The Moral Hazard: Consideration of Outstanding Criminal Charges, Acquittals, Suspicions and/or Rumours of Criminality
There are myriad considerations within the concept of moral hazard that pose considerable difficulty for jurists. But before exploring the ambit of the moral hazard, it is important to understand that section 21(2) of the Barbados Marine Insurance Act indicates that there is a clear correlation between materiality, the quantum of the premium to be charged and risk-assessment.
By addressing the function of materiality, the section thereby intimates the type of factors which will be considered material. In this regard, the common law groups material facts into two main categories: the â€?physical hazard,’ the physical condition of the life or property being insured, and the â€?moral hazard,’ the factors concerning the character of the insured — the desirability of the assured as a person with whom the insurer’s would want to contract.[392] It is important to appreciate that both â€?hazards’ may be subject to an express warranty, in which case there is no dispute as to the materiality of the information, as materiality is presumed.Undoubtedly, the presence of the express term, as was the case in Bowe v British Fidelity Assurance Limited[393] and Alleyne v Colonial Fire and General Insurance Company Limited,[394] has a bearing on the judicial response. In the Barbadian decision of Joseph v Clico International General Insurance Co Ltd,[395] [396] [397] in response to the question whether the appellant was insured with any other company, the insured responded â€?no’ when in fact there was a pre-existing mortgage and insurance on the property. Chief Justice Sir David Simmons, in upholding the decision of Madam Justice Kentish in the High Court, referred to the basis of contract clause as the â€?critical element’ making the truth of the statement, a condition precedent to the liability of the insurer, so that the insurer was held entitled to avoid the contract on the basis of non-disclosure. In that regard, it must be noted that while facts as to the moral hazard are less likely to be subject to express questions, they can be. Moreover, notwithstanding the importance of basis of contract clauses, as acknowledged by Justice Moore-Bick in James v CGUInsurance Plc,60 by their very nature many matters which insurers would regard as relevant to the moral hazard are unlikely to be the subject of questions in the proposal form and are equally unlikely to be volunteered by the insured. In any event, the duty of disclosure exists independently of any that may be spelt out in the policy documents. Consequently, the following additional questions may be posed: (i) whether the moral hazard extends beyond criminal activity to bankruptcy or financial mis-dealings; (ii) to what extent are the courts prepared to consider outstanding criminal history, criminal charges and acquittals;61 (iii) what is the relevance of allegations or circumstances which raise suspicion of involvement in criminal activity; and (iv) what is the relevance of allegations or circumstances that affect the risk insured? Although the answers to these questions illuminate the scope and ambit of the moral hazard, compounding the difficulty is the fact that moral hazard can surface in a variety of situations, sometimes with no clear distinct line of demarcation separating one moral hazard from another. This blurring of the lines is apparent in the â€?distinction’ between bankruptcy, financial insecurity and general dishonesty. At the crux of the dilemma is whether the moral hazard extends beyond criminal activity to bankruptcy and/or financial mis-dealings. Generally, it is accepted that an allegation of general dishonesty is a material fact that must be disclosed. Thus, in CTI v Oceanus[398] [399] at first instance, the Court stated that an insurer is entitled to know all facts which throw doubt on the business integrity of the assured at the time the insurance is placed. Similarly, in Insurance Corporation of the Channel Islands Ltd v Royal Hotel No 2,53 Mance J held that it was a material fact that the insured, a director who was also the company secretary, had prepared false invoices in order to give the banker a more favourable impression of the company’s profitability, even though the documents had no connection to the policy being effected. Arguably, as financial insecurity ultimately impacts on an insured’s ability to pay the premiums, it provocatively may be argued to fall within section 21(2) of the Barbados Marine Insurance Act, as a factor which may â€?influence the judgment of a prudent insurer in fixing the premium.’[400] This view must be countered, however, given that the fixing of the premium by underwriters correlates to the risk insured and not to the insured’s ability to pay. The relevance of the insured’s financial position can thus be seen in James v CGU Insurance[401] where the financial circumstances of the insured who was engaged in disputes with both Inland Revenue and Customs was found to be a material fact falling within the moral hazard. Of interest is the reference by the Court to United Kingdom Statements of General Insurance Practice and the code of practice on the type of matters that insurers regard as material - auxiliary mechanisms that are not available in the Caribbean.