditions whereby communication of facts known to the assured in time for the broker to place the cover was not always practicable. The section has the peculiarity that the imposition of the duty on the broker suggests that failure to disclose is a breach by the broker towards the insurer, so that the insurer still has to pay the claim but has a right of recourse against the broker. However, the pre-1906 cases did not even hint at that possibility, and all proceeded on the basis that the insurer could simply avoid the policy, leaving the assured to his remedies against the broker for failing to pass on the relevant information.

33  And note that fraud is the very situation in which a broker’s professional indemnity policy will not provide coverage in respect of any claim by the assured against the broker. 34  Roche v Roberts (1921) 9 Ll LR 59; Lyons v Bentley (1944) 77 Ll LR 335; O & R Jewellers Ltd v Terry [1999] Lloyd’s Rep IR 436; Winter v Irish Life [1995] 2 Lloyd’s Rep 274; Hazel v Whitlam [2005] Lloyd’s Rep IR 168; Lewis v Norwich Union Healthcare Ltd [2010] Lloyd’s Rep IR 198.

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Section 19(b) remains intact for all forms of insurance in most common law jurisdictions, but it has been modified in the UK, Australia and New Zealand. As far as the UK is concerned, section 19(b) has been entirely repealed. In consumer cases, the 2012 Act has abolished disclosure and so the point no longer arises. For business insurance, section 19(b) has been replaced by section 3 of the Insurance Act 2015 with a duty of disclosure imposed upon the assured applicable to all matters that the assured knows or ought to know. There is no longer a duty imposed upon the broker and the section operates whether or not a broker is used. The law for business insurance is in substance unchanged, but is more logically drawn in that the duty remains that of the assured. In Australia, the Marine Insurance Act 1909, section 25, remains in place for commercial marine policies only. However, the position is different for other forms of insurance. Most importantly—and leaving aside statutory insurances (and, arguably, reinsurance)—in the case of a non-marine policy or a consumer marine policy the governing rules are set out in the Insurance Contracts Act 1984. Somewhat surprisingly, there is nothing in the 1984 Act that deals with placement by brokers. In parallel with the Insurance Contracts Act 1984, Australia also passed the Insurance (Brokers and Agents) Act 1984, now the Corporations Act 2001, but it was silent on this issue. The Insurance Contracts Act 1984 speaks only of disclosure by the assured, and it must be assumed that an assured who made full disclosure to the broker only to find that the information had not been passed on would be treated as not having made the disclosure in the first place. The effect on the policy under section 28 of the 1984 Act remains uncertain, given the unresolved issue discussed above as to whether the relevant state of mind is that of the assured or the broker, but the assured would doubtless have a remedy against the broker for any shortfall in recovery from the insurer. As far as New Zealand is concerned, the position of brokers has been changed by section 10 of the Insurance Law Reform Act 1977. The section, as noted earlier, was designed to reverse the common law rule that an agent of the insurer who completes the proposal for the assured is morphed into the amanuensis of the assured. To that end, section 10(1) reverses the agency rule by deeming the agent to be that of the insurer, and section 10(2) goes on to state that: ‘An insurer shall be deemed to have notice of all matters material to a contract of insurance known to a representative of the insurer concerned in the negotiation of the contract before the proposal of the insured is accepted by the insurer.’ Section 10(3) then provides that: In this section the term representative of the insurer includes any servant or employee of the insurer and any person entitled to receive from the insurer commission or other ­valuable consideration in consideration for such person’s arranging, negotiating, soliciting, or procuring the contract of insurance between a person other than himself and such insurer. (emphasis added)

The anomalous common law rule that the broker is paid by the insurer was noted above, and it is clear that section 10 was designed to include brokers. The C ­ ontracts

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and Commercial Law Reform Committee, whose report was implemented by the 1977 Act, put the matter in this way: We recognise that there are special considerations relating to professional insurance brokers who are instructed by the insured. Insurers, too, rely on their skill. The question is, who as between insured and insurer should take the risk of default or lack of skill on the part of the broker. There are arguments each way. In the end we have been deterred from excluding brokers [from] the definition of ‘representative of the insurer’ by the difficulty of arriving at a definition of a broker that does not leave such a large loophole in the proposed reform.35

It was initally decided by the New Zealand courts that section 10 was really designed to deal with an insurer’s salesforce, and not brokers, so that information known by or disclosed to a broker was not imputed to the insurer.36 However, in later cases that interpretation was rejected, and the balance of authority is now clearly in favour of the proposition that what is known to the broker is deemed to be known by the insurer.37

V.  Failure to Pass on Information Known Only to the Broker The final situation is where the information withheld from the insurer is known only to the broker and not to the assured.

A.  The Common Law Rule The common law rule, enshrined in the marine insurance legislation of the various jurisdictions under consideration—although now repealed in England—is contained in what was section 19(a) of the 1906 Act. It provides that: Where an insurance is effected for the assured by an agent, the agent must disclose to the insurer … 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.”

35 Contracts and Commercial Law Reform Committee Aspects of Insurance Law (1 July 1975), para [27]. 36  Hing v Security & General Insurance Co (NZ) Ltd (1985) 4 ANZ Insurance Cases 60-696 (HC). 37  Helicopter Equipment Ltd v Marine Insurance Co Ltd [1986] 1 NZLR 448 (HC); Kane Fisheries Ltd v Universal Guarantee Assurance Co Ltd (in liq) HC Christchurch A103/83, 2 July 1986; Napier Discount Meats Ltd v Commercial Union General Insurance Co Ltd (1992) 7 ANZ Insurance Cases 61-160 (HC); Gaunt v Gold Star Insurance Co Ltd [1991] 2 NZLR 341 (HC); Ruston Investments Ltd v Nice HC ­Auckland CP533/93, 6 September 1994.

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The common law rule emanates from a series of cases decided in the latter half of the nineteenth century. It was held in Blackburn Low & Co v Vigors that information not known to the assured, but in the possession of a producing broker—who thus had no responsibility for placing the risk—was not imputed to the assured.38 In that case, producing brokers in Glasgow were instructed to secure reinsurance for the insurers of an overdue vessel. The brokers became aware that the vessel was lost, but did not communicate that information to London placing brokers appointed to effect the placement. The House of Lords held that the policy could not be set aside for non-disclosure. The outcome was codified in section 18(2) of the 1906 Act, to the effect that an assured was required to disclose only what he actually knew or ought to have known in the course of his business.39 However, their Lordships were of the view that the position would have been different had the London placing broker been aware of the information: in that situation disclosure would have been required, either40 because the broker owed a duty to the underwriters to communicate material facts to them,41 or because the placing broker’s knowledge was imputed to the assured42 or at least deemed to be known to the assured.43 Subsequently, in Blackburn Low & Co v Haslam, the ­Glasgow brokers were instructed to insure, and used London agents to do so on their behalf.44 In this case, the failure of the reinsured to disclose the non-arrival of the vessel had been the direct responsibility of the Glasgow brokers who had been instructed to insure, and for this reason their default was deemed to be the default of the assured. The decision in the reinsurer’s favour did not involve attribution of knowledge, but concerned only the duty of brokers to reinsure and thus to disclose material facts to the reinsurer. The comments in Vigors and the ruling in Haslam formed the basis of section 19(a). Although there have been voices in support of attribution as the reason why there is a duty of disclosure,45 it is now clear that section 19(a)

38 

Blackburn Low & Co v Vigors (1887) 12 App Cas 531. For what an assured ought to have known in the course of business, see Proudfoot v Montefiore (1867) LR 2 QB 511, where the information was in the hands of a shipping agent, and it was held to have been imputed to the assured for disclosure purposes. There are numerous decisions on the imputation of knowledge to the assured when held by an agent other than a broker. The effect of them was summarised in Simner v New India Assurance Co Ltd [1995] LRLR 240, namely that imputation operates where: (1) the assured was reliant upon the agent for information, in which case the agent would be an ‘agent to know’; or (2) the agent was in a predominant position in relation to the assured such that the agent’s knowledge was that of the assured. 40 In Lynch v Dunsford (1811) 14 East 494 Lord Ellenborough talked of the knowledge of the assured and the placing broker being ‘coupled’, yet another explanation of the common law rule. 41  Lord Macnaghten. 42  Lords Halsbury, Watson and Fitzgerald. 43  A distinction drawn in respect of the majority view in Blackburn Low by HH Judge Diamond QC in Simner v New India Assurance Co Ltd (n 39) Judge Diamond QC. 44  Blackburn Low & Co v Haslam (1888) 21 QBD 144. 45  Deutsche Ruck v Walbrook [1995] 1 Lloyd’s Rep 153. 39 

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involves a distinct duty of disclosure on the part of the broker46 and imputation of knowledge to the assured is not involved. Were it otherwise, there would have been no need for section 19(a), as imputation would fix the assured with the relevant knowledge under section 18.47

B.  Uncertainties Surrounding the Common Law Rule Section 19(a) remains good law in common law jurisdictions other than the UK and New Zealand, and in Australia for commercial marine insurance. But its operation is far from straightforward. Three particular issues have arisen. First, what is the meaning of the phrase ‘agent to insure’ in section 19(a)? It will be recalled that an agent is required to disclose material known to himself, but when the agent’s status is that of ‘agent to insure’ then the knowledge of the agent is deemed to include ‘every circumstance which in the ordinary course of business ought to be known by, or to have been communicated to, him.’ It appears from the Blackburn Low decisions that only a placing broker is the agent to insure for disclosure purposes under section 19(a), and that the knowledge of other agents is only relevant if it is imputed to the assured under section 18(1) on the basis that the assured ought to have known that information in the ordinary course of his business. However, that was thrown into doubt by two Court of Appeal cases, argued concurrently but giving rise to separate judgments, PCW Syndicates v PCW Reinsurers48 and Group Josi Re v Walbrook Insurance Co Ltd.49 The facts were similar and raised much the same issues. The reinsured had employed an agent to accept insurance risks on its behalf and then to arrange reinsurance for those risks. The agent had committed a fraud against the reinsured. The broker employed by the underwriting agent had no idea of the fraud. The question was whether the underwriting agent was under a section 19(a) duty to disclose its wrongdoing to the reinsurers. Two entirely different reasons were given by the Court of Appeal for rejecting any duty of disclosure: Staughton LJ held that facts relating to the agent’s fraud against its principal—by definition unknown to the principal—were not material; and Saville LJ held that an underwriting agent was not an ‘agent to

46 See HIH Casualty & General Insurance Ltd v Chase Manhattan Bank [2003] UKHL 6, where a clause excluding the duty of the assured to disclose material facts was held not to extend to the broker’s separate duty unless so specified. 47  See Hoffmann LJ in El Ajou v Dollar Land Holdings plc (No 1) [1994] 2 All ER 685 and in Société Anonyme d’Intermediaires Luxembourgeois (SAIL) v Farex Gie [1995] LRLR 116. For other cases confirming the point, see: PCW Syndicates v PCW Reinsurers [1996] 1 WLR 1136; Group Josi Re v Walbrook Insurance Co Ltd [1996] 1 WLR 1152; Kingscroft Insurance Co Ltd v Nissan Fire & Marine Insurance Co Ltd (No 1) [1999] Lloyd’s Rep IR 371. 48  PCW Syndicates v PCW Reinsurers (n 47). 49  Group Josi Re v Walbrook Insurance Co Ltd (n 47).

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insure’. Confusingly, Rose LJ agreed with both judgments. It can be said, therefore, although perhaps only by stretching the doctrine of precedent, that a majority of the Court of Appeal was in favour of the notion that section 19(a) was confined to the placing broker, a conclusion that makes practical sense in that only the placing broker deals with the insurer but one that does not square with the Blackburn Low decisions. Later English cases have not resolved the problem.50 Second, exactly what information in the possession of the agent to insure has to be disclosed to the insurer? There is nothing in the pre-1906 authorities to indicate any restriction on the information other than it has to be material to the risk. However, in PCW Syndicates v PCW Reinsurers51 Staughton LJ expressed the view that ‘an agent to insure is required by section 19 to disclose information which he has received other than in the character of agent for the insured’.52 Hoffmann LJ in El Ajou v Dollar Land Holdings plc (No 1)53 disagreed: ‘an insurance policy may be avoided on account of the broker’s failure to disclose material facts within his knowledge, even though he did not obtain that knowledge in his capacity as agent for the insured.’ Thus, in the view of Hoffmann LJ, the only limit is materiality, and that approach was repeated by him in Société Anonyme d’Intermediaires ­Luxembourgeois (SAIL) v Farex Gie.54 Here, brokers appointed by a reinsured to place reinsurance initially went to the market to secure retrocession cover, armed with which the task of placing reinsurance would have been much easier. The retrocessionaires purported to avoid the retrocession on the ground that their underwriting agent had exceeded his authority in accepting the risk, and the reinsurers sought to avoid the reinsurance for non-disclosure of the fact that the retrocession cover was at risk. The reinsurers’ argument was rejected on the ground that the brokers were unaware of that possibility and thus were not in a position to disclose it, but Hoffmann LJ confirmed that ‘the insured and his agent are under a duty to disclose every material circumstance of which they have knowledge, irrespective of the way in which it was acquired’ and ‘the agent’s duty [was] to disclose material circumstances known to him in any capacity’ even though it would be purely coincidental if a broker placing reinsurance had knowledge of material facts relating to retrocession. Saville LJ agreed: ‘the duty on the agent is not confined to knowledge

50 In GMA v Unistorebrand International Insurance AS [1995] LRLR 333 Rix J proceeded on the assumption that the knowledge of an intermediate agent fell within s 19(a), a view echoed by Colman J in Baker v Lombard Continental Insurance plc (unreported, EWHC, 1996). In ERC Frankona Reinsurance v American National Insurance Co [2005] EWHC 1381 (Comm) Andrew Smith J recognised the potential objections to a ruling that the knowledge of an intermediate agent had to be disclosed, but held that he was bound by the majority rulings in the two Court of Appeal decisions. 51  PCW Syndicates v PCW Reinsurers (n 47). 52  ibid 1147. The authorities relied upon Staughton LJ for this wider view—Espin v Pemberton (1859) 3 De G & J 547 and Cave v Cave (1880) 15 Ch D 639—were cases involving fraud by the agent against the principal, to which different princples apply. See below. 53  El Ajou v Dollar Land Holdings plc (No 1)(n 47). 54  Société Anonyme d’Intermediaires Luxembourgeois (SAIL) v Farex Gie (n 47).

