Utmost good faith. Section 17 of MIA states:
“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 either party”.
The underwriter is frequently unaware of the actual facts upon which he is accepting the risk. These facts are generally known only to the assured (and his broker). The underwriter, in accepting the risk and charging the premium, can rely only on the assured and broker for all necessary information. He must expect the assured not to conceal vital information which can influence the underwriter’s decision to accept the risk and the extent of his undertaking. Therefore the assured and the broker have a very heavy duty to disclose the material facts to the insurer before the contract is made.
This duty is strict because if some material fact was not disclosed, even without fault on the part of the assured or the broker, the insurer can avoid his liability to indemnify the assured.
The duty of the assured is contained in section 18 of the MIA. He must disclose to the insurer every material fact, which is known to him and which, in the ordinary course of business, he should know.
For example, if a clause in a bill of lading that goods were “unprotected”, “insufficiently packed” or “second-hand” is known to the agents of a cargo owner, the cargo owner himself is considered to have known of the clause.
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. (Section 18(2) of the MIA.)
There are certain circumstances, which need not be disclosed if the insurer does not enquire about them, for example:
-that the risk has been previously refused by another underwriter;
-any circumstances which lessen or reduce the risk, e.g., if the assured requests a one-year cover he does not have to tell the underwriter the ship will be sold in six months’ time;
-any circumstances known or presumed to be known to the insurer such as the mode of loading in the ports named in the policy, that stowage on deck may be in accordance with the custom of the trade or that a war is imminent in some area covered by the policy or the weather to be expected. The insurer is expected to know such circumstances in the course of his business;
-any circumstance if information is waived by the underwriter, e.g., a policy stated to cover ship under charter: the insurers should enquire about the terms of the charter; if they do not this may be a waiver. If the policy contains a clause “seaworthiness admitted”, insurers are also waiving in formation on any special condition of the ship for the voyage, e.g., about a floating dock not being seaworthy for an ocean voyage;
-any circumstance already dealt with by an express or implied warranty. In a voyage policy there is an implied warranty that the ship is seaworthy at the commencement of the voyage. There is no implied warranty in time policies and therefore full disclosure of unseaworthiness must be made.