CHANAKYA NATIONAL LAW UNIVERSITY

Law of Contracts final draft of project

On
“Uberrima Fides”

Submitted to:-Mrs. Sushmita Singh Submitted By: Diksha Singh

Faculty of Law of Contracts Roll No: 1724

1st Year B.A. LL.B. (Hons.)

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 DECLARATION BY THE CANDIDATE

I hereby declare that the work reported in the B.A., LL.B (Hons.) Project Report entitled
“Uberrima Fides” submitted at Chanakya National Law University is an authentic record of my
work carried out under the supervision of Mrs. Sushmita Singh. I have not submitted this work
elsewhere for any other degree or diploma. I am fully responsible for the contents of my Project
Report.

SIGNATURE OF CANDIDATE

NAME OF CANDIDATE: DIKSHA SINGH

CHANAKYA NATIONAL LAW UNIVERSITY, PATNA.

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 ACKNOWLEDGEMENT

I would like to thank my faculty Mrs. Sushmita Singh whose guidance helped me a lot with
structuring my project.

I owe the present accomplishment of my project to my friends, who helped me immensely with
materials throughout the project and without whom I couldn’t have completed it in the present
way.

I would also like to extend my gratitude to my parents and all those unseen hands that helped me
out at every stage of my project.

THANK YOU,

NAME: Diksha Singh

COURSE: B.A., LL.B. (Hons.)

ROLL NO: 1724

SEMESTER – Second

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CHAPTERIZATION

1. INTRODUCTION
2. AIMS AND OBJECTIVES
3. HYPOTHESIS
4. RESEARCH QUESTIONS
5. RESEARCH METHEDOLOGY
6. GENERAL PRINCIPLE OF UTMOST GOOD FAITH
7. GOOD FAITH EXPECTED FROM BOTH PARTIES
8. MATERIAL FACT
9. EVOLUTION OF DOCTRINE UNDER COMMON LAW
10. FACTS WHICH NEEDS TO BE DISCLOSED AND WHICH NEED NOT TO BE
DISCLOSED
11. CONCLUSION
12. BIBLIOGRAPHY

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 1. INTRODUCTION

Uberrima fides is a Latin phrase meaning "utmost good 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 are highly unusual in that they are founded upon the doctrine of uberrimae
fidei.1 The consequence is that the general contractual duty borne by parties to avoid
misrepresentation is extended and reinforced by the additional obligation to disclose all material
facts that would induce the insurers to underwrite the risk. This was first laid down by Lord
Mansfield C.J. in Carter v. Boehm,2 and his formulation of the disclosure duty is partially
codified in the Marine Insurance Act 19063.Lord Mansfield was at the time attempting to import
into English commercial law the civil law notion of good faith, but this ultimately proved
unsuccessful and only survived for a very limited class of transactions, including insurance.

Insurance contracts are a special class of contracts which are guided by certain basic principles
like those of utmost good faith, insurable interest, proximate cause, indemnity, subrogation and
contribution. As such, an insurance contract is generally a combination of more than one of these
principles and no single principle can be used at one time. The rest is dependent on the contract
between the parties. These principles are mostly guided by common law principles from which
they have developed. They have also been modified by principles of contract and by statutes as
in the case of the Marine Insurance Act, 1963 which has to a certain extent relaxed the basic
principles of insurance law.

1
Law Of Contracts, R.K.Bangia
2
(1766) 97 Eng. Rep. 1162, 1165.
3
Marine Insurance Act, 1906, 6 Edw. 7, c. 41, sections 17 -20 (Eng.).

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2. AIMS AND OBJECTIVES
A. To study about the doctrine of Uberrima fides.
B. To study about its applicability in a contract.
C. To study about the cases related to it.

3. HYPOTHESIS

The doctrine of uberrima fides is applicable in contracts.

4. RESEARCH QUESTIONS
A. What is the doctrine of Uberrima Fides?
B. What is its applicability in a contract?
C. What are the cases related to it?

