Manifest Shipping Co. Ltd. v. Uni-Polaris Shipping Co. Ltd.: "The Star Sea"

[2001] UKHL/1 [2001] 2 WLR 170

Sara Cockerill
Essex Court Chambers

The utmost good faith

  1. Carter v. Boehm (1766) 3 Burr 1905, Lord Mansfield:

    "Insurance is a contract of speculation. The special facts upon which the contingent chance is to be computed lie most commonly in the knowledge of the assured only; the underwriter trusts to his representation and proceeds upon confidence that he does not keep back any circumstance in his knowledge to mislead the underwriter into a belief that the circumstance does not exist. The keeping back such 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 risque run is really different from the risque understood and intended to be run at the time of agreement … The policy would be equally void against the underwriter if he concealed …. Good faith forbids either party, by concealing what he privately knows to draw the other into a bargain from his ignorance of the fact, and his believing the contrary."

  2. Section 17 MIA 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".

  3. Pre-contractual duty of good faith dealt with at greater length in ss.18-20:

    1. Section 18: disclosure by assured.

    2. Section 19: disclosure by agents to insure.

    3. Section 20: misrepresentation.

  4. Sections 18 to 20 MIA 1906 "far from any ordinary understanding of lack of good faith":

    SAIL v. Farex [1994] CLC 1,094 at 1,111;

    La Banque Financiere de la Cite v. Westgate [1988] 2 Lloyd's Rep. 513 at p.545.

    The ambit of Section 17

  5. Sections 18-20 exemplify the operation of the duty of good faith recorded in Section 17, but do not exhaust its content:

    1. Sections 18 to 20 concerned only with the duties of the assured or his agent to insure. Section 17 imposes obligations on the insurer as well (by either party).

    2. Sections 18 to 20 are each expressly concerned with the position "before the contract is concluded". There is no express temporal limitation on the operation of Section 17, which has given rise to the argument that the duty continues.

    3. The duty under Section 17, unlike those under Sections 18 to 20, is not limited on its face to the status of material facts:

    C.T.I. v. Oceanus [1984] 1 Lloyd's Rep. 476 at 525 (broker who sees underwriter has made mistake in his calculations).

  6. Was s.17 intended to have a wider temporal application than ss.18-20?

    1. All of these sections appear under heading "Disclosure and representation".

    2. No suggestion of any wider ambit in the final (3rd) edition of Sir Mackenzie Chalmers `Digest of Marine Insurance’ on which Act based.

    3. Suggestion of duty continuing post-contract appears for the first time in the first-post Act decision, influenced by two recent Court of Appeal decisions on orders for ships papers:

    Boulton & ors v. Houlder Bros & Co. [1904] 1 K.B. 784

    Harding v. Bussell [1905] 2 K.B. 83.

  7. Since repeatedly held that duty of utmost good faith in Section 17 continues In The Star Sea Lord Clyde expressed his desire to impose a temporal "pre-contract" limitation to Section 17 but recognised that on the basis of prior authority this solution was "past praying for": para. 6/p.174.

    The duty post-conclusion of the contract

  8. In what circumstances has the duty been held to apply The general test is where the insured is asking the insurer to take some form of decision (The Mercandian Continent [2000] 2 Lloyd’s Rep.357).

    Variation ?

  9. If the parties negotiate to vary the terms of a contract of insurance, the duty of utmost good faith will apply to the variation with its full rigour in relation to facts material to the variation (not facts relevant only to the original risk)::

    The Star Sea (CA) [1997] 1 Lloyd’s Rep. 360 at p.370

    Roadworks (1952) v Charman [1994] 2 Lloyd’s Rep. 99

    The Star Sea (HL) para. 54/page 188.

  10. If utmost good faith not shown, do you avoid just variation or entire contract ? Cases in paragraph 9 suggest former but what if variation replaced old policy by new one ? Some suggestion could avoid entire contract:

    Sawtell v London (1814) 5 Taunt. 359

    Lishman v Northern Maritime (1875) LR 10 CP 179 at p.182

    Arnould on `Marine Insurance’ paras. 621, 629.

    In relation to the insurer’s right to cancel the contract ?

  11. Provisional notice of cancellation given in long-term insurance treaty: no duty of utmost good faith:

    Iron Trades v Imperio [1991] 1 Re. L.R. 213.

