Good faith obligations in insurance contracts

The special nature of insurance contracts requires both the insurer and the insured to approach the relationship with utmost good faith and indeed the Latin phrase uberrimae fidei, which translates directly to “most abundant faith”, is used to describe the relationship between insurer and insured.

 

The steps to be taken by good faith generally occur early in the relationship for the insured (e.g. when taking out the policy) and late in the relationship for the insurer (e.g. when deciding whether to extend coverage).

 

It is necessary that the insured act in good faith to disclose relevant facts to the insurer when applying for insurance. For example, when taking out health insurance an insured is required to fully disclose all relevant pre-existing health conditions. The requirement for full disclosure by insureds dates back at least as far as the eighteenth century:

 

Insurance is a contract upon speculation. The special facts, upon which the contingent chance is to be computed, lie most commonly in the knowledge of the insured only:  the under-writer trusts to his representation, and proceeds upon confidence that he does not keep back any circumstance in his knowledge, to mislead the under-writer into a belief that the circumstance does not exist, and to induce him to estimate the risque, as if it did not exist. The keeping back such circumstance is a fraud, and therefore the policy is void.  Although the suppression should happen through mistake, without any fraudulent intention; yet still the under-writer is deceived, and the policy is void; because the risque run is really different from the risque understood and intended to be run, at the time of the agreement.

(Carter v. Boehm (1766), 3 Burr. 1905, 97 E.R. 1162 cited in Coronation Insurance Co. v. Taku Air Transport Ltd., [1991] 3 SCR 622).

 

The shipping context is certainly one historical situation in which insureds were considered to have knowledge of risks that needed to be disclosed to the insurer: 

 

Insurance is a contract of the utmost good faith, and it is of the gravest importance to commerce that that position should be observed. The underwriter knows nothing of the particular circumstances of the voyage to be insured. The assured knows a great deal and it is the duty of the assured to inform the underwriter of everything that he is not taken as knowing, so that the contract may be entered into on an equal footing.

(Greenhill v. Fed. Insurance Co., [1927] 1 KB 65 at 76 (C.A.))

 

The duty on insureds to provide forthright disclosure means that all questions asked by the insurer must be carefully answered:

 

The law is clear that in contracts uberrimae fidei the fact that a question is asked in the form makes the answer material. There is also a duty on the applicant to use reasonable diligence to see that the answers are correctly written, and whether he read the form or not the law treats him as having adopted it…

(Van Schilt v. Gore Mutual Insurance Co., 1988 CanLII 2974 at para. 21 (BCCA)).

 

However, the ability of an insurer to deny coverage on the basis of a failure by the insured to disclose information may be moderated in the context of mandatory insurance in a regulated industry where the insurer has knowledge of, or access to, the information the insured failed to disclose:

 

The insurers cannot escape liability on the grounds that Taku failed to disclose its accident record.  While the uberrima fides doctrine as formulated in 1766 can still hold true where the policy is for the exclusive benefit of the insured, it should not be applicable in the highly regulated field of aviation insurance, where insurance for passengers has been made a condition for licensing air carriers.  Where the insurance policy required by statute or regulation is primarily for the benefit of members of the flying public and not just the insured, the insurer must take some basic steps to investigate the flying record of the air carrier applying for insurance.  At a minimum, it should review its own files on the applicant, and should make a search of the public record of the air carrier's accidents.  This will not place too great a burden on an insurer since accident histories are easily available.  In this case the insurers had within their own grasp information which would have provided a more accurate assessment of the risk entailed by the policy.  At a minimum, they should have scrutinized their own records before issuing the policy.

(Coronation Insurance Co. v. Taku Air Transport Ltd., [1991] 3 SCR 622, headnote).

 

Insurers also owe insureds duties of good faith, including to promptly and fairly deal with claims after an insured as suffered a loss:

 

[T]here is an implied obligation in every insurance contract that the insurer will deal with claims from its insured in good faith… The duty of good faith requires an insurer to act both promptly and fairly when investigating, assessing and attempting to resolve claims made by its insureds.

(702535 Ontario Inc. v. Non-Marine Underwriters Members of Lloyd's London, 2000 CanLII 5684 (ON CA)).

 

In Canadian indemnity co. v. Canadian johns-manville co., [1990] 2 SCR 549 a comprehensive general liability policy providing insurance coverage against various risks, including products liability, was issued to a company involved in the mining, manufacturing and selling of asbestos products. The insurer sought to annul the policy on the basis that the insured failed to disclose relevant information when applying for the policy, but the insured argued that the insurer should have known about the risks associated with asbestos products, and that if it did not have such knowledge it should have made inquiries. In the course of its judgment the Supreme Court of Canada said that the insured has a duty to disclose relevant information, but as well the insurer should know, or make enquiries about, well known information relevant to the risks it is insuring: 

 

The notion of uberrimae fidei is often rightly mentioned in the context of the insured's duty to disclose.  The corresponding duties of the insurer receive less frequent mention, and I propose to make a few general comments here on that subject.

…

[A]n insurer which is underwriting risks in an industry for the first time will have to find ways to bring its knowledge up to the minimum level.  It cannot simply rely on the insured and later place the blame on that insured for the gaps in knowledge of the risk.  To do so would not be fraudulent, but it would certainly amount to bad faith.

 

…The taking on of an insurance risk is made very difficult if the insurer cannot rely on the full and fair disclosure of the insured regarding facts material to the risk.  Without such information, the insurer will be unable properly to decide whether to accept the risk and, if so, at what rate to set the premium.  It would be unfair to require the insurer to take on the risk without all the relevant facts.

 

Likewise, it must be said that the consequences of the annulment of an insurance contract are very serious for the insured.  The insured has almost certainly relied on the validity of the contract and cannot at a later date acquire coverage for a risk which is now perhaps realised.  Accordingly, it is in the interests of stability of such contracts that the insured be able to rely on the diligence and professionalism of the insurer so as to avoid having the insurance contract annulled on the basis of facts which were not disclosed but which should have been notorious to the insurer had it acquired the level of knowledge of a reasonably competent underwriter.

…

Clearly, both parties are required by law to treat the contract of insurance as an uberrimae fidei contract.  The insured will disclose fully and fairly or face the annulment of the contract, and the prudent insurer will ensure that it acquires a good knowledge of the industry in which it insures or fail to do so at its peril.

 

(Canadian indemnity co. v. Canadian johns-manville co., [1990] 2 SCR 549).

 

The above confirms that both insureds and insurers are required to conduct themselves honestly and in good faith.