Introduction
There are distinct kinds of contracts amongst which the insurance contracts, under special class of contracts. These special classes of contracts have distinctive features like indemnity, insurable interest, utmost good faith, etc. These features are based on the principles evolved in the common law and have also been modified by statutes such as S. 30 of the Indian Contract Act, 1872 and Indian Marine Insurance Act, 1963. All these aspects can also be modified by stipulation in the original contract, in this project the author will be dealing with the doctrine of good faith, its importance and its application in the field of insurance contracts.
As termed in the famous case of Carter v. Boehm by Lord Mansfield, the contracts of insurance are contracts of speculation. A contract of speculation would mean that a party who is called an insurer calculates and analyses the probability of the happening of any event which would be termed as risky event against which the insurance is being granted. The insurer calculates the risk and guarantees to pay the assured a certain sum of money in return of the consideration which is being paid by the insured in the form of premium. This calculation of risk cannot be done until and unless the insurer is well aware about the material facts which might influence the probability of happening of a risky event. This knowledge of material facts ought to come from the person seeking insurance and it is at this point when the principle of utmost good faith comes into action.
In the current project the author would be dealing with the specific aspect of insurance contracts being of utmost good faith – Uberrima fides. There is as such no clear definition of utmost good faith. In a book by Robert W Strain, Uberrima Fides has been explained as – "firm adherence to promises made to another including disclosure of all relevant fact and complete trust in the fidelity of the other". This project will discuss about the principle of concept of utmost good faith, the emergence of the concept and the evolution of the same. The project will also discuss about the scope of the principle of utmost good faith and try to explain the same using judicial precedents.
Utmost Good Faith – The Principle
When we talk about a contract in general, the parties to a contract does not owe any kind of positive duty whatsoever towards each other apart from showing good faith in the ordinary sense. Each of the parties is expected to make independent enquiries as they may think fit and make themselves informed about all the relevant facts which are accessible to both the parties. It can also be said that the legal maxim of "Caveat Emptor” applies here which means let the buyer be aware. The duty, if any, is negative in nature and by virtue of Section 19 of the Indian Contracts Act, 1872, if a party whose consent has been taken by way of misrepresentation or fraud can avoid the contract at his option. An explanation to section 19 also stipulates that if in case the party had the means of discovering the truth if the same would have exercise ordinary prudence then in such a case, where the consent is brought by misrepresentation or silence the chance to fraud, the contract cannot be avoided by the party whose consent has been affected.
In relation to contract of insurance, the person by whom insurance is being sought is bound to disclose all the material facts to the insurer with regard to the risk involved. There are various questions which are stipulated in the proposal form provided by the insurer and if the person seeking insurance provides wrong answers for those questions then in such a case the contract of insurance can be vitiated, provided the undisclosed facts are material in nature.
The commercial contracts are governed by a very general principle of law of contracts, the principle of Caveat Emptor, which literally means ‘let the buyer be aware’. According to this concept, one party having the knowledge of the facts needs to make the other party aware of the same unless the facts are discoverable upon normal inquiry or deliberation by the other party. Thus, if a defect can be revealed by ordinary inquisition then the party in the knowledge of the same need not voluntarily disclose such a defect and it is the duty of the other party to enquire about the same before buying the promise of the other. The principle of Uberrima Fide or utmost good faith neutralises the unequal footing on which parties to a contract of insurance stands as one party being the insured would always have better knowledge about the facts related to the situation as compared to the insurer. The contract of insurance belongs to this special class of contracts which can be also called as Uberrima Fides, that is, of utmost good faith. Thus, the parties to the contract of insurance are bound to disclose all the material information to each other. The principle applies to both the insurer and the insured and if there is failure in the disclosure of material facts then in such a case the other party can avoid the contract ab initio and it would be deemed to never have existed in the first place.