  12. Existence of cancellation clause: no duty of utmost good faith:

    Niger Co v. Guardian Assurance (1922) 13 Ll L Rep 175

    New Hampshire v. MGN [1997] LRLR 24

    NSW Medical Defence v. Transport Industries [1985] 4 NSWLR 107

    Hussain v Brown (No. 2) (1997) 9 ILM 4 (even though contract expressly obliged insured to notify insurer of change in material circumstances).

    "Held covered" clauses

  13. Insured seeking to take advantage of policy term obliging insurer to "hold the insured covered" for a premium to be agreed must exercise utmost good faith when invoking clause:

    Overseas Commodities v. Style [1958] 1 LLR 546

    Liberian Insurance Agency v. Mosse [1977] 2 Lloyd's Rep. 560.

    Cf The Litsion Pride [1985] 1 Lloyd’s Rep. 437.

    Claims

  14. By far most frequently litigated incident of the duty of the utmost good faith in relation to matters after the contract is concluded.

  15. NB widespread inclusion of contractual provisions addressing the issue of fraudulent claims and providing variously that the claim or the policy would be forfeit in the event of a false or fraudulent claim. Willes J in Britton v Royal Insurance Co. (1866) 4 F&F 905 at 909:

    "The contract of insurance is one of perfect good faith on both sides, and it is most important that such good faith should be maintained. It is common practice to insert in fire policies conditions that they shall be void in the event of a fraudulent claim … Such a condition is only in accord with legal principle".

    The Star Sea

  16. Issue of duty in claims context considered by reference to 5 issues:

    1. What is the content of the duty in the claims context ?

    2. What is a fraudulent claim ?

    3. What is the remedy for the breach of the duty ?

    4. Who owes the duty ?

    5. When does the duty end ?

    What is the content of the duty in the claims context ?

  17. Insurers argued more than duty to abstain from fraud, and encompassed duty to disclose material facts relevant to insurer’s decision whether or not to pay the claim:

    1. wording of Section 17;.

    2. decision of Hirst J in The Litsion Pride [1985] 1 Lloyd’s Rep. 437 at p.512 ("culpable" but non-fraudulent misrepresentation or non-disclosure would suffice).

  18. Rejected by the House of Lords: duty of the utmost good faith only breached in the claims stage if the claim was made fraudulently:

    para. 72/p.195 per Lord Hobhouse (with whom Lords Steyn, Hoffman and Scott agreed)

    para. 119-111 per Lord Scott (with whom Lords Steyn and Hoffman also agreed).

    What is a fraudulent claim ?

  19. What is "a claim" ?

    1. Request for payment or indemnity under a policy.

    2. The Mercandian Continent [2000] 2 Lloyd’s Rep. 357 (assured produced a forged document to assist his liability insurers in a jurisdictional challenge to proceedings brought against him).

    3. Was this a fraudulent claim ? Aikens J: no:

    "It only concerned the issue of whether the English Court could maintain jurisdiction over the claim by the claimants against the assured. It had no legal relevance to the assured’s claim on the policy itself. Therefore either the duty of utmost good faith does not attach to the acts of the assured or the act is not a breach of that duty which gives the insurers the right to avoid the policy".

  20. When is a claim "fraudulent":

    1. A claim for a loss which has not occurred..

    2. A claim for a loss in a larger amount than is known to have been incurred.

  21. But what of the insured who tells a lie to support an otherwise valid claim ? Conflicting authorities on this issue:

    In favour of wider concept of fraud in relation to claim

    Dome Mining v. Drysdale (1931) 41 Ll.L. Rep. 109 at 122

    The Litsion Pride [1985] 1 Lloyd’s Rep. 437

    Wisenthal v. World Auxiliary Insurance (1930) 38 Ll L Rep. 54

    Gate v. Sun Alliance [1995] LRLR 385 at 423 per Fisher J (N.Z.).

    The Michael [1979] 1 Lloyd’s Rep. 55; [1979] 2 Lloyd’s Rep. 1.

    In favour of narrow concept of fraudulent claim:

    Royal Boskalis v. Mountain [1997] LRLR at 523 at p.392

    GRE v. Ormsby (1982) 29 SASR 499 (Aus).

    Ross v. Commercial Union (1867) 26 UCQB 552

    Crowley v. Agricultural Mutual Assurance (1871) 21 CP 567

    Norton v. Royal Fire & Accident (1885) 1 TLR 460

    Deutsche Ruck v. Walbrook [1995] 1 Lloyd’s Rep. 153 at p.163.