5. RESEARCH METHEDOLOGY

The method of research for the project is doctrinal research.

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 6. GENERAL PRINCIPLE OF UTMOST GOOD FAITH

The principle of utmost good faith remains one of the most important doctrines underlying the
law of insurance. In Banque Finaciere de la Cite v. Westgate Insurance Co. Ltd.4, it was held that
the duty of disclosure is neither contractual nor tortuous, fiduciary or statutory in character rather
is founded on the jurisdiction originally exercised by the courts of equity to prevent impositions.

The term good faith has been mentioned in the Indian Penal Code and it signifies good intention
and due care and caution. However, this principle under insurance law needs to be examined in
the contractual context. In every contract in general, both parties owe no positive duty toward
each other beyond showing ordinary good faith. This emanates from the right of every person to
know about every material fact associated with the subject matter of the contract and there is no
escape to this. This follows from the maxim Caveat Emptor or buyer beware as under the Sale of
Goods Act. It means that each party must be given a reasonable opportunity to make independent
enquiries about the subject matter in question so that they may take a decision. Thus, all material
facts must be disclosed or made available to the party so that he or she may reasonably enquire
about the same. This further puts a duty on the party making the subject matter accessible to the
person enquiring, not to play fraud or misrepresent the same; else it would be hit by section19 of
the Indian Contract Act, making the contract voidable at the option of the innocent party. But,
section 19 also clarifies that misrepresentation or even silence amounting to fraud will not entitle
a party to avoid the contract if he had the means of discovering the truth with ordinary diligence
and did not do so. Hence, there must thus be free consent and the parties must understand the
same things in the same sense.

The burden of proof to show non-disclosure or misrepresentation is on the insurance company

and the onus is a heavy one. The duty of good faith is of a continuing nature in as much no
material alteration can be made to the terms of the contract without the mutual consent of the
parties.

4
(1989) 2 All ER 982

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CASES-

1. Brownlie v. Campbell, (1880), 5 App Cas 925-

If one knows any circumstance at all which may influence the underwriters opinion as to the risk
he is incurring, there is an obligation to disclose that which one knows and the concealment of
any material circumstance whether you thought of it as being material or not, avoids the policy.

2. Rozanes v. Bowen5

The principle of utmost good faith was laid down here. It was said that since it is to be presumed
that the underwriter knows nothing and the assured knows all, the latter must disclose the same.
Thus, an insurance contract is a contract uberrima fides.

5
(1928), 32 L.I.L.R. 98

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 7. GOOD FAITH EXPECTED FROM BOTH PARTIES

Good faith is expected from the insured or assured as well as the insurer. It is the buyer's duty to
disclose all facts related to the risk to be covered. Similarly, it is the insurer's duty to inform the
insured of all the terms of the contract. However, it is generally the assured person on whom
there is a bigger duty to disclose. This is primarily because very often the insurer has to depend
upon what details the insured mentions in his form. If the insured gives wrong details or details
of goods which are actually not in existence, the insurer may end up paying for the wrong claims
in the future. The insurer faces a lot of problems trying to verify all such details, even though the
advent of technology has made the task comparatively easier now a days. Wrong information
given not only affects the insurer but also the other people involved in the insurance pool whose
premiums may be wrongly utilized to satisfy the claims. It is therefore an implied condition or
principle of insurance that the Assured be required to make a full disclosure of all material
particulars within his knowledge about the risk. Further, considering the increase in new
businesses in which insurance is being taken, it becomes mandatory for the assured to inform the
insurer if there are any alterations or changes to the business which increases the risk during the
validity of the policy and get his permission. If no disclosure is made, the insurer has every right
to avoid the contract.

CASES:

1. United India Insurance Co. Ltd. v. MKJ Corpn.6

Just as the insured has a duty to disclose, it is the duty of the insurers and their agents, to
disclose, all material facts within their knowledge, since obligation of good faith applies to them
equally with the assured.

