Owen Tang
Introduction
For Commonwealth jurisdictions that adopted the Sir Mackenzie Chalmers’ Marine Insurance Act 1906 (“MIA 1906”), all insurance and reinsurance contracts are contracts of utmost good faith. In Hong Kong, the Marine Insurance Ordinance (Cap 329) follows the line of legal thought which governs the MIA 1906. This duty, put simply, means that there must be neither misrepresentation nor nondisclosure of any material fact for information concerning risk estimation or premium determination is presented to the underwriter.
If the insured fails to comply with the duty of utmost good faith, the underwriter could avoid the insurance contract, in other words, treating the contract as if it had never existed, with the premium being returned to the insured.
In 2005, one of the important English cases related to the duty of utmost good faith is ERC Frankona Reinsurance v American National Insurance Co [2005] EWHC 138 (‘ERC Frankona Reinsurance’).
In this article, I digest the updated developments on the duty of utmost good faith. Section I will talk about the duty of utmost good faith under the MIA 1906, with particular emphasis on, through ERC Frankona Reinsurance, the information need not be disclosed and the concept of ‘blind eye knowledge’. Section II will focus on the duration of the duty of utmost good faith. This article will conclude that a rather heavy burden is placed upon an intended insured. In other words, an insured has to disclosed everything a prudent underwriter would wish to know when the latter estimating a risk or setting the premium.
I. Duty of utmost good faith and the MIA 1906
The duty of utmost good faith has been codified in §§ 17 – 20 of the MIA 1906. Although MIA 1906 refers only to marine insurance, the principle of utmost good faith extends to all forms of insurance and reinsurance. The Star Sea, a famous English case decided in 2001, acknowledges that the principles relate to misrepresentation and nondisclosure apply to all classes of insurance and reinsurance.
Information need not be disclosed & the ‘blind eye knowledge’ doctrine
Material information need not be disclosed by the insured to the underwriter if the facts are neither known nor ought to have been known by the insured, the insured has no duty to disclose [§ 18(1) of the MIA 1906].
In other words, the insured is not required to make enquiries or investigations to find out facts that are outside his knowledge. The insured just merely needs to make a fair representation of the risk. The court presumes the underwriter knows about its own business and is able to form judgment.
However, it is worth noting that the English courts have long recognized the concept of deliberate or “Nelsonian” blindness, which has come to be known as “blind eye knowledge” on the part of the insured. It refers to a situation where the insured deliberately turns a blind eye to a matter he suspects in order to avoid being saddled with certain knowledge of a fact in question. The courts ruled that the insured would not succeed in saying that he was neither aware, nor ought to have been aware, of the matter in such circumstances.
In the recent case of ERC Frankona Reinsurance v American National Insurance Co, ERC Frankona wrote a 35% renewal line on a quota share reinsurance protecting American National Insurance (“ANI”). ANI was the sole participant of the Accident Insurance Group. The group was managed by National Accident Insurance Underwriters (NAIU). NAIU’s chairman had been convicted in 1983 and served a prision sentence for securities fraud.
The judge decided that the conviction was a material matter for disclosure. Anico’s defence was that it (and its agents) were not aware of the conviction and it was not under a duty to disclose the matter to ERC Frankona.
Since NAIU knew about its own chairman’s past transgressions, a debate focused on whether NAIU’s knowledge could be imputed to its principal, ANI. The facts special to the relationship between NAIU and ANI were that neither NAIU held any ‘predominant position’ with ANI, nor NAIU was an agent ‘effecting insurance’.
Instead of analyzing the relationship between NAIU and ANI, the judge found an easier route to solve the matters. The judge focused on the evidence given by a senior executive of ANI. The judge believed the senior executive was told of the conviction in the course of previous job. Although the senior executive did not know about the precise details only because he chose not to ask any pertinent questions and, so chose not to know. Accordingly, the judge found that there had been a material nondisclosure that entitled ERC Frankona to avoid the reinsurance.
II. Duration for the duty of utmost good faith
According to § 18(1) of the MIA 1906, the duty of utmost good faith arises ‘before the contract is concluded’. It is now an established principle that this precontractual duty does not continue in the same form after the contract has been agreed.
Certainly, the duty of utmost good faith would return again if the underwriter needs further information for making a new decision on premium rate or risk determination. For example, a fresh duty arises if the insurance contract is to be renewed and, the underwriter renegotiates new terms with the assured in such situation.
Therefore, a (re)insured or its agent should pay particular attention on the renewal of the terms agreed by the underwriter in the previous year. The (re)insured should draw the attention of the underwriter on any specific changes and, should better to obtain relevant acknowledgment from the underwriter.
Conclusion
Cases on the duty of utmost good faith remind about how important it is for a (re)insured in presenting the information to a prospective underwriter. The information presented forms the very foundation of the insurance contract both parties are about to enter; and if the information presented is inaccurate or incomplete, it may cause the contract to be open to question in the future. Therefore, an intended (re)insured is being placed with quite a heavy burden: the (re)insured must disclose everything a prudent underwriter would wish to know on risk estimation and premium determination. Of course, the practical problem is what such information would entail.
Owen Tang: Tutor in Law (Department of Logistics), and Program Manager in Supply Chain Management (Graduate School of Business) from Hong Kong Polytechnic University.
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