For many years the concept of the legal duty of utmost good faith or uberrim a fides has existed in the insurer-reinsurer relationship. The concept is alive and well in many jurisdictions (such as the USA and UK) and continues to evolve to this day. In South Africa, the notion of utmost good faith was rejected in the case of Mutual and Federal Insurance Co Ltd v Oudtshoorn Municipality¹ where the court stated:
“There are no degrees of good faith. It is entirely inconceivable that there could be a little, more or most (utmost) good faith. The distinction is between good faith or bad faith. There is no room for uberrima fides as a third category of faith in our law.”
Despite this rejection of the notion of utmost good faith, the court did not set out what good faith actually consists of as relating to insurance/reinsurance contracts. This means that international case law and industry practice with regards to the notion still needs to be consulted, that is, the concept of utmost good faith can be applied to the duty of good faith in South Africa. As such, I shall use the term utmost good faith in this article.
Fundamental to the reinsurance relationship is the duty of utmost good faith. So what is it? The basic requirement is that the ceding insurer has a duty to disclose all material facts about the risk being reinsured. In the 1928 English case of Rozanes v Bowden, the court found that:
“It has been for centuries in England the law in connection with insurance of all sorts, marine, fire, life, guarantee and every kind of policy that, as the underwriter knows nothing and the man who comes to him to ask him to insure knows everything, it is the duty of the assured, the man who desires to have a policy, to make a full disclosure to the underwriters without being asked of all the material circumstances, because the underwriter knows nothing and the assured knows everything. That is expressed by saying that it is a contract of the utmost good faith—uberrima fides.”
This means that there must be neither misrepresentation nor non-disclosure of any material fact when the ceding insurer presents the risk to the reinsurer. Material facts may include facts relating to the risk itself and activities of the ceding insurer and the primary insured. Where there is a misrepresentation or non-disclosure of a material fact(s), the reinsurance contract is voidable at the option of the reinsurer. This raises the question of what a “material” fact is in respect of reinsurance placement.
Generally, a fact is material if it would have, if disclosed or not been misrepresented, stopped the reinsurer from accepting the risk or would have changed the terms offered by the reinsurer. Such a misrepresentation or non-disclosure would be a breach of the duty of utmost good faith and it is therefore incumbent on the presenter of information to take great care. If there is any doubt as to whether certain information should be disclosed or not, it is advisable to disclose the information, especially if it is detrimental to the risk. There are no hard and fast rules as to what circumstances may be deemed to be material. Obviously, and this has been seen in case law, previous claims history is of material interest.
The principle of utmost good faith was been codified in the English Marine Insurance Act of 1906 (the ‘Act’). Sections 17 to 20 of that Act set out the general principles and specify its application in areas of disclosure and misrepresentation. It has for a long time been accepted that the principle of utmost good faith extends beyond marine insurance and applies to all forms of insurance and reinsurance.
Section 17 states that:
“A contract of marine insurance is a contract based upon the utmost good faith and, if the utmost good faith be not observed by either party, the contract may be avoided by the other party.”
Section 18 deals with disclosure by the ceding insurer:
18(1) Subject to the provisions of this section, the assured must disclose to the insurer, before the contract is concluded, every material circumstance which is known to the assured, and the assured is deemed to know every circumstance which, in the ordinary course of business, ought to be known by him. If the assured fails to make such disclosure, the insurer may avoid the contract.
18(2) Every circumstance is material which would influence the judgment of a prudent insurer in fixing the premium, or determining whether he will take the risk.
18(3) In the absence of enquiry the following circumstances need not be disclosed, namely:
(a) Any circumstance which diminishes the risk;
(b) Any circumstance which is known or presumed to be known to the insurer. The insurer is presumed to know matters of common notoriety or knowledge, and matters which an insurer in the ordinary course of his business, as such, ought to know;
(c) Any circumstance as to which information is waived by the insurer;
(d) Any circumstance which it is superfluous to disclose by reason of any express or implied warranty.
18(4) Whether any particular circumstance, which is not disclosed, be material or not is, in each case, a question of fact.
18(5) The term ‘circumstance’ includes any communication made to, or information received by, the assured.
Section 20 deals with representations during contract negotiations.
20(1) Every material representation made by the assured or his agent to the insurer during the negotiations for the contract, and before the contract is concluded, must be true. If it be untrue the insurer may avoid the contract.
20(2) A representation is material which would influence the judgment of a prudent insurer in fixing the premium, or determining whether he will take the risk.
