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MARCH 2001
HOUSE OF LORDS: "THE STAR SEA"
In a recent decision handed down in the case of Manifest
Shipping Co. Ltd. v. Uni-Polaris Insurance Co. Ltd. [the "STAR
SEA"] [2001] H. L. J. No. 2 the House of Lords considered whether
the requirement of "utmost good faith" in contracts of
marine insurance extends past the initial negotiations (the acceptance
of the risk by the insurer and the fixing of a premium) to apply
later in time when a claim is made by the insured. This case provided
an opportunity for the House of Lords in fact to comment on the
extent of the duty of utmost good faith after the conclusion of
a policy, and in particular, the context of the claim.
Courts have in the past confirmed that the duty of
utmost good faith goes past the formation of the contract, applying,
for instance: - where an insured is obliged to give notice to an
insurer under an existing policy of entry into a war zone; - where
an insured wishes to give notice to an insurer seeking to take advantage
of a "held covered" clause in an existing policy; - where
there are rights of inspection under reinsurance treaties. Courts
have held in the past that the duty of good faith remains upon an
insured to not make a dishonest claim or a claim amounting to fraud
against an insurer. If a dishonest claim is made, then the insurer
has been entitled to avoid the claim. This case involves an interesting
situation and the potential for the "utmost good faith"
obligation to be stretched well beyond the mere duty on the part
of the insured to make an honest claim.
In this case, a time policy of insurance was placed
insuring the vessel "STAR SEA" in 1989. In May 1990, "STAR
SEA" encountered serious fire damage while at sea, rendering
her a constructive total loss. A claim was filed by the vessel owner
with the defendant hull insurer. The insured denied the claim, alleging
a breach of a statutory warranty, specifically, that with the privity
of the insured that the vessel was sent to sea in an unseaworthy
state which directly lead to the fire loss in question. The claim
being denied, the matter went to litigation on the policy. Through
the course of the adjudication at trial, it emerged that the insured
opted not to make full disclosure of certain expert reports bearing
on the question of seaworthiness. In hindsight this simply seems
to have been a matter of litigation strategy and the insured availing
itself of normal rules of "privilege"; that is, the decision
when to withhold production and disclosure of certain documents
used in litigation. Underwriters complained at the end of the trial
that this failure to make full disclosure of relevant facts, combined
with certain misstatements of fact, amounted to a breach of the
"utmost good faith" duty placed on the insured. Underwriters
argued that this by itself allowed them not only to avoid payment
of the claim, but to avoid the entire policy ab initio. The
underwriters alleged that the insured was under a continuing duty
of utmost good faith to disclose to them any information material
to the claim and which might affect their decision to pay or defend
the claim. On a technical level the underwriter had an appealing
argument as the "utmost good faith" requirement in the
Marine Insurance Acts is generally stated and is not limited
to any particular point in time only (and therefore it should apply
even in the course of a trial involving a dispute on the policy).
On the other hand, this was a difficult case from the perspective
of the insured because as had been held throughout, the so-called
litigation strategy and the non-disclosure of certain facts was
not in any way fraudulent or seen as dishonest. At trial, the judge
ruled that there had been a breach of a warranty of seaworthiness,
specifically, there having been a privity on the part of the shipowner
in effectively ignoring or willfully ignoring the seaworthiness
problem, but that the insurer could not avoid the contract on the
basis of a breach of good faith by the insured during the course
of litigation. Both sides appealed to the Court of Appeal. The insured
successfully set aside the finding that there was a breach of warranty
(the facts not supporting a finding of privity) and the insurer
was again unsuccessful in its argument that there was a breach of
good faith allowing it to avoid the policy given the insured's conduct
during the trial.
On appeal to the House of Lords, the House of Lords
ruled as follows:
1. The court again concluded that there was no evidence
of fraud on the part of the insured in the making of the claim or
in the presentation of its case at trial;
2. The Court of Appeal correctly upheld the insured's claim, there
being no evidence of "privity" with the seaworthiness
problem;
3. On the material point of "utmost good faith", the court
unanimously ruled that that once parties are in litigation, it is
the procedural rules that govern the extent of the disclosure which
should be given in the litigation, and not the more general "utmost
good faith" requirement in the Marine Insurance Acts;
4. The court unanimously ruled that it is accepted that the duty
of utmost good faith continues to apply after the conclusion of
the insurance contract, but that it does not necessarily follow
that the content of the duty is the same as that existing prior
to or at the time of the making of the contract. The duty of good
faith after the making of the contract must be considered as a new
and different type of duty than that beforehand, which should not
be coloured by the extent of the duty owed pre-contractually by
the insured. The court confirmed that the duty of good faith owed
after the contract is not the same as in the pre-contractual stages.
At a minimum, an insured presenting a claim after the making of
a contract of insurance has an obligation to act honestly in the
presentation of the claim.
The House of Lords noted, in support of its findings,
that it is now well established in law that while the relationship
between parties to a contract is framed by that contract prior
to litigation, that once litigation commences, the rights of the
parties are "crystallized". The lawsuit is to then determine
the rights enjoyed by each of the parties, and the appropriate remedies.
Accordingly, the disclosure of documents and facts is now governed
by rules of procedure in court orders. New remedies are available
to the parties under that framework, and it is therefore unnecessary
that the draconian "ab initio" remedy be available
to an insurer in those circumstances. Indeed, the court found it
highly prejudicial and out of proportion that an insurer should
be able to point to the conduct of an insured in litigation (especially
where the litigation is precipitated by the insurer denying coverage)
as a basis to avoid the policy altogether especially in circumstances
such as those present, where the initial basis for the denial of
payment was ultimately seen to be without merit.
It is therefore clear that this case is another example
of the court considering the extent of the duty of post-contractual
good faith on the part of an insured, with the court insisting that
there be some reasonable connection between the conduct in question
and the remedy available. The court also noted the inevitable result
that, by not making a clear distinction between pre-contractual
dealings and any duty of disclosure on the part of an insured after
the contract is made that the remedy of avoidance of contract would
almost be wholly one-sided in favour of the insurer. In effect,
absent fraud or dishonesty on the part of the insured, if the insured
is seen to have reasonably conducted itself within the rules of
court, with an honest belief in the merits of its case, then an
insurer will have difficulty now arguing that certain steps taken
or decisions made in the insured's litigation strategy amount to
a breach of the overriding good faith obligations thereby allowing
the insurer to avoid the claim.
MGH
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