CONTENTS

1. INTRODUCTION

The marine insurance is based on an important principle that is ‘Uberrima fides i.e. Utmost
Good Faith’ which is the crown field in this law. It is the duty of the assured to an insurance
contract to make statement of facts, expectations, belief to the insurer before or at the time of the
contract being made in good faith. The assured must disclose every material fact known to him
before the contract is concluded. According to Marine Insurance Act of 1963 material
circumstance is one which is known to the assured and the assured is deemed to know every
circumstance which in the ordinary course of business ought to be known by him. The impact for
the non-disclosure of a material circumstance by the assured leads to avoidance of the contract
by the other party that is the insurer, this happens because a contract of marine insurance is a
contract based on good faith. It is very essential for the assured not to misrepresent as it may lead
to avoidance of the contract, therefore if the assured fails to make any disclosure or
misrepresentation, the insurer may avoid the contract from the time of inception of the contract.
This duty of good faith is not only on the insured but also on insurer. Earlier it was presumed that
this duty of good faith is only upon the insured and not upon the insurer but this position changed
in an English case

In common law, only insurance contracts provide an example of ‘utmost good faith’. It shall be
duty on the person taking up the insurance to disclose to the insurance company all facts of
which he is aware or which may affect the premium or acceptance of the risk. The failure to do
so make the contract voidable at the option of the insurance company, which means the contact
is rescinded.

Marine insurance business is mostly international and subject to law and international regulations
in every stage of operations. It is governed by the Marine Insurance Act, 1963, in India and
guided by the various clauses formulated by the Institute of London Underwriters (ILU) and the
International Commercial Terms, known as ‘Incoterms’ developed by ICC (International
Chamber of Commerce).
2. DISCLOSURE AND REPRESENTATIONS (LEGAL PROVISIONS)1

Section 19. Insurance is uberrimae fidei. - A contract of marine insurance is a contract based
upon the utmost good faith, and if the utmost good faith be not observed by either party, the
contract may be avoided by the other party.

Section 20. Disclosure by assured.

Clause (1) Subject to the provisions of this section, the assured must disclose to the insurer,
before the contract is concluded, every material circumstance which, is known to the assured,
and the assured is deemed to know every circumstance which, in the ordinary course of business,
ought to be known to him. If the assured fails to make such disclosure, the insurer may avoid the
contract.

Clause (2) Every circumstance is material which would influence the judgment of a prudent
insurer in fixing the premium, or determining whether he will take the risk.

Clause (3) In the absence of inquiry the following circumstances need not be disclosed, namely-
(a) any circumstance which diminishes the risk;

(b) any circumstance which is known or presumed to be known to the insurer. The insurer is
presumed to know matters of common notoriety or knowledge, and matters which an insurer in
the ordinary course of his business as such ought to know;

(c) any circumstance as to which information is waived by the insurer;

(d) any circumstance which it is superfluous to disclose by reason of any express or implied
warranty.

Clause (4) Whether any particular circumstance, which is not disclosed, be material or not is, in
each case, a question of fact.

Clause (5) The term “circumstance” includes any communication made to, or information
received by, the assured.

1
Marine Insurance Act, 1963
Section 21. Disclosure by agent effecting insurance - Subject to the provisions of the preceding
section as to circumstances which need not be disclosed, where an insurance is effected for the
assured by an agent, the agent must disclose to the insurer:2

(a) every material circumstance which is known to himself, and an agent to insure is deemed to
know every circumstance which in the ordinary course of business ought to be known by, or to
have been communicated to, him; and

(b) every material circumstance which the assured is bound to disclose, unless it comes to his
knowledge too late to communicate it to the agent.

Section 22. Representations pending negotiation of contract3

Clause (1) Every material representation made by the assured or his agent to the insurer during
the negotiations for the contract, and before the contract is concluded, must be true. If it be
untrue the insurer may avoid the contract.