20(3) A representation may be either a representation as to a matter of fact, or as to a matter of expectation or belief.
20(4) A representation as to a matter of fact is true, if it be substantially correct, that is to say, if the difference between what is represented and what is actually correct would not be considered material by a prudent insurer.
20(5) A representation as to a matter of expectation or belief is true if it be made in good faith.
20(6) A representation may be withdrawn or corrected before the contract is concluded.
20(7) Whether a particular representation be material or not is, in each case, a question of fact.
In the English case of Highlands Insurance Co v Continental Insurance Co², Steyn J held that there was no distinction to be made between marine and non-marine insurance, or insurance and reinsurance, for the purposes of judging the materiality of an alleged non-disclosure or misrepresentation.
In Assicurazioni Generali SpA v. Arab Insurance Group³, the Court of Appeal clarified the English legal position of when a material non-disclosure or misrepresentation induces an underwriter to accept a risk and so entitles the underwriter to avoid the contract of insurance or reinsurance. Clark LJ summarised the position thus:
“1. In order to be entitled to avoid a contract of insurance or reinsurance, an insurer or reinsurer must prove on the balance of probabilities that he was induced to enter into the contract by a material non-disclosure or by a material misrepresentation.
2. There is no presumption of law that an insurer or reinsurer is induced to enter into the contract by a material non-disclosure or misrepresentation.
3. The facts may, however, be such that it is to be inferred that the particular insurer or reinsurer was so induced even in the absence of evidence from him.
4. In order to prove inducement, the insurer or reinsurer must show that the non-disclosure or misrepresentation was an effective cause of his entering into the contract on the terms that he did. He must therefore show at least that, but for the relevant non-disclosure or misrepresentation, he would not have entered into the contract on those terms. On the other hand, he does not have to show that it was the sole effective cause of his doing so.”
What need not necessarily be disclosed?
Section 18(1) of the Marine Insurance Act requires the reinsured to disclose every material circumstance which is known to him. This does not mean that the duty of disclosure requires a reinsured to make enquiries or investigations as to facts outside his knowledge. This is, however, tempered by the fact that a reinsured must make a fair and bona fide presentation of the risk and, as stated in the Act, the “assured is deemed to know every circumstance which, in the ordinary course of business, ought to be known by him.”
Section 18(3)(a) of the Act codifies the principle that any circumstances which diminishes the risk need not be disclosed.
Section 18(3)(b) of the Act codifies the principle that any circumstances which are known to the reinsurer need not be disclosed. The reinsured need not disclose facts or circumstances which the reinsurer knows or ought to have known in the ordinary course of its business. Such information might include details normally associated with the type of risk proposed, items of public knowledge and matters of law. In any case, it is best practice that positive disclosure of such circumstances should be made in any event.
Section 18(3)(c) of the Act codifies the principle that any information that has been waived by the reinsurer need not be disclosed. Waiver, however, is not readily inferred by the courts. The reinsurer will be held to have waived disclosure only if “a prudent insurer would be sufficiently put on notice by the summary presented to him by the broker that the picture was incomplete and could well be altered by further information.” – Container Transport International Inc v. Oceanus Mutual Underwriting Association (Bermuda) Ltd⁴.
The next question is when is the duty of disclosure owed? Section 18(1) of the Act states that the reinsured’s duty of disclosure arises “before the contract is concluded.” This means that every material circumstance which becomes known to the prospective reinsured between the time of presenting the risk and acceptance of the risk by the reinsurer needs to be disclosed.
The Act is silent as to whether there is any utmost good faith duty of disclosure after the risk has been accepted by the reinsurer. English courts have held that the utmost good faith principle relating to disclosure does not survive the conclusion of the contract. They have, however, acknowledged that there is an ongoing duty of disclosure about material circumstances of the risk and that a breach of such duty is in fact a breach of contract.
It can be seen that a great burden has been placed upon the prospective reinsured. All the material information that a prudent underwriter would wish to know when considering whether to underwrite a risk and the premium at which to write it must be disclosed. It is therefore essential that the person seeking cover is armed fully with accurate details of the risk.
The best approach to be adopted generally in presenting a risk for consideration by the underwriter will be to err on the side of caution and offer such information as he might consider material. The only limitation on the need for full disclosure is that the reinsured can only disclose what he actually knows or can reasonably be expected to know.
¹ 1 All SA 324 (A)
² 1 Lloyd’s Rep 109
³ Lloyd’s Rep IR 131 para 10.34
⁴ Lloyd’s Rep 476