“The facts of the case were simple. Commissions and other ancillary interests in goods were insured by the plaintiffs under a marine voyage policy at greatly excessive values. The vessel sank in circumstances which gave rise to suspicion. At the trial the jury was unable to reach a conclusion on whether the ship was cast away and whether the overvaluations were fraudulent, but did find that it was material to the underwriter to know of the overvaluation and that the fact of it was concealed. On these facts the sole issue was whether the non-disclosure was material. This was the culmination of a long-standing controversy about the nature of the "risk" to which the duty of disclosure was related. Was the duty of disclosure confined, as Duer had argued, at p. 390, to those facts which affected the intrinsic nature of the risks - i.e. those which affected the probability that the subject matter would be lost or damaged by a peril insured against? Or were Phillips and Arnould right to say that "risk" should be given a wider meaning so that the duty extended to anything which would probably influence the insurer's ultimate decision, including what later came to be called the "moral hazard?" The Court of Queen's Bench decided in favour of the latter view. This was certainly very important, but the decision was concerned with the kind of risk which was the subject of the duty to disclose, and not with either the standard imposed by the duty or the identity of the person by reference to whom the extent of the duty was to be ascertained; and there is nothing in either the texts or the decisions cited in argument which bore on these questions at all. The nearest that can be found in the entire report is the following passage from the judgment of the court, delivered by Blackburn J., at p. 539: "We agree that it would be too much to put on the assured the duty of disclosing everything which might influence the mind of an underwriter. Business could hardly be carried on if this was required. But the rule laid down in [Parsons, A Treatise on the Law of Marine Insurance and General Average, vol. I], p. 495, that all should be disclosed which would affect the judgment of a rational underwriter governing himself by the principles and calculations on which underwriters do in practice act, seems to us a sound one." As I read this passage its purpose was the following. The law postulated by Duer was comparatively simple to apply. One simply looked at the intrinsic nature of the perils insured against and inquired whether they were enhanced by the non-disclosure. This was a question which was capable of reasonably objective ascertainment. The problem with the wider test, preferred by Parsons and in the event by the court itself, was that if the duty of disclosure was widened to include all the additional matters which might influence what an underwriter might think or do the duty would be at the same time impractically wide and impossible of ascertainment. The court therefore answered Duer's objection by emphasising that it was matters which might influence the mind not of "an underwriter" (Blackburn J.'s words) but of a hypothetical reasonable underwriter, whose standards of materiality would be at once bounded and possible to fix. This qualification was an essential part of the court's decision on the controversy which was the only issue before it …..”
“Before coming to the cases decided after 1906 I should mention Rivaz v. Gerussi Brothers & Co. (1880) 6 Q.B.D. 222, which was relied on to suggest that a test expressed in terms of the underwriter's assessment of the risk is contrary to authority. I disagree. As clearly appears from the argument for the defendants (reported at pp. 225-226) the case was concerned with the same controversy between the views of Duer and Parsons on whether the duty of disclosure extended beyond matters directly affecting the probability of a loss by perils insured against, as had previously been resolved in favour of the wider view in Ionides v. Pender, L.R. 9 Q.B. 531. That the word "risk" must be understood in the wider sense is now beyond dispute, but this has no bearing on the principle which I derive from the authoritative texts, and indeed from both the letter and the spirit of Carter v. Boehm, 3 Burr. 1905, that it is the relevance to the underwriter's intellectual process when assessing the risk which determines the scope of disclosure.”
“18. Disclosure by assured (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 by him. If the assured fails to make such disclosure, the insurer may avoid the contract. (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. (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 circumstances 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. (4) Whether any particular circumstance, which is not disclosed, be material or not is, in each case, a question of fact (5) The term 'circumstance' includes any communication made to, or information received by, the assured. …. 20. Representations pending negotiation of contract (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. (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.”