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acquired from the assured but extends to knowledge otherwise acquired’. All of this leaves open the question whether confidential information that the broker has obtained from a relationship with an entirely different client, but which is in some way relevant to the risk to be placed, falls within section 19(a). Third, there is the problem of the broker’s fraud against the assured. In Re Hampshire Land Co two companies, Portsea and Hampshire Land, shared four common directors and a company secretary.55 Hampshire Land’s articles of association imposed a borrowing limit of £10,000. Portsea loaned some £30,000 to Hampshire Land, which it sought to recover. The Court of Appeal held that it was entitled to do so: the company secretary’s knowledge of the limitations on the borrowing powers of Hampshire Land was not imputed to Portsea. Although the facts were highly unusual, Re Hampshire Land is generally taken to have decided that if an agent has committed an act of fraud upon his principal, any knowledge of that fraud is not to be imputed to the principal.56 That is because a principal cannot be expected to be aware of his agent’s fraud, given that the fraud would only be successful if it was hidden from the principal. But how does this apply to section 19(a)? There are two separate issues here. The first is whether Re Hampshire Land trumps section 19(a). Staughton LJ, with whom Rose LJ agreed, in PCW Syndicates v PCW Reinsurers,57 felt that Re Hampshire Land prevailed and that disclosure was not required, but that point aside it could not be said that an agent perpetrating a fraud against his principal had ceased to be an agent by such conduct. The second is whether the fraud has to be directed against the assured. Typically, in an insurance case, the fraud of a placing broker will take the form of withholding material information from the insurer in the sure knowledge that, with full disclosure, the risk would be refused. Rix J in Arab Bank plc v Zurich Insurance Co58 regarded fraud of that type, while aimed primarily against the insurer, as rendering the assured an indirect target of the fraud and thus entitling the assured to rely upon the principle in Re Hampshire Land. So, a case dealing only with the conflicting duties owed by a company secretary has been converted into one which precludes an insurer from avoiding a policy for non-disclosure of information deliberately withheld from it by the placing broker.59

55 

Re Hampshire Land Co [1896] 2 Ch 743. Watts, ‘Imputed Knowledge in Agency Law—Excising the Fraud Exception’ (2001) 117 LQR 300; P Watts, ‘Auditors and Corrupt Clients’ (2009) 125 LQR 38. 57  PCW Syndicates v PCW Reinsurers(n 47). 58  Arab Bank plc v Zurich Insurance Co [1999] 1 Lloyd’s Rep 262. 59  Note that in Moore Stephens v Stone & Rolls Ltd [2008] EWCA Civ 644 the Court of Appeal held that Arab Bank was wrongly decided on the indirect fraud issue, and that the fraud had to be directed against the principal rather than a third party before in order to prevent knowledge of it to be imputed to the principal. However, a bare majority of the House of Lords on appeal in Moore Stephens v Stone & Rolls Ltd [2009] UKHL 39 reversed the Court of Appeal’s decision on the ground that Re Hampshire Land had no application to one-man companies, and that decision has itself been undermined by a later Supreme Court ruling in Jetivia v Bilta [2015] UKSC 23, leaving—at least in terms of strict precedent—Rix J’s decision still standing. 56  P

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VI.  Reforms in Common Law Jurisdictions A.  Reform in Australia As far as Australian non-commercial marine insurance and all other forms of insurance falling within the Insurance Contracts Act 1984 are concerned, the law relating to disclosure by a broker is uncertain. Section 21 of the 1984 Act required the assured to disclose anything that the assured ‘(a) knows to be a matter relevant to the decision of the insurer whether to accept the risk and on what terms; or (b) a reasonable person in the circumstances could be expected to know to be a matter so relevant.’ The High Court in Permanent Trustee Australia Ltd v FAI General Insurance Company Ltd held that ‘the word “knows” in the requirement that the matter is one that the insured “knows” meant considerably more than “believes” or “suspects” or even “strongly suspects”.’60 Plainly section 21(1)(a) cannot apply to an assured who is unaware of facts known to his broker. The relevant provision here is section 21(1)(b). There is an initial difficulty as to whether the test is objective or subjective, a question unclear before the amendment of section 21 by the Insurance Contracts Amendment Act 2013 and now equally unclear, the phrase in the revised wording ‘every matter known to him that a reasonable person in the circumstances could be expected to know to be a matter so relevant’ being tantalisingly ambiguous. But that is not the main problem. If the assured did not know, and objectively or subjectively was not capable of reasonably knowing, information held by his broker, is the assured to be treated as having failed to disclose that information? The issue was discussed, inconclusively, by the High Court in Permanent Trustee Australia Ltd v FAI General Insurance Company Ltd.61 The assured had layered professional indemnity insurance, FAI participating in the first and third excess layers. On renewal, the assured instructed its brokers to find other insurers in place of FAI. At the time of the expiry of the policy, renewal arrangements had not been made, and the brokers secured a 30-day extension from FAI without disclosing that FAI would not be involved in the renewal. The assured sought to notify a claim against it in the period of temporary cover, and FAI claimed that it would not have agreed to the extension had it been informed that it was to be excluded from the renewal. FAI’s non-disclosure defence was defeated by a 3:2 majority ruling that the matter withheld did not relate to the ‘risk’ run by FAI and was thus not relevant for disclosure purposes. The High Court was also split on the relevance of the intervention of the brokers. McHugh, Kirby and Callinan JJ said that ‘that the

60  Permanent Trustee Australia Ltd v FAI General Insurance Company Ltd [2003] HCA 25, at para [30]. 61 ibid.

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knowledge of which [ICA 1984, section 21(1)] speaks, either actual or constructive, is the knowledge of the insured, and not of any insurance ­intermediary’.62 By contrast, G ­ ummow and Hayne JJ were of the view that the delegation of placement meant the broker ‘was bound to disclose what it knew, however it acquired that ­knowledge’.63 What will be here appreciated is that the High Court was not addressing knowledge of the facts themselves, because that was in the possession of both parties, but rather knowledge of their relevance to the insurer. Had the decision of the brokers to exclude FAI been theirs alone, and not known to the assured, there is no indication as to whether the High Court would have regarded that knowledge as disclosable either because it was in the deemed possession of the assured, because it was imputed to the assured or because the assured was independently required to disclose it. The wording of the 1984 Act probably precludes the last possibility, but the others remain open. The narrow issue in ­Permanent Trustee was, assuming that the assured had knowledge of the facts themselves, whether knowledge of their relevance was imputed from the broker to the assured. The minority view found favour, obiter, with Gyles J in Tosich v Tasman Investment Management Ltd64 and, more recently, with McMillan J in Kalabakas v Chubb Insurance Company of Australia Ltd.65 In the latter case it was held that the assured’s knowledge of facts relating to the condition of his house had to be disclosed on the renewal of the policy because a reasonable person would have known that they were relevant to the insurer in question and also because the broker actually knew that that was the case.

B.  Reform in New Zealand In New Zealand, the position is seemingly straightforward. Under section 10(2) of the Insurance Law Reform Act 1977, here repeated for convenience: An insurer shall be deemed to have notice of all matters material to a contract of ­insurance known to a representative of the insurer concerned in the negotiation of the contract before the proposal of the insured is accepted by the insurer.

Given that a broker is a representative of the insurer, the obligation of the broker to disclose material facts to the insurer under section 19(a) of the Marine Insurance Act 1908 (NZ) cannot operate, because such facts in the broker’s possession are deemed to be known to the insurer. Nice questions may arise as to how these provisions apply to a producing broker, given that any commission is presumably paid to the placing broker only, so that a producing broker is paid by the placing

62 

ibid, para [30]. ibid, para [85] (emphasis added). 64  Tosich v Tasman Investment Management Ltd [2007] FCA 377. 65  Kalabakas v Chubb Insurance Company of Australia Ltd [2015] VSC 705. 63 

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broker66 and is arguably outside section 10(2) of the 1977 Act. However, that issue has yet to emerge as a practical problem.

C.  Reform in the UK As far as the UK is concerned, section 19 of the Marine Insurance Act 1906 has been repealed in its entirety, leaving the curious position that the UK parent legislation has been changed whereas its progeny elsewhere in the common law world are still for the most part thriving. The troublesome concept that the broker owes a distinct duty of disclosure to the insurer has been repealed, and replaced with the rule that the duty of fair presentation—incorporating the duty of disclosure—is a matter for the assured alone. Under section 3(4), an assured must disclose what he knows or ought to know. An individual under section 4(2)(a) knows what he actually knows and also, under section 4(2)(b), what is known to one or more of the individuals who are responsible for the insured’s insurance. Similarly, a corporate assured under section 4(3) knows what is known to one or more of the individuals who are either (a) part of the insured’s senior management, or (b) responsible for the insured’s insurance. So, the key is determining who is an individual responsible for the assured’s insurance. That question is answered by section 4(8)(b): [A]n individual is responsible for the insured’s insurance if the individual participates on behalf of the insured in the process of procuring the insured’s insurance (whether the individual does so as the insured’s employee or agent, as an employee of the insured’s agent or in any other capacity).

This definition catches employees and also external agents such as brokers. A producing broker plainly participates on behalf of the insured, but what about a placing broker? The English cases are clear that a placing broker has no contractual relationship with the assured and owes no duty of care in tort, and is the sub-agent of the producing broker. The producing broker owes non-delegable duties to the assured, and it follows that the placing broker acts for the producing broker and not the assured.67 Can it then be said that a placing broker is an individual who ‘participates on behalf of ’ the assured? If not, section 19(a) has been repealed and not replaced at least as it applies to a placing broker who has no relationship with the assured: it will be recalled that under section 19(a) the dispute concerned the producing broker, not the placing broker. Assuming that the knowledge of the broker is to be treated as that of the assured, what knowledge is here involved? Does it apply to market information that the

66  Prentis Donegan & Partners Ltd v Leeds & Leeds Co Inc [1998] 2 Lloyd’s Rep 326; Crema v Cenkos Securities [2010] EWCA Civ 1444. 67  Of the many authorities, see, most recently, Involnert Management Inc v Aprilgrange Ltd (n 19).

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assured could not possibly have known? The answer is, seemingly, yes, but subject to the restriction in section 4(4): an assured is not … taken to know confidential information known to an individual if— (a) the individual is, or is an employee of, the insured’s agent; and (b) the information was acquired by the insured’s agent (or by an employee of that agent) through a business relationship with a person who is not connected with the contract of insurance.

This resolves the question not answered by the common law as to confidential information, but raises the question why such a limitation exists: would it not suffice for the information to be obtained by the broker in a business relationship with a third party, whether or not it is confidential? It may be added that there is a further restriction, in that by section 6(2) assured is not treated as knowing where there is fraud on the assured by an individual responsible for the assured’s insurance. This is an attempt to preserve the rule in Re Hampshire Land, while recognising that nobody is completely clear as to what that rule actually is. The issue discussed above, whether Re Hampshire Land applies where the assured is simply the indirect target of the fraud, the direct target being the insurer, remains unanswered.

17 Conclusions: (Utmost) Good Faith and Pre-contractual Duties Globally in the Twenty-first Century YONG QIANG HAN It is necessary to rethink (utmost) good faith in insurance law in the second decade of the twenty-first century. This is not just because the year 2016 was the 250th anniversary of its perceived origin in the landmark English insurance law case Carter v Boehm. It is also because almost globally insurance law in this respect has undergone significant changes through law reform in the first decade of this century and because the English insurance law too has, belatedly, completed its reform in recent years. Ultimately, such changes and reforms were driven by incremental socio-economic development and the relatively rapid technological advances in the societies in which the insurance industry operates. The current law is the result of but still based on the law in the past 250 years or more. What might the law be in the next 50 years or by the end of this century? This one can hardly tell now, but it helps to look back, look around and look forward when we rethink (utmost) good faith and pre-contractual duties not only from the perspectives of common law but also of civil law jurisdictions and the mixed legal systems.

I.  Rethinking Utmost Good Faith We often speak and write of the ‘duty of utmost good faith’ in insurance law. Strictly speaking and without being pedantic, however, it is perhaps somewhat inaccurate to use this phraseology as an equivalent of or alternative reference to the pre-contractual duty of disclosure. This is primarily because, although a policyholder’s pre-contractual duty is the epitome of utmost good faith in insurance law, they are not the same. The Marine Insurance Act 1906 sections 18–20 are not exhaustive listings of its section 17 requirement of utmost good faith for

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­insurance contracts.1 It is hardly disputed that the requirement of utmost good faith is broader than pre-contractual duties in that the requirement is binding on both parties pre-contractually and post-contractually. The distinction is not pedantic, because the understanding that the requirement of utmost good faith is not the same as the pre-contractual duty (of disclosure) is relevant not only to the legal doctrines or rules related thereto, but also to pinpointing the ‘obscure’2 origin of the requirement and/or pre-contractual duty of disclosure in insurance law.