Clause (2) A representation is material which would influence the judgment of a prudent insurer
in fixing the premium, or determining whether he will take the risk.

Clause (3) A representation may be either as to a matter of fact, or as to a matter of expectation

or belief.

Clause (4) A representation as to a matter of fact is true, if it be substantially correct, that is to

say, if the difference between what is represented and what is actually correct would not be
considered material by a prudent insurer.

Clause (5) A representation as to a matter of expectation or belief is true if it be made in good

faith. Clause (6) A representation may be withdrawn or corrected before the contract is
concluded.

Clause (7) Whether a particular representation be material or not, is, in each case, a question of
fact.

2
Supra note 1
3
Ibid
Section 23. When contract is deemed to be concluded. - A contract of marine insurance is
deemed to be concluded when the proposal of the assured is accepted by the insurer, whether the
policy be then issued or not; and for the purpose of showing when the proposal was accepted,
reference may be made to the slip, covering note or other customary memorandum of the
contract, although it be unstamped.

Explanation:

2.1 Disclosure of Material Facts

According to section 20 and 21 of the Marine Insurance Act 1963, it shall be the duty to disclose
every material fact before the contract is concluded. It means that before entering into a contract
it shall be the duty of the assured to disclose every matter that he knows or reasonably expected
to know, facts, includes reports, information and opinions from credible sources which are
relevant to the contract.

In the case of Carter vs. Boehm4, it was laid down that “Insurance is a contract upon speculation,
the special fact upon which the contingent chance to be computed lie most commonly in the
knowledge of insured only. The underwriter trust to his representation and proceeds upon the
confidence that insured does not keep back any circumstances in his knowledge so as to mislead
the underwriter into a belief that the circumstance does not exist and to induce him to estimate
the risk as if it does not exists.”

The contract does not require disclosure of matters:

(i) that diminish the risk

(ii) that is of common knowledge
(iii) certain other details which indicate that are not required
(iv) Any matter which is not required either by implied or express warranty.

These disclosures of circumstances play a very important role in fixing upon the premium of the
contract or determining whether the risk will be taken or not.

4
[1776] 97 IR 1162.
2.2 Material circumstance which has to be disclosed to the insurer

It is the duty of the assured to disclose facts to the insurer but not everything. The disclosure
made by the assured should contain the risk factor which shall allow the insurer to enable him to
make his underwriting judgement. It is necessary for the agent to disclose every material
circumstance known to him.

According to Marine Insurance Act of 1963 “every material circumstance which the assured is
bound to disclose, unless it comes to the assureds knowledge too late to communicate it to the
agent.’ It shall be the responsibility of the agent to pass on every material circumstance within
the assured’s knowledge. The remedy which is available for the breach of duty of disclosure is
avoidance of the contract.

2.3 Representation

The term representation under the Marine Insurance Act of 1963 carries out principles of
uberriame fidei as laid own under section 19. Representations are statements made by the
assured or his agent, during the negotiations of the contract, and before the contract is concluded.
Representations are nothing but answers to questions put to the assured by his insurer. It shall be
the duty of the assured to answer truthfully regardless of the materiality of the question to the
risk. If the answer given by the assured turn out to be false with the intention of deceiving the
insurer, though it may not be a material fact, and this act by the assured would lead him to a
breach of duty of utmost good faith, the effect of which would render the contract voidable at the
option of insurer under section 19.

Representations can be made orally or in writing and representation made by the assured to the
insurer may be withdrawn or corrected before the contract is concluded. The duty of
representation is applied to both the assured and their broker; if anyone of them fails to represent
truthfully to deceive another then the remedy shall be recession of the contract. The
representation which are made are the material facts which is nothing but the every material
circumstances which is known to the assured, and the assured is deemed to know every
circumstance which in the ordinary course of business, ought to be known by him. If the assured
fails to make such disclosure the insurer may avoid the contract.
The other important feature of representation is that section 20(3) of the Marine Insurance Act
tells us that ‘representations may be either a representation as to a matter of fact, or as to a
matter of expectation or belief’.