  22. The Court of Appeal in The Star Sea,:

    1. p.372lhc supported narrow view through endorsement of Rix J in Boskalis;

    2. p.372rhc supported wider view.

  23. The House of Lords in The Star Sea:

    1. Lord Hobhouse, with whom Lords Steyn, Hoffmann and Scott agreed, adopted narrow view (paras. 71-2/pages 195-6).

    2. Lord Scott appeared As well as agreeing with Lord Hobhouse’s judgment, Lord Scott appears to adopt wider (para. 107/page 206; para. 109/page 206; para. 111/page 207).

  24. NB some contractual clauses will impose wider test in any event: clause referred to by Rix J in Boskalis at p.593.

    What is the remedy for breach of the duty ?

  25. Section 17 provides for avoidance. Is this remedy for fraudulent claims (and is it only remedy) ?.

  26. A claim in damages ?

    1. Held that in its pre-contractual context, the duty of good faith does not sound in damages (La Banque Financiere de la Cite v. Westgate Insurance Co. Ltd. [1988] 2 Lloyd's Rep. 513; [1990] 2 Lloyd's Rep. 377 at pp.387-8).

    2. Conflicting authorities as to the juridical basis of the continuing duty of good faith in the post-contractual sphere.

    3. Rule of law view: La Banque Financiere v. Westgate [1987] 1 Lloyd's Rep. 69 at p.94 per Steyn J and The Good Luck [1990] 1 QB 818 at pp.886-888.

    4. Implied term view: Bank of Novia Scotia v. Hellenic Mutual [1988] 1 Lloyd's Rep. 514 at p.547 per Hobhouse J; Orakpo v. Barclays Insurance Services Ltd. [1995] LRLR 443 at p.451 per Hoffmann LJ; The Litsion Pride at pp.518-9 per Hirst J; and La Banque Financiere v. Westgate [1988] 2 Lloyd's Rep. 513 at pp.547-8 .

    5. The Star Sea definitively adopted "rule of law" theory, and e killed off any suggestion that the remedy of the utmost good faith might sound in conventional contractual terms (per Lords Hobhouse, and by agreement, Steyn, Hoffmann and Scott: para. 46/page 185; para. 49 page 186).

  27. A right to resist the claim ?

    1. Suggestion insurer can refuse to pay the claim without avoiding the policy: The Litsion Pride [1985] 1 Lloyd's Rep. 437 at p.515; Reid and Co. v. Employer's Accident and Livestock Insurance Co. Ltd. (1899) 1 F 1031, The Captain Panagos DP [1986] 2 Lloyd's Rep. 511 at p. 512 and Diggens v. Sun Alliance [1994] CLC 1,147.

    2. Rejected by the Court of Appeal on three occasions: The Star Sea at page 369; Orakpo v Barclays Insurance Services [1995] LRLR 443 (by a majority) and Galloway v GRE [1999] Lloyd’s Rep. IR 209.

    3. The Star Sea in the House of Lords:

      1. Lord Hobhouse (with whom Lords Steyn, Hoffmann and Scott agreed) appears in places to accept that the remedy is avoidance of nothing (paras. 49/page 186 and 71/page 195.

      2. Lord Scott, again supported by Lords Steyn and Hoffmann:

    para. 81/page199:

    "The section 17 duty has repeatedly been held to be owing in the context of claims. A dishonest claim constitutes a breach by the assured of section 17 and entitles the insurers to avoid the insurance contract".

    para. 110/207:

    "The presentation of a dishonest or fraudulent claim constitutes a breach of duty that entitles the insurer to repudiate any liability for the claim and, prospectively at least, to avoid any liability under the policy. Whether the presentation of such a claim should be regarded as a breach of a continuing duty under section 17 that entitles the insurer to avoid the policy with retrospective effect, enabling any payments made in satisfaction of previous unimpeachable claims to be recovered by the insurer, is more debatable. It is not necessary in the present case to decide that point".

    Who owes the duty ?

  28. Section 17 imposes a duty on "the assured". Who is "the assured" ? For argument in pre-contractual context see:

    PCW Syndicates v PCW Reinsurers [1996] 1 Lloyd’s Rep. 241 at p.250 per Waller J; pp.256-7 per Staughton LJ and p.257 Rose LJ.

    Group Josi v Walbrook [1996] 1 Lloyd’s Rep. 345 at 361 per Staughton LJ.