In the case of P. C. Chacko and Anr.v. Chairman, Life Insurance Corporation of India and Ors, the court said that,
“(10) One great principle of insurance law is that a contract of insurance is based upon utmost good faith Uberrima fides; in fact it is the fundamental basis upon which all contracts of insurance are made. In this respect there is no difference between one contract of insurance and another. Whether it be life or fire or marine the understanding is that the contract is uberrima fides and though there may be certain circumstances from the peculiar nature of marine insurance which require to be disclosed, and which do not apply to other contracts of insurance, that is rather an illustration of the application of the principle than a distinction in principle. From the very factthat the contract involves a risk and that it purports to shift the risk from one party to the other, each one is required to be absolutely innocent of every circumstance which goes to influence the judgment of the other while entering into the transaction”.
In the case of Carter v. Boehm , an insurance policy was taken in order to insure Fort Marlborough which is located in the island of Sumatra, East Indies against the loss which might occur if the fort is captured by a foreign enemy. The policy was issued for the benefit of the Governor of the Fort, George Carter. The issue in this case was whether the disclosure of weakness related to the Fort and the possibility of an attack by the French on the same is a material fact which needs to be disclosed or not. The jury gave the decision in favour of the insurance company. The decision of this case was given by Lord Mansfield who is also known as the father of English commercial and insurance law. The principle of utmost good faith was stated by him in this case,
"Insurance is a contract upon speculation. The special facts upon which the contingent chance is to be computed lie more commonly in the knowledge of the insured only; the underwriter trusts to the insured's representations and proceeds upon confidence that he does not keep back any circumstance in his knowledge to mislead the underwriter into a belief that the circumstance does not exist, and to induce him to estimate the risk 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 underwriter is deceived and the policy is void; because the risk run is really different from the risk understood and intended to be run at the time of the agreement … Good Faith forbids either party, by concealing what he privately knows, to draw the other into a bargain from his ignorance of the fact and his believing the contrary".
It was observed by Jusctice M. R. Jessel in the case of London Assurance v. Mansel that,
"… Whether it is life or fire or marine assurance I take it good faith is required in all cases and though there may be certain circumstances from the peculiar nature of marine insurance which require to be disclosed and which do not apply to other contracts of insurance, that is rather, in my opinion, an illustration of the application of the principle, than a distinction in principle".
It was observed by Justice Scrutton that, it is expected of the person who seeks insurance to disclose all the material information to the insurer because the insurer is unaware about any of the facts or situations in relation to the person seeking insurance whereas bad person knows everything in this regard. Thus it is the duty of the assured to disclose all the material facts without the insurer asking as the insurer knows nothing but the assured knows everything. This concept is expressed by saying that insurance contracts are contract of utmost good faith also called as Uberrima Fides. The contract of insurance being the contract of utmost good faith ensures that neither of the party conceals any information which they are privately aware of. The assured has a duty to disclose all the relevant information and on the same the insurer and their agents are also bound to disclose all the material knowledge at their disposal since the obligation of good faith applies equally to both the parties.
Thus, unlike other contracts, in the insurance contracts the party does not stand on an equal footing with regard to the economic nature of the obligation which the contract creates. The insured will always have all the knowledge and the better means to acquire that knowledge than the other party, insurer.
Scope of the Duty to Disclose
First of all it needs to be noted that under insurance contract nondisclosure does not mean the same thing as concealment. A duty is imposed by the rule of utmost good faith to disclose all the facts, known or imputed, but the nature of such facts should be material to the insurance contract. Thus, in the following points the scope of this duty to disclose is being discussed:
Duty to disclose – not unlimited
A duty to disclose has a limit, that is, the disclosure must be related and extended only to material facts related to the contract in question. It is a question of fact whether or not a certain fact is material to the subject matter or not and the same must be decided on case to case basis. The failure to disclose the material fact might be knowingly or unknowingly or might also be because of the belief of the party that the same is not material. The question of a packed being material or not does not depend upon the thinking of the insured and not even depends upon what the insurer think, it basically depends upon whether a prudent and experience insurer would be inclined to changes judgement or decision to grant insurance if the same would have been known.14 the final judgement does not depend upon the opinion of the parties, it depends upon the decision of the court. The court decided in the case of LIC v. Sakuntalabai 15 that, the nondisclosure by the assured of suffering from indigestion for a few days is not a material fact and it did not affect in any way the validity of the policy. In this case the husband was suffering from indigestion for a few months before taking policy and the same was not disclosed in the proposal form. The husband died after the policy will issue and the company refused to honour the claim on the ground that the insured did not disclose the fact about his indigestion.
