Duty of Utmost Good Faith, Disclosure & Misrepresentation in Insurance

The doctrines of utmost good faith and disclosure in general contract law are applicable to contracts of insurance. In the same respect, the questions of fraud, non disclosure and misrepresentation do apply to the contracts of Insurance. All these principles are conceptually applicable to both the insured and the insurer sine each of the parties are obliged to give information to the other to assess whether to proceed with the contract.

Utmost Good Faith And Non-Disclosure.
The contract of insurance binds both parties to surrender information to each other to enable them to make a decision as to whether or not conclude the contract. Such information should be material enough to enable the other party to make a decision. It is worth noting that the insurer will be deemed to have knowledge that his agent has if that knowledge was acquired by the agent acting in the scope of his authority actual or implied.
The general duty of good faith stretches throughout the term of the contract but in relation to the disclosure of information by the insured, the prospective insured is under the duty to disclose to the insurer, prior to the conclusion of the contract, but only up to this date, all material facts within his knowledge that the latter does not or is not deemed to know. A failure to disclose entitles the insurer to avoid the contract.

The rationale for the avoidance is based on the fact that the insurance contract is based on speculation. The special facts upon which such speculation is to be made are with the insured only. The insurer and its agents trust such representations by the insured and it is upon these representations that the insure estimates the risk and the amount to be paid. It should however be noted that the duty to disclose and the duty not to misrepresent in relation bind the insured only to facts that are within his knowledge. Basic principle; you can not disclose what you don’t know.
Fraud.

In this respect, fraud is twofold.
We have instances of fraudulent misrepresentation and fraudulent non-disclosure. Both of these are defenses that may be raised by the insurer in an action to determine coverage. One is guilty of fraudulent misrepresentation if he knowingly makes a statement that is false, without belief in its truth or recklessly as to whether it is true or false. Fraudulent non-disclosure occurs where one willfully conceals from the insurer any material fact. What amounts to a material fact shall be discussed further. Compare with: Misrepresentation under Insurance

The non disclosure or the misrepresentation gives the insurer the right to avoid the contract at the instance of the insurer. In addition to the right to avoid the contract, the insurer has the right to affirm the contract despite the misrepresentation or the non disclosure. But such time that the insurer takes to make the decision to avoid or affirm if reasonable does not amount to a waiver of the right to avoid the contract.

In Kenindia Assurance Company Ltd v Kamithi and another, the court allowed the insurance company to avoid the life insurance policy where the deceased insured had not disclosed to the insurance company that he had a private doctor for his heart condition and that he had been treated for pneumonia prior to applying for insurance.

The court observed that Non-disclosure or concealment or misrepresentation of material facts did not have the effect of automatically voiding a contract of insurance, but its effect was to make the contract voidable at the instance of the insurer.
If and when an insurer became possessed of all the facts entitling him to avoid or repudiate the policy for reason of non-disclosure, concealment or misrepresentation of material facts, he would be entitled to elect to avoid or affirm the contract at once, or to have a reasonable time to weigh his options. If he opted to delay his election, the delay per se would not have the effect of vitiating his right to avoid or repudiate the contract.
The delay would only be prejudicial to his rights if it had prejudiced the assured or the rights of third parties who had intervened as a result thereof, or it was of such a length as to be evidence that the insurer had in truth decided to accept liability.

What About the Information that the Insurer’s Agent Knows? , Can It Be Imputed Upon The
Insurer?

The law of agency often imputes actions of the agent upon the principal. As earlier stated the duty of utmost good faith and disclosure that is placed on the insured in insurance law is based upon the fact that the insured is the one with the most information about the risk to be insured. The issue that would arise in this regard is whether any information that the agent knows about the insured is imputed upon the insurer. Basically, the information shall not be imputed upon the insurer since the insurer relies on the proposal form

This issue was discussed in the case of TAK Damba, he Motor Union Insurance Co Ltd v where the insured while applying for insurance asked the insurer’s agent to assist him fill in the proposal form. The proposal form was later found to have misrepresentations upon which the insurer decided to avoid the contract. The insured claimed that the insurer’s agent had the true information and that such should be imputed upon the insurer.
However, the court declined to follow the argument by the insured and relied on the case of Newsholme Bros. v. Road Transport and General Insurance Co. Ltd. [1929] All E.R. Rep. 442, in determining that the insurer only had information that was in the proposal form and this was the basis upon which the insurance contract was made.

In Newsholme Bros. v. Road Transport and General Insurance Co. Ltd, A proposal form was handed by the agent of an insurance company to a partner in the plaintiff firm who was minded to insure a motor omnibus, the property of the partnership, against damage by accident and third-party risks. In answer to three of the questions set out in the proposal form the partner gave the correct answers orally to the agent, but the agent wrote those answers on the form incorrectly, either because he had misunderstood or forgotten what the partner had told him or intentionally to earn a commission which otherwise he might not receive.

The partner then signed the form, which contained a warranty that the answers were true and a statement that the warranty was promissory and should be the basis of the contract between insurers and assured. The company issued a policy and accepted a premium. An accident having occurred, the plaintiffs claimed to be indemnified under their policy, but the company repudiated the claim on the ground that the written proposal contained untrue statements.
It was held that: the agent was not authorised by the company to fill in the proposal form and in doing so must be regarded as the agent of the proposer, and knowledge of the agent that the answers to certain questions in the form were not true was not notice to the company; the written contract alone could be looked at to ascertain the terms of the agreement between the parties; and, therefore, the company was not liable to meet the plaintiff’s claim.
Greer, L.J further observed that; the acceptance of the premium cannot be regarded as an agreement to vary the contract by inserting in it a promise to indemnify the assured if the statements contained in the proposal form are untrue, nor can the company be said to be estopped by the receipt of the premium from relying on the contract under which the premium was paid.”
Since the duty of utmost good faith is binding upon the insurer too, where the insurer breaches this duty by not disclosing material information or by misrepresenting facts to the insurer, the insured has the right to rescind the contract and claim the premiums paid.

The court in the case of Banque Keyser Ullmann SA v Skandia (UK) Insurance Co Ltd and others and related Actions observed that the duty of the utmost good faith existing between an insurer and an insured in relation to contracts of insurance was reciprocal and required the disclosure of all material circumstances, particularly those peculiarly within the knowledge of one party only, which might affect the decision to conclude the contract of insurance. The test of whether, in all the circumstances, a duty of good faith existed was whether good faith and fair dealing required disclosure.

On the facts, since D knew that the banks were relying on the credit insurance policies as security for the loans, that L was the banks’ sole source of information as to the obtaining of cover for the policies and that L’s deception in relation to the January 1980 loan was potentially highly prejudicial to the banks, it followed that D’s failure to disclose L’s deception was a breach of the duty of utmost good faith. reffer to the Case of : Dresdner Bank v Sangobay Estates (1971) ULR 149
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