Insurance Contracts CP - Law Reform Commission

8.11 The most visible demonstration of utmost good faith is the duty on insureds not to submit
fraudulent claims. The way in which this aspect of the post contractual duty of utmost good faith has
been supported by some judges – whether it is seen as related to s.17 of the 1906 Act, or is an implied
term in an insurance contract itself – has no real impact on the rationale that stands behind the
requirement that an insured must not submit a fraudulent claim.
―The logic is simple. The fraudulent insured must not be allowed to think: if the fraud is
successful, then I will gain: if it is unsuccessful, I will lose nothing.‖ 21
8.12 In Aviva Insurance Ltd v Brown 22 the insured made a claim for subsidence damage to his
home. The claim was a valid one but in putting forward his claim in respect of alternative accommodation
he indicated that a named property was available to rent and it was owned by someone other than
himself. The insured owned the property and it was not in fact on the rental market. Holding that the
misrepresentation was not ―insubstantial‖, ―insignificant‖ or ―immaterial‖, Eder J held that £176,951.78,
paid for repairs due was to be repaid as the claim was tainted by fraud,
―this conclusion might seem harsh but it seems to me that it is the inevitable results of the
conclusions I have reached on the facts and the well-established policy of the law, set out, in
the authorities I have already cited.‖ 23
8.13 There are some post contractual situations that have been regarded as involving good faith
issues. Longmore LJ, in the Mercandian Continent 24 suggested that post contractual duties of good faith
may arise when the insured or the insurer seeks to vary the contractual risk. As these situations are
regarded as analogous to negotiating a new contract, a misrepresentation will avoid the term as to
variation. 25 The same position holds in respect of misrepresentations made at renewal of a contract. 26 In
both these instances the earlier contract is not rendered void ab initio and thus add little or no support to
the existence of a general good faith doctrine. The Commission consider that these duty of disclosure
cases do not strengthen any argument that a post contractual duty of good faith exists, at common law,
by analogy with section 17 of the Marine Insurance Act 1906; the Commission believe that those cases
reflect the essentially ad hoc nature of the duty.
8.14 Nevertheless, there are instances where the contract of insurance may contain express or
implied terms requiring the insured to provide information to the insurer. These situations were examined
by the Law Commissions in Issues Paper No.7, largely in the context of Articles 4:201 and 4:202 of the
PEICL which impose obligations on the parties to notify each other of changes in circumstances which
either aggravate the risk or effect a material reduction of the risk. 27 This mechanism was also found in the
ill fated proposed Insurance Directive from the late 1970s and it is an essential part of the European
Insurance scene because insurance contracts tend to run for long periods (as distinct from the UK and
Irish models which are short term or revolve around annual renewals).
8.15 The Commission see no need for specific provisions about change in circumstances. Insurers
themselves are well able to identify and seek to insist on circumstances being communicated as a matter
of contractual obligation, and insurers use conditions, exemptions and temporal restrictions to protect
their interests. Adding a generalised duty of this kind would cause uncertainty and would in the
Commission‘s view be unnecessary. The Commission agree with the Law Commissions that notification
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27
Lord Hobhouse in The Star Sea [2001] UKHL 1, [2003] 1 AC 469 at para. 62.
[2011] EWHC 362 (QB).
Ibid, para 122, citing The Star Sea [2001] UKHL 1, [2003] 1 AC 469; Britton v Royal Insurance Co (1866) 4 F
& F 905; Galloway v Guardian Royal Enchange (UK) [1999] 2 Lloyd‘s Rep IR 209.
[2001] EWCA Civ 1275.
Eggers, Picken and Foss, Good Faith and Insurance Contracts, 3 rd ed (ISBS 2010) at para. 16.50 – 16.54.
Eggers, Picken and Foss, Good Faith and Insurance Contracts, 3 rd ed (ISBS 2010) at para. 10.38 – 10.40.
Issues Paper 7, para. 6.29 – 6.47. See also Smith, The Effect of subsequent increases of risk on Contracts of
Insurance [2009] LMCLQ 366.
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