What did the case decide?
Case Note contributed by Dr. Aleka Mandaraka Sheppard
: DMC Category Rating: Developed
Summary of the Facts
Liability arose to the claimant shipowners under the ship-repair contract.The claimants obtained leave to serve English proceedings out of the jurisdiction against the assured ship-repairer, relying on an English jurisdiction agreement entered into between the shipowners and the ship-repairers’ assistant manager.
The ship-repairers and their liability underwriters had been (incorrectly) advised by Trinidad lawyers that there would be a limitation of time advantage, if the case against the ship-repairers proceeded in Trinidad. Acccordingly, the solicitors for the ship-repairers challenged English jurisdiction, alleging lack of authority of the assistant manager. In support of this, the managing director and the chairman of the ship-repairers concocted a forged letter. The discovery of the forgery caused the application to set aside the writ to be abandoned and the underwriters withdrew from the liability litigation.
The ship-repairers were found negligent in the liability action and judgment was given in favour of the shipowners. The ship-repairers went into liquidation and the shipowners obtained a winding up order against them. This enabled the shipowners to proceed against the ship-repairers’ liability underwriters, pursuant to the provisions of the Third Parties (Rights against Insurers) Act, 1930.
In the light of the forgery by the assured ship-repairers, which took place during the litigation between shipowners and ship-repairers, the underwriters avoided the policy and – in the claim against them by the shipowners - raised the defence they would have had against their assured, namely breach of s.17 of the MIA 1906 and/or breach of an express contractual term in the insurance policy prohibiting fraudulent claims by the assured.
Issues in the Case
At first instance, the judge, Aikens J., had held that the duty did not extend post-contractually unless (a) the insurer was being invited to renew or vary the risk, or (b) the assured was prosecuting or pursuing a claim on the policy. Neither of these arose in this case. He found that the concoction of the letter constituted fraud but that fraud was not material to the underwriters’ liability to indemnify the shipowners under the third party liability insurance. The underwriters appealed.
(i) Contractual Defences
The question then was whether the underwriters could achieve by statute what they could not achieve by contract.
(ii) The Good Faith Defence (an over-arching principle)
(b) Variations to the risk were treated more robustly by Longmore LJ than had been suggested in the Star Sea. He stated that the right of avoidance only applies to the variation, not to the original risk.
(c) Renewals: a duty of good faith exists when the insured seeks to renew the contract of insurance. It is never suggested that, although the breach takes place during the currency of the earlier contract, the earlier contract is avoided as well as the renewal.
(d) "Held covered" cases were treated as variations to the risk to the extent that the result is a variation of the contract because an additional premium has to be assessed. But if they are only an exercise by the assured of rights which he has under the original contract they are puzzling, he said. However, he added, it was never suggested that lack of good faith in relation to a matter held covered by the policy avoids the whole contract.
I(e) Insurer’s right to information during the policy: the giving of information pursuant to an express or an implied term of the contract attracts the obligation of good faith. Since the obligation stems from the contract, the remedy for fraudulent misinformation must be commensurate with the insurer’s remedies for breach of contract. The insurer would not be able to avoid the contract with retrospective effect unless he could show that the fraud was relevant to his ultimate liability under the policy.
(f) Liability policies: good faith may be implied if the insurer decides to take on the assured’s defence to a claim. The duty imposed on the insurer is to exercise his defence in good faith
It is doubtful, however, whether the "held covered" clauses (d) can be classed in the category of variations (b). If the notice provision of the clause is not complied with, the clause will provide the consequence of breach, or alternatively, if there is a wilful breach to deprive the insurer from the additional premium, the breach will fall in the category of a fraudulent claim. It seems also that variations of the policy are treated as a new contract, which may not always be the case.
No remedy was suggested by Longmore LJ in the situation when the insurer is in breach of good faith in the conduct of his defence in the case of liability insurance.
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