It is a fundamental principle of insurance law that the utmost good faith must be observed by each party. This rule was clearly stated by Lord Mansfield as long ago as 1766, when he said:
‘Insurance is a contract upon speculation. The special facts, upon which the contingent chance is to be computed, lie more commonly in the knowledge of the insured only: the underwriter trusts to his representation, and proceeds upon confidence that he does not keep back any circumstance in his knowledge, to mislead and underwriter into a belief that the circumstance does not exist, and to induce him to estimate the risqué as if it did not exist. The keeping back such a circumstance is a fraud, and, therefore, the policy is void. Although the suppression should happen through mistake, without any fraudulent intention; yet still the underwriter is deceived, and the policy is void; because the risqué run is really different from the risqué understood and intended to be run at the time of the agreement….The governing principle is applicable to all contracts and dealings. Good faith forbids either party by concealing what he privately knows, to draw the other into a bargain, from his ignorance of that fact, and his believing the contrary.
This case concerned a policy which had effected against the taking of a fort by a foreign enemy. But the same principle was applied in a case concerning life insurance in which Jessel MR observed:
‘The first question to be decided is, what is the principle on which the Court acts in setting aside contracts of assurance? As regards the general principle I am not prepared to lay down the law as making any difference in substance between one contract of assurance and another. Whether it is life, or fire, or marine assurance, I take it good faith is required in all cases, and though there may be certain circumstances from the peculiar nature of marine insurance which require to be disclosed, and which do not apply to other contracts of insurance, that is rather, in my opinion, all illustration of the application of the principle than a distinction in principle.
Further examples can be found in other judgments, ’In policies of insurance, whether marine insurance or life insurance, there is an understanding that the contract is uberrima fides, that, if you know any circumstance at all that may influence the underwriter’s opinion as to the risk he is incurring, and consequently as to whether he will take it, or what premium he will charge, if he does take it, you will state what you know. There is an obligation there to disclose what you know, and the concealment of a material circumstance known to you, whether you thought it material or not, avoids the policy.’
‘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.’
‘Now, insurance is a contract of the utmost good faith, and it is of the gravest importance to commerce that that position should be observed. The underwriter knows nothing of the particular circumstances of the voyage to be insured. The assured knows a great deal, and it is the duty of the assured to inform the underwriter of everything that he has not taken as knowing, so that the contract may be entered into on an equal footing.
As far as marine insurance is concerned, the Marine Insurance Act 1906, s 17, provides:
‘A contract of marine insurance is a contract based upon the good faith, and, if the utmost good faith be not observed by either party, the contract may be avoided by the other party.
It is the duty of the parties to help each other to come to right conclusion, and not to hold each other at arm’s length in defence of their conflicting interest.
Similarly, it is the duty of the of the insurers and their agents to disclose all material facts within their knowledge since the obligation of good faith applies to them equally with the assured. All representations made by them during the negotiations with a view of including the assured to accept a policy must be true.