2.4 Representation of a matter of fact

A matter of fact is nothing but disclosure of material circumstances made by the assured to the
insurer and it works on the principle of utmost good faith. The disclosure made should be true
and before the contract is concluded.

2.5 Representation of a matter of expectation or belief

The term belief or expectation here means any statement of facts made which has reasonable
grounds for belief. These statements which are made of a matter of expectation or belief are to be
done under good faith.

2.6 Disclosure by the Assured Himself

Section 20 of the Marine Insurance Act 1906 states that: "Subject to the provisions of this
section, the assured must disclose to the insurer, before the contract is concluded, every material
circumstance which is known to the assured and the assured is deemed to know every
circumstance which in the ordinary course of business ought to be known by him. If the assured
failed to make such disclosure, the insurers may avoid the contract". The assured then must
disclose all material facts which are within his actual or presumed knowledge.

2.7 Actual Knowledge

It is the duty of the proposed assured to disclose to the insurers all material facts within his actual
knowledge. The special facts distinguishing the proposed insurance are, as a general rule,
unknown to the insurers who are not in a position to ascertain them. They lie, for the most part,
solely within the knowledge of the proposed assured.5

Thus, Kennedy L J said that6: “No class of case occurs to my mind in which our law regards
mere non-disclosure as invalidating the contract, except in the case of insurance. That is an
exception which the law has wisely made in deference to the plain exigencies of this particular

5
E R Hardy Ivanmy, Marine Insurance Act 1906 (10th ed., Butterworths, London, 1993.)
6
London General Omnibus Co. Ltd v. Holloway [1917] 2 KB, CA at p. 85
and most important class of transactions. The person seeking to insure may fairly be presumed to
know all the circumstances which materially affected the risk, and, generally, is, as to some of
them, the only person who has the knowledge; the underwriter, whom he asks to take the risk,
cannot as a rule, know and rarely has either the time or the opportunity to learn by enquiry,
circumstances which are or may be most material to the formation of his judgement as to this
acceptance or rejection of the risk and as to the premium which he ought to require”.

Good faith, therefore, requires that he should not, by his silence, mislead the insurers into
believing that the risk, as proposed, differs to their detriment from the risk which they will
actually run.7 On the contrary, he should help them by all means in his power to estimate the risk
at its proper value.

The duty of disclosure requires that statements made by the proposer be that of facts not of
opinion. A mis-stated opinion is actionable only if not given in good faith. However, the
distinction between questions of fact and questions of opinion is not always an easy one, it may
not matter greatly in practice.

In Joel v. Law Union and Crown Insurance Co.8 a statement as to the health of the proposer,
made by him, was regarded as a statement of opinion. This accords with common sense, as the
proposer who is not a medical expert, or was not told specifically by such an expert of facts as to
his health, cannot be expected to give more than an opinion. However, in a later case 9 concerning
a similar issue, a proposer who failed to disclose a visit to a specialist was held to be guilty of
non-disclosure of material fact, even though he did not know that there was anything seriously
wrong with him. Thus, although a mere statement as to health without more information, is a
statement of opinion, at least where the proposer does not know any relevant facts. If a proposer
for life insurance has consulted a doctor in more than an ordinary way, the fact of consultation
will almost certainly be a material fact requiring disclosure.

7
Seaton v. Burnard [1899] 1 QB 782 CA (Solvency Insurance) per Romer L J at p. 793.
8
[1908] 2 KB 863.
9
Godfrey v. Britannic Assurance Co. Ltd. [1963] 2 Lloyd's Rep 515.
2.8 Constructive Knowledge.

When the Marine Insurance Act 1963 applies, the proposer is fixed with constructive knowledge
under Section 20(1) which states that: “The assured is deemed to know every circumstance
which, in the ordinary course of business, ought to be known by him.