Thus, that is applied by the court to decide whether a fact is material or not is that, if the fact would have been disclose then whether or not the insurer would have refused to give the insurance policy.17 If fact is material enough then the same should be of the capability to change the stand which the insurer took when he was unaware of the same.
Ignorance of Materiality not an excuse
The duty of disclosure of material fact only extends to those facts which the insurer knows or ought to have known. The famous principle of law says that ignorance of law is not an excuse, but ignorance of fact is permissible. In the case of contract of insurance the ignorance of fact is an excuse but the ignorance of materiality of fact is not. If the party is unaware about the fact and it is held to be an material then in such a case there is no breach of good faith.22 it was held in one of the cases that, if a misstatement has been made by a party the same should be material in nature, that is, it must be related to the insurance policy directly. It was held that, the insured made the misstatement, that she's a government servant, nowhere affects the policy of life insurance, thus is not material, and cannot be used as a ground to repudiate the policy. 24
Duty – Mutual
Now, it is true that the assured is always at a better position with regard to the knowledge about the facts as he is the one who knows about all the facts and narrates the same to the insurer on which basis the insurer grants insurance. But, this does not mean that the duty of utmost good faith is only applicable upon the assured, it is equally applicable to the insurer will. 25 the duty to disclose relevant facts is a mutual one and lies on both the insured as well as the insurer. In a case decided by the honourable Supreme Court, an insurance company did not inform the insured while insuring the spinning mill along with the blow-room that the insured had to install a particular Co-2 flooding system. At a later stage the insurance company asked the assured to pay extra premium on account of non-installation of the said system. The court held that the insurer should have informed the insured prior with regard to the said system and at this stage the company is not entitled to claim additional premium. 26 this rule applies to all kinds of insurance equally. 27
Duty – Before conclusion of contract
With regard to the duty of disclosure, such duty applies only to the negotiations which occurred before the finalising of the contract of insurance. If certain fact comes to the knowledge of either of the parties after the completion of the contract, there is no duty as such to disclose the same and the nondisclosure cannot be said to offend the principle of utmost good faith. Thus, if an assured finds after the finalisation of the insurance policy that he or she is suffering from a serious complaint, the policy in such a case is not affected due to nondisclosure even though it might be material in nature. The same was held in the case of Ratanlal v. Metropolitan Insurance Co. , in this case the policy was issued in favour of the assured after proper medical examination. The assured also paid his first premium and on the date of issuance of the policy he suffered from some respiratory problem. The doctor examined the patient but did not prescribe medicine considering it was some normal minor disease. The incident was not reported to the company and subsequently the assured died. The insurance company refused to honour the policy and thus case was filed and it was laid down by the court that disclosure of material fact is not an continuing duty and it ends as soon as the contract of insurance comes into existence.
Conclusion
This project dealt with the concept of utmost good faith also known as Uberrima Fide, which is a principle of common law and governs the contracts of insurance. The term utmost good faith means that the parties to the contract of insurance are bound to disclose every material facts before entering into the contract and if some facts are concealed then the contract can be avoided. The contract of insurance belongs to special class of contracts in which the position of assured is safer as compared to the insured. The position of both the parties in the contract of insurance is not balanced and the assured is always in better condition to have knowledge about the subject matter of insurance. This unequal position is countered by the concept of utmost good faith which ensures that the insurer discloses all the facts which are material to the contract of insurance to the insurer. The project also discussed about the scope of duty to disclose in which in four points with the help of case laws it was explained as to the scope till which the duty extends. The duty of disclosure extends only to the facts which are material in nature, the duty of disclosure is upon both the insured as well as the insurer, the duty of disclosure extends only to the facts which the assured knows or ought to have known and finally the duty of disclosure exists only till the contract is concluded.
Thus, the concept of utmost good faith is an imperative and integral part of the contracts of insurance and it applies to all insurance contracts irrespective of their type, i.e., whether it be Marine insurance, fire insurance, life insurance or any other form, the parties have upon them a duty of utmost good faith and the same binds the parties to disclose all the relevant and material facts before the contract is concluded.