6
(1998) 92 Comp Cases 331 (333)

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2. Banque Finaciere de la Cite v. Westgate Insurance Co. Ltd.7

In this case, the plaintiff bank had agreed to lend some 30 million pounds securities in the form
of some gemstones and some credit insurance policies. The gemstones when valued did not
prove to be worth much. So, the bank sought to rely on the insurance policies. The policies had
been brokered by a major firm of brokers who resorted to a series of false covers due to inability
to obtain full cover. On making claims under the policies, the bank discovered severe shortage in
cover. It was held that the insurers were under an obligation to disclose the same. It was also held
that the only remedy available to the insured is to rescind the policy and claim the premium. No
other damages may be awarded.

3. Joel v. Law Union, 77 LJKB 1108

The duty to show good faith falls on the insured as well as the insurer to an equal degree in all
types of insurance contracts.

4. Anstey v. British Natural

The insurer must inform the insured about the terms and conditions of the policy that is going to
be issued to him and must strictly conform to the statements in the prospectus if any.

7
(1989) 2 All ER 982

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 8. MATERIAL FACT

Another issue arises as to the definition of the term material fact. What may be material for one
may be immaterial for the other and vice-versa. But, generally speaking, a material fact is one
which affects the judgmental capacity of a person. It must be such that a different consequence
would have occurred had it not been disclosed. The following cases illustrate the different
theories evolved by the judiciary regards this.

CASES:

1. Marine Life Insurance Co. v. Ontario Metal Products, 94 LJPC 60

The test of materiality is the judgment of the prudent insurer and it is not what is material in the
opinion of a reasonable assured.

2. Reynolds v. Phoenix Assurance Co. (1978) 2 Lloyds Rep 440

The test is whether the circumstance in question would influence the prudent insurer and not
whether it might influence him.

3. Lindenau v. Desborough, (1828) 8 B & C 586

The question is whether any particular circumstance is infact material and not whether the
proposer believed it to be so.

4. St. Paul Fire and Marine Insurance Co. (UK) Ltd. v. Mc Connell Dowell Constructors Ltd, 45
Con LR 89

Two major questions were decided in this case. The first was the test of materiality according to
which the fact in question must have been of interest to a prudent insurer. Secondly, as regards
the presumption of inducement, it was held that the test would be satisfied if the insurer could
show that he was influenced in whole or in part by the assureds misleading presentation of the
risk.

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 9. EVOLUTION OF THE DOCTRINE UNDER COMMON LAW

The contract of insurance is thus one of uberrima fides or of utmost good faith where the duty of
disclosure lies on both the parties. A greater duty is cast on the assured to make known to the
insurer till the date of validity of the policy about all such material facts connected with the
subject matter of the insurance which the insurer doesn’t know or is not deemed to know. A
failure to disclose such fact, even if done innocently, will entitle the insurer to avoid the contract
within a reasonable time period.

The basis of this rule can be found in the famous case of Carter v. Boehm (1766) 3 Burr 1905,
where L. Mansfield stated that 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
assured only; the underwriter trusts to his representation and proceeds upon confidence that he
does not keep back any circumstance in his knowledge to mislead the underwriter into a belief
that the circumstances do not exist. The keeping back of such circumstances is fraud, and
therefore the policy is void. Although the suppression should happen through mistake, without
any fraudulent intention, yet still the underwriter is deceived and the policy is void. Clearly so, L.
Mansfield here talks only about the obligation of the insured towards the insurer at the time of
making of the contract. This statement fails to cover such disclosures as are ought to be made by
the assured after the completion of the contract and during the validity of the policy. The facts of
this case were that a policy was created against the loss of Fort Marlborough on its being
captured by a foreign enemy. The policy was for the benefit of George Carter, the Governor of
the Fort. It was alleged by the insurer that weaknesses in the fort and possibility of attack by the
French must have been disclosed. The jury decided in favour of the plaintiff and held that as it
may be presumed that the underwriter knows nothing about the subject matter in question, it is
the duty of the insured to disclose all material circumstances which may greater the risk
involved.

