Insurance Contract Law: The Insured’s Post-Contract Duty of Good Faith

Open date: 09 July 2010

Close date: 21 October 2010

Insurance contracts are said to be based on mutual duties of good faith. The two Commissions have been looking at how these duties work after the contract has been formed.

On 9 July 2010, we published an issues paper on the policyholder’s duty to act honestly during the life of a contract. The paper focuses on the law of fraudulent claims, and in particular the remedies which should be available to the insurer if a policyholder makes a fraudulent claim.

The current law is confused. Under section 17 of the Marine Insurance Act 1906, if a policyholder acts fraudulently, the insurer may deny the whole insurance contract, and demand back any money paid on previous claims. In practice, the courts are reluctant to allow this. Instead, they have said that a fraudulent claimant should forfeit their entire claim, even the part that is legitimate, but that other claims should remain unaffected.

We think that the courts apply the right policy, but this is incompatible with the 1906 Act. We tentatively propose that section 17 should be reformed and ask for views. The paper also considers fraudulent claims in joint and group insurance, and whether the duty of good faith has other implications. 

We received 33 responses and published a summary on 15 December 2010. Consultees told us that the current law was unduly complex and in need of clarification. The approach taken under the Marine Insurance Act does not sit easily with modern insurance industry practice, and the continuing disjuncture between law and practice operates to the detriment of all stakeholders in the insurance market.

We are now developing our proposals on fraudulent claims and other topics, with a view to publishing them in a joint Consultation Paper in 2011.

This paper relates to our project on Insurance Contract Law.

Reference Number:  ICL issues paper 7

 

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