The Duty of Utmost Good Faith - Temporal Application

An issue that has arisen is whether the requirement of utmost good faith applies throughout the contract of insurance. The debate stems from section 20 of the Barbados Marine Insurance Act, Cap 292, which provides:

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.

The confusion arises because section 20 has no temporal restriction, whereas section 21 and 23 are clearly restricted to the pre-contractual stage. According to this section, the remedy for breach of uberrimae fidei is the option of avoidance i.e., from the beginning (ab initio), because the duty applies and operates up until the conclusion of the contract, although it remerges, of course, on renewal.^[454] There has been an attempt however, to apply this somewhat draconian remedy, to situations where the breach of utmost good faith occurs during the existence of the contract. As discussed earlier the term �utmost’ was introduced by the Marine Insurance Act. Admittedly, according to the Oxford dictionary, the term means �furthest, extreme or the greatest,’ so that the section has been relied upon to canvass a continuing duty of utmost good faith. One argument is that, if section 20 is coloured by sections 21 and 23, it is superfluous and unnecessary so that the logical assumption is that its purpose is to impose a wider, continuing duty. The other argument is that the term �utmost’ must be read in light of section 21 and 23 to refer to the pre-contractual stage.

In accordance with The Star Sea, the idea of good faith in the context of insurance contracts reflects the degrees of openness required of the parties in the various stages of their relationship. It is not an absolute and there is a clear distinction to be made between the pre-contractual duty to disclose and any duty of disclosure which might exist after the contract has been made.

From an academic standpoint, the dispute has been described as �unquestionably one of the most academically challenging issues in insurance law.^[455] From a practical standpoint, the issue may arise in connection with some action or inaction on the part of the insured but also to the insurer’s tardiness in paying claims.^[456] At the crux of the dispute is whether:

i. a breach of the duty of utmost good faith, at the claims stage, entitles the insurer to avoid the entire contract ab initio;

ii. the insurer can only repudiate as from the date of the breach of the duty; or

iii. the insurer is restricted to merely repudiating the claim.^[457]

Unfortunately, there is no Caribbean authority on point. If one looks to authority from the United Kingdom for guidance, there is dicta suggesting that fair dealing does not come to an end when the contract has been concluded,^[458] and it appears that the strictness of the level of duty �fluctuates depending on the stages of contract.’^[459] The complexity can be seen in two Court of Appeal decisions, K/S Merc-Scandia XXXXII v Lloyd’s Underwriters (The Mercandian Continent)^{[460] [461] and Agapitos v Agnew (The Aegeon).[462] The Queen’s Bench Division first had to confront the decision of Black King Shipping Corporation v Massie (The Litsion Pride).116}

In the Litsion Pride,^[463] the insurer was entitled to avoid the whole contract, ab initio.

In Joseph v Clico International, there was a breach of an expressed term of the contract. Chief Justice Simmons, however, stated:

In a contract of fire insurance, in addition to the express terms constituted through answers to specific questions in the proposal form, there is an implied term of the contract that the person seeking insurance must communicate all matters within his knowledge which are in fact material to the question of insurance and not merely those which he believes to be material.^[468]

If this statement refers broadly to the duty of uberrimae fidei, then an obvious difficulty arises as to how can the requirement of uberrimae fidei be an implied term of the contract?^[469] Admittedly, the implied term of the contract theory would facilitate the operation of section 50(2) of the Marine Insurance Act of 1906.^[470]4 As section 50(2) refers to �defences arising out of the contract’ it was argued in the The Litsion Pride that the provision would be ineffective if the duty of utmost good faith was based on a rule of law.

