Misrepresentation, Non-Disclosure and Breach ... - Law Commission

Although the issues arise under a policy of non-marine insurance it is
convenient to state them by reference to the Marine Insurance Act
1906 since it has been accepted in argument, and is indeed laid down
in several authorities, that in relevant respects the common law
relating to the two types of insurance is the same, and that the Act
embodies a partial codification of the common law. 3
A contract of the utmost good faith
2.6 The fact that the normal rules of contract law, and in particular the law of
misrepresentation, apply to insurance contracts is sometimes obscured by the
fact that an insurance policy is one of a small number of types of contract that are
uberrimae fidei - of the utmost good faith. 4 At the pre-contractual stage, the effect
of the duty of utmost good faith is that each party has obligations:
(1) to refrain from misrepresenting material facts, and
(2) to disclose material facts even if no question is asked.
2.7 In contrast, ordinary commercial contracts start from the premise of caveat
emptor – let the buyer beware. 5 A party to a contract caveat emptor must not
misrepresent facts, but is under no obligation to disclose facts about which it is
not asked.
2.8 Misrepresentation and non-disclosure are often pleaded and considered together.
In commercial litigation before the courts, the law of non-disclosure has tended to
dominate, with relatively little attention being applied to misrepresentation in an
insurance context:
Historically, misrepresentation in the strict sense has not been of
particular importance in the insurance context. This is partly because
the extreme width of the duty to disclose material facts, as described
below, has meant that often non-disclosure has subsumed questions
of misrepresentation. Cases have frequently failed to distinguish
between the two defences taken by an insurer, and indeed it appears
to be standard practice for an insurer, where possible, to plead both
defences. 6
2.9 The difference between the two has been described as follows:
3
Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co Ltd [1995] AC 501 518, by Lord
Mustill.
4 Other such contracts include contracts to subscribe for shares in a company, family
settlements, and partnerships: see Chitty on Contracts (29 th ed 2004) para 6-139.
5 Though they are often subject to implied terms, such as those set out in the Sale of Goods
Act 1979, ss 13, 14 and 15, which may have the indirect effect of requiring that the seller
disclose defects.
6
J Birds & N J Hird, Birds’ Modern Insurance Law (6 th ed 2004) p 101.
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