The Marine Insurance Act, 1906 in England also incorporates within it the principle of utmost
good faith. Sections 18-20 of the Act address the pre-contractual duty of good faith at more

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length. Section 18 deals with disclosure by the assured, Section 19 with disclosure by agents to
insure, and Section 20 deals with misrepresentation.

In the landmark case of Black King Shipping Corp. v. Massie (The "Litsion Pride") the issue of
the duty of utmost good faith continuing even after the contract is made. In this case, the assured
ship owners failed to disclose to the underwriters that the vessel was about to enter a dangerous
part of the Persian Gulf so as to avoid having to pay a higher war risks premium. The vessel was
struck by an Iraqi missile, and the owners then presented a fraudulent claim by lying to the
underwriters about the vessel's position at the time of the casualty. The court held that the
underwriters were entitled either to avoid the policy for fraud or deny the particular claim.

In Manifest Shipping Co. Ltd. v. UniPolaris Insurance Co. Ltd. (The "Star Sea"), 10 Greek ship
owners sued underwriters under a marine policy following the constructive total loss of their
vessel as a result of a fire. The underwriters raised two defences. First, they relied on Section
39(5) of the Marine Insurance Act, which provides a defence to liability where, "with the privity
of the assured, the ship is sent to sea in an unseaworthy state." The underwriters alleged that the
owners had "blind-eye knowledge" of the unseaworthy condition of the vessel namely, defective
funnel dampers-which meant that the engine room could not be sealed, and the fact that the fire
extinguishing system had been poorly maintained and was not working properly. Second, they
relied on Section 17 of the Act, alleging that the owners were in breach of the duty of utmost
good faith by failing to disclose the facts relating to an earlier fire aboard another vessel,
Kastora, at the time the underwriters' solicitors were investigating the Star Sea claim. It was held
that utmost good faith is a principle of fair dealing which does not come to an end when the
contract has been made. Lord Hobhouse proceeded to distinguish between a contractual
obligation of good faith in the performance of a contract, the primary remedy for breach of
which was damages, and the legal duty imposed by Section 17. He said that the right to avoid
under S.17 operates retrospectively and allows a party to rescind the contract ab initio. Thus,
where a fully enforceable contract has been entered into insuring the assured, but later, towards
the end of the period the assured fails in some respectfully to discharge his duty of complete
good faith, the insurer is able not only to treat himself as discharged from further liability but can
also undo all that has perfectly properly gone before. Thus, there is a duty to disclose on the
insured even after the contract is completed.

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Thus, the law relating to utmost good faith stands as follows now-

1. The common law imposes a reciprocal duty of good faith on the parties to insurance and
reinsurance contracts (i) at the time the contract is made (pre-contractual duty) and (ii) following
the making the contract (post-contractual duty). The nature and extent of the pre-contractual duty
and the post-contractual duties are, however different.

2. At the pre-contractual stage, there is a positive obligation on the parties" to disclose all facts
material to the risk and to refrain from material misrepresentation. The only remedy the common
law allows for breach of the duty of good faith is avoidance of the contract of insurance or
reinsurance. Damages for breach of the duty of good faith are not available.

3. There does not appear to be a general duty that the parties perform the contract of insurance or
reinsurance in good faith. Thus there is no basis under English law for awarding damages against
an insurer or a reinsurer for "bad faith" in relation to the handling of claims.

4. However, there does appear to be a continuing duty on the parties not to be materially
fraudulent in relation to the performance of the contract. After the contract has been made, the
duty of good faith includes but is not confined to (i) cases analogous to the pre-contractual
context, such as variation of the risk, and (ii) a requirement that the assured refrain from making
fraudulent claims.

