Marine Insurance Act 1906 of United Kingdom

The Act was passed in the United Kingdom in 1906 as UK act by the parliament to regulate the marine insurance. Sir Mackenzie Dalzell Chalmers was the person who drafted this act. The Act is very important for the UK and has huge significance for the world. This insurance not only governs the English Law but this insurance has huge impact on the marine insurances across the world. This Act has huge impact on almost every Marine Insurance acts and laws across the world that regulate the world Marine Insurance industry. Although this Marine Insurance act would cease to exist by the year 2012 but is expected that this Act will be reenacted by the parliament in 2012.

Some Important Terms in the Act

There are some terms that have to be explained in the process of the discussion on the conditions under which the marine insurance is void. These terms are as below:

Insurable Interest[1]

Under the provisions the Act, everyone who is interested in any kind or form marine transportation is said to have an insurable interest. Any person or firm can be said to have interests in marine adventure when he has some kind of relationship that can be proved legally with the properties or the adventure that are insurable for the mentioned or agreed risks. In other words, the person has direct interest in the marine adventure or the properties that would be transported via the sea routes or marine routes in inland sea or else places that come under the preview of the Act. Insurable interests arise when the insured may have a possible loss, say damage to the properties or other ways, because of some uncertain events that may be unfavorable.

Duties

Under the doctrine of Uberrimae fides the insured has duties to answer to all the questions honestly and not risk should be misrepresented in any case. This is duty of the proposer the insurance to provide and disclose all the material information and facts regarding the insured property that are important and relevant to the acceptance of the offer the insurance. The failure to disclose and provide of the relevant information to the insurer is called the non-disclosure of concealment. And this means that the insurance is voidable from the insurer side.

Disclosure by assured [2]

Under this doctrine of good faith, assured has duties of disclosure. Under the provisions of the Act, the insured has liability to disclose all the material facts and information regarding the interests or properties prior to the agreement is entered upon. In any case or circumstances, the assured cannot hide any facts of material significance. All the circumstances are said to material that may have had any kind of impact or influence on the judgments or decisions of the insurer while determining the risk or fixing the insurance premium. But there are some special circumstances where the insured is not necessarily supposed to disclose the facts and information to the insurer when it is supposed that the insurer already has the information regarding the risk or the risks are of common nature that are known to all.

Disclosure by agent effecting insurance

Like the assured, the agents or insurer too have obligations to provide or supply the facts or information regarding the insurance contract before the insurance contract is concluded. Under the provisions of the Act, the agent has obligation of informing the assured about all the applicable and relevant terms and conditions of the insurance. Agents are expected to inform properly about the every clauses of the insurance policy as it is right of the assured to have full information about the insurance policy that the assured in buying.

 

Avoidance of Marine Insurance Contract[3]

Under the Act of marine insurance, 1906, there are some events and condition according to which the Marine Insurance is considered as void and is said to be in avoidance. These conditions are as below

Wagering or gaming contracts[4]

All the marine insurance contracts are said to be void that have been entered by the act of gaming or wagering with purpose to get insurance.

An insurance contract of marines is said to be deemed to be an activity of wagering or gaming where the insured has actually no insurable interest according to the Act but the assured entered into the insurance contract to gain such insurable interest.

Avoidance of Uberrimae fides

A marine insurance contract is entered on the basis of the concept of utmost good faith. In a case where a party is found to be not observing the utmost good faith, the marine insurance is said to be void and the benefits under the insurance cease to exist. In this case of avoidance of the utmost good faith either party has right to withdraw from the contract if anyone is found to be in a practice that is against the Uberrimae fides.

Doctrine of Utmost Good Faith[5]

Utmost good faith in legal term is called Uberrima fides. It is Latin word. This Latin phrase Uberrima fides mean utmost good faith or the doctrine of utmost good faith. This doctrine legally governs any insurance contract entered between two parties. Under this doctrine of utmost good faith, both the parties have to ensure that utmost good faith is always maintained. Both the parties are liable to for making full declarations regarding all the material facts and information in the insurance proposal. Unlike the doctrine of the caveat emptor, the doctrine of Uberrima fides makes it legally binding on both the parties to disclose all the relevant facts to each other when entering into the marine insurance contract.

In other words the utmost good faith can be defined as the minimum standards maintained by the parties to the contract of marine insurance in a transaction towards each other and there is no misleading fact or information and no party has withheld any material or critical facts or information. Both the parties are expected to maintain the utmost good faith towards each other.

Facts that are to be disclosed

  • Any fact that previously was immaterial but later it has become material, should be disclosed to the other party in contract of marine insurance.
  • Any fact or information that in any way can have influence on the risk assessment.
  • All kinds of previous losses and claims made on the previous insurance contracts should be disclosed.
  • Any kind of special terms and conditions that have bearing on the current insurance contract.
  • Any kind of the terms or conditions that were extended for the previous insurance contract.
  • Any facts that have any information regarding the motives of the insurance contract.
  • Any information relating to the moral hazards.

Why Utmost Good Faith is Important

The contract marine insurance is a commercial contract and the insurance promises to compensate for any kind of losses arising out any unwanted or unpleasant event that may result into losses for the assured in future on the agreed terms and conditions and the insurance premium. Insurance premium is decided by the assessing the risk of the assured. There may be mistakes in risk assessment by the insurer in case where the assured decides to hide some relevant information that may increase the premium. In the same ways, the insurer may not inform the assured about some certain terms and conditions that may lead to assured not buying the insurance from the company. There may be so many conditions that may lead to failure of maintaining the utmost good faith and this failure leading to losses to both the parties. These are as below:

Gaming and Wagering

An insurance contract of marines said to be deemed to be gaming or wagering where the assured does not have any kind of insurable interest under the Act but the assured entered into the insurance contract to gain such insurable interest.

