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UTMOST GOOD FAITH

1. Uberrima fides [applying to both parties]

A contract of insurance is a contract uberrimae fidei: it is not just a matter of ordinary commercial good faith but one of the utmost good faith. The principle works both ways but, inevitably, there are more instances where it is required of the insured person than of the insurers. The picture conjured up by the expression is that of two men of equal standing - though not necessarily of equal commercial power - sitting in a quiet corner of a busy market place and settling the details of a contract which is intended to benefit both. An essential part of the bargain is an understanding that each has taken the other entirely into his confidence. If there were to be any question of one withholding from the other what he needs to know, the entire transaction would be void.

In these days of literally millions of insurance contracts in the market, and such pressure on insurers that the idea of an individually tailored policy can seldom be entertained, the picture has acquired a distinct bias. The printed policy is the only one on offer - give or take an endorsement or two and subject to a possible survey - and the customer can take it or leave it. He still has to take the faceless insurer into his confidence, though only so far as a proposal form will allow, bearing in mind that ease of administration plays a prominent part in its wording. The problem of devising safeguards for mass production insurance leads to exceptions, exclusions and conditions which, for marketing reasons, are often under-emphasised. Mutual suspicion creeps in and the ' us and them' instinct already discussed rises to the surface. They magnify the unnecessary rift that there is today between the insurance industry and the public.

What has happened then to the uberrima fides principle? It seems to have been lost somewhere along the way and is only drawn upon in the even of a dispute arising over what was disclosed in the proposal form. This must surely be wrong. The principle applies - in its different forms - throughout the life of the contract and binds both parties equally. It is thus just as serious a breach of the principle for an insurer to convey news of a significant diminution of cover in an obscure note of the back of the renewal notice as it is for an insured to fail to tell an insurer that there has been a significant change in the risk. My ideal picture of the bargain in the market place provides insurers and insured alike with a yardstick against which to measure their actual conduct. The difference between the ideal and the reality can prove quite a shock - either way.

From the insurer' s point of view re-dedication to the principle of uberrima fides means remembering to tell prospective policyholders that insurance does not cover every possible disaster - whatever the advertisements may say to the contrary - and drawing attention to the gaps as well as to the advantages. From the point of view of the insured, it means not treating the insurer as fair game and an unofficial provider of income.

AR (88) para 2.2

2. Fair Dealings

As my predecessor observed in his last report: ' a contract of insurance is a contract uberrimae fidei: it is not just a matter of ordinary commercial good faith but one of the utmost good faith. The principle works both ways but, inevitably, there are more instances where it is required of the insured person than of the insurer' (para 2.2) [See: para 1 above]. In our experience this observation remains remarkably true. In quantity, policyholders are most often in breach, misrepresenting risks and falsifying claims. So much so that it sometimes seems forgotten that this duty of utmost good faith must be borne by insurers too. In our judgement, the obligation involved of fair dealing at all stages - marketing, administering, investing and claims handling - should be seen as overriding and underpinning all the detailed rules and regulation spawned by the Financial Services Act 1986. Indeed, treating policyholders with the utmost good faith at all times must surely be the fundamental principle of good insurance practice. Regrettably, but understandably, this high standard is not invariably reached. In particular, instances have been seen where insurers or their representatives have deliberately offered policyholders less than their proper entitlement. For example, they may have on their files a professional valuation of the property lost - say a ' written off' car - but have nonetheless proposed a settlement at a figure below that value. Often the idea is a matter of beginning the bargaining but it ought to be abandoned as completely improper. As Mr Justice Peter Pain stated in one such case: ' there was a quality of confidence between the policyholder and the insurers, which extended beyond that inherent in the confidence that can well exist between trustworthy persons who in business affairs deal with each others at arms length' . (Horry v Tate and Lyle Refineries Ltd [1982] 2 Lloyd' s Rep. 416 at page 421).

Happily, however, we do also see numerous examples of policyholders being offered more than their strict entitlement, even more perhaps than their reasonable expectations could demand. The idea is to keep the confidence of the consumer at the point where it mainly matters, that is in dealing with claims or complaints. Ex gratia, no doubt, possibly generous, but surely an appreciated aspect of insurance practice. Often this involves serious money but one pretty illustration concerned a policyholder' s principal complaint that he did not receive the promised free gift of a personalised mug for his daughter. After thorough investigation it emerged that the insurer had actually sent two mugs lost in the post. Nevertheless at my suggestions it remained more than ready to send another by registered mail together, as its own apologetic gesture, with an illustrated set of Beatrix Potter books by way of compensation for distress!