A.  The Obscure Origin: Common Law and Roman Law Had the requirement of utmost good faith and the pre-contractual duty of disclosure been the same, then it would be legitimate to maintain3—as is pointed out by Bennett4—that, in a weak sense however, the origin of utmost good faith (and of duty of disclosure) was the common law case Seaman v Fonereau (1742) which concerned pre-contractual non-disclosure.5 In this sense (only), ‘Lord Mansfield [in Carter v Boehm] restated the doctrine of utmost good faith as a doctrine of common law’.6 Although this pre-Carter v Boehm case did not refer literally to (utmost) good faith which is not identical with pre-contractual disclosure, their close inter-relatedness and particularly the incorporation of the duty of disclosure into the requirement of good faith can rightly justify Seaman v Fonereau7 (concerning non-disclosure) as an ‘earlier [authority] on utmost good faith’.8 That being said, it is not an earlier authority of utmost good faith. This is because the duty of disclosure and the requirement of utmost good faith are not the same or identical. As long as one accepts this principled distinction, Carter v Boehm is not really the origin of the requirement of utmost good faith in insurance law though it can be rightly thought of as the modern origin of a policyholder’s p ­ re-contractual duty of disclosure. In the latter sense, Carter v Boehm is still a landmark case in insurance law. But one can find that what was really intended in Carter v Boehm by Lord Mansfield, ie that the requirement of good faith should govern all ­contracts, has not been accepted in common law; in contrast, as Hasson argued,9

1  Manifest Shipping Co Ltd v Uni-Polaris Shipping Co Ltd (‘The Star Sea’) [2001] 1 All ER (Comm) 193, 198, 209, 221; see also ERH Ivamy, Chalmers’ Marine Insurance Act 1906 10th edn (London, ­Butterworths, 1993), citing Stephenson LJ in Container Transport International Inc v Oceanus Mutual U/W Association (Bermuda) Ltd. [1984] 1 Lloyd’s Rep 476 (CA), 525. 2  J Cartwright, Misrepresentation, Mistake and Non-Disclosure 4th edn (London, Sweet & Maxwell, 2017) [17.05]. 3  Ch 6. 4  H Bennett, The Law of Marine Insurance 2nd edn (Oxford, Oxford University Press, 2006) 105. 5  Seaman v Fonerau (1742) 2 Str 1183; 93 Eng Rep 1115 (1378-1865). 6  Bennett (n 4) 105. 7  Seaman v Fonerau (n 5). 8  Bennett (n 4) 105, emphasis added. 9  R Hasson, ‘The Doctrine of Uberrima Fides in Insurance Law—A Critical Evaluation’ (1969) 32 MLR 615, 618 and 632–33. See Chapter 4 as republished in this book.

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what was not intended by the learned Lord, ie a fairly onerous pre-contractual duty of disclosure for policyholders, subsequently became an entrenched part of English insurance law before it was partly reformed in recent years. It seems that Seaman v Fonereau (1742) or Carter v Boehm (1766) is not strictly the common law origin of the requirement of utmost good faith in insurance law.10 Instead, as has been pointed out in MacGillivray on Insurance Law,11 the first insurance law case referring to uberrima fide literally, by Buller J (Lord Mansfield’s protégé), was Wolff v Horncastle (1798):12 ‘From the language of the two statutes, as well as the consideration that we are construing a contract uberrimae fide; viz. a policy of insurance, we must avoid bearing harder upon the Plaintiffs than is absolutely necessary.’13 From this statement it can be inferred that prior to Wolff v Horncastle an insurance contract had already been recognised as a contract requiring utmost good faith. But this case gave no earlier authority for the recognition as such, nor did it cite Carter v Boehm as the authority or the origin of the requirement of utmost good faith. It did not explain at all what ‘utmost’ good faith really meant. But this should not be surprising, because the case itself did not concern the ­pre-contractual duty of disclosure: The issue in this case was whether the policy in question was valid under the Marine Insurance Act 1788 (28 Geo 3, c 56), and whether the plaintiffs had insurable interests to a specified amount. Therefore, tracing the origin of utmost good faith to Wolff v Horncastle does not really help much in the intellectual efforts to understand it. On the matter of origin of utmost good faith, it can be recalled14 that in France the existence of the policyholder’s pre-contractual informational duty can be traced back to at least a century before Carter v Boehm in the second part of a treatise published in 1647 titled The Guidon de la Mer. According to this treatise, policyholders were required to provide specific information according to the kind of insurance. If utmost good faith and pre-contractual duty of disclosure are the same, again it could be said that the principle of utmost good faith had its origin in civil law tradition, in which however there has not been such a third category of (utmost) good faith. Regarding the purported origin in civil law, an uncommon but still noteworthy argument is that ‘the modern doctrine of uberrima fidei under insurance contracts originated in Roman law’.15 However, this argument can hardly be substantiated with first-hand resources in Roman law. The evidence given for this argument is

10 

Seaman v Fonerau (n 5). Legh-Jones, J Birds and D Owen, MacGillivray on Insurance Law 8th edn (London, Sweet & Maxwell, 2008) 435 fn 1; see also J Birds, B Lynch and S Milnes, MacGillivray on Insurance Law 13th edn (London, Sweet & Maxwell, 2015) 453, fn 4. 12  Wolff v Horncastle (1798) 1 Bos. & Pul 316. 13  ibid, 322. 14  See the French chapter (Chapter 9) in this book. 15  R Davis, ‘The Origin of the Duty of Disclosure under Insurance Law’ (1991) 4 Insurance Law Journal 71, 74. 11  N

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Story CJ’s statement that Roman law ‘required the utmost good faith in all cases of contracts involving mutual interests.’16 Nevertheless, according to the lead ­judgment of Lord Hobhouse in The Star Sea,17 the phrases ‘utmost good faith’ and ‘uberrimae fidei’ are the result of lexicological ‘coining’,18 and that mention made by Storey CJ—and also similar ones by others—was just one of the notable examples that the two ‘phrases not used by Lord Mansfield … only seem to have become current in the 19th Century.’19 That is to say, Story’s reference to ‘the utmost good faith’ cannot be regarded as close to the primary source for its origin in Roman law or secondary source in Roman jurists’ treatises. It is also contestable that use of uberrima fidei or utmost good faith ‘may have been inspired by the use of similar language in Book IV of the Codex of Justinian (C. 4.37.3) in relation to the contract of partnership.’20 However, in this regard what can be found in C 4.37.3 of the Codex of Justinian (translated and annotated by Fred H Blume)21 is ‘good faith’ only.22 That being said, the Codex of J­ustinian did make one mention of ‘utmost good faith’23 in its C 4.20.15 paragraph 5 (­section 15, Title 20 De Testibus, or concerning witnesses, Book IV), part of which reads that ‘a person who demands proof of origin, must, before everything else, swear that he contends in the utmost good faith that his opponent is not his blood relative.’ If this translation is free from doubt,24 the reference therein to utmost good faith is in a totally different context—it does not concern any kind of contract at all. What is more, for this only reference to ‘utmost good faith’, the Codex of Justinian did not explain at all whether it would be really different from ‘good faith’ which is frequently referred to. Therefore it could be reasonably thought that

16 J Story, Commentaries on Equity Jurisprudence 6th edn (Boston, Little Brown & Co, 1853) 246 [211]. 17  Manifest Shipping Co Ltd v Uni-Polaris Shipping Co Ltd (‘The Star Sea’) [2001] 1 All ER 743; [2001] UKHL 1. 18  Manifest Shipping Co Ltd v Uni-Polaris Shipping Co Ltd (‘The Star Sea’) [2001] UKHL 1 [44] (per Lord Hobhouse). 19 ibid. 20 ibid. 21 F Blume (trans), The Codex of Justinian (A New Annotated Translation, with Parallel Latin and Greek Text; Cambridge, Cambridge University Press, 2016). It was translated by Fred H Blume, attorney and Wyoming Supreme Court Justice, from about 1920 to 1952. For more introduction and its reliability, see www.uwyo.edu/lawlib/blume-justinian/ajc-edition-2/. 22 ‘[A] contract of partnership is pre-eminently one of good faith’. For the full text of C.4.37.3 online, see www.uwyo.edu/lawlib/blume-justinian/ajc-edition-2/books/book4/book%204-37rev.pdf. 23  There are another two mentions thereof, but they are not part of the original Codex of Justinian. Rather they are made by Blume the English translator in his notes to C.4.49.2 concerning contract of purchase and sale, and to C.4.35.10 concerning contract of agent or mandate. 24  However, the Latin translation of C.4.20.15 together with the Greek original has no reference to use the terms fides, bona fides, or uberrima fides. See Codex Iustinianus, Recognovit [edited] Paulus Krueger in Corpus Iuris Civilis Volumen secundum [vol 2], (editio stereotypa sexta 6th edn) (Berlin, apud Weidannos, 1895) 159. I would like to thank Professor Geoffrey MacCormack for help on this point. The Latin translation can also be found in any edition of the standard (Mommsen-Krueger) version of the Corpus Iuris Civilis. A digitalised version of the 1892 edition of Codex Iustinianus edited by Krueger is available online: https://archive.org/details/corpusiuriscivil02krueuoft.

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the single reference to ‘utmost good faith’ in the Codex of Justinian is not different in substance from ‘good faith’, a requirement that pervades therein. It is therefore not surprising that senior English judges, citing and agreeing with the South ­African judgment25 (discussed in Chapter 13 of this book), have found that ‘The best view seems to be that it [ie uberrimae fidei] had been unknown to Roman law and had no equivalent in Roman law.’26 According to Lord Clyde, he has ‘not been able to trace [the origin of uberrimae fidei]. The concept of uberrima fides does not appear to have derived from civil law’.27 Etymologically, it is clear that the phrase uberrimae fides was not known in Roman law at all—neither as an independent legal stanadard, nor as an incidence of bona fides. Furthermore, ­uberrimae fides was also unknown by the canonists and the civilian jurists. What can be said about the term, is that it was a convenient Latin translation for a legal standard that was described as ‘greatest good faith’, ‘the most abundant good faith’, [and etc] in English courts and legal writings in the nineteenth century.28

The Latinisation seems to have rendered it ‘more impressive sounding’.29 It is more certain that it had no origin in Roman law than it had origin in English common law. But do we still need to trace its origin? Although it might be necessary in ­common law jurisdictions for the purpose of finding out whether it originated from ­common law or from equity—and in Chapter 4 the origin is found to be in common law—because that might be relevant to the remedies available to ­policyholders for the insurer’s breach of utmost good faith,30 it is certainly unnecessary for civil law jurisdictions to trace its origins, at least unnecessary in the common-law manner. However, with the Insurance Act 2015 (UK) abolishing avoidance as the only remedy under the pre-reform Marine Insurance Act (MIA) 1906 section 17, in principle there is no statutory obstacle—but it is still ­difficult31—to award damages for insurer’s breach of utmost good faith whether or not its origin was in equity which per se could be a bar to damages. What is more important than the origin of utmost good faith is its meaning. Whatever the origin, if it did not manifest the meaning of uberrima fidei and particularly its difference (if any) from good faith, such an origin would only be valuable as a mere historical fact about an important aspect of insurance law.

25 

Mutual and Federal Ins Co v Oudtshoorn Municipality 1985 (1) SA 419, 432 (per Joubert JA). Manifest Shipping Co Ltd v Uni-Polaris Shipping Co Ltd (‘The Star Sea’) [2001] 1 All ER 743; [2001] UKHL 1 [44] (per Lord Hobhouse). 27  Manifest Shipping Co Ltd v Uni-Polaris Shipping Co Ltd (‘The Star Sea’) [2001] UKHL 1 [5]. 28  JH Botes, From Good Faith to Utmost Good Faith in Marine Insurance (Frankfurt am Main, Peter Lang, 2005) 215. 29  Hasson (n 9) 615. 30  O Gurses, ‘An English Insurer’s Pre-Contractual Duty of Utmost Good Faith’ (2012) 23 Insurance Law Journal 51, 62–64. 31  R Merkin and O Gurses, ‘The Insurance Act 2015: Rebalancing the Rebalancing the Interests of Insurer and Assured’ (2015) 78 MLR 1004, 1008. 26 

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B.  The Meaning Matters More, But … More important than the origin of utmost good faith is perhaps what it means: in particular, what are the differences, if any, between good faith and utmost good faith. Whether there is a difference between ‘good faith’ and ‘utmost good faith’ is unclear to Aikens LJ,32 and the two modern concepts are viewed as ­interchangeable.33 ‘The word “utmost” may add very little … it is the examination of “good faith” that goes to the heart of the concept.’34 But since it seems that utmost good faith in insurance law has often, if not always, been viewed as a distinctive feature that distinguished insurance contract law from general contract law, it is necessary to examine any potential difference between utmost good faith and good faith. Prima facie, it seems to be only a difference in the degree of good faith. Good faith means openness, honesty and fair dealing. As a corollary, utmost good faith seems to mean the most open, honest and fair dealing. However, this is actually problematic. Strictly speaking, openness, honesty and fairness cannot be ­graduated.35 A subject of fairness is either fair or unfair—there cannot be a comparative degree of fairness, otherwise we would have what is akin to the Animal Farm satire of ‘All animals are equal but some animals are more equal than others.’ A person can be open; a person can be less than open; but a person cannot be more open. A person is either honest or dishonest. ‘One may be less than honest but ­cannot be more honest than honest.’36 Indeed, [T]here is no magic in the expression uberrima fides. There are no degrees of good faith. It is entirely inconceivable that there could be a little, more or most (utmost) good faith. The distinction is between good faith and bad faith. There is no room for uberrima fides as a third category of faith in our [South African Roman-Dutch] law. … Uberrima fides is not a juristic term with a precise connotation. It cannot be used as a yardstick with a precise legal meaning.37 32  Richard Aikens LJ, ‘The Post-Contract Duty of Good Faith in Insurance Contracts: Is There a Problem that Needs A Solution?’ (2010) 5 Journal of Business Law 379. 33 G Swaby and P Richards, ‘Insurance Reforms: Rebalancing the Kilter?’ (2011) 6 Journal of­ Business Law 535. 34  T Scotford, ‘The Insurer’s Duty of Utmost Good Faith: Implications for Australian Insurers’ (1988) 1 Insurance Law Journal 1, 2–4. See also O Gurses, ‘What does “utmost good faith” mean?’ (2016) 27 Insurance Law Journal 124, 133. 35  In everyday language, whether someone is ‘a bit/utterly dishonest’ or something is ‘a bit/totally unfair’ largely hinges on the severity and/or the value of the subject matter in question and it does not mean that honesty and fairness per se can be graduated. A routine customer who unknowingly takes but then knowingly keeps extra small changes from a corner-shop is just as dishonest as a bank ­fraudster who cons thousands or millions of dollars from banks. Similarly, a bank customer who refunds the bank an extra two hundred (or more) dollars of unjust enrichment is not more h ­ onest than a routine customer who refunds a corner-shop an extra change of two dollars. See YQ Han, ‘­Disenchanting the Principle of Utmost Good Faith in Insurance Law’ (2011) 115 Journal of Gansu Institute of Political Science and Law 153,156. 36  Mutual and Federal Ins Co v Oudtshoorn Municipality (n 27) 443 (per Miller JA, dissenting, but also saying that ‘The words “uberrima fidei” must not, of course, be taken too literally.’) 37  ibid, 433 (per Joubert JA).