In Joel v. Law Union and Crown Insurance Co.10an issue was pointed out over whether the
proposer was bound to disclose the fact that she had suffered from acute depression, it being
accepted that she was unaware of that fact. This argument was rejected by the court and the
judges were at pains to point out that there is no duty to disclose what the proposer does not
know. However, it has later been said that the question as to the disclosure of constructive
knowledge is an open one, so far as non-marine insurance is concerned. It is arguable that a
proposer is under a duty to disclose what he constructively knows because that is the law in
respect of marine insurance.

2.9 Facts known to his agents

The proposer is assumed to have the knowledge of his “agent to know”. In marine insurance it is
not the knowledge of all agents and servant that is imputed to the proposer of marine insurance,
but only the knowledge of the master or the shipowner.

Applying the general law of agency in a non-marine case, Pearson J said that 11: “One should
consider, mainly at any rate (i) the position of the agent in relation to the principal and whether
the agent had a wide or narrow sphere of operation and (ii) the position of the agent in relation to
the relevant transaction and whether he represented the principal in respect of that transaction”.

2.10 Avoidance

According to the Marine Insurance Act 1963 it is not possible to claim damages for the breaches
of the duty of good faith. The only remedy available for the breach of duty of good faith is
avoidance of the policy. Avoidance under section 19 means ‘avoidance by ab intio’. No other
remedy can be claimed such as right to damages. For any breach of the duty of utmost good
faith, non-disclosure and misrepresentation avoidance shall be the only remedy available.
Avoidance of a contract can be done from the time of a breach of duty is to be found in the
10
Supra note 4 at pg.
11
Regina Fur Co. Ltd. v. Bossom [1957] 2 Lloyd's Rep 466 at p. 484
contract. Rescission is not compulsory, only if the party discovers that there is a breach of duty
of good faith, then the party may choose to avoid the policy or not, the party is under no
obligation to avoid the policy and it depends on his decision, it is also not necessary that
avoidance of a policy should be exercised for serious breaches of duty and the court shall not
have the power to intervene the party to do so.

2.11 Pre Contractual Duties

The sentence of diction 19 of the Marine Insurance Act does not limit the duty of good faith only
to pre contractual situations and it is possible to interpret it as a continuing duty of disclosure of
duration of an insurance contract. The exact meaning of pre contractual utmost good faith was
settled in the case Pan Atlantic Insurance Plc V Pine Top Insurance 12, here the majority of House
of Lords held that it should be the broad, insurer friendly test of what a prudent insurer would
wish to know when assessing the risk or deciding the premium rather than the narrower assured
friendly test that demands the prudent insurer would have charged a high premium or would
have decline the risk the court then introduced another requirement into the utmost good faith
and the majority was influenced by the need to temper the harshness of the broad test for the
issue of materiality. The additional requirement was that the misrepresented or non-disclosed
fact must have induced the actual insurer to enter into the contract.

The case Carter V Boehm13 to played an important role in the pre contractual duties of good
faith. Here the case was whether the Fort Marlborough in Sumatra would be captured by an
enemy within the year of insurance cover. The Fort was taken by the French, and the Governor
of the Fort claimed under the policy. The underwriter put forward the defence that the weakness
of the fort and probability of being attacked were not disclosed. The judgement was ruled out in
favour of the assured that he was under no obligation to disclose the matter which the
underwriter could have investigated themselves. This statement tells us that both the parties in
the contract shall have the equal liability to perform the contract in utmost good faith.