  29. NB when considering the post-contractual duty in the claims stage, no equivalents to:
    1. Section 19 imposing a separate duty of disclosure on "agents to insure"; and
    2. Section18 "deeming" an assured to know matters which he ought to know in the ordinary course of his business, because in the ordinary course of his business his agents or employees would tell him.
  30. Limited guidance on attribution in Section 17:
    1. Pre-contractual failure to exercise good faith falling outside Sections 18 to 20, CTI v. Oceanus [1984] 1 Lloyd's Rep. 476 at p.512 assumed that the conduct of the broker would be attributable to the assured.
    2. In The Litsion Pride at pp.513-4, Hirst J found conduct of the broker in presenting a claim breached the assured's s.17 duty.
    3. In The Michael [1979] 1 Lloyd's Rep. 55 at p.65, the Court of Appeal assumed without argument that the state of mind of the assured’s solicitor was relevant.
  31. In The Star Sea, the issue arose in relation to:
    1. The conduct of a director of the assured with position of importance in the events giving rise to the claim, but was not himself responsible for handling the claim, save in giving evidence to support it.
    2. The assured’s solicitor who had handled the prosecution of the claim.
  32. The Court of Appeal held that the conduct of neither party was relevant (pp.366-7):
    1. Necessary for the relevant individual to be "mounting a fraudulent insurance claim" or "handling the claim".
    2. Where a claim was supported by false evidence, it was necessary to show that the individuals "handling the claim" had tampered with, or participated in, that witness’ evidence.
    3. Solicitors’ conduct was not attributable unless "overall conduct" of the claim was out of the clients’ hands (although they expressly did not determine issue of attribution in relation to the solicitors: p.369).
  33. In the House of Lords, Lord Scott assumed, without deciding, that a solicitors’ conduct of litigation was attributable to his client (para.92/203), and approved the Court of Appeal’s conclusion as to the status of the director (para.94/page 203).

    When (if at all) does the duty end ?

  34. Does duty end on rejection of claim /when litigation starts ? Sir Mackenzie Chalmers, stated in the first edition of The Marine Insurance Act 1906 (at p.21):

    "It follows from the nature of the contract that even in litigation both parties must play with their cards on the table; hence the full discovery allowed as to ship's papers and other material documents".

    Lek v Matthews (1927) 29 Ll. L. Rep. 141 at p.145 suggests duty applies during litigation.

  35. However:

    1. The Star Sea [1995] 1 Lloyd’s Rep. 651 at first instance, Tuckey J held duty brought to an end by the rejection of the claim (relying upon a passage in Professor Clarke’s `The Law of Insurance Contracts’ and the Connecticut Supreme Court decision in Rego v Connecticut Insurance Placement Facility 593 A 2d 491, 497)

    2. The Court of Appeal held that rejection of the claim did not bring the duty to an end (The Star Sea at pp.371-2 applied in Baghbadrani [2000] Lloyd’s Rep. IR 94) and also stated that they were "prepared to contemplate" that a duty not to bring a fraudulent claim would continue notwithstanding litigation (although they held that any duty of disclosure which would otherwise exist would be supplanted by the procedural rules of the RSC, now the CPR).

    3. Issue considered by all three Law Lords who delivered speeches in The Star Sea:

      1. Lord Clyde held that there was no need for an assured to make "a full disclosure" of his own case to the other side in litigation (para.4/page 174).

      2. Lord Hobhouse, supported by Lords Steyn, Hoffmann and Scott, held that the issue of a writ crystallised the position of the parties (para. 75/pages196-7).

      3. Lord Scott said that it was not necessary to deal with the issue, but that he could "see a great deal of force in the argument that the section 17 duty does not apply to conduct in the prosecution of litigation".

  36. NB:

    1. A claim form can be issued and not served for 4 months, so that "litigation" can be underway without the insurer knowing.

    2. The insured’s cause of action against his insurer accrues immediately on the happening of the casualty, and is not, in the absence of a contractual provision to the contrary, dependent on the insurer rejecting the claim:

      The Italia Express [1992] 2 Lloyd’s Rep. 281

      Sprung v Royal Insurance [1997] CLC 70

      Calllaghan v Dominion [1997] 2 Lloyd’s Rep. 541.

    3. In marine cases it is common for an insurer to agree to treat the insured as though a writ has been issued even before the claim has been made (Sailing Ship Blairmore v Macredie [1898] AC 593 and Polurrian Steamship Co. v. Young (1913) 19 Com Cas 143).
 
© 2005 The British Insurance Law Association : Disclaimer