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This was noted by Lord Hobhouse, who, referring to the South African case, opined: ‘The connotation [of the word ‘utmost’] appears to be the most extensive, rather than the greatest, good faith.’38 In what sense is ‘utmost good faith’ the most extensive among all ‘good faith’? To this query, one might argue that utmost good faith is always more—hence the most—extensive than (ordinary) good faith because utmost good faith applies or binds pre-contractually, the underlying point in contrast being that good faith applies or binds post-contractually. This immediately runs into a problem of logic in the common law context. The problem is that in the common law of contract, except that in the USA39 and recently in Canada,40 there is no requirement or principle of good faith (and certainly not pre-contractually). Therefore, in the common law context, it is not meaningful as a matter of comparison to have pre-contractual ‘utmost good faith’. It has been held in Australian insurance law that ‘utmost good faith has been said to: impose principles of fairness and honesty; compel full and frank disclosure; require notice of important obligations; necessitate avoidance of conflicts of interest; and oblige a timely response to a claim for indemnity’.41 It requires both parties to act by the commercial standards of decency, honesty and fairness, and particularly with due regard to the counterparty’s interest.42 But this is no more than the requirement of good faith as recently stated in the common law of ­contract by the Supreme Court of Canada: Good faith may be invoked in widely varying contexts and this calls for a highly contextspecific understanding of what honesty and reasonableness in performance require so as to give appropriate consideration to the legitimate interests of both contracting parties.43

In the context of civil law, the likely response to the foregoing query also cannot be sustained. This is because the principle of good faith pervading in civil law has overarching binding effect: the principle applies to all civil juristic acts including

38  Manifest Shipping Co Ltd v Uni-Polaris Shipping Co Ltd (‘The Star Sea’) [2001] 1 All ER 743; [2001] UKHL 1 [44] (per Lord Hobhouse). 39 The Uniform Commercial Code (UCC) s 1-304: ‘Every contract or duty within the Uniform Commercial Code imposes an obligation of good faith in its performance and enforcement.’ The UCC has been adopted in 50 states. Also the Restatement (Second) of Contracts s 205: ‘Every contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement.’ 40  Bhasin v Hrynew [2014] 3 SCR 495 [33] per Cromwell J: ‘In my view, it is time to take two incremental steps in order to make the common law less unsettled and piecemeal, more coherent and more just. The first step is to acknowledge that good faith contractual performance is a general organizing principle of the common law of contract which underpins and informs the various rules in which the common law, in various situations and types of relationships, recognizes obligations of good faith contractual performance. The second is to recognize, as a further manifestation of this organizing principle of good faith, that there is a common law duty which applies to all contracts to act honestly in the performance of contractual obligations.’ 41  Matton Developments Pty Ltd v CGU Insurance Ltd (No 2) [2015] QSC 72 [246] (Flanagan J). 42  Re Zurich Australian Insurance Ltd [1999] 2 Qd R 203, 217 [71], 218–19 [82] (Chesterman J). For similar opinions, also see the High Court (of Australia) case CGU Insurance Ltd v AMP Financial ­Planning Pty Ltd [2007] HCA 36 [15] (Gleeson and Crennan JJ). 43  Bhasin v Hrynew (n 40) [69] (Cromwell J).

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but not limited to contract—so this is much more extensive and ‘utmost’ than ‘utmost good faith’. Binding in all contracts and dealings, the principle per se already applies pre-contractually and there are particularised systematic rules for the liabilities ensuing from and remedies available for breach of ­pre-contractual good faith: rules similar to culpa in contrahendo in the German civil code44 have now been operative in many other civil law jurisdictions such as France,45 China46 and Japan47—this makes it unnecessary to have ‘utmost good faith’ for ­pre-contractual purposes. The principle of good faith certainly applies postcontractually, and even in litigation between parties48—but not so for ‘utmost good faith’ in English insurance law.49 Again the application of the civil law principle of good faith to litigation means this overarching principle is more extensive and ‘utmost’ than ‘utmost good faith’. The overarching binding effect of the pervading principle of good faith in civil law (jurisdictions) is the major reason why civilian-jurisdiction legislators find it unnecessary to have an additional principle of ‘utmost good faith’ in their insurance law even though some of their academic lawyers (in China for example) think otherwise in the fashion of English insurance law. Even for common law jurisdictions, ‘[i]t is submitted that if the word “utmost” were omitted, the duty of good faith would be construed no differently’.50

C.  Is it a Legal ‘Duty’?51 It is more appropriate to refer to utmost good faith in insurance law as a principle or a requirement rather than as a ‘duty’. Why is it not a duty? Arguably there are three reasons. First, in spite of the Marine Insurance Act 1906 section 17 and the (Australian) Insurance Contracts Act 1984 section 13, there is not a statutory duty of utmost good faith. The former is the codification of common law, rather than created by the statute. Of the latter, it was held over two decades ago that the ­Australian Parliament had not clearly stated its will as to the existence of a statutory duty under the Insurance Contract Act 1984 (Cth) section 13.52

44 

BGB s 311. French Code civil s 1112, 1112-1, 1112-2 (as amended by Ordinance no 2016-131 of 10 February 2016). 46  Chinese Contract Act 1995, ss 42 and 43. 47  It was adopted via case law occasionally. The ongoing Japanese law of obligations reform is likely to formally establish culpa in contrahendo or an equivalent thereof. 48  This has its origin in bona fide actions in Roman law. In respect of the modern law of civil procedures, see for example at least the Japanese Civil Procedure Code 1996 s 2 and the Chinese Civil Litigation Code (as amended in 2012) s 13. 49  Manifest Shipping Co Ltd v Uni-Polaris Shipping Co Ltd (‘The Star Sea’) [2001] UKHL 1 [77]. 50  Gurses (n 30) 133. 51 This is an abridgement of Y Han, ‘(Utmost) Good Faith in Insurance Law: General and ­Independent, Not a Duty but an Interpretative Principle’ (2016) 28 Insurance Law Journal 95. 52  Byrne v Australian Airlines Ltd (1995) 185 CLR 410, 458 (McHugh and Gummow JJ). 45 

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More recently, Flanagan J ruled against the argument that there is a statutory duty of utmost good faith, reasoning that: On an ordinary reading of s 13(1), it does no more than imply into a contract of insurance a provision requiring each party to act towards the other party with the utmost good faith. It takes effect ‘by a legal fiction … that the parties had made a contract which included the obligation’. … The mere implication of a term into a contract of insurance by statute does not, in itself, give rise to a statutory duty. More is required.53 … The enactment of s 13(2) was to provide ASIC with wide powers for regulatory action against an insurer and to conduct representative actions on behalf of aggrieved insureds … It does not provide support for a statutory duty.54

Despite being of a single judge at first instance, these statements on the requirement of good faith under the Insurance Contracts Act 1984 (Cth) section 13 are good law, because they were not contested by either party or dissented from by judges in the appeal.55 Second, though developed through common law, utmost good faith is not a duty in common law. This is also why it is not codified in statutory law as a duty. Had there been a common-law duty of (utmost) good faith, the codifying Marine ­Insurance Act 1906 (UK) would have expressly restated in its section 17 that ­parties to an insurance contract are bound by a duty of utmost good faith. ­Nevertheless, the Marine Insurance Act 1906 (UK) section 17 does not literally or effectively spell out a (common-law) duty of utmost good faith. Rather, in its old version the first sentence only reads, as does the current version, that ‘A contract of marine insurance is a contract based upon the utmost good faith.’ From this, it can be inferred that a common law duty of (utmost) good faith did not and does not exist in insurance law. This line of reasoning was also similarly employed in Byrne v Australian Airlines Ltd.56 Meanwhile, in the Australian context, The duty of good faith is most commonly referred to in the context of an insured’s obligation [of pre-contractual disclosure to the insurer] … It is to be observed that the duty is to disclose material facts. The duty is not to act in good faith. It is because the relationship between insurer and insured is one ‘of the utmost good faith’ that the duty to disclose arises but the duty is described in more specific terms than to act in good faith.57

In Australia, the insurance relationship ‘of good faith, is not itself expressed in terms of an obligation but is the basis for implying a more specific duty’58 other

53 

Matton Developments Pty Ltd v CGU Insurance Ltd (No 2) (n 41) [263]. ibid [264]. Matton Developments Pty Ltd v CGU Insurance Ltd (n 41). 56  Byrne v Australian Airlines Ltd (1995) 185 CLR 410, 458, (McHugh and Gummow JJ holding that the Australian Parliament had not clearly stated its will as to the existence of a (statutory) duty under the Insurance Contract Act 1984 (Cth) s 13. 57  Re Zurich Australian Insurance Ltd [1999] 2 Qd R 203, 209 [37] (per Chesterman J, emphasis added). 58  ibid, 210 [40] (per Chesterman). 54  55 

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than a general duty of good faith. In particular, Chesterman J concluded, based on his ‘review of the cases and articles’, ‘that there is not … a separately existing, independent general duty to act in good faith’.59 Third and more fundamentally, utmost good faith does not have the prominent feature of a legal duty,60 which is that a breach of a legal duty gives rise to a standalone cause of action if other conditions are satisfied. Hence the existence and a breach of ‘duty of care’ is necessary for a cause of action in tort, as is the existence and a breach of a contractual duty necessary for a cause of action for damages for breach of contract. Before the Marine Insurance Act 1906 section 17 was changed by the Consumer Insurance (Disclosure and Representations) Act 2012 and the Insurance Act 2015, it had never been the sole or stand-alone ground for a cause of action for breach of contractual duties—nor can or will it be so after the change— recourse was always to the MIA 1906 sections 18–20 on disclosure and misrepresentation. Although good faith in insurance contract law has broad binding force, the breach of good faith does not give rise to a cause of action.61 ‘Good faith is ­usually a shield and not a sword—it is a defence to an action and not the foundation of an action.’62 This ‘shield’ perception of good faith has been accepted into the recently reformed English insurance law.63 Good faith ‘is generally an underlying principle … rather than an active or creative nature’.64 In law broadly, the requirement of good faith is ‘generally an underlying principle of an explanatory and legitimating [nature]’,65 a principle that has overarching interpretative and justificatory strength. Regarding the pre-contractual stage in insurance, as was stated in Carter v Boehm: ‘The reason of the rule against concealment is, to prevent fraud and encourage good faith.’66 Post-contractually, or during the contract period, good faith also justifies, though not exclusively, why the assured has such duties as timely notification of an increase in risk and the occurrence of risk or loss, mitigation of loss,67 honesty and co-operation in making claims and the insurer’s duty of reasonable exercise of discretion. Good faith also explains and justifies desired adjustment68 of the parties’ obligations, as well as the 59 

ibid, 218 [82] (per Chesterman). It is impossible to discuss the nature of ‘duty’ in law generally here—such a jurisprudential effort will involve a monograph at least, as is for discussion of ‘right’. 61  Australian & New Zealand Banking Group v RQA Accountants Pty Ltd [2013] NSWSC 165 [90]–[95] (Adamson J). 62  William W McBryde, The Law of Contract in Scotland 3rd edn (Edinburgh, W Green, 2007) [17]–[29]. 63  Insurance Contract Act 2015 ss 16A(2)–(3), as inserted by the Enterprise Act 2016 s 29. See also Law Commission, ‘Insurance Contract Law: Business Disclosure; Warranties; Insurers’ Remedies for Fraudulent Claims; and Late Payment’ (Law Com Consultation Paper No 353 2014) [26.63], [28.97]. 64  R v Immigration Offıcer at Prague Airport [2005] 2 AC 1 [60] (per Lord Hope). 65 ibid. 66  Carter v Boehm (1766) Burr 1905, 1919, 1911. 67  Re Zurich Australian Insurance Ltd [1999] 2 Qd R 203, 210 [39]: ‘Similarly, the duty of an insured to take reasonable steps to reduce or to minimise its loss and therefore the liability of the insurer is “a manifestation of the principle of utmost good faith”.’ (Chesterman J). 68  Peter Macdonald-Eggers, Simon Picken and Patrick Foss, Good Faith and Insurance Contracts (Informa, 3rd ed, 2010), [3.51]–[3.59]. 60 