3. GENERAL PRINCIPLES IN MARINE INSURANCE

12
[1994] 2 ALL E R 581.
13
ER 96 KB 342 at 343
3.1 Principle of Utmost Good Faith

A contract of marine insurance is a contract uberrimea fidei i.e. a contract of utmost good faith.
This is a fundamental principle of insurance law. There is no difference between a contract of
insurance and any other contract, except that in a contract of insurance, there is a requirement of
utmost good faith. According to section 19, a contract of marine insurance is a contract based
upon utmost good faith and if the utmost good faith be not observed by either party, the contract
may be avoided by the other party. Under section 20, the assured must disclose to the insurer,
before the contract is concluded, every material circumstance which, is known to the assured,
and the assured is deemed to know every circumstance. Under Section 21, the agent must
disclose to the insurer every material circumstance which is known to him, and an agent to insure
is deemed to know every circumstance where insurance is effected for the assured by an agent.
Very importantly, the duty of disclosure continues to apply even after the conclusion of the
contract.

3.2. Principle of Insurable Interest

The principle of insurable interest states that the insured must be in a position to lose financially
if a loss occurs. In a contract of marine insurance, the assured must be interested in the subject-
matter insured at the time of the loss, though he need not be interested when the insurance is
effected [Section 8(1)]. A contract of marine insurance is deemed to be a wagering contract,
where the assured has not an insurable interest, and the contract is entered into with no
expectation of acquiring such an interest [Section 6(2a)].

According to the Marine Insurance Act, every person has an insurable interest who is interested
in a marine adventure [Section 7(1)]. In particular, a person is interested in a marine adventure
where he stands in any legal or equitable relation to the adventure or to any insurable property at
risk therein, in consequence of which he may benefit by the safety or due arrival of insurable
property, or may be prejudiced by its loss, or by damage thereto, or by the detention thereof, or
may incur liability in respect thereof [Section 7(2)].
3.3. Principle of Indemnity

Most kinds of insurance policies other than life and personal accident insurance are contracts of
indemnity whereby the insurer undertakes to indemnify the insured for the actual loss suffered by
him as a result of the occurring of the event insured against. A contract of marine insurance is an
agreement whereby the insurer undertakes to indemnify the insured to the extent agreed upon
(Section 75). Although the insured is to be placed in the same position as if the loss has not
occurred, the amount of indemnity may be limited by certain conditions as follows:

1. Injury or loss sustained by the insured has to be proved.

2. The indemnity is limited to the amount specified in the policy, the insured is indemnified
only for the proximate causes, the market value of the property determines the amount of
indemnity.

In the famous case of Castellian vs. Preston14, the principle of indemnity was applied and it was
held by the Court that “every contract of marine or fire insurance is a contract of indemnity and
of indemnity only. The meaning of which is that the assured in case of loss is to receive a full
indemnity but is never expected to receive more”.

3.4. Principle of Subrogation

The principle of subrogation is a corollary of the principle of indemnity. Subrogation means

substitution of the insurer in place of the insured for the purpose of claiming indemnity from a
third person for loss covered by insurance. The insurer is therefore entitled to recover from a
negligent third party any loss payments made to the insured [Section 79(1)].

In the marine policy, the insurer must have paid the claim before they are entitled to rights of
subrogation [Section 79(2)]. Whether the loss paid is total or partial insurers subrogated to all the
rights and remedies of the insured. However, the insurer can retain only up to the amount they
have indemnified the insured under subrogation.

CONCLUSION
14
[1881-1885] All ER Rep. 493
The term utmost good faith is always an intriguing one. According to the Marine Insurance Act
of 1906 we can see that how a contract of marine insurance should take place with the principles
of utmost good faith, duty of disclosure by assured and the agent and many other principles. But
interestingly we find that avoidance is the only possible remedy which is available for the breach
of duty of utmost good faith. Further we can see that how the doctrine of pre contractual good
faith developed through certain cases like Pine top case which stated that insurer did not have
right to avoid the contract but later it was changed. In Banque Keyser Ullaman SA V Skandia the
Court held that both the insurer and the assured had reciprocal duties toward utmost good faith.
The CTI case held that there should be disclosure of every previous claim to maintain utmost
good faith or the contract can be avoided. Thus we can see that there has been a development of
doctrine of pre contractual good faith in the Marine Insurance Act of 1906.