Keeping the faith

Among the stormy seas of recent corporate events, the 'good faith' section of the Marine Insurance Act 1906 has been making waves of its own. Joanna Goldsworthy reports

Commercial events of 2001 were dominated by several high-profile corporate collapses, including Railtrack, Equitable Life, Independent Insurance and, most spectacularly of all, Enron.
The issues raised by these commercial disasters will ensure that 2002 is a busy year for regulators and commercial lawyers, with the liability and regulation of auditors, directors and insurers likely to undergo significant examination and possibly reform. Attention is now focusing on the adequacy or otherwise of insurance policies to protect shareholders and contractors, in much the same way that the Maxwell debacle in the 1990s focused attention on the deficiencies of pension laws.
Some of the most interesting recent developments in commercial insurance law have arisen from the principle of good faith under Section 17 of the Marine Insurance Act 1906, which provides that: “A contract of marine insurance is a contract of the utmost good faith, and if the utmost good faith is not observed by either party, the contract may be avoided by the other party.”
The issues in the following three cases arise from the examination of the scope and application of any post-contractual duty of good faith.

Manifest Shipping Co Ltd v Uni-Polaris Shipping Co Ltd & ors (2001)
The Star Sea was the earliest of the cases and concerned a claim for total constructive loss of the vessel The Star Sea as a result of fire.
The insurer's case was based on the allegation that the respondent had breached its duty of utmost good faith by failing to disclose reports on two other losses that had occurred in similar circumstances. The House of Lords confirmed that the duty of good faith did extend beyond the making of the insurance contract, but that at the claims stage it was limited to a duty of honesty.
In order to establish privity, the insurer had to establish a suspicion or realisation in the mind of at least one of the relevant individuals that the ship was unseaworthy in the relevant aspects, and that a deliberate decision was made (not mere negligence) not to check whether that was so for fear of having certain knowledge about it. Unless the insured had acted in bad faith, it could not be in breach of a duty of good faith and culpable non-disclosure was insufficient to attract the drastic consequences of avoidance provided by Section 17. The court left open the question of when the remedy of avoidance was available because on the facts there was no breach of duty.

K/S Merc-Scandia XXXXII v (1) Underwriters Of Lloyd's Policy No 25t 1054 87 (2) Ocean Marine Insurance Co Ltd & ors (2001)
Considering the same issue, The Mercandian Continent was an unusual case where the insured's deceit was aimed at a third-party defendant.
The insured party was a ship repairer in Trinidad that had a policy with the insurer (the defendants) covering against liability to third parties. The claimant was the owner of the vessel, who asserted that the insured ship repairer was liable for breach of contract. It was a term of the policy that the insured would give prompt notice of any event that might give rise to a claim to the insurer.
The insured did provide notice of the claim, but during a dispute over jurisdiction it supplied a forged document to the insurer's solicitors. The forgery was discovered before any hearing on the issue of jurisdiction was held and the forged document itself was unconnected with the merits of the claim. The insured was found liable to the shipowner but subsequently went into liquidation. The claimant then continued the action directly against the insurer under the Third Parties (Rights Against Insurers) Act 1930. The insurer was attempting to avoid the policy on the grounds of breach of the duty of utmost good faith under Section 17 of the Marine Insurance Act 1906.
The Court of Appeal held that it was only appropriate to invoke the remedy of avoidance for breach of the duty of utmost good faith post-contract in circumstances where, in any event, the insurer had a right to terminate for breach of contract. In this case, the fraud was not relevant to the insurer's liability and it would be disproportionate if the insurer was entitled to avoid the insurance policy.
This case can be distinguished from The Star Sea on three important points: (1) the contract was not a property insurance contract, but a liability insurance contract; (2) the conduct of the insured was fraudulent instead of merely culpable; and (3) in The Star Sea, the alleged breach of the duty of good faith took place at the claim stage, whereas here it took place before the claim had been made. The Mercandian Continent, therefore, established the duty of good faith as a continuing one and not limited to certain events after the contract was made.

Konstantinos Agatipos & anor v Ian Charles Agnew & ors (2002)
The post-contractual duty of good faith was again under the spotlight in this case, which was decided in the Court of Appeal on 6 March. The action concerned the loss of the passenger ferry Aegeon, which was insured under a slip policy for six months while undergoing maintenance. The policy included a warranty that there would be no hot work.
After pleadings had been served, the claimant alleged that hot works had not begun until 12 February 1996, but workmen's statements disclosed in early 2001 attested that hot works of a substantial nature had been carried out from as early as 1 February 1996. This difference was significant to the alleged breach or otherwise of the warranty.

“Suppose his lies are exposed, but the judge takes the view that he would have won his case anyway. Does he lose the case because he lied? The answer is no”
Mr Justice Park, Court of Appeal

On appeal, the two main issues were: (i) whether, and in what circumstances, the common law rule of law and/or Section 17 of the Marine Insurance Act 1906 could apply in the event of use of fraudulent means or devices to promote a claim, when the claim might prove at trial to be in all other respects valid; and (ii) if so, whether the application of that rule and section ceased with the commencement of litigation.
The Court of Appeal held that the common law rule relating to fraudulent insurance claims did apply to the use of fraudulent means or devices to promote a claim. The decision followed the powerful dicta in The Star Sea, that the common law rule and the duty of good faith under Section 17 were both superseded or exhausted by the rules of litigation once the litigation had begun.
This case raised the question of the status of claims brought by 'lying litigants', (although deceit was not admitted in this instance), and Mr Justice Park commented: “Suppose at the trial his lies are exposed, but the judge takes the view that he would have won his case anyway without them. Does he lose the case because he lied? The answer is no. If his case is a good one anyway, he wins. It is deplorable that he lied, but he is not deprived of his victory in consequence”.
It seems that even tellers of untruths get their day in court.
Joanna Goldsworthy is the specialist products group editor at Lawtel

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