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policyholder’s duty to file claims honestly and the insurer’s duty to handle claims properly.69 Even the contra proferentum interpretation of insurance contract terms could be thought to have its rationale in the requirement of utmost good faith: Because the insurer invariably prepares the policies and chooses the wording and because it must act in good faith towards its insured, it is obliged to make the meaning of its policies plain. If it does not, any ambiguity is resolved in favour of the insured.70

The broad interpretative and justificatory strength of good faith at least partly explains why in the recent English insurance law reform it has been r­ e-characterised as a ‘general interpretive principle’.71 This manifests in the Insurance Act 2015 (UK) section 14 on ‘good faith’, for which Parliament has explained that ‘The intention of section 14 is that good faith will remain an interpretative principle, with section 17 of the 1906 Act and the common law continuing to provide that insurance contracts are contracts of good faith.’72 In civil law jurisdictions, the requirement of good faith is undoubtedly a ­principle: it is invariably provided for as one of the principles in the general part of a civil code or the general part for contract law. If and when it enters the statutory insurance law, it is also in the general part. The general part usually sets forth a few general and overarching principles for the body of the whole area or the particular area of law—such as the law of obligations, or of contract, or of insurance contract. However, non-compliance with the principle of good faith alone in civil law jurisdictions does not give rise to a cause of action based thereon. Courts do not recognise such non-compliance or breach as the sole basis of judgment for the non-breaching party. ‘[Good faith] was not a source of obligation in itself. That remains generally true today in the civilian systems, which recognise the principle.’73 In civil law jurisdictions, the principle of good faith is applied, if frequently at all, to complement the (contract) law. Although the principle of good faith can be used—by legislators but not by courts—to create an actionable duty (such as the duty to explain financial products), the principle itself is not a standalone cause of action, and the cause of action is still the breach of the particular duty created and legislated under the principle of good faith. To a varying extent, this also influences the manner in which good faith in insurance law is applied to insurance contracts. This can be seen from insurance law and its relation to civil law in China, France, Germany and Japan, as discussed in previous chapters for each of these jurisdictions.

69 

ibid [3.60]–[3.73]. Re Zurich Australian Insurance Ltd [1999] 2 Qd R 203, 210 [38] (Chesterman J) referring to Re Bradley [1912] 1 KB 415, 430. 71  Insurance Contract Act 2015 (UK) ss 16 A(2)–(3), as inserted by the Enterprise Act 2016 (UK) s 29. See also Law Commission, ‘Insurance Contract Law: Business Disclosure; Warranties; Insurers’ Remedies for Fraudulent Claims; and Late Payment’ (Law Com Consultation Paper No 353 2014), [30.22], [30.28]. 72  Insurance Contract Act 2015 (UK) Explanatory Notes, [116]. 73  R v Immigration Offıcer at Prague Airport (n 64) (Lord Hope). 70 

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D.  (Re)focus on Pre-contractual Duties. But… One possible tendency is to focus on the principle of utmost good faith too much and hence lose a good grasp of the pre-contractual duties. So there shall always be a (re)focus on those duties. It has been submitted generally that although ‘[t]he terminology [‘utmost good faith’] is well established, its usefulness is questionable. It tends to divert attention from the real questions: … what should be the content of the duty of disclosure.’74 ‘Uberrima fides’ is an unhelpful test for pre-contractual duties of disclosure. … [E]ven in England, which has not developed a generalized principle of good faith, the term ‘utmost good faith’ seems unhelpful and unnecessary at least as a tool to determine whether and what duties of disclosure should be imposed- and even more evidently so, given that the common law remedial consequences of the categorisation of the contract as of ‘utmost good faith’ have now been removed by statute for insurance contracts … It is preferable to address the substantive questions of when duties of disclosure should be imposed on parties negotiating a contract, and what the content of those duties should be.75

But ‘old habits die hard.’ ‘Utmost good faith’ as a terminology and a principle has been so entrenched in insurance law that it is unlikely—or it will take decades— that common law jurisdictions will make a drastic change to abandon merely the terminology and to use ‘good faith’ instead. This is also because doing so will be misinterpreted as a drastic change in or an abolition of the substance of pre-contractual duties in insurance law when actually there is not such a drastic change overall. It could be recalled here that in our South African chapter Joupert JA is quoted as saying that ‘[The South African] law of insurance has no need for uberrima fides and the time has come to jettison it.’76 It is less difficult to do so in a jurisdiction such as South Africa which, though of a mixed legal system, is predominantly of the Roman(-Dutch) legal tradition. Meanwhile this is not an issue for civil law jurisdictions such as China, France, Germany, Japan, Switzerland and other continental European countries. That is because their respective positive law simply does not even have, or find it necessary to have, a principle or requirement of utmost good faith—instead the overarching and pervading principle of good faith in its contract law, or even civil law more broadly, is sufficient for and applicable to insurance contracts. That being said, as long as insurance lawyers in common law jurisdictions contentedly maintain their use of the phraseology ‘utmost good faith’, some of their civil law counterparts will follow suit. Nevertheless, whether or not insurance lawyers stick to the conventional ­phraseology is perhaps academic and practically unproblematic, as long as they

74 

Cartwright (n 2) [17.03]. ibid [17.05]. 76  Mutual & Federal Insurance v Oudtshoorn Municipality (n 25) (A) 433 E–F. 75 

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(re)focus on the specific (pre-contractual) duties under its broad ambit. O ­ verall, the pre-contractual duties of policyholders and of insurers have substantially changed by now. Generally speaking, policyholder’s pre-contractual duty has remained but has been diluted and insurer’s pre-contractual informational duty has been on the rise.

II.  The Dilution of a Policyholder’s Pre-contractual Duty For policyholders, their traditional pre-contractual duty (of disclosure) has been substantially diluted in three ways. Firstly, there has been a trendy shift, mostly around and in the twenty-first century, from the active and voluntary duty of disclosure to a passive and responsive duty not to misrepresent. This is particularly so for consumer insurance. Such a shift substantially relieves policyholders of a duty to disclose or to volunteer information. Second, in most jurisdictions under discussion in this book, the test of the materiality of the information to be provided by policyholders has been changed to a policyholder-oriented objective perspective. This makes it much more difficult for a policyholder to know what information is material so that it should be represented to the insurer. Third, indiscriminate avoidance of the insurance contract and the ‘all-or-nothing’ approach in relation to insurance payment in relation to the policyholder’s breach of ­pre-contractual duties is no longer the sole remedy for the breach. Instead, the re-designed ­remedies have qualified avoidance and have taken a proportionate approach.

A.  From Duty of Disclosure to Duty not to Misrepresent There has been an overall trend in policyholder’s pre-contractual duty being a shift from that of disclosure to a duty not to misrepresent. This is particularly so in consumer insurance. The shift, of course, is conceptually based on a true but pragmatically under-recognised basic distinction between disclosure and representation in contract law: disclosure means to volunteer information or ‘to disclose something which was not the subject of a question, … whereas a representation is something directly said in answer to a specific question’.77 With the Consumer Insurance (Disclosure and Representations) Act 2012, global insurance

77  Zurich General Accident and Liability Insurance Co v Leven: 1940 SC 406, 415. See also J Lowry, ‘Pre-contractual information duties: the insured’s pre-contractual duty of disclosure—convergence across the jurisdictional divide’ in J Burling and K Lazarus eds, Research Handbook on International Insurance Law and Regulation (Cheltenham, Edward Elgar, 2011) 56.

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law in respect of policyholder’s pre-contractual duty has eventually culminated in a notable shift from a pro-active duty of (voluntary) disclosure to a (passive) duty not to misrepresent in response to insurer’s enquiry; this is particularly so for consumer insurance. Such a shift in insurance law was made through legislation: it occurred in Australia (1998), China (2009), France (1989), Germany (2008), Japan (2008), the optional Principles of European Insurance Contract Law (2010 and 2016), the UK (2012). The shift across jurisdictions could be regarded as a trend without coordination. Three points can be made about the shift. First, in most jurisdictions under discussion in this book, the shift applies mostly to both consumer insurance and business insurance except in Australia, the UK and the US where the shift applies to consumer insurance only. Second, if this shift could be thought of as a ‘trend’ at all, Switzerland and also France are more the harbingers or pioneers than followers. This is because the Swiss insurance in its first enactment in 1908 opted for what is an equivalent of policyholder’s duty not to misrepresent and the French insurance code made the change in 1989 which is also much earlier than the trend around the first two decades of this century. Third, as is argued in Chapter 6, in the UK’s Insurance Act 2015, policyholder’s ‘duty of fair presentation (of risks)’ in business insurance is in itself more of an old wine in the new bottle though the redesigned remedies for the breach of the duty gave the wine some new taste to the liking of non-consumer policyholders.

B.  Materiality—To Whom? And the Decisive Influence Test As regards material circumstances that must be disclosed or truthfully represented, the test of materiality is a crucial matter that has two aspects. First, to whom is the circumstance material? This is more than a mere matter of perspective. Second, for a circumstance to be material, must it have decisive influence on the insurer’s underwriting decision? Across jurisdictions under our discussion, the law in both aspects has largely— but not completely—changed. Before the wave of insurance law reforms, under the old laws policyholders had the pre-contractual duty in relation to circumstances which a prudent insurer thought to be material. The problem with this was that policyholders did not always know well what would be material in the view of a hypothetical prudent insurer. The problem has been partly addressed by changing the insurer-oriented test of materiality to a policyholder-oriented one. In common law jurisdictions, this change started from Australia, where its Insurance Contracts Act 1984 section 21(1) and section 28(1) replaced the prudent insurer test of materiality with a ‘reasonable insured’ test and adopted what was effectively the decisive influence test. In the US, courts in marine insurance cases fairly ­uniformly apply a ‘decisive influence’ test for materiality; in non-marine insurance materiality is generally determined by an objective test focusing on what a r­ easonable insurer would have done, but there are jurisdictions adopting

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a subjective test focusing on the mental intent of the particular or actual insurer in the dispute. In the UK, for business insurance, materiality is assessed from the perspective of a (hypothetical) prudent insurer. But the decisive influence test of materiality is likely to continue to be inapplicable unless the Insurance Act 2015 section 7(3) would be reinterpreted in the future by the UK Supreme Court overruling the ‘mere influence’ test adopted in Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co Ltd78 and resurrecting the decisive-influence test instead. This, however, seems unlikely in the foreseeable future. In civil law jurisdictions which have provided for policyholders a duty not to misrepresent, the insurers are expected to make specific inquiries related to the risks to be considered for underwriting so that policyholders can represent thereto—and such enquiries shall not be general. In this context, the test of materiality does not seem to be practically important, because whether or not what is asked of by the insurer is material, policyholders are obliged to respond or represent truthfully anyway. Or, a different interpretation could be that what the insurer asks of is presumed material, but this presumption is rebuttable in that if what the insurer asks of has no influence on its decision on whether to underwrite the risks and if so on what terms or/and rates then it is immaterial. The shift from a duty of disclosure to the duty not to misrepresent has diluted the policyholder’s pre-contractual duty to the benefit of policyholders in that the burden is shifted on insurers and the issue of materiality no longer bothers ­policyholders. Under the policyholder’s duty not to misrepresent, insurers are expected to ask questions in the first place—because an insurer knows better what information is relevant or material and hence merits being asked for—so that ­policyholders shall truthfully represent and reply thereto. This means policyholders are no longer factually or legally bothered by the issue of materiality for the purpose of disclosure. This brings certainty for policyholders amidst their consumer experience in or business process of seeking insurance. With the ­policyholder’s duty shifting to a passive duty not to misrepresent, materiality is more often conceptually presumed and it is hardly a practical or even legal problem—that is ­perhaps why in the UK’s CIDRA 2012, which takes the shift, the ­matter of materiality is not even mentioned.

C.  Conditional Avoidance, and Proportionality The orthodox insurance law rule that the insurer to whom a policyholder has made non-disclosure or misrepresentation may simply avoid (or cancel or terminate) the insurance contract regardless of the policyholder’s subjective blameworthiness has been diluted in a number of ways. First, simple or outright avoidance is diluted into what can be called ‘conditional avoidance’, by which the insurer’s

78 

Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co Ltd [1995] 1 AC 501 (HL).

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right of avoidance is conditional upon the policyholder being blameworthy in the breach. If the policyholder is innocent in the breach, there is no avoidance; if the policyholder is reckless or deliberate or fraudulent, there is avoidance. This is so in Australia, China, France, Germany, Japan, Switzerland, the UK and the US. The consequence of a policyholder’s breach of the pre-contractual duty is no longer always a matter of ‘all or nothing’. Absent the pre-contractual non-­ disclosure or misrepresentation by the policyholder, if the insurer would not have underwritten the risk on any terms at all, it may avoid the contract; if the insurer would have underwritten the risk on different terms unrelated to premium, then the contract may be treated as if it been entered into on those different terms; if the insurer would have underwritten the risk with a higher premium, it may proportionately reduce the amount to be paid upon an insurance claim. This is the part of the post-reform position in insurance law of the UK. Not all countries or jurisdictions under our discussion have taken this triad approach, but France adopted in 1989 the insurer’s proportional payment as a remedy for policyholder’s breach of pre-contractual duty, so did Germany in 2008 allowing the insurance contract to be varied to the effect of proportional payment, with the UK following suit in the CIDRA 2012 and the Insurance Act 2015. The remedy of proportional payment might be the next point of convergence in insurance law reforms in ­different jurisdictions, particularly given the continuing global influence of English insurance law post-reform.

