—Adv. (Capt.) Ashwani Jhingan
The principle of Utmost Good Faith, also known as uberrimae fidei, is a cornerstone of marine insurance. This principle requires both the insurer and the insured to be completely honest and transparent with each other.
When purchasing marine insurance, one is expected to provide accurate and complete information without hiding or misrepresenting any details. This ensures that the insurer can accurately assess the risks involved and accordingly offer appropriate coverage.
If an insurer believes that you have hidden important information or provided false details, they have the right to reject your application or deny a claim. This principle requires you to act in good faith throughout the policy’s duration.
The doctrine of Utmost Good Faith is of universal application and is entrenched in industry custom and practice. Historically, this important doctrine arises principally from the need to protect marine underwriters against acts of misrepresentation, concealment or non-disclosure.
In the world of marine insurance, due to the nature of the risks being underwritten, marine underwriters do not have the same resources available to independently confirm information provided by an insured and must rely, rather, solely on what an insured is telling them about the risk in question as a basis for providing terms. In cargo insurance, for example, an underwriter may have to rely substantially on information provided by the insured as to how cargo is packed and stowed within a shipping container. Likewise, a marine underwriter must rely on the insured’s declarations as to quantity and value the cargo. Underwriters in this specialised class, generally, do not have any other source for verifying this information.
Consequently, the effects of misrepresentation or concealment are serious and generally allow underwriters to avoid a policy ab initio.
The Marine Insurance Act 1963 places a statutory duty on the prospect client to disclose all material facts that he may know or should reasonably know as part of his business. Failure to do so, whether intentional or accidental, can result in the cancellation of your policy.
Breaches of the Utmost Good Faith principle can be categorised into four types:
(a) Non-disclosure
(b) Concealment
(c) Innocent Misrepresentation
(d) Fraudulent Misrepresentation
Disclosure by assured
* The assured must disclose to the insurer, before the contract is concluded, every material circumstance which is known to the assured, and the assured is deemed to know every circumstance which, in the ordinary course of business, ought to be known by him.
* Every circumstance is material which would influence the judgment of a prudent insurer in fixing the premium, or determining whether he will take the risk.
* In the absence of enquiry, the following circumstances need not be disclosed, namely:
(a) Any circumstance which diminishes the risk.
(b) Any circumstance which is known or presumed to be known to the insurer.
(c) Any circumstance as to which information is waived by the insurer.
(d) Any circumstance which it is superfluous to disclose by reason of any express or implied warranty.
* Whether any particular circumstance, which is not disclosed, be material or not is, in each case, a question of fact.
* The term ‘circumstance’ includes any communication made to, or information received by, the assured.
Example:
If you’re transporting fragile or hazardous goods and don’t inform the insurer, the insurer might refuse to pay a claim if something goes wrong. The nature of goods must be disclosed.
Case Study on Utmost Good Faith
Contship Container Lines Ltd v D. K. Lall and Ors. (2010):
An Indian exporter received two orders from Spain: 121 packages of iron furniture items, and 1 package of miniature paintings (Contship Container Lines Ltd v D. K. Lall and Ors., 2010). The packages were cleared by Customs and loaded into one container in Jodhpur, then trucked to Bombay and loaded onto the CMBT Himalaya, owned by Contship.
Lall purchased a marine cargo/inland transit insurance policy. The package of miniature paintings never arrived and Lall’s claims were denied by both Contship and Lall’s insurers. Lall’s claim began in the National Consumer Disputes Redressal Commission. The insurer argued that because Lall represented the insurance would cover a C.I.F. contract, Lall would maintain ownership of the goods until it is delivered to its final destination. However, the contract of sale was for goods sent on F.O.B. basis.
As such, Lall would no longer have an insurance interest in the package and could not make a claim on the policy. The Commission agreed that this was a misrepresentation but said the contract would instead be void because it was a material misrepresentation of fact in violation of the duty of uberrimae fidei.
On appeal, the Supreme Court first considered the potential that Lall retains an insurable interest. While they do find the F.O.B. sale ended the buyer’s rights when the goods were delivered to Jodhpur, they do at least consider the possibility that a seller could retain a lien on an item if unpaid. The Court affirmed the Commission’s ruling “on the ground that the shipper had not observed utmost good faith while obtaining the insurance cover.”
Amending the uberrimae fidei standard would change the Court’s analysis of this case, and potentially the outcome. Under the new rules, the Court would first proceed by asking if the misrepresentations were material.
Materiality is a subjective test of whether it could influence a hypothetical insurer, and an objective test of whether it did influence the insurer in the specific case (Assicurazioni Gerali SpA v Arab Insurance Group, 2003). It is certainly possible that the specific owner of cargo or a vessel is immaterial to the risk.
The National Commission found that the carrier misdelivered the package of miniature paintings and held them liable for US $1,800 under India’s Carriage of Goods by Sea Act, 1925, but the High Court reduced this to 666.67 special drawing rights (Rs 47,810 in March 2010) as compensation because the value and nature of the goods was undeclared on the bill of lading (Contship Container Lines Ltd v. D. K. Lall and Ors., 2010).
Considering that the full value of the goods was reported to be Rs 39,23,225, this remaining amount could be collected from the insurer by the insured party who maintained an insurable interest – something that Lall did not have with the FOB sale. More testimony and evidence would be necessary to determine whether or not Lall would still receive the C.I.F. coverage, and in this case the insurers seemed to have a good case that such coverage would not be available.
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