CLASS REPORT of 02.09.

2020 - DOCTRINE OF GOOD FAITH IN INSURANCE

CONTRACTS
SUBMITTED BY-
KARISHMA RAJPUT (BC0160021)
SAYANTANI SARKAR (BC0160038)

 Doctrine of Uberrimae fidei (utmost good faith)- defined as honesty in a person's

conduct during the agreement. The obligation to perform in good faith exists even in
contracts that expressly allow either party to terminate the contract for any reason. It
states that the insurer and the insured must disclose all material facts before the
policy inception.
 The doctrine of good faith owes its origin to the law of equity and can be traced to the
Court of Chancery’s decision in the case- Carter v. Bohemn.
 In layman’s term, doctrine of good faith means that two parties sign a contract
without any mala fide intention.
 There are 3 main key words related to Doctrine of good faith- Knowledge,
suppression of knowledge and Disclosure of facts.
 Facts which may enhance the level of risk are called material facts.

 The insurer or insurance company needs to declare all public disclosures and
investment strategies while the insured needs to declare health condition, family
medical history, lifestyle, food habits, smoking and alcohol history etc.

 In case of non-disclosure or misrepresentation of material facts, the policy can be

considered null and void.

 This principle applies to both life insurance and general insurance policies.

 In case, an insured person doesn’t know about a detail which he was supposed to tell
the insurer provided he would’ve known it, then the insured has not violated the
contract.
 If an insured person has means to know any ailment and chooses not to know then
there will a fault on the part of the person insured.
 In the case of insurance law, insured person has the best knowledge about the subject
of insurer. Because the insured person is getting an insurance for something that
belongs to him/her.
 Insurer is the outsider so we start with the fact that he knows nothing. Which in turn,
puts a duty on an insured person to tell the insurer everything relevant he/she knows
about.
 According to the Doctrine of good faith, there is duty on insurer to find out everything
and there is duty on the insured to disclose everything.
 There is a duty on the insurer to ask extremely relevant question and use the best of
diagnostic tools at his disposal.
 Caveat emptor and Caveat venditor- since the Courts of England follow this principle,
they are reluctant of giving recognition of Doctrine of good faith in the court of law.
 Doctrine of fairness-
 There are two contractual duties on the insured
 No misrepresentation facts/knowledge
 Disclose everything relevant.
 Burden of proof- depends on the facts of the case.
 It is the responsibility of the insurance company to disclose everything covered under
contract. That is, for example: extent of coverage, duration of coverage, due diligence,
etc. the reason for the same is- Due Diligence
 It is the duty of insured to read everything in detail.
 How doctrine of good faith started in day to day life? On the docks, ships used to have
many containers for import and export, not everyone can count every time, so they
used the believe the words of the Captain of the Ship. This practise was later codified
and thus got recognised as Doctrine of Good Faith.
 Doctrine of equitable subrogation- The principle under which an insurer that has paid
a loss under an insurance policy is entitled to all the rights and remedies belonging to
the insured against a third party with respect to any loss covered by the policy.
 Under the English law, parties can include a provision of Doctrine of good faith in
their contract, if they wish so. But by default, there is no existence of the Doctrine of
good faith.
 Courts, sometime during liberal interpretation, gave recognition to the Doctrine of
good faith. For example- Muslim Maintenance during the leadership of Rajiv Gandhi.
There was an appeal filed based on arbitrariness. To which the Hon’ble Supreme
Court responded by stating that- Act provides for 3 months maintenance. Meaning,
lump sum amount of maintenance should be paid within 3 months.
 Doctrine of good faith can also be enforced in the case of Joint Ventures and
Distribution.
 Lord Mansfield was criticised because English laws did not have the Doctrine of good
faith initially.
 In the case of U.K. Marine Insurance, there is an express implication of Doctrine of
Good Faith.
 CASE OF CARTER v. BOHEMN
The decision of the Court of King’s Bench in London, given by Lord Mansfield in
1766 in the case of Carter v Boehm, famously articulated the principle of uberrima
fides (utmost good faith), which became the standard benchmark for disclosure in
modern insurance contracts. Yet the insurance policy and claim from which this
ruling derived was anything other than standard. The policy concerned was taken out
with the underwriter Charles Boehm in London on 9 May 1760 by Roger Carter, the
Governor of the English East India Company Presidency at Fort Marlborough, near
Benkulen on the west coast of Sumatra, to insure £10,000 against the fort being taken
by a foreign enemy at any point between 16 October 1759 and 16 October 1760. The
fort was indeed attacked and captured by the French in April 1760. Carter’s policy
was not taken out by his brother in London until 9 May 1760, over a month after Fort
Marlborough had fallen. The underwriter, Charles Boehm, was well known in the
City as a merchant and director of the Bank of England and the London Assurance
Corporation. The insurance that he wrote was highly unusual. It was most probably
regarded by him as an opportunity for a little private speculation. It was an insurance
against the occurrence of an event - an enemy attack. It was not an indemnity for any
damage resulting from this event to specific property, stock or building. The premium
of £400, at the rate of 80s%, was greater than Carter’s annual salary. There is
evidence in the instruction to his brother that in the event of a war with the Dutch he
was anxious to have the insurance at any rate. It was also expensive by comparison
with property insurance in England at the time. Policies on highly inflammable
industrial risks in London such as sugar refineries, for instance, were charged no more
than half the premium rate that Carter paid. Carter’s policy also contained the terms
‘interest or no interest’, ‘free from average’, and ‘without benefit of salvage’. The
underwriter Boehm resisted the claim on the grounds that Carter had concealed
circumstances about the risk that he should have disclosed, namely the weakness of
the fortifications and the probability of its being attacked by the French. Counsel for
Boehm argued ‘that the insurer has a right to know as much as the insured himself
knows.’ Carter provided depositions in Chancery to show that there was no
concealment with intention to defraud. His counsel argued that all the circumstances
were ‘universally known to every merchant upon the exchange of London’ and that
the insured is only obliged to disclose facts, ‘not ideas or speculations which he may
entertain, upon such facts’. Mansfield came down unanimously on the side of the
insured and, drawing on the common law concept of bona fides, systematically
dismissed all of Boehm’s arguments. Insurance is a contract upon speculation,
characterized by an asymmetry of information. ‘Good faith forbids either party by
concealing what he privately knows, to draw the other into a bargain, from his
ignorance of that fact, and his believing the contrary’. However, either party to a
contract ‘may be innocently silent’. The insured need not mention what the
underwriter knows or ought to know, and the latter cannot insist that a policy is void
because the insured did not tell him what he knew already or what he reasonably
ought to have found out by inquiry. This included ‘general topics of speculation,
including every cause which may occasion natural perils, the difficulty of a voyage,
the kind of seasons, political perils’.