[402] The issue also arose in Galle Gowns Ltd v Licenses and General Insurance Ltd.67 Here, the facts surrounded a fire insurance policy where the chairman of the plaintiff company had a history of financial difficulties, including two adjudications of bankruptcy under an assumed name. In respect to the first bankruptcy, he had not obtained a discharge until 11 years after and in the case of the second, not until five years later. Additionally, according to the facts, two previous companies of which he was a director had gone into liquidation and he had been found guilty of breach of trust and misfeasance for which he was fined. The insurer was thus entitled to avoid liability due to non-disclosure. It seems clear therefore that the answer to at least one of the questions is â€?yes’ - the moral hazard does indeed embrace financial impecuniosities on the part of the insured. The boundaries of moral hazard were tested in the leading decision of Somat Ali6i arising out of the jurisdiction of Guyana. The facts which were relatively uncomplicated, surrounded a policy of indemnity effected by the insured on 30 June 1994, on his dwelling house, factory and fibreglass moulds with the appellant insurance company. The initial cover was for a period of one month but subsequent to a request for additional insurance and a visit by agents of the insurer, additional coverage was agreed. On 31 July 1994, the respondent’s house and factory were completely destroyed by fire. Upon an action for indemnity in the amount of $132 million, at first instance, Madam Justice Bernard ruled in favour of the insured, dismissing a counterclaim by the insurer that the policy was void. The insurer appealed to the Court of Appeal on the ground that the policy was void for material non-disclosure in that the insured had failed to disclose that at the time of effecting the contract the insured was declared bankrupt in Canada. The Court of Appeal while accepting the lower court’s position on the parameters of the moral hazard, ruled in favour of the insurer on the ground that the insured had failed to comply with the condition precedent for additional coverage. The findings of the lower court merit further scrutiny. There, Madam Justice Bernard acknowledged that â€?any fact which influences the moral hazard assumed by the insurer and exposes him to the dishonesty of the insured’ must be disclosed regardless of whether that fact involves criminality or just deceptive conduct. Nevertheless a measure of judicial restraint was exercised as the learned judge was loath to expand the moral hazard beyond accepted boundaries to embrace financial difficulty. This is evident in the following extract: [M]ost of the cases in which materiality of a non-disclosed fact has been discussed, involve non-disclosure of previous criminal convictions for dishonesty although, as mentioned earlier, nonÂdisclosure is not confined to this. I have not personally been able to discover any case and none was cited to me where failure to disclose prior bankruptcy when applying for coverage for fire insurance or non-marine insurance was held to be a material fact, or where such failure entitled the insurer to avoid.[405] The Court of Appeal accepted that there was no duty on the respondent to disclose his past bankruptcy and past financial history as those matters were not material for the insurer to know and in any event, the failure of the insurer to make due inquiry particularly having been put on alert as to the insured’s â€?cash flow’ problems amounted to waiver by the company of the information sought.[406] Legal practitioners are cautioned, however, as the result in Somat Ali cannot be relied upon as definitive on the relevance of financial difficulty. Instead, relevance hinges on the degree of financial difficulty. This is supported by the New Zealand decision of Quinby Enterprises Ltd (in liquidation) v General Accident Fire and Life Assurance Corp plc,[407]1 cited in Somat Ali, where the insured had a large unsecured debt and had previous convictions in relation to fraudulent financial transactions which â€?cumulatively mean[t] that there should have been disclosure to the insurer of Quinby’s precarious financial position.’[408] The Court held that the non-disclosure rendered the policy void.[409] The Somat Ali decision is therefore justified given that the facts are distinguishable from the Quinby decision. With respect to the question raised, one can conclude as follows: (i) that bankruptcy/financial difficulty is clearly not within the ambit of rehabilitation legislation, (ii) bankruptcy/financial difficulties are, however, relevant to the moral hazard despite the stance adopted by Somat Ali, since bankruptcy/financial difficulties speak to the insured’s financial integrity.[410] As to the question, to what extent are the courts prepared to consider outstanding criminal history, criminal charges and acquittals, it is clear, that the insured’s criminal history is similarly relevant to the moral hazard. The question remains, however, as to what extent are the courts prepared to consider outstanding criminal charges and acquittals?[417] If one looks to the common law for answers, material charges must be disclosed to the insurer even if the insured knows that the charges are unfounded.[418] This is in accordance with the decision of March Cabaret Club & Casino v London Assurance,[419] and the judgment of Justice May. There are two aspects of the March Cabaret case that reflect the nuances of modern commerce and which compound the difficulty relating to utmost good faith. Firstly, there were no questions on the proposal relating to moral hazard and secondly, the contract of insurance was renewed prior to the date of conviction.