Tuesday, 5 February 2013

Uberrima Fides contracts

Doctrine of Uberrima Fide

Definition –
Uberrimaefidei is a Latin phrase meaning "utmost good faith" (literally, "most abundant faith"). Uberrimaefidei contracts are made in utmost good faith. There is no concealment or deception in such contracts. If one of the parties to a contract has a special knowledge, he/she must disclose such knowledge relevant to the contract. Although all contracts are to be made in utmost good faith, insurance contracts are very strict in this regard. Failure to disclose these facts will make the contract voidable.
Uberrima fides (sometimes seen in its genitive form uberrimaefidei) is a Latin phrase meaning "utmost good faith" (literally, "most abundant faith"). It is the name of a 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. This contrasts with the legal doctrine caveat emptor (let the buyer beware).


Insurance contracts

Thus the insured must reveal the exact nature and potential of the risks that he transfers to the insurer, while at the same time the insurer must make sure that the potential contract fits the needs of, and benefits, the assured.
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. The principles underlying this rule were stated by Lord Mansfield in the leading and often quoted case of Carter v Boehm(1766) 97 ER 1162, 1164,
"Insurance is a contract of 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 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.

Fiduciary duties

The fact that a contract is one of utmost good faith does not however mean that it gives rise to a general fiduciary relationship. The relationship between insured and insurer is not akin to the relationship between, say, guardian and ward, principal and agent, or trustee and beneficiary. In these latter instances, the inherent character of the relationship is such that the law has traditionally imported general fiduciary obligations. The insurer-insured relationship is contractual; the parties are parties to an arms-length agreement. The principle of uberrima fides does not affect the arms-length nature of the agreement, and cannot be used to find a general fiduciary relationship. The insurance contract, as noted above, imposes certain specific obligations on its parties. These obligations, however, do not import general fiduciary duties into each and every insurance relationship. Before such fiduciary obligations can be imported there must be specific circumstances in the relationship that call for their imposition.

A contract in which knowledge of the material fact(s) lies with one party alone; that party is under a duty to make a full disclosure of these facts, and failure to do so makes the contract voidable.
A Latin expression: the utmost of (good) faith.
At page 500 of the 29th edition of Chitty on Contracts:
"Mere non-disclosure of fact, material or not, does not ordinarily amount to misrepresentation, and the general rule is that in order to be actionable a representation must take an active form.
"But in certain cases a stricter rule is enforced.
"The most important of these are the contracts uberrimae fidei, in which knowledge of the material facts generally lies with one party alone; that party is under a duty to make a full disclosure of these facts, and failure to do so makes the contract voidable.... The duty varies in its extent from one type of contract to another.

"Contracts of insurance of every kind form the main group of contractsuberrimae fidei.
"Other examples generally included, though these are probably not all uberrimae fidei in the strict sense, are contracts to subscribe for shares in a company, family settlements, contracts for the sale of land, contracts of suretyship, and partnerships.

"Contracts of service are not uberrimae fidei, nor are contracts of sale of goods."

In Jowitt's 1977 Dictionary, the term was described as follows:
"A contract is said to be uberrimae fidei when the promisee is bound to communicate to the promisor every fact and circumstance which may influence him in deciding whether to enter into the conract or not.
"Contracts which require uberrimae fidei are those entered into between persons in a particular relationship, as guardian and ward, solicitor and client (and) insurer and insured."

In Coronation Insurance v Taku Air, Canada's Supreme Court wrote:
"The uberrima fides doctrine is a longstanding tenet of insurance law which holds parties to an insurance contract to a standard of utmost good faith in their dealing. It places a heavy burden on those seeking insurance coverage to make full and complete disclosure of all relevant information when applying for a policy."

In a Canadian case, Gabriel v. Hamilton Tiger-Cat Football Club, Justice O'Leary used these words:
"There is a limited class of contracts in which one of the parties is presumed to have means of knowledge which are not accessible to the other and is, therefore, bound to tell him everything which may be supposed likely to affect his judgment. They are known as contracts uberrimae fidei, and may be avoided on the ground of non-disclosure of material facts.

"Contracts of insurance of every kind are in this class. There are other contracts, though not contracts uberrimae fidei in the same sense, which impose a duty of full disclosure of all material facts by the parties entering into them. Contracts for family settlements and arrangements fall into this category.

