It has long been recognised that insurance contracts are governed by a higher standard of utmost good faith (uberrimae fidei) which does not apply to other contracts.

In the leading case of Carter v Boehm (1776), Lord Mansfield stated that if the true facts are concealed in any way, whether fraudulently or not, then the risk taken by the insurers may be different from the risk they intended to take in which case the policy would be void. This was seen as a natural consequence of an imbalance of knowledge under which the insured (usually) has sole knowledge of most of the key information which should form the basis for a risk assessment by the insurer.

This general principle of good faith is affirmed in section 17 of the Marine Insurance Act 1906 (the "Act"). The Act spells out that the requirement of utmost good faith must be observed by both parties (as did Lord Mansfield).

"A contract of marine insurance is a contract 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."

The general duty of good faith manifests itself in at least two important respects: (1) a positive duty to disclose material information; and (2) a duty not to make any material misrepresentations.

In practice these good faith duties are significantly more onerous for the insured than for the insurer. The Law Commissions of England and Scotland are engaged in an ongoing review of insurance law. As part of that review they have identified several potentially unfair aspects of the current law:

  • The insured can be unaware of their duty to volunteer information which applies to information not specifically asked for by the insurer on the proposal form;
  • The law requires the insured to assess whether information would be relevant to the assessment of risk by a "prudent underwriter". This test for materiality, which underlies the rules on disclosure and misrepresentation, assesses the insured by reference to the professional knowledge of the insurer;
  • The insured can still be in breach even if their error was reasonable in the circumstances; for example if a question was unclear or required specific technical knowledge which they did not have;
  • The only remedy for breach of the good faith duties is retrospective avoidance of the entire contract;
  • The insurer does not require to show that the non-disclosure / misrepresentation had any causal link to the claim in order to avoid the contract. For example, if a claim was submitted relating to flood damage the insurer could avoid the whole contract if the insured had failed to disclose that their alarm system was not functioning;
  • Intermediaries, including brokers, are generally treated as being agents of the insured. As such, the insured is held responsible for any failings on their part. That is so even where in practice the intermediary is most closely connected with the insurer.

Against that background, the Law Commissions have tentatively proposed various reforms. Given the enormous scope of their project, only a few relevant areas for potential reform can be considered here.


As noted, this area is considered by many to be in need of reform. The current test for materiality is set out in section 20(2) of the Act which states:

"A representation is material which would influence the judgment of a prudent insurer in fixing the premium, or determining whether he will take the risk."

The House of Lords in the leading case of Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co Ltd [1995] AC 501, decided that the relevant test was whether the information not disclosed or misrepresented would have influenced the mind of a prudent insurer in assessing the risk. Information is therefore material if it would affect the premium charged or any other policy terms. Nor is it necessary to show that there would actually have been any change in premium / terms. It is sufficient for materiality if the information would have been relevant in making that decision (i.e. no "decisive influence") is required.

In the recent case of Synergy Health (UK) Ltd v CGU Insurance Plc (t/a Norwich Union) and others [2010] EWHC 2583 the insured informed its insurance company, four months before renewal of its policy, that it was installing an intruder alarm. Due to administrative errors the alarm was not installed and a major fire occurred. The court held, that by failing to correct its material misrepresentation, the insured had impliedly repeated the misrepresentation on renewal. However, on the facts, the insurance company had not been induced by the misrepresentation to renew the policy and so could not avoid it.