[420] [421] This position, that material charges must be disclosed to the insurer even if the insured knows that the charges are unfounded was approved by Coleman J in the Court of Appeal in Brotherton v Aseguradora Colseguros SA No 2.75 In Brotherton, the insured failed to disclose, at the time of effecting insurance, that he was under investigation for alleged fraudulent activity - an allegation that was subsequently proven false. The danger for the insured is immediately apparent, a danger which is reinforced by the more recent decision of Strive Shipping Corporation v Hellenic Mutual War Risks Association.[422] [423] Here the court considered that an outstanding charge on the date of the application for insurance was a material fact that must be disclosed. Furthermore, if the assured knows of facts which, when viewed objectively, suggest that circumstances might exist (â€?the suggested facts’) which would increase the magnitude of the risk and, the known facts would have influenced the judgment of a prudent insurer, the known facts do not cease to be material because it may ultimately be demonstrated that the suggested facts did not exist. The upshot is that there has been a rapid development in the relevance of allegations and charges which is seemingly at odds with the presumption of innocence that operates in criminal law. In disentangling the common law on the relevance of outstanding criminal charges and allegations of dishonesty, certain principles emerge: (i) if the insured has been charged with an offence and committed to trial, this is a material fact that must be disclosed in accordance with March Caberet; (ii) this position stands, even where the matter has come to trial and the insured has been acquitted and/or where the matter has not yet come to trial and the insured is aware that the charges are groundless; (iii) where the insured is of the view that the charges are groundless, in accordance with the decision of Brotherton, the insured is still required to make full disclosure, including his own assertions of innocence and put forward any exculpatory evidence (although the effectiveness of this mechanism was doubted in the decision of The Dora;11 (iv) as to the corollary question of the relevance of allegations or circumstances which raise suspicion of involvement in criminal activity, it is not necessary for the assured to evaluate perfectly innocent facts in order to determine whether they might or might not be misconstrued by an underwriter for the duty to disclose does not involve such a rigorous approach.[424] Put another way, there is no duty on the insured to disclose matters which he knows have no bearing on his honesty and integrity even though a suspicious third party might take a different view.[425] While these tentative conclusions may be proffered, an ancillary question remains relating to the relevance of rumours and the subject matter insured. The relevance of â€?rumours and rumours of war’ was interestingly addressed in the Trinidad and Tobago case of Solomon Ghany Oil & Engineering Ltd v NEM (West Indies) Insurance Ltd.[426] In Solomon Ghany, decided before Brotherton v Aseguradoa Colseguros SA,[427] a threat to â€?burn the place down’ was considered material. Evidence of the actual insurer was used to assist in the determination of materiality. Justice Moosai stated: It would obviously have been material for a prudent insurer, in assessing the risk, to know that shortly before the contract, a threat had been made to burn down the building, and that threat had been reported to the police. I am therefore of the view that was a material fact which ought to have been disclosed by the plaintiff. And Cabral’s evidence establishes that the fact that a threat had been made would also have influenced the insurance company whether or not to accept the risk. That was therefore a material fact, the non-disclosure or omission of which would have had an effect on the decision of the actual underwriter.[428] Based on the foregoing, it does appear that a rumour relating to the subject matter insured may indeed go to the question of materiality. If one goes further, given that section 21(3)(b) of the Barbados Marine Insurance Act relinquishes an insured from disclosing â€?a circumstance that is known, or presumed to be known and the insurer is presumed to know matters of common notoriety or knowledge,’[429] the question can be raised as to whether it can it be argued that widely published media reports amount to manifest knowledge and, therefore, fall within the rubric of â€?circumstances that need not be disclosed’? In Brotherton, media reports circulating on the president of the bank’s misconduct were found by Morrison J to be material. The answer to the question must, therefore, depend on the manner in which the matter of â€?common notoriety’ became public, for an unsubstantiated rumour cannot satisfy the test. It is important to appreciate that at the core of understanding the breadth of the moral hazard is the nature of risk. â€?Risk’ is not simply the peril or possibility of loss or damage occurring within the scope of the policy, but it embraces all matters which would, if known, influence the judgment of a prudent underwriter. But for the insured, the range of the moral hazard is worrisome, particularly where the conditionality of insurance coverage is tied to financing. 5.