In the context of maritime law, Justice McKeown of the United States Court of Appeals , 9th Circuit, used these words in the February 2008 decision of Certain Underwriters at Lloyd's v Inlet Fisheries Ltd.:
"This case involves the interplay between an ancient legal doctrine and contemporary vessel pollution insurance. Historically, all insurance policies were contracts uberrimae fidei, meaning that both parties were held to the highest standard of good faith in the transaction.

"The doctrine of uberrimae fidei was grounded both in morality and efficiency; insureds were considered morally obligated to disclose all information material to the risk the insurer was asked to shoulder, but such a principle was also an economic necessity where insurers had no reasonable means of obtaining this information efficiently, without the ubiquity of telephones, email, digital photography, and air travel.
"The reasons which brought into being the strict marine insurance law doctrine as to disclosures, go far back into the early days of marine insurance, when sailing ships in faraway seas were insured in London by underwriters who could get no information except from the ship owners.
"The contract of insurance, is one of mutual good faith; and the principles which govern it, are those of an enlightened moral policy.
"Today, uberrimae fidei has been displaced in most insurance contexts. Nevertheless, the doctrine enjoys continuing vitality in the world of marine insurance."

Case Law

20 March 2008, the U.S. Court of Appeals for the Ninth Circuit rendered its decision in New Hampshire Ins. Co. v. C’EstMoi, Inc., addressing the maritime insurance doctrine of Uberrimae Fidei, or the duty of the assured and insurer of utmost good faith, for the second time in as many months.
 UberrimaeFidei was first recognized in 1766 by Lord Mansfield and codified in the English Marine Insurance Act of 1906. It imposes a duty of “utmost good faith” on the insured to disclose all facts material to the risk. The United States Supreme Court incorporated the On doctrine into American federal general maritime law more than 150 years ago.
 Later, in Sun Mutual Ins. Co. v. Ocean Ins.,107 U.S. 17 (Otto) 485, 510-511 (1882), the United States
Supreme Court held:
It is the duty of the assured to place the Underwriter in the same situation as himself; to give him the same means and opportunity of judging the value of the risks and when any circumstance is withheld, however slight and immaterial it may have seemed to himself, that if disclosed, would probably have influenced the terms of the insurance, the concealment vitiates the policy.
The Ninth Circuit has rendered several opinions over the last 15 years allowing insurers to avoid insurance policies from inception on the basis that the assured breached its duty of utmost good faith.
The Ninth Circuit recognizes that the doctrine of Uberrimae Fidei is a federal rule that applies under the federal general maritime law in all insurance policies. In C’EstMoi, the Court held that any agreement between insurer and insured to forego application of Uberrimae Fidei must be expressed in clear, unequivocal policy language. 
The Assured’s Misrepresentation and Breach of the Duty of Utmost Good Faith. In C’EstMoi, there was no real question that the insured had made material misrepresentations in its application for insurance. The insured misrepresented the vessel’s purchase price, including instead the purported value of subsequent improvements made by the insured. The insured also misrepresented the status of the vessel’s insurance, listing “Wash Int.” as the insurer, when in fact the vessel was uninsured at the time of its application. However, the insured claimed that one of the policy’s “General Conditions and Exclusions” excused it from its  Court Holds Any Contractual Waiver of Uberrimae Fidei Must be Explicit Uberrimae Fidei obligations, imposing a lower standard and permitting rescission of the policy only where the misrepresentation was intentional. The provision at issue states:

Any relevant coverage(s) shall be voided if you intentionally conceal or misrepresent any material fact or circumstance relating to this insurance, or your insurance application, before or after a loss.
Court Holds Any Contractual Waiver of Uberrimae Fidei Must be Explicit.

The Ninth Circuit did not resolve the question whether an insurer may contractually waive
UberrimaeFidei. Instead, the Court noted that such a waiver “would certainly require very clear
policy language, unequivocally disclosing a mutual intent to supersede” the doctrine. The Court
concluded that the clause quoted above “comes nowhere close” to the clarity sufficient to effect
a waiver, as it did not mention UberrimaeFidei or purport to displace any common law
obligation. Because the misrepresentations in the insured’s insurance policy application were
material, the policy was held to be void.  

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