5. In a post-contractual case, the underwriter is entitled only to avoid the contract with
retrospective effect if he can show (i) that the fraudulent conduct of the assured was relevant to
the underwriter's ultimate liability under the contract and (ii) was such that it would entitle him
to terminate the contract for breach.

6. When a claim is made, the assured is, as a matter of principle, under an obligation to disclose
all material facts to the underwriter's agents investigating the claim. However the failure to make
full disclosure, unless it was materially fraudulent, does not entitle the underwriter to deny an
otherwise valid claim. Once a writ is issued, the obligation of disclosure is governed by the
relevant procedural rules and the consequences of a failure to disclose relevant documents are
also determined by reference to those rules. Never the less, Section 20(1) of Marine Insurance
Act,1963 says that the duty to disclose continues till the time the contract is concluded.

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 10. FACTS WHICH NEED TO BE DISCLOSED AND FACTS
WHICH NEED NOT BE DISCLOSED

10.1 FACTS REQUIRED TO BE DISCLOSED

A fact which is earlier immaterial but becomes material later on must be disclosed if it has been
expressly mentioned in the terms and conditions of the policy. Example, fire insurance of one’s
house. Earlier, vacant plot located nearby. Later on a petrol pump is constructed on such plot. A
fact which increases the risk must be disclosed in all circumstances. Example, in case of theft
insurance, if a person lives alone in an isolated place, the same needs to be compulsorily
disclosed as it increases the risk. Previous losses incurred and claims under previous policies
needs to be disclosed. This is mainly in case of double insurance where it needs to be ascertained
as to whether the subsequent insurance company is willing to insure and to what extent. If any
Special terms and conditions under previous policies are mentioned. The fact of existence of
non-indemnity is to be disclosed. This relates to any charge or encumbrance on the policy in the
form of a loan security or otherwise. The description of the subject matter must be stated
properly. This is mainly to locate the property if it is immovable and to recognize it if it is
movable. If the fact suggests that there is any special motive behind taking the insurance. The
fact that the existence of any moral hazards which relate to the moral integrity of the proposer,
etc.

CASES:

1. Economides v. Commercial Union Assurance Co.8

It was held that the duty of the assured to disclose all material facts required an assured only to
disclose facts known to him. There is no obligation on the assured to make enquiries as to the
factual basis of his belief.

8
(1997) 3 All ER 636

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 10.2 FACTS WHICH NEED NOT BE DISCLOSED

If the fact is lessening the risk, it need not be disclosed. If it is in public knowledge that is, facts
regarding government policies, taxes, subsidies, etc. which are expected to be known to all.

If fact of law like rules, regulations, etc. which have already been made available to all by way
of the notification in the official gazette is there. If the fact is superfluous or such information
which is not logical, then also it need not be disclosed. If facts could be inferred from the
information. If the fact is waived by the insurer himself. If the facts are governed by the policy
itself.

CASES:

1. LIC v. Shakunthalabai9

In this case, the insured had failed to disclose that he suffered from indigestion for a few days
and took chooram from an ayurvedic doctor. He died within that year due to jaundice. The
insurer repudiated the claim on this account. The court did not approve of the repudiation as the
insurer did not establish by clear and cogent evidence that the question was properly explained to
the insured and that he was told that illness included such casual disturbances to health and
medicines included tablets that could be purchased at the nearest coffee store.

2. Bhagwani Bai v. LIC of India10

The insurer cannot avoid or repudiate an insurance policy on the ground of non-disclosure of
lapsed policies by the assured which had no bearing on the risk taken by the insurer.

