Whither the Duty of Good Faith in UK Insurance Contracts, John Lowry

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146 CONNECTICUT INSURANCE LAW JOURNAL [Vol. 16:1 should the fraud fail, he or she will lose nothing. 263 The court should not, therefore, undermine the prophylactic policy of the common law rule by holding that forfeiture should not apply to a part of a claim that is otherwise honest. 264 Accordingly, it was held that the effect of the common law is to forfeit the whole of the fraudulent claim so that the consideration for any interim payments made on that claim fails. 265 Such sums are thus recoverable by the insurers irrespective of whether they were paid prior to the fraud. 266 The issue of fraudulent claims again came to the fore in Danepoint Ltd. v. Allied Underwriting Insurance Ltd., in which a block of some thirteen flats was damaged by a fire. 267 The insured lodged a number of exaggerated claims together with a fraudulent claim relating to loss of rent. 268 Coulson J. subjected the authorities to thorough review. He concluded that the duty of utmost good faith declared by section 17 of the 1906 Act does not trigger during the claims process. 269 An insurer cannot, therefore, avoid the policy ab initio on the ground of fraud. 270 Where all or part of the claim is fraudulent, or where fraudulent devices are enlisted to promote a genuine claim, the insured will not be permitted to recover in respect of any part of the claim. 271 Mere exaggeration will not, in itself, suffice to substantiate an allegation of fraud. 272 But if the exaggeration is wilful, or is allied to misrepresentation or concealment, it will, in the judge’s view, probably be held to be fraudulent. In this regard, an exaggeration is more excusable where the value of the particular claim or head of loss in question is unclear or is a matter of opinion. 273 263 Id. 264 Id. 265 AXA Gen. Ins. Ltd. [2005] EWCA Civ. 112. 266 Id. 267 [2005] EWHC 2318 (TCC). See also J. Lowry and P. Rawlings, Fraudulent claims: framing the appropriate remedy, [2006] J. BUS. L. 339. Cf. Stemson v. AMP Gen. Ins. (NZ) Ltd., [2006] UKPC 30. 268 Danepoint Ltd. [2005] EWHC 2318. 269 Id. 270 Id. 271 Id. at 432. 272 Id. at 438. 273 See, e.g., Orakpo v. Barclays Ins. Serv., [1994] C.L.C. 373 (A.C.).
2009] GOOD FAITH IN UK INSURANCE CONTRACTS 147 V. THE FUTURE The reasoning expressed in the modern cases demonstrates a significant shift in the way the courts approach the good faith duty. The process of recalibrating the insured’s pre-contractual duty of good faith seen in the case law over the last decade or so is not being done in isloation from other aspects of the insurance contract for the courts are also adding content to the duty of good faith which the insurer owes to the insured at the time the risk is presented, at the time when the remedy of avoidance is exercised and at the time when insurers assert the benefit of claims clauses. With respect to consumer insurance there is a considerable body of Ombudsman jurisprudence to be added to the burgeoning case law. The result is that we now have two parallel regimes governing insurance contracts: one relating to commercial insurance and one relating to consumer insurance. In terms of coherence, this is not satisfactory. However, the Scottish and English Law Commissions current reexamination of insurance offers the potential for a thorough overhaul of the law, and in this regard it will be recalled that non-disclosure is identified as a key issue. It was to be hoped that the exercise would seek to assimilate the developments seen in the modern decisions into a single scheme for both consumer and commercial insurance. Admittedly, for other types of contracts the legislature has seen fit to distinguish between consumer and commercial transactions, 274 but, as is pointed out by Professor Clarke, for insurance the distinction necessarily results in the adoption of arbitrary tests based on turnover. 275 In any case, English judges have shown some reluctance in recognising such a dichotomy. For example, in Cook v. Financial Insurance Co., 276 Lord Lloyd, 277 considering the effect of a term contained in a policy for disability insurance effected by a self-employed builder, took the view that it “must be construed in the sense in which it would have been reasonably understood by him as the consumer….” 278 In framing a suitable model for the duty of good faith, an appropriate balance needs to be struck between the economic costs of reform and the benefits, including social benefits, which a more balanced regime will bring. Such considerations must also be weighed against the 274 For example, in the realms of sales law and credit transactions. 275 Clarke, supra note 199, at 288. See supra text accompanying note 9. 276 [1998] 1 W.L.R. 1765. 277 Both Lord Steyn and Lord Hope agreed. 278 Cook, [1998] 1 W.L.R. at 1768.
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Whither the Duty of Good Faith in UK Insurance Contracts, John Lowry

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