The Insurer’s Duty

The Insurer’s Duty

1. Introduction

Section 17 MIA is quite clear in saying that the duty of good faith rests on both the assured and the insurer. The section further states that if there has been a breach of the duty by one party, the other party is entitled to avoid the insurance contract. As will be discussed, the remedy of avoidance is a very powerful remedy in the hands of the insurer, but it is often useless in the hands of the assured, as the assured will in most cases want to preserve, not set aside, the insurance contract. However, the Insurance Act 2015 amends section 17 MIA by removing reference to the right of avoidance and further, by section 14, abolishes the remedy of avoidance for any breach of the duty of utmost good faith.

The Insurance Act 2015 does not deal with the insurer’s duty of utmost good faith, but by reason of the abolition of the general remedy of avoidance for any breach of the duty of utmost good faith (section 14(1)), the insurer’s duty is effectively abrogated. 

2. Insurer’s Pre-Contractual Duty

The insurer owes the assured a duty of disclosure and is bound to abstain from misrepresentation.

The nature of this duty of full disclosure, as it lies upon the insurer, was not given extensive consideration by the Courts until the decision in Banque Keyser Ullmann SA v Skandia (UK) Insurance Co Ltd. Here the insurer was aware that the assured’s broker had been guilty of fraudulent conduct but did not disclose that fact to the assured before the insurance contracts were agreed. There was no dispute that the insurer bore a duty of disclosure. The dispute arose in defining the scope of that duty.

In Banque Keyser Ullmann SA v Skandia (UK) Insurance Co Ltd, the Commercial Court, the Court of Appeal and the House of Lords each laid down different tests of materiality in respect of the insurer’s duty of disclosure. We need only focus on the Court of Appeal’s and the House of Lords’ definitions. The Court of Appeal held that a circumstance known to the insurer was material for disclosure by the insurer if it was ‘material either to the risk sought to be covered or the recoverability of a claim under the policy which a prudent insured would take into account in deciding whether or not to place the risk for which he seeks cover with that insurer’.

In the House of Lords, Lord Bridge adopted the Court of Appeal’s definition but applied it in a peculiar way (holding that the broker’s fraud was not material because any loss resulting from that fraud would not be excluded from cover under the policy). Lord Jauncey seems to have focussed on the essence of materiality in this sense by stating that ‘the duty is, however, limited to facts which are material to the risk insured, that is to say facts which would influence a prudent insurer in deciding whether to accept the risk and, if so, on what terms, and a prudent insured in entering into the contract on the terms proposed by the insurer.’ Lord Jauncey’s test has the advantage of mirroring the test of materiality as defined in sections 18(2) and 20(2) MIA.

As regards the exceptions to the insurer’s duty of disclosure, these will follow the pattern set by section 18(3) MIA for the assured’s pre-contractual duty of disclosure. Therefore, it is likely that the insurer is not obliged to disclose:-

a) circumstances which diminish the risk

b) circumstances known to the insurer, that is, circumstances which are actually known to the assured, circumstances which are the subject of common knowledge, circumstances which are known by the relevant agents of the assured, or circumstances which are deemed to be known to the assured in the ordinary course of his or her business

c) circumstances the disclosure of which has been waived by the assured

d) circumstances the disclosure of which has been rendered superfluous by warranties in the insurance contract (although it is arguable that this might be extrapolated to apply to any term in the insurance contract which is included for the assured’s benefit, given that warranties are included for the insurer’s benefit).

It is unclear how the insurer’s duty of utmost good faith and the pre-contractual duty of disclosure will be affected by the Insurance Act 2015. If such a duty remains, the test of materiality will mirror the test of materiality in sections 7(3) and 7(4) and the exceptions will mirror those set out in sections 3(5) and 5 of the 2015 Act

3. The Insurer’s Post-Contractual Duty Of Good Faith

In respect of post-contractual matters such as claims, the insurer is under a duty similar to the duty of good faith borne by the assured. 

That is, the insurer is under a duty to abstain from fraud. There is no duty of utmost good faith requiring the insurer to handle and consider claims fairly and reasonably. Therefore, any wrongful conduct of the insurer in handling an insurance claim will not constitute a breach of the duty of good faith, unless the insurer has acted fraudulently.

Similarly, if the insurer acts fraudulently in respect of the performance of the contract unconnected with an assured’s claim, the insurer will likewise be in breach of the duty of good faith.

Traditionally, it has been said that the duty of good faith is not to be used by the insurer as an ‘engine’ of oppression or fraud upon the assured. If the insurer does use the duty in this way, it may be that the insurer is denied any right to rely on a breach of the duty of good faith by the assured or, possibly, the insurer may be in breach of the duty of good faith. Accordingly, if the insurer abuses his or her position by acting otherwise than in good faith, the insurer may be deprived of any right to avoid the insurance contract in respect of a misrepresentation or non-disclosure by the assured. It should be noted that this proposition is subject to the conflicting decisions of the Court of Appeal (Drake Insurance plc v Provident Insurance plc).

As a result of section 13A of the Insurance Act 2015, which entered into force on 4 May 2017, there is an implied term in the insurance contract that insurance claims must be paid by the insurer within a reasonable time (allowing for investigation and assessment of the claim). 

What constitutes a ‘reasonable time’ depends on all the relevant circumstances (section 13A(3)), including (1) the type of insurance, (2) the size and complexity of the claim, (3) compliance with statutory or regulatory rules, and (4) factors outside the insurer’s control (Explanatory Notes to the Enterprise Act 2016).

If the insurer shows there are reasonable grounds for disputing the claim, there is no breach of the implied term while the dispute is continuing. If there is a breach, the insured will have remedies (e.g. damages) in addition to the payment of the claim and interest (section 13A(4)).

If the relevant term of the insurance contract puts the assured in a worse position, contracting out of section 13A is not permitted for non-consumer insurances, if the insurer’s breach is deliberate or reckless, but otherwise is permitted, provided that the transparency requirements of section 17 of the 2015 Act are satisfied, namely (1) the term must be clear and unambiguous as to its effect, and (2) the insurer must take sufficient steps to draw the relevant term to the assured’s attention before the contract is agreed. The assured cannot rely on any failure in this respect if the assured (or the broker) had actual knowledge of the term when the contract was agreed.

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