III.  The Rise of Insurer’s Pre-contractual ‘Informational’ Duties Although the requirement of (utmost) good faith binds both policyholders and insurers, the law of insurer’s pre-contractual duties has been fairly underdeveloped, particularly in common law jurisdictions. Until Banque Financiere de la Cite SA v Westgate Insurance Co Ltd,79 the duty of disclosure on the insurer ‘did not, however, seem to have any real significance’80 in common law—and it is unlikely this case would really herald an exciting judicial development of ­insurer’s ­pre-contractual good faith in common law.81 That being said, what can be described generally as the pre-contractual ‘informational duties’ of insurers have been on the rise mainly through legislation. This is certainly more so in civil law jurisdictions than in common law jurisdictions.

79 

Banque Financiere de la Cite SA v Westgate Insurance Co Ltd [1991] 2 AC 249 (HL). J Birds, Birds’ Modern Insurance Law 10th edn (London, Sweet & Maxwell, 2016) 159. 81  ibid, 164. 80 

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A.  An Implied Duty to Ask the Policyholder for Information? With the shift to the policyholder’s duty not to misrepresent, or to truthfully ­represent in response to the insurer’s questions, insurers are practically expected to ask questions or to ask the proposing policyholder for information. This is the corollary to the policyholder’s duty of truthful representation, and in modern practices in the insurance sector, insurers do ask for information usually by using questionnaires or enquiry forms. This is not disputed. The issue that merits consideration in this regard is whether insurers have a duty to ask for information. There is hardly a black-letter rule on this. Such a ‘duty’ in a weak sense can be implied either in existing statutes or in common law out of necessity. For example, in the former, even in relation to disclosure, if an insurer wants to know from its policyholder such information as is exempted from disclosure under the Insurance Act 2015 section 3(5), the insurer shall ask the policyholder questions for the information. This is because the exemption applies only ‘in the absence of inquiry’.82 However, an insurer’s duty to ask the policyholder for information is a duty in a fairly weak sense. That is because the insurer’s breach of such a duty is not a cause of action by a policyholder, nor does it entitle the policyholder to award of damages. It can only be used by the policyholder as a defence to rebut the insurer’s allegations of misrepresentation and/or non-disclosure by the policyholder. So the legal nature of such a weak-sense duty is similar to the German gesetzliche Obliegenheit (roughly as ‘legal obligation’), the breach of which, unlike an enforceable duty (echte Rechtspflicht), does not confer an enforceable claim for either performance or damages but instead leads to other specific legal consequences determined by law.83

B.  A Duty to Remind/Alert the Policyholder? It is noteworthy that in Australia according to the Insurance Contracts Act 1984 section 22 an insurer has the duty to inform clearly in writing its proposing ­policyholder of duty of disclosure and of the consequences of the breach. This is effectively an insurer’s duty to remind the policyholders of their duty of disclosure and to alert them of the consequences of non-disclosure. The insurer’s ­non-compliance with such a duty means it may not exercise its right in respect of non-disclosure by the policyholder unless the non-disclosure was fraudulent. Similarly, the German insurance contract law the VVG 2008 section 19(5) requires the insurer to inform the policyholder in a separate notification in text form of the consequences of any misrepresentation; otherwise the insurer’s remedies for

82  83 

Insurance Act 2015 s 3(5). See the German chapter (Chapter 10) in this book.

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the policyholder’s misrepresentation will not be available to the non-complying insurer except the misrepresentation is fraudulent. Again, the legal nature of this duty is similar to the German gesetzliche Obliegenheit as referred above. Other jurisdictions in our discussions do not follow the Australian or the G ­ erman approach in this regard. However, the ongoing insurance law reform in Ireland takes this approach in its Consumer Insurance Bill 2017 section 6(9), which states that ‘Every insurer shall, before a contract of insurance is entered into, or renewed, inform the consumer in writing of the general nature and effect of the ­pre-contractual duty of disclosure.’ This duty to alert the policyholder of its duty of disclosure or duty not to ­misrepresent is particularly helpful and useful for consumer policyholders and for small business insureds who are not familiar with such technicalities of insurance law and do not have the brokering service of a professional broker. It is somewhat lamentable that such a practical approach has not been taken in other jurisdictions: they should do so in the future.

C.  The Informational Duties: Disclosure, Explanation, Advising i.  How Wide (or Narrow) are the Informational Duties? The pre-contractual ‘informational duties’ of insurers vary in width in the jurisdictions under our discussion. Not every jurisdiction’s insurance law in this respect adopt all these variations but they include the insurer’s duty: to provide information about the insurer’s business identity; to provide complimentary ­information about the insurance product (particularly for life insurance); to remind the ­policyholder of unusual policy terms (exclusions and limitations); to explain to the policyholder unusual policy terms (exclusions and limitations); to advise the p ­ olicyholder on the adequacy of the insurance coverage being sought. The insurer’s provision of its business identity perhaps is a fairly ‘soft’ duty because it has been prevalent normal and business practice for the transactional parties to provide their own business identity. This is often voluntary and is hardly imposed by law—even if the law does not so require, insurers will provide i­nformation about their business identity. The duty for insurers to provide information about the (life) insurance product is often the statutory requirement in ­financial regulation applicable to insurance. The purpose is to ensure that consumer investors/policyholders can have access to product information so that they can make an informed investment decision. Such information is mostly for illustrative purpose and is not part of the insurance contract. The duty to remind the policyholder of unusual policy terms such as exclusions and liabilities also aims to ensure that policyholders can make an informed decision on whether to proceed to take out the insurance; along this line the duty to explain unusual terms to policyholders goes further. The duty for insurers to advise the policyholder is limited to giving advice on the adequacy of the insurance coverage being sought

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by the policyholder, who may be able to make an informed decision on taking out insurance.

ii.  The Consequences of an Insurer’s Breach of the Duty In all jurisdictions discussed in this book except the US, there can be no award of damages to the policyholder for the insurer’s breach of its pre-contractual duty; the breach only affects the validity of the contract or of the particular ­contract term specifically in relation to the breach. There can be no damages in tort, because it is not recognised that in such matters the insurer has a duty of care for the policyholder; nor damages for breach of contract, because pre-contractual duties are hardly part of the insurance contract terms the breach of which would lead to award of damages. The only exception to the unavailability of damages for insurer’s breach of its pre-contractual duties is the likelihood that the tort of ‘bad faith’ in the US insurance law. If the duty is imposed by regulatory statutes there might be consequences beyond private law or involving the regulator. This is so in Australia, as is noted in Chapter 5.

IV.  More Thoughts A.  A Convergence Not as Assumedly Grand Globally, there is indeed an overall convergence of insurance law in respect of pre-contractual duties. But the convergence is not simply a matter of a concerted shift from a policyholder’s duty of disclosure toward the duty not to misrepresent around this century. For two reasons, the shift, although certainly significant, is perhaps not as grand as might have been assumed. First, among the jurisdictions under discussion in this book, Switzerland prescribed for policyholders an equivalent of the duty not to misrepresent as early as 1908, and the French insurance law made the shift in 1989, with Australia prescribing in 1998 a limited shift in respect of some major (but not all) lines of consumer insurance. In the meantime in the US, under its state insurance laws policyholders of non-marine insurance have effectively been required only not to misrepresent. It is only China, G ­ ermany and Japan which made the converging changes, all in the first decade of this c­ entury. Second, against policyholder’s misrepresentation and/or non-disclosure, there is at most only an emerging convergent adoption, after France in 1989 only in ­Germany (2008) and the UK (2012 and 2015), of the remedy of proportional ­payment by insurers. It is interesting to wonder why within the 1900s the UK, Germany and ­Switzerland had markedly different provisions about the duty per se. For the UK, the Marine Insurance Act 1906 was only a partial codification of the common law, so it would and could not change the already entrenched common law of duty of

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disclosure. It is not clear whether the old duty of disclosure under the German Insurance Contract Act 1908 was actually influenced by the MIA 1906 sections 17–20. Considering that The First Moroccan Crisis in 1905 worsened the AngloGerman relations to the brink of a war of Germany against the UK and France, such influence in parliamentary legislation was unlikely. Nevertheless, it seems very clear that the Swiss insurance law then in 1908 was not influenced as such at all, because what it prescribed for policyholders was not a duty of disclosure but effectively a duty not to misrepresent. In the meanwhile, the German and the Swiss insurance law legislation enacted in the same year of 1908 also differed markedly in this respect in spite of the substantial similarity between the two jurisdictions in private law broadly defined. All that being said, the lack of evidenced influence among the three jurisdictions in the late 1900s should not be surprising to comparativist lawyers today, because studies of comparative law, let alone its use in legislation, was not even in its infancy then.

B. Consumer-welfarism Vis-à-vis Market-individualism in Insurance Law It seems that law reform in policyholder’s pre-contractual duties fits the observation that there has been a dichotomy between consumer-welfarism and marketindividualism in English contact law. Adams and Brownsword contend that there are two realist philosophies underlying contract law: market-individualism and consumer-welfarism. Generally, market-individualism insists upon contractors being held to their market-based and individualistically freely agreed exchanges, and consumer-welfarism seeks to ensure a fairness and reasonableness in deals and to relieve against harsh or unconscionable bargains.84 The CIDRA 2012 and the Insurance Act 2015 in respect of a policyholder’s pre-contractual duties are two different regimes, overlapping though, for consumer insurance and for business insurance respectively, with the CIDRA 2012 being clearly consumer/ policyholder-friendly and the Insurance Act 2015 being of rebalanced neutrality. But that dichotomy does not fit with civil law jurisdictions’ insurance laws on the policyholder’s pre-contractual duties which are uniform for consumer insurance and non-consumer insurance. It is natural that civil law jurisdictions in a global consumerism and global consumer protection movement take a ­policyholder-friendly approach in consumer insurance for protection of consumer ­policyholders. What is less natural perhaps to lawyers of common law is that civil law jurisdictions have reformed their laws of insurance without distinguishing consumer insurance from business insurance, so that the laws intended 84  J Adams and R Brownsword, ‘The Ideologies of Contract’ (1987) 7 Legal Studies 205, 206, 208 and 210. For more in the context of English insurance law, see YQ Han, The Relevance of Adams and Brownsword’s Theory of Contract Law Ideologies to Insurance Contract Law Reform in Britain: An ­Interpretative and Evaluative Approach (PhD Thesis, University of Aberdeen, 2013).

Conclusions

 467

for consumer policyholders are also applicable to business policyholders. Legislators and lawyers do not seem to find this problematic or as a need to be addressed. For this, a tentative explanation could be that civil law countries under our ­discussion g­ enerally tend to be more interventionist or less laissez-faire than their common law counterparts are in running their economies and industries,85 and therefore are less hesitant to use legislative powers and statutory laws to regulate the contract-related rights and duties of policyholders and insurers even in business insurance.

C. Reductionism (Pro-policyholders or Pro-insurers), or Rebalancing? The simple, practical but not simplistic explanation of the multi-faceted changes in insurance law in respect of pre-contractual duties is that the national laws and their legislators have sought to rebalance the imbalance between policyholders, whether consumers or not, and insurers for fairness to both parties. This explanation is perhaps better than a reductionism that the law as the result of the reforms shifted from being pro-insurers to being pro-policyholders. Such reductionism might have more truisms in consumer insurance. In this context, however, the law is essentially pro-consumer in the context of consumer insurance than being pro-policyholder generally. In business insurance, the reductionism does not hold water, because in principle business law is not intended to be pro-either-party although it might have such an effect: the law always seeks to balance and rebalance the interests of both parties for fairness to both rather than favour a particular party to the business transaction. In a law reform, the rebalancing exercise often means that a widely-recognised problematic old legal rule is not always just simply discarded for the benefit of one party in general whose interest has not been well protected thereunder. The old rule might be only partly changed to address the problem of imbalanced protection. This is so for the entrenched law of the policyholder’s pre-contractual duty of

85  In respect of economic freedom in 2005–06, Australia, the UK and the US was ranked 9, 9, and 5 respectively, with China (111), France (44), Germany (19), Japan (27), South Africa (50), Switzerland (15) lagging far behind. See MA Miles, KR Holmes and MA O’Grady, 2006 Index of Economic Freedom (Washington DC and New York, The Heritage Foundation and Company, Inc, 2006) 13–16. While there might be bias in this, the three common law countries have been consistently ranked far above these civil law countries. I choose the ranking in 2006 rather than a more recent past year, because the year 2006 was closer both ways to the launch of the insurance law reforms in the jurisdictions under our discussion. For general information about the Index of Economic Freedom, see www.heritage.org/ index/. Another similar ranking is The World Bank Group’s Easiness of Doing Business (www.doingbusiness.org/rankings), which consistently ranks the three common law jurisdictions above the civil law countries except Switzerland occasionally; however the indicators it employs are hardly relevant to the operation of insurance business in relation to pre-contractual duties in insurance law, so there is no need to restate the specific rankings under this scheme.

468 

Yong Qiang Han

disclosure. Although the old law has been criticised as too burdensome and harsh for policyholders, the duty itself is not abolished but moderated. Nor is the harsh consequence of breach, ie indiscriminate avoidance of insurance contract, simply abolished either: instead it has been substantially qualified in the law reform and the ‘all-or-nothing’ approach to remedies has been replaced with a proportionate approach.