9
AIR 1975 AP 68
10
AIR 1984 MP 126(130)

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 11.CONCLUSION

Thus, this principle forms an integral part of insurance law. It gives a fair chance of risk
assessment to the insurer and also ensures that the assured fully understands all the terms and
conditions of the contract. But, this principle is more favourable to the insurer as it is the assured
who has to generally make all the disclosures. This is primarily because when this doctrine was
evolved in the 18thcentury, the insurance market was in its infancy and thus required protection.
However, the enactment of the English Unfair Contract Terms Act, 1977 has considerably
alleviated the position of the assured who is now protected against unfair contractual terms.
Further, the Insurance Act lays down that an insurance policy cannot be called in question two
years after it has been in force. This was done to obviate the hardships of the insured when the
insurance company tried to avoid a policy, which has been in force for a long time, on the ground
of misrepresentation. However, this provision is not applicable when the statement was made
fraudulently. Never the less, technological advancements have further made it possible for both
parties to see to it that their interest is taken care of. But, there are several other grey areas to this
doctrine as well. There is still no clear cut distinction between as to what is material or
immaterial and the same is largely dependent on the whims of the insurers and the terms of the
contract. It is still very easy for an insurer to repudiate the contract on the slightest point of non-
disclosure by treating them as warranties, thereby putting the assured in an even more difficult
position. Another problem is with regards to as to what duration does the disclosure(s) need to be
made. Common law cases may somewhat seem to have settled this point but the Indian Marine
Insurance Act still shows a confusion regards the same as it says that duty of disclosure shall end
with the conclusion of the contract. Thus, all these problems need to be taken care of and an
effective solution must be provided considering the principle of utmost good faith is one of the
most fundamental principles associated with insurance law.

The term good faith has been mentioned in the Indian Penal Code and it signifies good intention
and due care and caution. The contracts of insurance including the contract of life insurance is
contracts Uberrima fides that means contract based on "utmost good faith" hence each and every
material facts must be disclosed and the concealment of any material information or providing
any false or incorrect information in the policy is a violation of the insurance contract. This
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emanates from the right of every person to know about every material fact associated with the
subject matter of the contract and there is no escape to this.Concealment of any material fact will
entitle the insurer to deprive the assureds’ benefits of the contract.It was observed that the
purpose for taking a policy of insurance is not very material. It may serve the purpose of social
security but then the same should not be obtained with a fraudulent act by the insured. Proposal
can be repudiated if a fraudulent act is discovered. The proposer must show that his intention
was bona fide. It must appear from the face of the record. Thus, this principle forms an integral
part of insurance law. It gives a fair chance of risk assessment to the insurer and also ensures that
the assured fully understands all the terms and conditions of the contract. But, this principle is
more favourable to the insurer as it is the assured who has to generally make all the
disclosures.Further, the Insurance Act lays down that an insurance policy cannot be called in
question two years after it has been in force. This was done to obviate the hardships of the
insured when the insurance company tried to avoid a policy, which has been in force for a long
time, on the ground of misrepresentation. However, this provision is not applicable when the
statement was made fraudulently. Never the less, technological advancements have further made
it possible for both parties to see to it that their interest is taken care of. But, there are several
other grey areas to this doctrine as well.

Firstly, There is still no clear cut distinction between as to what is material or immaterial and the
same is largely dependent on the whims of the insurers and the terms of the contract. It is still
very easy for an insurer to repudiate the contract on the slightest point of non-disclosure by
treating them as warranties, thereby putting the assured in an even more difficult position.

Secondly, while both parties are under a duty of utmost good faith, it is unclear what this entails
on behalf of the insurer. In effect the insurer is left with the minimum or no duties at all other
than a duty to make certain questions. These questions are often vague and it is not clear to the
assured, what he is being asked or what to disclose. Therefore the assured may find himself in a
position where he is required to disclose material facts.

An effective solution must be provided considering the principle of utmost good faith is one of
the most fundamental principles associated with insurance law.

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12.BIBLIOGRAPHY

 Uberrima Fides, www.legalservicesindia.com

 Uberrima Fides - Utmost Good Faith, www.lawyersclubindia.com
 Uberrimae Fidei Contract, www.investopedia.com
 Uberrimae fidei: contracting with the utmost good faith – Lexology,
www.lexology.com
 DR. R.K. BANGIA CONTRACTS -1 7th Ed. (2017)

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