The Law Commissions have made several relevant proposals in this area:

  • Consumers
    • That consumers should only have a duty to answer questions posed by insurers (i.e. abolishing the residual duty of disclosure). General questions would be permitted but insurers would only be entitled to a remedy if it is clear that the insured should have realised that they should have disclosed the relevant information in response;
    • That the insurer's remedy against consumers following a non-disclosure or misrepresentation should be proportionate to the insured's level of fault. Avoidance would only be available if the insured deliberately or recklessly withheld information. In the remaining cases where the insured was negligent but their breach was not deliberate or reckless, the insurer should be put in the position they would have been in but for the breach. If they can show that they would not have provided any cover then the policy would be avoided. However, if the only change would have been an increase in premiums, additional exclusions or an increased excess then any claims would still need to be met but would be assessed on the basis of the policy as it would have been written.
    • In making the above assessments, one of many relevant factors should be whether the insured reasonably expected that the insurer would obtain the information themselves.
  • Businesses
    • That businesses should be assessed by what a reasonable insured would be expected to know an insurer would want to know (i.e. replacing the current test based solely on a prudent insurer). What is to be expected would vary depending upon the experience and size of the insured;
    • The Law Commissions are undecided as to whether the remedies available to insurers should be amended in the case of businesses.

The proposals raise many difficult issues and uncertainties. For example, how is it to be proved that the insured's breach was deliberate or reckless? Can it be shown with certainly what policy (if any) would have been written had certain information been disclosed?

Insurers' duties of good faith

The reference by the Law Commissions to the insurers' duties to obtain information coincides with a general increased focus on insurers' duties of good faith. This focus is based on a recognition that insurers have greater access to relevant sources of information and communications systems. It does however raise difficult issues relating to what an insurer is expected to check and also the accuracy of the relevant records. More generally, it raises the possibility of the insurer being in breach for failing to disclose material facts to the insured. A linked issue which arises from good faith and has also been considered by the Law Commissions is the Insurer's potential liability in damages for late payment of claims.


The case of Jones v Environcom Ltd [2009] EWHC 16 (Comm) demonstrates that the use of brokers does not dissipate the burden placed on the insured to provide insurers with full disclosure.

Jones, operated an electrical goods waste recycling plant and plasma cutters were used for cutting up the items. Insurers regarded the plasma cutters as high fire risk. A major fire was reported to insurers in 2007 however, it was established that the use of plasma cutters had not been disclosed as well as a number of smaller fires. It was alleged that the broker, Miles Smith, had not provided adequate guidance on what should have been revealed.

The brokers argued that it had fulfilled its duty by sending various documents to Environcom explaining the disclosure obligations. The court held that the standardised wording of these documents was insufficient as they did not show what a material fact was, its effect on the policy cover, or when it should be declared.

Although the documentation provided by the brokers was held to be insufficient this was not held to be the cause of the loss. The main cause of the loss was the failure to disclose the plasma cutters by the insured and even if the broker had carried out more stringent enquiries it would not have established that plasma cutters were being used. The real cause was therefore the likelihood of not being insurable at all if the facts had been known, and the insured's failure to notify that they were processing items in breach of their waste management licence.

The Law Commissions have suggested that a new default rule should be introduced to the effect that intermediaries are agents of the insurer. That would be subject to being displaced depending upon the circumstances. For example, large corporates would generally have brokers as their agents.

Alternatives to reform

It has been argued that any potential unfairness in the strict "letter of the law" is mitigated by FSA Statements of Practice, self-regulation and the Financial Services Ombudsman. Whilst recognising the benefits of these, the Law Commissions rejected the idea that they removed the need for reform. The Ombudsman was considered to be the best of these alternative codes, since it can decide based upon what is "fair and reasonable in the circumstances". However, the Law Commissions point out that (1) that requires a specific claim to be brought; (2) the courts still enforce the default legal rules; (3) there is a £100K limit on binding awards; (4) decisions are private and therefore lack the force of precedent; and (5) jurisdiction is limited to consumers and businesses with turnover of less than £1 million.


At present there is an onerous duty of disclosure on the part of the policyholder. It is recommended that a full and frank disclosure is made to insurers to avoid repudiation at a later stage. The complex task of reforming the law on insurance is ongoing. That is certain to be an extended process in light of the significance and likely impact of any reforms as well as the number and size of stakeholders affected. Insurers are under the same duty as the insured in terms of good faith. However, it remains to be seen how far that concept will be developed by the courts and / or the Law Commissions.