D.  Insurtech and Pre-contractual Duties Digital technologies and what is now often referred to as ‘insurtech’ are bringing and will continue to bring changes to the proposing of insurance or the underwriting process. When and how shall the law of pre-contractual duties respond to this? [I]t is important to remember that Carter v Boehm involved a contract entered into at a time when communications were poor and insurers were not equipped with means easily to discover all the information they needed to know by the asking of questions of the proposer.86 Today much has changed. … Communications across the globe are now virtually instant. Information is widely available. Insurers, brokers and policyholders have the ability to store, analyse and process data in ways that could not have been foreseen even a few years ago. Improvements in IT have allowed businesses to span the globe and to grow to sizes that would previously have been unimaginable.87

Nowadays, with the use of insurtech and big data, insurers have many more means than a decade ago to know consumer policyholder’s information and industry-specific business policyholder’s risk information without even asking ­policyholders thereof; and this will be more so in the decades to come. If it would be common practice for insurers to have specialised data-mining teams which can relatively easily make out a prospective policyholder’s risk profile from the policyholder’s digital traces, would that expand the insurer’s knowledge and therefore, for example under the Insurance Act 2015 sections 3(5)(b)–(d), effectively narrow down the ambit of the policyholder’s pre-contractual duty in the presentation of risks? For now, this is perhaps more a matter of speculation, but it will not take insurtech another 250 years or even 100 years to render the rules of pre-contractual duties in insurance law partly obsolete, as it might happen by the end of this century.

86 

Birds (n 80) 124. D Hertzell, ‘The Insurance Act 2015: Background and Philosophy’ in M Clarke and B Soyer (eds), The Insurance Act 2015: A New Regime for Commercial and Marine Insurance Law (London, Informa, 2016) 2. 87 

Conclusions

 469

E. The Incrementally Declining Importance of Carter v Boehm in the Twenty-first Century Last, and indeed least important, the importance of Carter v Boehm will be destined to be incrementally on the wane. In civil law jurisdictions where the principle of good faith prevails and makes it unnecessary to have a principle of utmost good faith, unless comparativist lawyers would still uncritically follow the conventional wisdom that Carter v Boehm is the origin of utmost good faith in the common law of insurance, it will inevitably be of less and less relevance as far as citation thereof and reference thereto are concerned. In the UK, the practical importance in terms of judicial citation of Carter v Boehm will incrementally be in decline. Three factors account for this. First, even before the reform, the duty of disclosure has been restated or codified in statutory provisions, which has replaced Carter v Boehm as the immediate authority in law for the duty of disclosure and for the requirement of utmost good faith. According to Merkin, Carter v Boehm had been cited 51 times in cases decided up to the passing of the MIA 1906—a search on cases up to today would involve several databases and checking duplicates. The numbers might vary, but it is certain that there were far fewer citations of Carter v Boehm up to 1906 than might be thought.88 This is more likely so after the MIA 1906 became the codifying source of law. Second, the convergence in insurance law reform toward a policyholder’s duty not to misrepresent is a substantial shift from the now abolished duty of disclosure as stated in the obiter of Carter v Boehm. That being said, as long as elements of the policyholder’s duty not to misrepresent overlap with those of non-disclosure, Carter v Boehm will still remain as a landmark insurance law case, though with waning influence. Third, the legal sources of the post-reform remedies against policyholders for their breach of the duty not to misrepresent and/or the duty of fair presentation of risks are no longer limited to the common law as stated in Carter v Boehm; instead the post-reform remedies, particularly their new elements such as the tie-in with the policyholder’s blameworthiness of breach and the availability of proportionate payment, are now statute-based. The incremental wane of Carter v Boehm in terms of its judicial citation is bound to have implications for other jurisdictions gradually, as will be seen by the far-future generations of insurance lawyers within this century and thereafter. But the incremental wane of Carter v Boehm in the long future should be no matter of concerns or worry for us. This is because the essence of Carter v Boehm, ie pre-contractual duties in insurance law, will survive time with adaptations to the advances of insurance technologies and to the socio-economic context within which the insurance industry and insurance law continues to operate in this and future centuries. 88  I am thankful to Professor Rob Merkin for kindly double-checking and confirming via emails (on file with me) his remarks in the colloquium.

470 

INDEX

agents see brokers’ role ambiguous questions see under uberrima fides (utmost good faith) doctrine American insurance law good faith requirement  420–1 insurers’ obligations  188–96 consumer protection legislation  191–2 federal law, Racketeer Influenced and Corrupt Organizations Act (RICO)  194–6 reasonable expectations doctrine  193–4 reverse pre-emption  188–9, 196 unfair insurance practices acts  189–91 key issues/summary  172, 196 marine insurance  173–80 admiralty jurisdiction  173 2015 English law reforms, significance in US  179–80 uberrima fides see uberrima fides doctrine below non-marine insurance, policyholder’s duties  180–8 fraudulent misrepresentation  184–5 material fact, failure to voluntarily disclose  181 misrepresentation and rescission, state approaches  183–8 Restatement of the Law of Liability Insurance (RLLI) (ALI)  182–3 risk assumed/actual cause of loss, distinction  181–2 summary  187–8 warranties designated in policy  186–7 policyholder’s duties  172–88 key issues  172 marine insurance see marine insurance above non-marine insurance see non-marine insurance above state-centred focus  171–2 uberrima fides doctrine content and duration  176–8 federal marine insurance law  173–6, 179–80 vertical/horizontal choice of law  175–6 Anglo-French commercial rivalry/war in East Indies  27–8

Anna Catherina (sloop)  29–30 Australian insurance law basis/overview/conclusion  111–13, 140–1 brokers see under brokers’ role good faith requirement  420 Insurance Contracts Act 1984  112 contracts not subject to  137–40 contracts subject to  140 insurer’s duties  122–37 basic duties/summary  122–4, 137 common law  123 electronic transactions  124, 135–6 Financial Services Guide and a Product Disclosure Statement  124 first party property policy  123 flood insurance, example  125–6, 137 Key Facts Sheets (home building/contents insurance products)  124 prescribed contract  123 reliance impossible, matters where  123 standard cover see standard cover regime below statutory policy cover  124 unusual terms see unusual terms below marine insurance  137–9 common law  137–8 legislation  137 review recommendations  138–9 policyholder’s duty  113–22 common law  113–14 disclosures and misrepresentations  114–15 eligible contracts’ disclosure  119–20 innocent pre-contractual non-disclosure, information about  120–1 known to the insurer, matters  116–19 matters to be disclosed  115–16 prudent/reasonable insurer’s knowledge  117–19 relevant matters notion  116 restrictions on remedy of insurer  121–2 scope of duty of disclosure  115–22 reinsurance  139–140 standard cover regime aims and objectives  124–5 derogation from, ‘clearly inform’ requirement  125–6

472 

Index

prescribed contracts  124 scope of ‘clearly inform’ requirement  126–9 unusual terms see unusual terms below unusual terms basic ‘clearly inform’ obligation  129–34 definitions  130–2 insurance intermediary/agent involvement  134–5 reasonable notice in writing  132–4 utmost good faith  112–13 fraudulent non-disclosure  113 implied term  113 innocent non-disclosure  112 policyholder’s duty  114, 115 Australian Law Reform Commission (ALRC)  111, 138 big data  468 Boehm, Charles  24, 45, 53–4, 57 arguments against liability  61–3, 66–8, 71–3 immateriality of poor state of defences  65–6 waiver of disclosure  63–4 brokers’ role assured, as agent for  431–2 Australian reforms  443–4 common law jurisdictions, reforms in  443–6 independent brokers  430 information disclosed by assured, failure to pass on  436–8 Australian legislation  437 New Zealand legislation  437–8 UK legislation  436–7 information known only to broker  438–41 information known only to broker, failure to pass on  438–41 agent to insure, phrase’s significance  440–1 common law rule  438–40 fraud against assured  442 information to be disclosed  441–2 insurers’ agents  429–30 insurers, brokers’ role  431–2 London broker market  430–1 misrepresentation  433–6 Australian legislation  434–5 common law approach  434 UK legislation  435–6 New Zealand reforms  444–5 online aggregators  429 risk placement/presentation  432–3 significance  429–32 UK reforms  445–6 Canada, good faith requirement  420 Carter, Roger anticipation of French attack  71–3 apprehending a Dutch war  75–7

career  23, 25–6 defensive condition of fort  62–4 insurance policy form of  40–4 purpose of  39–40 surrender of fort  38 Carter v Boehm (1766) analysis of judgment see Mansfield’s judgment full judgment, Burr 1905  1, 11–21 history of case Carter’s appointment  26 insurance claim  23–4 insurance instructions  23 insurance policy see under Carter, Roger above key points/conclusion  23–4, 84–5 significance  23–4 Chalmers’ Marine Insurance Act  51 Chinese insurance law insurer’s duties to explain/remind/ elucidate  213–26 asymmetry of information  219 breach and bias against insurers  220–2 burden of proof  217–18 clauses that exempt  215–16 clearness of elucidation  216–17 consumer insurance reform proposals  222–6 consumer/business insurance distinction  222–3 cooling-off period expansion  223 information provision duty  223–4 reasonable expectations doctrine  224–6 drawing applicant’s attention  216 elucidating duty  215–18 explaining duty  214–15 good faith/utmost good faith  213–14, 218–19, 226–7 party autonomy/informed choice rationales  219–20 reasonable expectations doctrine  224–6 reminding duty  215–18 utmost good faith/good faith  213–14, 218–19, 226–7 key issues/summary  199, 226–7 policyholder’s truthful representations duty  201–13 breach’s consequences all-or-nothing approach  210–13 Contract Act 1999  209–10 Insurance Act 2009  206–9 broadness of  202–3 English law, comparison  204 general negligence, consequences  212–13 information imbalance  205–6 intentionality  207–8 key issues  201 materiality  203–4

Index misrepresentation  206–9 nature of  202 parameters of  204–5 proportionate remedies  211–12 rescission impact  210–11 utmost good faith  200–1 civil law jurisdictions see Chinese/French/ German/Japanese/Swiss insurance law claims history of insured see under uberrima fides (utmost good faith) doctrine Clive, Lord  76 common law jurisdictions see American/ Australian/United Kingdom insurance law Condé (ship)  37 consensualism principle  234, 259 constructive knowledge see under uberrima fides (utmost good faith) doctrine contra proferentem principle see under uberrima fides (utmost good faith) doctrine D’Aché, Comte de  28, 31 D’Estaing, Count  23, 27, 36–8 Dutch war, apprehensions of  75–7 Earl of Holderness (ship)  33 East India Company  27–8 European insurance law Directives  381 draft rules see PEICL (Principles of European Insurance Contract Law) 2016 Expedition (ship)  37 expert evidence see under uberrima fides (utmost good faith) doctrine Fort Marlborough conflict in India  26–8 contemplation of French attack  28–30 defensive condition  61–3 established in Sumatra  24–5 insurance instructions  23, 58–60 long-term threat of French attack  26–36 origins of attack on  36–8 surrender  38 Wynch’s letter and responses  30–6 Fort Marlborough Secret Committee  29–30, 33–5, 56–7 French East India Company  27–8 French insurance law advice provision to policyholder, insurer’s obligation content of  254–5, 260 limits of  256–7 loss of opportunity, remedy  257–8 obligor of  255 protection of inexperienced party  256 recoverable loss  258–9 remedies  257–9 consensualism principle  234, 259

 473 good faith  230–3 behaviour norm  231–2 informational duty  231 intention/nature of contract/equity, as considerations  230–1 relevance/origin of Carter v Boehm  232–3 uberrimae fidei (utmost good faith)  232–3 insurer’s informational duty  248–59 life insurance see life insurance contracts, specific rules for insurers below origin of  248–9 standardised information see standardised information provision to policyholder below key issues/summary  229–30, 259–60 life insurance contracts, specific rules for insurers legally required information and specific remedy  251–2 right to revoke, availability  252–3 misrepresentation proof  237–48, 259 admissions by policyholders  247–8 bad faith of policyholder  239–40 key points  237 means of proof  240–8 pre-written declarations, evidentiary value  240–5 alternative means of proof  245–6 risk appreciation of insurer, causal link  238–9 voluntary disclosure/spontaneous declarations  246–7 policy holder’s duty  234–48 closed questionnaire system  235 consensualism principle  234, 259 general law of obligations, remedies under  237 misrepresentation see misrepresentation proof above special remedies  236–7 to disclose  234–5 to truthfully answer  234–7 standardised information provision to policyholder insurer’s duty  249–50 life insurance see life insurance contracts, specific rules for insurers above remedies  250–1 utmost good faith  232–3

German insurance law advice, insurer’s duties  285–90 general contract law  287–8 incorrect advising /liability for performance  288–90 Insurance Distribution Directive, implementation  290

