Insurance Contracts CP - Law Reform Commission

Insurance Corporation of the Channel Islands v McHugh 83 Mance J advanced the view, within the context
a counterclaim by an insured alleging unreasonableness in rejecting an insurance claim, that any fraud
would breach this aspect of the duty of utmost good faith. In contrast, in Fargnoli V GA Bonus plc 84 Lord
Penrose expressed the view, obiter:
―Of course it follows from the mutuality of the obligation of utmost good faith that an insurer has
similarly rigorous duties in dealing with claims. It mist be open to question whether an insurer
would be in good faith in delaying an admission of liability, or in advancing spurious defences
to a claim, or to put the insured to proof of what the insurer knows is true, or in delaying
settlement of claims which he would, objectively, be obliged to admit before a court to be
valid.‖ 85
8.52 In other words, fraud is a requirement in English law while the Scottish position is not so
restrictive. There is however a recent Irish High Court decision 86 which appears to side with the position
taken by Lord Penrose but there is no clear Irish judicial decision on this in a claims context. One could
of course extrapolate from McCarthy J‘s speeches in Aro Road and Kelleher v Irish Life that honesty is
required and that, in this context, honesty has a broader meaning than not acting fraudulently: recall the
Financial Regulator‘s 2012 Code of Practice which requires a regulated entity in all its dealings with its
customers to act ―honestly, fairly and professionally in the best interests of its customers and the integrity
of the market‖.
8.53 Despite the asserted mutuality of the principle of good faith in the Marine Insurance Act 1906, s
17, judicial examination of the application of the principle, not surprisingly, normally focuses on the
behaviour of the proposer/insured. It is therefore useful to consider some recent examples of
circumstances in which it may be argued that insurers have failed to exercise good faith.
8.54 First, it has notoriously been held, in Sprung v Royal Insurance (UK) Ltd 87 — paradoxically,
given that insurance is presumably meant to provide the insured with protection in the event of a loss—
that there is no effective sanction against an insurer who procrastinates in discharging his liability to pay
an indemnity: court interest will be due but not damages for consequential loss.
8.55 Secondly, in Drake Insurance Plc v Provident Insurance Plc 88 an insured failed to disclose a
speeding conviction which, if it had been disclosed when the contract was negotiated, would not have
affected the insurer. Nonetheless, the insurer purported to avoid the policy. In the circumstances, the
English Court of Appeal held that the insurer had not shown that he been induced by the non-disclosure
and so was not entitled to avoid the policy. That rendered necessarily obiter the Court‘s speculation that
an insurer might be disentitled to rescind for lack of good faith, in failing to ascertain whether the
circumstances were in fact such that it would not have been induced by the non-disclosure. However,
despite raising the possibility, the Court of Appeal generally registered a reluctance to go so far. 89
83
84
85
86
87
88
89
(1997) 6 Reinsurance Law Reports 374.
[1997] CLC 653
Ibid at 376.
See the unreported account in the Irish Times for May 13, 2009, ―€30,000 awarded to solicitor or over fraud
accusation against him.‖
[1999] Lloyd‘s Rep IR 111 (CA). See J Lowry and P Rawlings, ―Insurers, Claims and the Boundaries of Good
Faith‖ (2005) 68 MLR 82.
[2003] EWCA Civ 1834.
[2004] QB 601, 626–630, 642–643, 646–650 (per Rix, Clarke and Pill LJJ respectively) and the cases there
cited, in particular Brotherton v Asegurodora Colseguros SA (No. 2); [2003] Lloyd‘s Rep IR 746; noted R Gay
[2004] LMCLQ 1 (rejecting Colman J‘s view in Strive Shipping Corp v Provident Ins Plc (The Grecia Express);
[2002] 2 Lloyd‘s Rep 88) that the insurer‘s right to avoid is dependent upon the insurer‘s good faith or good
conscience)..
176