Duty of Disclosure under Insurance Contracts
Introduction
The insurance contract, as a sub-species of contract, shares the common rules of law as they are in general contracts. However, the uniqueness result of its nature makes it inevitable that specific rules exist. As the contract of insurance has been classified as one of utmost good faith, one party of the contract, usually the assured, is thus required not only to abstain from making misrepresentation but also to volunteer information. The duty of disclosure, therefore, plays a crucial rule in insurance contracts.
As it will be seen, the breach of duty of disclosure is a decisive factor in vitiating the insurance. However, the only remedy provided by law in the case of breach is extremely harsh. The absolute and uncompromising nature of such remedy, as a result, has never stopped the doctrine from being critically scrutinized. Besides, the archaic duty, born in 18th century, was also found to be hard to adapt in the modern world. The broad test for the duty of disclosure render it difficult for the assured to apply, and the scope of it is also too broad to be appreciated. In the area of consumer insurances, the unfairness it has brought to the consumers is too extreme, and the abolishment of the duty is thus inevitable. However criticized and questioned, in the area of non-consumer insurance, the duty of disclosure still has its irreplaceable and imperishable value. Perhaps for non-consumer insurances, the more logical way is to adjust the unsatisfying parts, rather than deny its value and eliminate it in a radical way.
1. Background
The concept of good faith, which implies a measure of fairness and honesty,1 exists in “all contracts and dealings”.2 There are two common types of a lack in good faith, one of which is that a contract is made by an inaccurate or misleading statement, generally known as misrepresentation. The other one is that two parties enter into a contract by one withholding information which is relevant to the other party in deciding whether to enter into a particular bargain.3 The principle of misrepresentation, designed to achieve procedural fairness, gives common law the backing in all contracts.4 In contrast, the duty to make a full disclosure of all relevant information are applied in insurance contracts, the specific nature of which expects the assured to do more than just not to make representation.
The principles underlying the duty of disclosure can be traced back to 18th Century when Lord Mansfield first took the opportunity to explain the necessity of the existence of such duty in insurance contracts in the case Carter v Boehm.5 Generally speaking, the assured has the knowledge of the facts upon which the contingent chance would be computed.6 This, however, leads to a vast imbalance of information in relation to the risk between the assured and the insurer who is traditionally regarded to have the knowledge on only what the assured has revealed.7 Besides, one cannot forget the nature of the insurance contracts by which the insurer agrees to provide a benefit on condition of the occurrence of an uncertain event in consideration of the promise of the assured who agrees to pay premium.8 The imbalance of knowledge and the speculative nature of insurance contracts, thus, requires the assured to make a full disclose in order to allow the insurer to consider either the acceptability of the risk or the terms of a policy based on fair dealings with regard to the equality of information.9 The rules of disclosure, have been codified in codified in Section 17 to Section 19 of the Marine Insurance Act 1906 (the MIA 1906), and it has been held to be applicable to non-marine insurance contracts as well. 10
In contrast, in other areas of commercial contracts, there is no need to apply the doctrine of good faith to its full extend. The parties to the contract are not required to volunteer information, regardless of the fact that the information might be