Types of Breach of Utmost Good Faith

A breach of utmost good faith can be in the form of either a misrepresentation (i.e. the giving of false information) or a non-disclosure (i.e. failure to give material information). Alternatively, it can be classified into a fraudulent breach and a non-fraudulent breach (i.e. a breach committed either innocently or negligently, rather than fraudulently). Both classifications combined produce a four-fold categorisation as follows:

(a) Fraudulent Misrepresentation: an act of fraudulently giving false material facts to the other party;

(b) Non-fraudulent Misrepresentation: an act of giving false material facts to the other party done either innocently or negligently;

(c) Fraudulent Non-disclosure: a fraudulent omission to give material facts to the other party; or

(d) Non-fraudulent Non-disclosure: an omission to give material facts to the other party done either innocently or negligently.

Remedies for Breach of Utmost Good Faith

If the duty of utmost good faith is breached (any one of the four types mentioned above), the aggrieved party (normally the insurer) may have available certain remedies against the guilty party:

(a) To avoid within a reasonable time the whole contract as from policy inception, with the effect that premiums (and claims) previously paid without knowledge of the breach are generally returnable, unless it was a fraudulent breach on the part of the insured or his agent;

(b) In addition to (a) above, it is in principle possible to sue in tort (see Glossary) for damages in the case of fraudulent or negligent misrepresentation;

(c) To waive the breach, alternatively, in which case the contract becomes valid retrospectively.

Note: An insurer aggrieved by a breach of utmost good faith has not the option to refuse payment of a particular claim, to treat the policy as valid for the remainder of the insurance period, and to retain part of or the whole of the premium paid. This is because rescinding only part of a contract is not an available remedy.

PROXIMATE CAUSE

Meaning and Importance of the Principle

The proximate cause of a loss is its effective or dominant cause. Why is it important to find out which of the causes involved in an accident is the proximate cause? A loss might be the combined effect of a number of causes. For the purposes of insurance claim, one dominant cause must be singled out in each case, because not every cause of loss will be covered.

Types of Peril

In search of the proximate cause of a loss, we often have to analyse how the causes involved have interacted with one another throughout the whole process leading to the loss. The conclusion of such an analysis depends very much on the identification of the perils (i.e. the causes of the loss) and of their nature. All perils are classified into the following three kinds for the purposes of such an analysis:

(a) Insured peril: It is not common that a policy will cover all possible perils. Those which are covered are known as the ‘insured perils’ of that policy, e.g. ‘fire’ under a fire policy, and ‘stranding’ under a marine policy.

(b) Excepted (or excluded) peril: This is a peril that would be covered but for its removal from cover by exclusion, e.g. fire damage caused by war is irrecoverable under a fire policy because war is an excepted peril of the policy.

(c) Uninsured peril: This is a peril that is neither insured nor excluded. A loss caused by an uninsured peril is irrecoverable unless it is an insured peril that has led to the happening of the uninsured peril. For example, raining and theft are among the uninsured perils of the standard fire policy.

Application of the Principle

The principle of proximate cause applies to all classes of insurance. Its practical applications may be very complex and sometimes controversial. For our purposes, we should note the following somewhat simplified rules:

(a) There must always be an insured peril involved; otherwise the loss is definitely irrecoverable.

(b) If a single cause is present, the rules are straightforward: if the cause is an insured peril, the loss is covered; if it is an uninsured or excepted peril, it is not.

(c) With more than one peril involved, the position is complex, and different rules of proximate cause are applicable, depending on whether the perils have happened as a chain of events or concurrently, and on some other considerations. Specific cases should perhaps be a matter of consultation with the insurer and/or lawyers, but the general rules are:

(i) uninsured perils arising directly from insured perils: the loss is covered, e.g. water damage (uninsured peril) proximately caused by an accidental fire (insured peril) in the case of a fire policy;

(ii) insured perils arising directly from uninsured perils: the loss from the insured peril is covered, e.g. fire (insured peril) damage proximately caused by a careless act of the insured himself or of a third party (uninsured peril) in the case of a fire policy.

(iii) the occurrence of an excluded peril is generally fatal to an insurance claim, subject to complicated exceptions.

(d) Other Features of the Principle (i) Neither the first nor the last cause necessarily constitutes the proximate cause. (ii) More than one proximate cause may exist. For example, the dishonesty of an employee and the neglect on the part of his supervisor of a key to a company safe may both constitute proximate causes of a theft loss from the safe. (iii) The proximate cause need not happen on the insured premises. Suppose a flat insured under a household policy is damaged by water as a result of a fire happening upstairs. The damage is recoverable under the policy, although the insured flat has never been on fire. (iv) Where the proximate cause of a loss is found not to be an insured peril, it does not necessarily mean that the loss is irrecoverable under the policy.

[Illustration: There are four containers of cargo being carried on board a vessel and insured respectively under four marine cargo policies. The first policy solely covers the peril of collision, the second fire only, the third explosion only, and the fourth entry of water only. During the insured voyage, because of the master’s negligence, this vessel collides with another. The collision causes a fire, which then triggers an explosion. As a result, the vessel springs several leaks and all the cargo is damaged by seawater entering through the leaks. These facts show that the cargo damage was proximately caused by negligence. Bearing in mind that negligence is merely an uninsured rather than insured peril of each of the four cargo policies, an immediate, important question that has to be grappled with is: ‘Is the cargo damage irrecoverable under those policies?’ In search of an answer to this question, we must look at the links between the individual events of the incident. Negligence, the identified proximate cause, naturally causes a collision, which then naturally causes a fire. The fire naturally leads to an explosion, which then naturally causes an entry of water. At last, the water damages the cargo. Before us is a chain of events, happening one after another without being interrupted by other events. With respect to each policy, the water damage is regarded as a result of its sole insured peril, notwithstanding that this peril can be traced backward to an uninsured peril. Therefore, the only conclusion that we can reach is that each of the policies is liable for the water damage to the cargo it has insured. (Of course, if the proximate cause is found to be an excepted peril, the opposite conclusion will have to be made.)]