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Friday, October 3, 2014

Utmost Good Faith (Uberrimae fidei) .... Carter V Boehm 1766

Insurance is a contract between Insured and Insurer.  In contract law, the implied covenant of good faith and fair dealing is a general presumption that the parties to a contract will deal with each other honestly, fairly, and in good faith, so as to not destroy the right of the other party or parties to receive the benefits of the contract.  Insurance  contracts are special – they are bound by ‘Uberrimae fidei’ (a Latin phrase meaning "utmost good faith")  - the legal doctrine which governs insurance contracts. This means that all parties to an insurance contract must deal in good faith, making a full declaration of all material facts in the insurance proposal.  It is not simply good faith but more – a  higher duty is expected from parties to an insurance contract than from parties to most other contracts in order to ensure the disclosure of all material facts so that the contract may accurately reflect the actual risk being undertaken.


Even as Tamilnadu gears for the new incumbent at Fort St. George, democracy in Indonesia suffered a major setback, when the outgoing Parliament passed a last-minute law eliminating direct elections for mayors, district chiefs and governors. The measure was pushed through around 2 a.m. Friday by the Gerindra party, whose candidate for president, the former army general Prabowo Subianto, was defeated in a bitterly contested election in July. The winner, Joko Widodo, rose to prominence as a popular reformist mayor and governor. Analysts said the law would further polarize an already politically divided country in a bruising election year, and represented a direct challenge to Mr. Widodo by the country’s political elite.

This is no political post – something on a Fort  - connected to Insurance.  Fort Marlborough built between 1713-1719  is an English fort located in Bengkulu City, Sumatra. It was built by the East India Company under the leadership of Governor Joseph Collett as a defensive fort for the British Bencoolen.  It was considered to be one of the strongest British forts in the eastern region, second only to Fort St. George in Madras.  It is stated that the  earthquake that registered 7.3 on the Richter scale had no effect on the strongly-built fort.  The fort was built on an artificial hill and construction, using both convict and local labour. The trading post was never profitable for the British, being hampered by a location which Europeans found unpleasant, and by an inability to find sufficient pepper to buy.  The British transferred Bengkulu, then known as Bencoolen, to Dutch control under the Anglo-Dutch Treaty of 1824, which defined British and Dutch spheres of influence.  The Japanese occupied the fort during their occupation of the Dutch East Indies (1942-1945). When the Dutch left Indonesia in 1950, the Indonesian Army took over the fort. In 1977, the fort was handed over to the Department of Education and Culture to be restored and converted into a heritage site.
Photo credit : tripadvisor.com

The principle of ‘Utmost Goodfaith’ was enunciated  by Lord Mansfield in the leading and often quoted case of Carter v Boehm (1766) - .. The special facts, upon which the contingent chance is to be computed, lie most commonly in the knowledge of the insured only: the underwriter trusts to his representation, and proceeds upon confidence that he does not keep back any circumstances in his knowledge, to mislead the under-writer into a belief that the circumstance does not exist... 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.

Mr Carter was the Governor of Fort Marlborough, built by the British East India Company in the island of Sumatra. He took out an insurance policy with Mr Boehm against the fort being taken by a foreign enemy. A witness called Captain Tryon testified that Mr Carter knew the fort was built to resist attacks from natives but not European enemies, and the French were likely to attack. The French did attack, a claim was preferred - Mr Boehm refused to fulfill the insurance claim. Mr Carter sued, protesting the non-consideration of the claim.

In the case famously known as  Carter v Boehm  - Lord Mansfield held that Mr Carter as the proposer owed a duty of utmost good faith (uberrimae fidei) to the insurer under which he was required to disclose all facts material to the risk. Lord Mansfield held that the duty was reciprocal and that if an insurer withheld material facts, (the example cited being that an insured vessel had already arrived safely), the policyholder could declare the policy void and recover the premium. Lord Mansfield proceeded to qualify the duty of disclosure, commenting,  ….“ either party may be innocently silent, as to grounds open to both, to exercise their judgment upon....An underwriter cannot insist that the policy is void, because the insured did not tell him what he actually knew...The insured need not mention what the underwriter ought to know; what he takes upon himself the knowledge of; or what he waives being informed of. The underwriter needs not be told what lessens the risque agreed and understood to be run by the express terms of the policy. He needs not to be told general topics of speculation      ”

Lord Mansfield found in favour of the policyholder on the grounds that the insurer knew or ought to have known that the risk existed as the political situation was public knowledge and, there was not a word said to him, of the affairs of India, or the state of the war there, or the condition of Fort Marlborough. If he thought that omission an objection at the time, he ought not to have signed the policy with a secret reserve in his own mind to make it void. 

Going by the case and the judgment of Lord Mansfield -  non-disclosure in the insurance context in the early years was referred to as a ‘concealment’, and the doctrine was sometimes viewed and explained as constructive fraud and later, non-disclosure  in a substantial proportion of cases was treated to be the result of an innocent mistake.

With regards – S. Sampathkumar

29th Sept. 2o14.

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