Subsequently, in Agapitos v Agnew (The Aegeon) No 1^[472]6 the Court of Appeal, inter alia, considered whether and in what circumstances the common law rule of law and/or section 17 can apply in the event of the fraudulent devices being used to promote a claim, which (the claim) may be proved at trial to be in all respects valid and, if so, whether the application of the rule and the Marine Insurance Act ceases with the commencement of litigation. Mance LJ distinguished the decision of The Star Sea because the fraud in that case was directed at the third party claimant and hence it was considered as affording no guidance as to the appropriate approach to fraudulent devices. A distinction was made between �fraudulent devices’ and �material fraud.’ Material fraud, according to the learned judge, operated during the life of the contract and attracted severe consequences entitling the insurer to terminate the contract for breach as was the case in the Mercandian Continent.^[473] Mance LJ tentatively concluded that the section 17 duty (section 20 in the Barbados Act) has no application to fraudulent claims. Rather, the common law fraudulent claim rule — that of forfeiture of the claim — should be applied in cases where fraudulent devices are used.

Unravelling the complicated common law principles is undoubtedly a tortuous process that is far from complete. Although public policy may justify the operation of good faith at the post-contractual stage — for, as Longmore LJ observed in the Mercandian Continent, post-formation duty is a �necessary and beneficial discipline’ to discourage deliberately exaggerated claims^[474] - a forfeiture of all benefits due to public policy considerations is not the same as the remedy of avoidance of the contract, ab initio, as prescribed by section 20.^[475] Further, a distinction must be drawn between material fraud and fraudulent devices.

Before concluding, mention must be made of a feature of modern commerce where good faith arguably transcends the pre-contractual stage. Invariably, policies of insurance contain an express clause known as an �increase of risk clause.’ This type of clause, usually created by way of a promissory warranty, triggers a duty analogous to that of uberrimae fidei. In accordance with section 37 of the Barbados Marine Insurance Act:

(1) A warranty...means a promissory warranty, that is to say, a warranty by which the assured undertakes that some particular thing will or will not be done, or that some condition will be fulfilled, or where he affirms or negatives the existence of a particular state of facts.

A promissory or continuing warranty places an obligation on the insured to keep the insurer abreast of material facts which may affect the risk. It is an absolute undertaking by the insured that certain facts or conditions pertaining to the risk shall continue, or that certain things will be done or omitted.^[476] The implications of the insertion of such a clause can be seen in the decision of the House of Lords in Dawson v Bonnin^[477] where it was held that the insurer was entitled to repudiate liability, since compliance with a warranty bearing on the risk is a condition precedent to the attaching of risk and when the answers are declared to be the �basis of contract’ exact fulfilment is foundational to its enforceability. Interestingly, although there is Caribbean authority surrounding the obligation created by such a clause, adjudication has been primarily on principles of construction. This can be seen for instance in Solomon Ghany,^[478] where when the insurers argued, inter alia, that the insured was in contravention of clause 5(1) of the policy by storing on the premises a flammable oil, the decision of Thomson v Equity Fire Insurance Co^[479] was cited and applied in order to determine whether diesel was �stored’ on the premises.

With respect to fire policies, clauses descriptive of the risk similarly give rise to analogous specific disclosure requirements. Generally, such terms relate to property being unoccupied for a specific period requiring the insured to provide a continuing warranty and to notify the insurer should the property become unoccupied. The operation of such a clause arose for consideration in the Privy Council decision of Marzouca v Atlantic and British Commercial Insurance Company^[481] on appeal from Jamaica. Here, Lord Hodson stated that for the occupation to be effectual it must be actual, not constructive. It must involve the regular daily presence of someone in the building. If there is no one present for a continuous period of more than 30 days, there is a breach of condition.^[482] In Swaby v Prudential Assurance Co Ltd the Court of Appeal of Jamaica in construing the term, ruled that the phrase �become unoccupied’ implied a change of status and did not cover instances where absence was merely temporary and there was a manifest intention to return.’^[483]

It is clear that the terms of the insurance contract and the presence of promissory or continuing warranty place an obligation on the insured to keep the insurer abreast of material facts which may affect the risk. Moreover, clauses descriptive of the risk similarly give rise to a duty analogous to that of the duty of utmost good faith. The question remains, however, as to the extent of the duty of utmost good faith and whether it is capable of extending beyond the pre-contractual stage to the post- contractual stage. The law is far from settled. While the region must understandably look to the common law for answers, regional marine insurance legislation can also be resorted to, to resolve many a thorny question.

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