AR (90) para 4.1-4.2

3. Utmost Good Faith Again

A claim was made by the daughter of a deceased policyholder and she was informed that the policy in question had lapsed. She asked for proof that this fact had been relayed to her mother. A letter, stated to be a copy of a letter sent to her mother was provided. After investigations into the address and the letterhead on this copy it was found that it could not possibly be a direct copy of the alleged lapse' letter. The insurer then stated that it was an up to date copy of the wording that would have been used for a computer generated letter that was sent. On further investigation it was found that the letterhead was not up to date either. It became clear that someone had printed the letter on old letterhead paper, but not old enough to mimic the original, if there had been one. Whether this was incompetence or a deliberate attempt to mislead was impossible to tell. An award of £1,000 was made to reflect whichever of these was the truth.

AR (93) para 7.30 p. 50

4. Motor - Theft and Fire - Utmost Good Faith - submission of a forged service history

A claim was submitted in respect of the theft of the policyholder' s car which was subsequently discovered in burnt out state. The insured came to the Bureau claiming that: ' the insurer has twisted a lost of information in its favour' . The insurer had refused to deal with the claim on the basis that it felt the insured had breached its duty of utmost good faith. The following problems came to light:

·  A forensic report showed that the service history submitted was forged.

·  There was discrepancies and conflict in the accounts given since the date of the claim.

·  In a signed statement, the owner of the garage where the servicing was purported to have been carried out, denied ever doing so.

·  The policyholder was unable to provide the full name and address of her mechanic. In addition, the insured claimed to have not paid the mechanic for work carried out on the vehicle which contradicted the statement of the mechanic himself.

·  Regarding a car stereo that formed part of the claim, the policyholder had originally stated that this had been obtained from a friend' s catalogue, whilst refusing to give the name and address of this person. Later it transpired that the stereo had been obtained from a sister' s catalogue. The sister lived with the policyholder. The price paid for this stereo later turned out to be inflated. The policyholder told the Bureau that only once the stereo had been fitted did the policyholder discover that a different, more expensive model had been supplied. This contradicted the earlier statements of both the insured and her sister. No receipt could be produced for the stereo nor an explanation as to why not.

·  The first signed statement of the policyholder stated that she had not previously suffered any claims or losses of any description, whereas the second statement documented the break in and theft of a car stereo in 1994.

Complaint rejected

Although the submission of the service record may have been of some value in determining the market value of the car, ordinarily such is not required when making a claim. Despite this, in the event that a service record is submitted and it later transpires to be forged, there arises an issue of breach of the duty of utmost good faith and if there was such a breach the policyholder has not come to the Bureau with clean hands. The duty extends beyond the date of policy inception and the Ombudsman is reluctant to deal with those who do not have a clear conscience in their dealings with insurers. Even though we suspected that the policyholder had in fact ' come clean' by the end of our investigations and had made the various misrepresentations about the stereo, only in order to protect her sister, we could no longer give her the benefit of the doubt following the series of untruths presented.

BN (97) 14.5 p. 9

5. Motor - theft - car to be left in garage at night - car stolen from outside home - repudiation

When the proposal for insurance was completed in 1994 the proposer was asked where his car was usually left. As the insured rented a garage at that time he said that he usually kept it in a locked garage. The policy was renewed in 1995 and 1996 and the car was then stolen. At the time of the loss the insured no longer had the use of the garage and the car had been stolen from the road outside the insured' s house which was where he usually left it at night. The insurer relied on a breach of policy requirements when rejecting the claim.

Complaint upheld

The insurer failed to provide evidence of a relevant policy condition or warranty. It also failed to establish a non-disclosure on either of the two renewals. In any event the answer that the policyholder gave in the proposal from could not be read as importing a promise as to future conduct. (Hussain v Brown 9 [1996] 1 Lloyd Rep 627). The insurer agreed to meet the claim

BN (97) 14.7 p. 10

6. References

(a) Manifest Shipping & Co Ltd v Uni-Polais Insurance Co Ltd and La Rˇunion Europˇenne (The Star Sea) [1997] 1 Lloyd' s Rep. 360

(b) Horry v Tate and Lyle Refineries [1982] 2 Lloyd' s Rep 416

(c) Hussain v Brown[1996] 1 Lloyd' s Rep 627

(d) New Hampshire Insurance Co v MGN Ltd (unreported, September 1996) (Insurance Law Monthly Vol 9 No. 1 January 1997)

(e) Kansar v Eagle Star Insurance Company Ltd (The Times, 15 July 1996)

(f) Insurance Co of the Channel Isles v McHugh [1997] LRLR 94

(g) Glencore v Portman [1997] 1 Lloyd' s Rep. 225

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