474 

Index

intermediaries’ duties  290 nature and scope  285–7 see also information, insurer’s duties breach of non-misrepresentation duty for content  270 for form  271 instruction requirement/lack of knowledge of insurer  275 remedies see remedies for breach of non-misrepresentation duty below for timing  270–1 content and scope of non-misrepresentation duty  264–9 broker’s questions  266 clarity/definiteness of questions  267–9 insurer’s questions  265–6 key points  264–5 knowledge of policyholder  269 material questions  266–7 text form questions  265 echte Rechtspflicht (enforceable duty)  263 gesetzliche obliegenheit (legal obligation)  263 good faith principle  261–2 information, insurer’s duties  279–85, 291–2 applicability to insurance contracts  279 content  279–81 general contract law  285 key points  278 nature of duty  282 remedies see remedies for information provision duty violations timeliness  281–2 to policyholder  282–3 see also advice, insurer’s duties key issues/summary  262, 290–2 non-misrepresentation duty of policyholder  262–78, 290–1 attribution to policyholder  277 breach see breach of non-misrepresentation duty consumer contracts  264 enforcement of rights by insurer  276–7 legal obligation  263 remedies see remedies for breach of non-misrepresentation duty risk calculation  262 risk-relevant facts, disclosure  263 semi-mandatory provisions  264 specific information provision  263 remedies for breach of non-misrepresentation duty discharge of insurer from liability  274 gross negligence  273 intent  273–4 legal consequences  272–5 no fault/slight negligence  273 scope/content  271–2 varying the contract  274–5

remedies for information provision duty violations  283–5 claim for damages  285 key points  283 revocation  283–5 global conclusions big data  468 Carter v Boehm, declining importance  469 consumer-welfarism/market-individualism, dichotomy  466–7 convergence significance  465–6 echte Rechtspflicht (enforceable duty)  463 gesetzliche obliegenheit (legal obligation)  463–4 information, insurer’s duties breach of duties, consequences  465 disclosure/explanation/advice  464–5 implied duty to ask for  463 key developments  462 remind/alert policyholder, duty to  463–4 insurtech, responses to  468 key issues  447 policyholder’s duty conditional avoidance and proportionality  461–2 disclosure to misrepresentation duties  459–60 key shifts  459 materiality and decisive influence test  460–1 pro-policyholders or pro-insurers, reductionism v rebalancing  467–8 utmost good faith civil law jurisdictions  457 common law origins  448–9 differences in meaning  452–4 importance of origins  451 as legal duty  454–7 pre-contractual duties distinction  447–8 refocus  458–9 Roman law origins  449–51 see also pre-contractual duties illness see under uberrima fides (utmost good faith) doctrine India, Anglo-French commercial rivalry/war  27–8 insurers’ agents see brokers’ role insurtech, responses to  468 intermediaries see brokers’ role Ireland, good faith requirement  420 Japanese insurance law cancellation by insurer for non-disclosure  305–9 effect of cancellation  306–7 insurer’s negligence  307

Index intention/negligence intention  306 intermediaries’ actions  307–9 non-allowance situations  307–9 pro-rata settlement not allowed  305–6 time bar  309 and Carter v Boehm  294–5 claims unrelated to non-disclosure causation test, application difficulties  310–11 rules and rationale  309–10 disclosure, policyholder’s duty basic character  299–300, 321 cancellation see cancellation by insurer for non-disclosure facts see facts to be disclosed by policyholder Insurance Business Act  311–12 nature of  300 persons who owe duty  300–1 rationales  301–2 technical necessity/assessment of risk theories  301–2 types of parties  300–1 facts to be disclosed by policyholder basic requirements  302 materiality, objective/subjective tests  302–4 other insurance’s existence  304–5 unknown facts  305 gesetzliche obliegenheit (legal obligation)  300 good faith principle application to insurance contract  298–9 general mandatory principle  298 insurance business law  297 insurance contract law  295–7 insurer’s duty basic points  312–13 breach of contract compensation  320–1 breach of duty sanction  315 Civil Code  317–21 conduct prohibitions  313–14 Consumer Contract Act  317 customer’s intention, ascertaining of  314–15 financial instruments, Act on Sales  316 information provisions  314 Insurance Business Act  313–15, 322 mistake, avoidance  318 multiple insurers, agents acting for  315 tort claims see tort claims against insurer key points/summary  293–4, 321–2 marine insurance  296 policyholder’s duty see disclosure, policyholder’s duty tort claims against insurer

 475

breach of contract compensation  320–1 legal basis  318–19 quantification of damages  319–20 unilaterally mandatory provisions  296 jurisdictions civil law jurisdictions see Chinese/ French/German/Japanese/ Swiss insurance law common law jurisdictions see American/ Australian/United Kingdom insurance law mixed legal system see South African insurance law Lally, Comte de  27–8, 32, 36 MacGillivray on Insurance Law  147, 449 Malaysia, good faith requirement  420 Mansfield’s judgment, Carter v Boehm (1766)  23–4, 44–85 Carter v Boehm (1766), context of policy  54–7 construction of policy, and insured-against contingency  58–60 context of policy account of circumstances  54 principle proposition  54–6 second proposition  56–7 substantial inequality of accessible information, absence  55–6 defences (Boehm’s) to liability  60–1 fraudulent avoidance by insurer basic argument  77–8 circumstances where reason to suspect non-disclosure, conscious failure to inquire  79–80 context  81–2 fraudulent failure to inquire  79 obligation without inquiry  79–80 waiver of disclosure, relationship with modern law  80–1 key aspects/summary  45, 84–5 material non-disclosure, anticipation (Carter’s) of French attack Boehm’s argument  71–3 rejection of argument  73–4 material non-disclosure, apprehending a Dutch war, Carter’s grounds for historical context  75–6 rejection of argument  77 material non-disclosure, defensive condition of Fort Marlborough Boehm’s argument  61–3 historical context  62 immateriality of poor state of  65–6 rejection of argument  63–6 waiver of disclosure  63–4

476 

Index

material non-disclosure, Wynch’s letter  66–71 Boehm’s argument  66–8 rejection of argument  68–71 non-disclosure law balance of the law, subsequent changes  51 circumstances in which no complaint possible  47–8 Common law principles, exposition  45–6 consumer/non-consumer distinction  51–2 fair presentation duty  52–3 governing principle  46 limited rationale  47 materiality  47 in treatises/jurisprudence/ legislation  48–51 public policy objection grounds for dismissing objection  83–4 preliminary objection  82–3 sailors’ wages analogy  83 see also Carter v Boehm (1766) marine insurance/other areas, distinction see under uberrima fides (utmost good faith) doctrine Marshall, S, A Treatise on the Law of Insurance  48–9, 79 material information disclosure see under uberrima fides (utmost good faith) doctrine Merkin, Robert  157 mixed legal system see South African insurance law model disclosure statute see under uberrima fides (utmost good faith) doctrine narrow duty see under uberrima fides (utmost good faith) doctrine nationality of insured see under uberrima fides (utmost good faith) doctrine New Zealand, and brokers see under brokers’ role Park, JA, A System of the Law of Marine Insurance  48 PEICL (Principles of European Insurance Contract Law) 2016 acquis communautaire  386–7 advice, insurance distributor’s duties  407–8 application’s scope  384–5 breach of disclosure duty, consequences  393–400 amend/terminate contract, right to  396–7 general contract law  398 group insurance, as special case  399–400 incorrect/incomplete answers  393–4

insurer’s release from obligation  395–6 life insurance, indisputability  398–9 no legal consequences, exception  397–8 sanctions and outcomes for contract  394–5 disclosure, policyholder’s duty application of PEICL  388 breach see breach of disclosure duty, consequences above duration of duty  393 features of duty  389–93 information exempt from duty  392–3 insurer’s questions  389–91 knowledge of applicant  391 nature of  389 provisions on  387–8 questionnaire model  389–91 draft rules  381–2 Expert Group on European Insurance Contract Law (2013 and 2014)  384 gender factors  386 information, insurer’s duties advice, insurance distributor’s duties  407–8 Distance Marketing Directive, additional/ overlapping duties  405–6 general insurance and life insurance, pre-contractual documents  408–9 harmonisation  401 life insurance (Solvency II)  402–5 non-life insurance (Solvency II)  401–2, 404 pre-contractual documents re-loaded, (PRIIPS and IDD)  406–7 warning duties  409 internal market barriers  382 mandatory provisions  385–6 need for  382–3 non-mandatory rules  386 optional (model) instrument  383–4 Principles of European Contract Law (PECL)  384–5 summary  410 Pigot, Sir George  37 Pitt (ship)  33–4, 38, 40, 56–7, 77 Pocock, Sir George  28, 31 pre-contractual duties civil law jurisdictions  3, 6–7 common law jurisdictions  3, 6 consumer protection focus  1–2 insurance contract law reforms  2 non-disclosure and misrepresentation  4–6 significant republications  2–3 spheres/contexts  3 utmost good faith (uberrima fides)  1, 3–4 see also global conclusions

Index Preston, Richard  35–6, 62–3, 65, 68, 70, 75 previous losses, disclosure see under uberrima fides (utmost good faith) doctrine reinsurers/reinsured aleatory nature  415, 427 asymmetry/uncertainty 512 background  411–14 Carter v Boehm, role in US law  418–20, 426–7 differentiating features of insurance/ reinsurance contracts  415 disclosures required  425–6 general context  411 information asymmetry  412–13 jurisdictions with similar requirements  420–1 materiality, objective determination  422–5, 427 practical duty  420–2 Principles of Reinsurance Contract Law (PRICL)  3, 411n, 427n reasonableness touchstone  417–18, 422 summary  426–7 UNIDROIT Principles of International Commercial Contracts (PICC)  417–18 utmost good faith  413–14, 415–20 Carter v Boehm, role in US law  418–20 differentiation with good faith in US law  417–18, 427 disclosures required  425–6 as more than good faith  421–2 reasonableness touchstone  417–18, 422 standard/terminology, development  416–17 rejection notice see under uberrima fides (utmost good faith) doctrine Seven Years’ War  27–8 Singapore, good faith requirement  420 South African Financial Services Board  367–8 South African insurance law background  353–4 common and statute law  354 disclosure, insured/policyholder’s duty ex lege common law duty  366–8, 379 inducement requirement  370 materiality test  368–70 misrepresentation  369, 371–2 reasonable person  369 remedies for breach  371–2 specified list  370 disclosure, insurer’s duty asymmetry of information  374 direct marketing  375 essential terms  373

 477

ex lege duty  372 intermediaries’ duties  375–6 performance data/forecasts  374–5 Policyholder Protection Rules, proposed changes  377–9 remedies for breach  376–7 statutory duties  373–5, 380 transparency of information  373–4 good faith common law  355 degrees of  355–6 ethical/controlling principle  355 public policy see public policy below uberrima fides  356 unconscionability  355–6, 365–6 insured/policyholder’s duty see under disclosure above insurer’s duty see under disclosure above public policy consensus factors  358–60 Constitutional rights  360–3, 364–5 definitions  357 exceptio doli generalis  357–8 rules-based principles  356–7 ubuntu concept  363–4 summary  379–80 Swiss insurance law advice, absence of insurer’s duty  348–9 see also information, insurer’s duties below disclosure, policyholder’s duty application’s scope  327–8 duties’s scope  328–32 form of required information  332 Gefahrstatsache  330 key points  327 knowledge  331–2 materiality  330–1 non-disclosure see termination of contract for non-disclosure below written question  329–30 good faith in contract law  324–5 in insurance law  326 information, insurer’s duties application’s scope  338–9 general duties’ scope  340–1, 350 in good faith basic issues  345 content/scope of duty  345–6 relationship to Arts 3 and 3a ICA  346–8 group insurance  342–3 modalities of provision  341–2, 350 other sources of  349 ratio legis  337–8 remedies see remedies for insurer’s breach of information duties

478 

Index

semi-mandatory character  339–40 statutory provisions  337 see also advice, absence of insurer’s duty above insurer’s duties see advice; information above key points/summary  323–4, 349–50 non-disclosure see termination of contract for non-disclosure below policyholder’s duties see disclosure above remedies for insurer’s breach of information duties compensation claim  344, 346, 347 contract termination  343–4 regulatory sanctions  344 sources  323–4 termination of contract for non-disclosure damages, liability for  336–7, 350 exceptions to termination  335–6 group insurance  334–5 indemnification obligations  334 legal consequences  333–5 life insurance surrender  334 modalities of  333 other private law sanctions  336–7 premium payments  334 right of  332–3, 349–50 vices of consent, rules on  336 uberrima fides (utmost good faith) doctrine  1, 3–4, 87–108 ambiguous questions  95, 108 basic principle  87 broad duty  90–3 Carter v Boehm (1766) and aftermath  88–91 claims history of insured  94–7 ambiguous questions  95, 108 marine insurance/other areas, distinction  94–5, 105 notice of rejection  94–5 constructive knowledge  93–4 contra proferentem principle  108 criminal convictions  98–9 critical assessment  87–8, 104–6 expert evidence  103–4, 108 illness  99–101 Mansfield’s judgment  88–9, 103 marine insurance/other areas, distinction 94–5, 105, 106 material information disclosure  107–8 model disclosure statute  107 as more than good faith (in reinsurance market)  421–2

narrow duty  89–90, 104, 107 nationality of insured  101–3 19th century developments  90–3 previous losses, disclosure  95–7 reform provisions  106–8 rejection notice  94–5 waiver principle  107 United Kingdom insurance law breach and changes to remedies, deliberate/ reckless/careless culpability  154–5 brokers see under brokers’ role business law, policyholder’s duty breach and changes in remedies  161–2 fair presentation (of risks), newness of duty  155–7 knowledge of the insured  157–8 knowledge of the insurer  159 materiality, Pan Atlantic case  160–1, 169 consumer law, policyholder’s duty breach and changes in remedies  153–5 change of duty  151–3 fundamental changes  151–5 non-disclosure/misrepresentation, distinction  152–3 pre-contract misrepresentation  153–4 qualifying misrepresentation  154–5 reasonable care not to make a misrepresentation  151–2 insurer’s duty  162–8 disclosure duty, and Banque Financière case  162–6 transparency requirements  166–8 key issues/summary  144–5, 168–9 new and old in recent legislation  143–4, 169 policyholder’s duty business law see business law, policyholder’s duty consumer law see consumer law, policyholder’s duty contracting out  162 key issues  150–1 utmost good faith common law  145–7 specious meaning  147–9 statutory change  149–50, 168–9 United States insurance law see American insurance law utmost good faith see uberrima fides doctrine waiver principle see under uberrima fides (utmost good faith) doctrine Wilson, Captain  34–5 Wynch, Alexander  30–6, 66–71