It is interesting how often things do come in threes. After not thinking of the case of Carter v Boehm (1766) 3 Burr 1905 for months, it came up 3 times in the past week.
First, I delivered a paper at the Northern Territory Insurance Conference on the Six Principles of General Insurance and it was the first case I referred to. I then had cause to refer to it in an email I forwarded to an insurer, reminding them that principle as explained by Lord Mansfield was a “two way” street requiring insurers and insureds to exercise utmost good faith. Thirdly, I learned that the Australian Insurance Law Association were considering visiting the site of the fort that gave rise to the case during their 2016 convention.
The facts of the landmark case were that Carter was the Governor of Fort Marlborough (now Bengkulu in Indonesia), which was built by the British East India Company on the island of Sumatra. He arranged an insurance policy with Mr Boehm against the fort being destroyed or captured by a foreign enemy. At the time the Britain was at war with France.
Captain Tryon testified that Carter was aware that the fort was built to resist attacks from the local inhabitants, but not European enemies and the French were likely to attack. The French did attack and Boehm meet the claim lodged by Carter. As a result, Carter sued.
Lord Mansfield held that Mr Carter as the proposer owed a duty of Utmost Good Faith, (the Latin term uberriamae fidea was commonly used till recently) to the insurer under which he was required to disclose all facts material to the risk. In his summing up, Lord Mansfield stated
Insurance is a contract based upon speculation. The special facts, upon which the contingent chance is to be computed, lie most commonly in the knowledge of the insured only; the underwriter trusts to his representation and proceeds upon the confidence that he does not keep back any circumstance in his knowledge, to mislead the underwriter into a belief that the circumstance does not exist, and to induce him to estimate the risque [risk] as if it did not exist. 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.”
Lord Mansfield went on to hold that the duty was was reciprocal and that if an insurer withheld material facts, the example cited being that an insured vessel had already arrived safely, the policyholder could declare the policy void and recover the premium.
The significance of this case cannot be overstated. In the much more recent Manifest Shipping Co Ltd v Uni-Polaris Shipping Company Limited, (200) UKHL1 Lord Hobhouse said:
As Lord Mustill points out, Lord Mansfield was at the time attempting to introduce into English commercial law a general principle of good faith, an attempt which was ultimately unsuccessful and only survived for limited classes of transactions, one of which was insurance. His judgment in Carter v Boehm was an application of his general principle to the making of a contract of insurance. It was based upon the inequality of information as between the proposer and the underwriter and the character of insurance as a contract upon a “speculation”. He equated non-disclosure to fraud. He said at p 1909:
The keeping back [in] such circumstances is a 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.”
Closer to home, and even more recent, in HIH Casualty and General Insurance Ltd v Chase Manhattan Bank (2003) UKHL 6 Rix LJ stated,
I am conscious that in Carter v. Boehm itself Lord Mansfield does seem to have considered that there was a difference between the concealment which the duty of good faith prohibited and mere silence (‘Aliud est celare; aliud tacere…). As a result, non-disclosure in the insurance context in the early years was referred to as a ‘concealment’, and the doctrine has sometimes been viewed and explained as constructive fraud. However, Lord Mansfield was seeking to propound a doctrine of good faith which would extend through the law of contract, and in that respect his view did not bear fruit. Where, however, in the insurance context it put down firm roots, it came to be seen as a doctrine which went much further than the antithesis of fraud, and, as it came to be developed, “non-disclosure will in a substantial proportion of cases be the result of an innocent mistake.”
Despite the common law position, most insurers have a condition addressing misrepresentation and non-disclosure and it is of course addressed by 4 sections of the Australian Insurance Contracts Act (1984) namely:
- Section 13: The Duty of Utmost Good Faith
- Section 48: Entitlement of Named Persons to Claim
- Section 56: Fraudulent Claims
- Section 28: General Insurance
While Carter v Boehm is certainly important to the insurance industry, it is not regarded as his most important judgment. That goes to his ruling in what is known as the Somersett Case oon the legality of owning slaves. Somerset v Stewart (1772) 98 ER 499.
Being a lover of history and insurance I will make every endeavour to attend the 2016 AILA Conference.