6.1 Utmost Good Faith at Common Law
Key Takeaways
- Utmost good faith (uberrimae fidei) is the principle that each party to an insurance contract must disclose all material facts before the contract is concluded, because the insurer cannot know the risk without the insured's help
- The doctrine was codified for marine insurance in section 17 of the Marine Insurance Act 1906, which states a contract of marine insurance is founded on utmost good faith
- Insurance differs from ordinary contracts where caveat emptor ('let the buyer beware') applies, because the insured alone knows the facts affecting the risk
- At common law a breach of utmost good faith by non-disclosure or misrepresentation entitled the insurer to avoid the contract ab initio, treating it as if it had never existed
- A fact is material if it would influence the judgment of a prudent insurer in deciding whether to accept the risk and on what terms
The Doctrine of Uberrimae Fidei
Utmost good faith — from the Latin uberrimae fidei — is the principle that every contract of insurance is founded on the utmost good faith of both parties. The insurer cannot properly price a risk it cannot see, and the insured is the party that holds almost all of the information about that risk. The law therefore places a duty on the insured to disclose what the insurer needs to know, and a duty on the insurer to deal honestly with the insured.
Insurance is unusual among contracts in this respect. The general commercial rule is caveat emptor — 'let the buyer beware' — under which each party must satisfy itself of the facts before contracting. Insurance cannot work that way: the insurer is asked to underwrite a risk it has never inspected, based on a proposal form or a broker's presentation prepared by or for the insured. The information asymmetry is extreme, and the doctrine of utmost good faith is the law's answer to it.
The Marine Insurance Act 1906, Section 17
The classic statutory statement of the doctrine is section 17 of the Marine Insurance Act 1906:
'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.'
Although section 17 is expressed in terms of marine insurance, the courts treated the principle as applying to all contracts of insurance under English law. Section 18 of the same Act dealt with the insured's duty of disclosure, and section 20 with misrepresentation. For most of the twentieth century, the 1906 Act provided the statutory framework that the wider insurance market operated under, even for non-marine business.
Why Insurance Is Different from Ordinary Contracts
In an ordinary sale of goods, the buyer inspects the goods (or takes the risk of not inspecting) and the law does not generally force the seller to volunteer every flaw. In insurance, the 'goods' are invisible — they are the circumstances surrounding a risk that has not yet materialised. The insurer is being asked to bet, in effect, on whether a future event will happen, and the odds depend entirely on facts only the insured knows.
| Feature | Ordinary contract | Insurance contract |
|---|---|---|
| Governing default | Caveat emptor — let the buyer beware | Uberrimae fidei — utmost good faith |
| Information asymmetry | Usually moderate | Extreme — insured holds the facts |
| Duty to volunteer | Generally none | Duty of full disclosure of material facts |
| Remedy for breach | Damages for misrepresentation | Historically, avoidance ab initio |
The rationale is not merely historical. An insurer that underwrites on incomplete information is not 'buying' a definable thing; it is exposed to a risk whose true character has been hidden. Allowing the insured to stay silent about material facts would let adverse risks be insured at prices designed for better risks, driving up premiums for honest insureds — a form of adverse selection.
Non-Disclosure and Misrepresentation at Common Law
A breach of utmost good faith took one of two forms at common law:
- Non-disclosure (sometimes called concealment): the insured fails to reveal a material fact. This is silence — the insured does not say anything untrue, but does not say enough. The duty is to volunteer material facts, not merely to answer questions honestly.
- Misrepresentation: the insured makes an untrue statement of fact (or sometimes law) that induces the insurer to enter the contract on the agreed terms. A misrepresentation may be fraudulent, negligent, or innocent, and the common law treated any material misrepresentation as a breach of utmost good faith.
The two are distinct. A perfectly honest answer to every question asked can still be a non-disclosure if the insured failed to volunteer a material fact the insurer did not think to ask about. This is the feature of the old law that most attracted criticism: the insured had to guess what the insurer might want to know.
The Historical Remedy: Avoidance Ab Initio
Under the Marine Insurance Act 1906 and the common law, the remedy for a breach of utmost good faith was avoidance of the contract ab initio — from the beginning. The contract was treated as if it had never existed. The insurer could return the premium (subject to section 84 of the 1906 Act for marine) and walk away from all claims, including claims that had nothing to do with the non-disclosed fact.
This was a blunt, 'all-or-nothing' remedy. A householder who forgot to mention a minor unspent conviction could lose the entire claim for a fire that had nothing to do with that conviction. The remedy was widely regarded as disproportionate, and it was this disproportionality that the Insurance Act 2015 and the Consumer Insurance (Disclosure and Representations) Act 2012 were designed to correct (see sections 6.2 and 6.4).
It is important to remember, though, that the common-law doctrine of utmost good faith is not itself abolished. The 2015 Act and the 2012 Act reform the duties and remedies in particular contexts, but the underlying principle that insurance is founded on utmost good faith remains the conceptual foundation of English insurance law.
Materiality — The Prudent Insurer Test
Whether a fact had to be disclosed turned (and still turns) on whether it was material. The test, set out in section 18(2) of the Marine Insurance Act 1906 and carried through into the modern law, is the prudent insurer test: a circumstance is material if it would influence the judgment of a prudent insurer in deciding whether to take the risk, and if so, on what terms (premium, excess, exclusion, warranty).
The test is objective. It does not ask whether the actual underwriter who looked at the file would have cared; it asks whether a hypothetical reasonable underwriter, placed in the same market, would have regarded the fact as relevant to the underwriting decision. A fact can therefore be material even if the particular insurer would have accepted the risk on the same terms anyway — although, as we will see in section 6.4, the insurer must still show it was induced by the breach to enter the contract before it can exercise a remedy.
The Duty on Both Parties
Although the duty is usually discussed from the insured's side, section 17 speaks of utmost good faith being observed by either party. The insurer too must act in utmost good faith — for example, by not misrepresenting the terms of the cover to the insured, and by not relying on obscure exclusion clauses the insured could not reasonably have understood. In practice, the bulk of the doctrine and almost all of the litigation concerns the insured's duty of disclosure and representation, and the exam will test it from that direction.
Key Takeaways
- Utmost good faith (uberrimae fidei) is the foundation of every insurance contract and reflects the extreme information asymmetry between insured and insurer.
- Section 17 of the Marine Insurance Act 1906 codified the doctrine for marine insurance, but the courts applied it to all insurance contracts.
- The doctrine displaces caveat emptor: the insured must volunteer material facts, not merely answer questions truthfully.
- A breach took the form of non-disclosure (silence) or misrepresentation (an untrue statement), and the historic remedy was avoidance of the contract ab initio.
- A fact is material if it would influence the judgment of a prudent insurer in deciding whether to accept the risk and on what terms — an objective test.
Why does English insurance law impose a duty of utmost good faith on the insured rather than relying on the ordinary caveat emptor rule that applies to most commercial contracts?
Under the common law as reflected in the Marine Insurance Act 1906, what was the remedy available to an insurer where the insured breached the duty of utmost good faith by failing to disclose a material fact?