“The term “circumstance” includes any communication made to, or information received by, the assured”
“An apparently well-founded rumour, though it turns out to be incorrect, must be disclosed (Arnould, Ed. 6, p.574)”
“Lord Ellenborough, C.J. The question is, whether the assured’s agent was bound to communicate to the underwriters a material fact within his own knowledge, as coupled with the report made relating to the supposed risk they were about to insure, which report afterwards turned out not to be true. Now the duty of the assured or his agent in making such communications of material circumstances within their knowledge must attach at the time of effecting the insurance, and cannot depend upon the subsequent event. There is no case perhaps exactly like this in species, but others have been decided involving the same principles, that the assured is bound to communicate to the underwriters every thing material to the risk within his knowledge at the time. Here, coupling the peculiar knowledge which the agent had of the name of the ship, on board of which the goods were loaded, with the information contained in the paper stuck up at Lloyd’s, it cannot be said that the fact was not material to be communicated to the underwriters. With the knowledge of such a fact kept back from them, can they be said to have contracted upon equal terms? The intelligence announced in the paper at Lloyd’s was nothing to the underwriters, unless they had the means of applying it to the particular ship or goods in which the assured were interested. If the underwriters had had the knowledge possessed by the assured, it might have been a question with them whether they would have insured at all; or if they did, whether they would not have required an enhanced premium. Bayley, J. The assured’s agent is blameable, not for not communicating the rumour, but for not communicating to the underwriters a fact material with reference to that rumour, which fact was within his knowledge, so as to enable them to apply it to the rumour, and exercise their judgment accordingly. As to the assured taking the chance of the event upon himself; he did not tell the underwriters of the fact within his knowledge, and that he was willing to take that chance upon himself; but he took the chance of their finding out his knowledge of the fact, if it afterwards turned out to be true.”
“It is important to realize what is embraced by “risk”
“When accepting a risk underwriters are properly influenced not merely by facts which, with hindsight, can be shown to have actually affected the risk but with facts that raise doubts about the risk”
“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. ….. There are many matters, as to which the insured may be innocently silent – he need not mention what the under-writer knows – Scientia utrinque par pares contrahentes facit. [i.e. Equal knowledge on each side makes equal contracting parties]”
“ ….. one should not lose sight of the fact that were the evidence before the court, upon which underwriters rely to avoid the policy, to establish that, although the known facts were not disclosed, the suggested facts did not in truth exist, underwriters would be seeking to avoid liability in respect of a risk which, had they been in possession of the true facts, as distinct from the allegations of suggested facts, they would have written without hesitation. In so doing they would, in effect, be utilising loss of the opportunity of forming an unfounded suspicion of non-existent facts in order to avoid paying a loss under a policy which, had the truth been made known to them when they wrote the risk, they would not have hesitated to underwrite. To persist in such a course in the face of evidence before the court that the suggested facts never existed would, in my judgment, be quite contrary to their duty of the utmost good faith. Such a course would be so starkly unjust that I would hold that in such a case it would be unconscionable for the court to permit the insurers to avoid the policy on the grounds of non-disclosure. Having regard to the equitable origin of the jurisdiction to avoid a policy for breach by the assured of the duty of the utmost good faith, the court should not be inhibited from giving effect by appropriate orders to the insurers’ countervailing duty of the utmost good faith to the assured. The breach of that duty by the insurers would be so unconscionable as to disentitle the insurers from invoking the equitable jurisdiction of the court to avoid the contract on the grounds of non-disclosure by the assured. The procedural and evidential consequences which flow from this conclusion are, in my judgment, as follows: (1) In the field of moral hazard, a failure by the assured to disclose an existing allegation against him of dishonesty or relevant criminal conduct or a criminal charge will normally be non-disclosure of a material fact which prima facie entitles the insurer to avoid the policy. (2) If, in proceedings in which the insurer seeks to avoid the policy for such non-disclosure, the assured proves that the allegation or charge was unfounded and that there has been no dishonesty or criminal conduct on his part, the insurers will not normally be entitled to avoid the policy. For example, where the assured has been charged with a criminal offence and subsequently acquitted at a trial, he can deploy his acquittal as some evidence, but not conclusive evidence, of his innocence. Similarly, if he has been charged but not yet convicted, he can prove his innocence in order to displace the entitlement of the insurers to avoid for his failure to disclose the charge against him. (3) If I am wrong in concluding that an assured is under no duty to disclose facts merely because they are objectively suspicious as to his own wrong-doing when he knows that the suggested facts do not exist, it must by parity of reasoning be open to the assured to displace the underwriters’ entitlement to avoid for non-disclosure of circumstances because they are objectively suspicious by proving that the suspicion was misplaced and that the facts of the existence of which there was suspicion never in truth existed. (4) If the facts objectively raise suspicions going to the magnitude of the risk, the assured is under a duty to disclose them but if at the trial he establishes that there was in truth no basis for those suspicions it is not open to the insurers to invoke the court’s equitable jurisdiction to avoid the policy. I therefore agree with the conclusion as to the duty to disclose allegations of misconduct going to moral hazard arrived at by Phillips J. in The Dora, supra, and I am unable to accept the analysis of Forbes J. in Reynolds, supra. However, for reasons which were not argued or considered in either case, I do not consider that failure to disclose allegations which on the evidence before the court are proved to have been false entitles the underwriters to avoid the policy.” “ ….. one should not lose sight of the fact that were the evidence before the court, upon which underwriters rely to avoid the policy, to establish that, although the known facts were not disclosed, the suggested facts did not in truth exist, underwriters would be seeking to avoid liability in respect of a risk which, had they been in possession of the true facts, as distinct from the allegations of suggested facts, they would have written without hesitation. In so doing they would, in effect, be utilising loss of the opportunity of forming an unfounded suspicion of non-existent facts in order to avoid paying a loss under a policy which, had the truth been made known to them when they wrote the risk, they would not have hesitated to underwrite. To persist in such a course in the face of evidence before the court that the suggested facts never existed would, in my judgment, be quite contrary to their duty of the utmost good faith. Such a course would be so starkly unjust that I would hold that in such a case it would be unconscionable for the court to permit the insurers to avoid the policy on the grounds of non-disclosure. Having regard to the equitable origin of the jurisdiction to avoid a policy for breach by the assured of the duty of the utmost good faith, the court should not be inhibited from giving effect by appropriate orders to the insurers’ countervailing duty of the utmost good faith to the assured. The breach of that duty by the insurers would be so unconscionable as to disentitle the insurers from invoking the equitable jurisdiction of the court to avoid the contract on the grounds of non-disclosure by the assured. The procedural and evidential consequences which flow from this conclusion are, in my judgment, as follows: (1) In the field of moral hazard, a failure by the assured to disclose an existing allegation against him of dishonesty or relevant criminal conduct or a criminal charge will normally be non-disclosure of a material fact which prima facie entitles the insurer to avoid the policy. (2) If, in proceedings in which the insurer seeks to avoid the policy for such non-disclosure, the assured proves that the allegation or charge was unfounded and that there has been no dishonesty or criminal conduct on his part, the insurers will not normally be entitled to avoid the policy. For example, where the assured has been charged with a criminal offence and subsequently acquitted at a trial, he can deploy his acquittal as some evidence, but not conclusive evidence, of his innocence. Similarly, if he has been charged but not yet convicted, he can prove his innocence in order to displace the entitlement of the insurers to avoid for his failure to disclose the charge against him. (3) If I am wrong in concluding that an assured is under no duty to disclose facts merely because they are objectively suspicious as to his own wrong-doing when he knows that the suggested facts do not exist, it must by parity of reasoning be open to the assured to displace the underwriters’ entitlement to avoid for non-disclosure of circumstances because they are objectively suspicious by proving that the suspicion was misplaced and that the facts of the existence of which there was suspicion never in truth existed. (4) If the facts objectively raise suspicions going to the magnitude of the risk, the assured is under a duty to disclose them but if at the trial he establishes that there was in truth no basis for those suspicions it is not open to the insurers to invoke the court’s equitable jurisdiction to avoid the policy. I therefore agree with the conclusion as to the duty to disclose allegations of misconduct going to moral hazard arrived at by Phillips J. in The Dora, supra, and I am unable to accept the analysis of Forbes J. in Reynolds, supra. However, for reasons which were not argued or considered in either case, I do not consider that failure to disclose allegations which on the evidence before the court are proved to have been false entitles the underwriters to avoid the policy.”
“As to the assured taking the chance of the event upon himself; he did not tell the underwriters of the fact within his knowledge, and that he was willing to take that chance upon himself; but he took the chance of their finding out his knowledge of the fact, if it afterwards turned out to be true.”
“When accepting a risk underwriters are properly influenced not merely by facts which, with hindsight, can be shown to have actually affected the risk but with facts that raise doubts as to the risk”
“the vice of misrepresentation and non-disclosure is not that after the event the underwriter has suffered from having taken on a parcel of risks one of which led to a loss, but that a breach of the duty of good faith has led the underwriter to approach the proposal on a false basis”