In such cases the insurer ends up making losses by the way of compensating for the fake kind of insurable interests. In a case the insured has no insurable interest but enters into the insurance just with purpose of acquiring the insurable interests by other means than proper. In such conditions the insurance hides the right information from the insurer. Instead the assured fakes the insurable interest so that in case of any loss coming from the unfavorable events, the assured may gain monetary benefits while actually the assured does not have any insurable interests. This is in avoidance of the utmost good faith. This case shows that the insurer is going make loss as the assured is going to be compensated even for having no insurable interests. This will a loss the insurance pool and it will have negative impact on the health of industry. So in this case the insurer has right to walk out of this contract of marine insurance to safeguard its interest from a fraud because in such cases the insurance becomes void.

For example an assured has arranged to enter into the marine insurance contract for a cargo foods being sent to the US from the UK without actually having such kind of food cargo. The assured has not food cargo to be shipped to the US from the UK. He has empty cargo that is being shipped to the US with purpose of benefiting in case there is any unfavorable event en route. In this case there is no physical existence of the foods but the insurance has been bought by the way fraud. In such cases the insurer is covering no property in realty still it on paper it is covering a property. In case of any ruin, the insurer would not be able to get a salvage value for the cargo as there were never any food articles. With help of salvage, the insurance companies try to reduce their financial burden that arises from the compensation. The insurance companies have right on the salvage of the property and they sell this salvage to arrange some money. In such cases, the insurer will make huge loss as there will be no salvage. This condition too can be said to avoidance of utmost good faith as the assured has intentionally not informed the insurer of the material facts. The insurer has right to conceal the contract and walk out from the contract to save itself from the fraud.

All the marine insurance contracts are said to be void that have been entered by the act of gaming or wagering with purpose to get insurance.

To Lower the Risk[6]

It is the rule lower is the risk lower is the premium and higher is the risk higher is the premium. The assured sometimes tends to hide some of the important and relevant facts and information to the insurer with purpose to decrease the insurance premium. By doing so, the assured succeed in lowering the cost to insurance premium. But for the insurance company it is a negative thing. The real risk of the asset is higher than the disclosed risk so the chances of compensation would be higher than the estimated. In such cases the probabilities of the unfavorable events would be higher. Also in case of compensation, the insurance company has to pay more compensation than that of the insured one or expected one. This situation would be loss making situation for the insurer. The risk of the insurer will increase. This is a case of avoidance of utmost faith as the assured has intentionally hided the material facts and information. So the insurer has right to conceal the insurance contract.

Inflated Asset Value

Higher is the value of the assets or properties that have been insured, higher would be the compensation in case of damage or unfavorable events. Sometimes the assured tends to buy an contract of marine insurance where the insurance cover is higher than the actual worth of the assets. In such cases, possibilities of unfavorable events are very high so the case of damage may be common. In case of unfavorable events, the assured will get higher assured compensation as entered into the agreement. This end up providing more money that the actual cost of assets to the assured while, the insurer suffering from the losses as it has to pay higher amount of money as compensation than that of the actual value of the assets. This is avoidance of the utmost good faith from the assured side. So the insurer has right to conceal the contract to safeguard itself from frauds.

Deflated Asset Value

Marine Insurance is mandatory for all kinds of the marine adventures in any form. There are some routes that are very safe and there is hardly any risk of unfavorable events may be because of route or length of journey. In case of almost no risk nobody would like to but an insurance policy as it will be wastage of money for such risks that may never occur. In such cases, the assured tends to deflate the asset value so that the premium is lower than actual level. Because of this practice, the insurer will get lower amount of premium for taking higher level of risk. This will be unprofitable for the insurer. This is avoidance of utmost good faith as the assured has done this intentionally. So the insurer has right to conceal the contract.

Insurer not disclosing some terms and conditions of the contract

It is found that the insurers too tend to not disclose some of the terms and conditions. They do it because of two main reasons, either the terms and conditions are such that the buyer will be not or huge competition forces the insurers to hide unfavorable terms and conditions. In both the conditions, the buyer of insurance is going to be at loss because the assured would finally not get the exact amount of the compensation because of terms and conditions or may have to face lot problems. In case of the unfavorable events where the insurer pays less than the assured amount because some term and conditions. This avoidance of utmost good faith and the assured has right to walk out of the agreement and can ask for damage or compensation under the laws of the land.

Legally binding[7]

The maintenance of the utmost good faith by both parties under the Act is legally binding to all the parties. It is the obligations of the parties that they have to discharge when required. In simple words the parties cannot afford to breach the doctrine of utmost good faith. The law of the land enforces this. In case of breaching the doctrine of utmost good faith, the parties might have to be subjected to the penalties fixed by the court of law or damage has to be paid to the suffering parties. Even the court of law may punish the breaching parties with some other kinds of legal punishment under the Act. This makes the practice of utmost good faith a necessity for the parties.

Losses of time and resources

In case of avoidance of the utmost good faith, the parties involved in marine insurance contract has to put time, money and other resources to enquire and gather the right information before entering into any contract of marine insurance. If the utmost good faith is practiced, there will be need for a lower level of the expenditures in form of time and resources. Also the practice of utmost good faith would result into decreasing the number of conflicts arising from the marine insurance contracts for the parties. This will save on the costs of legal actions in case of breach utmost good faith by the other parties.

Proper execution of rights and obligations

It is important that both the parties involved in marine insurance execute their rights and obligations. It is imperative for a successful marine contract that all the concerned parties execute their obligations and rights. But in case avoidance of utmost good faith, the party that suffers from the breach utmost good faith, tends to either conceal the contract or tend to respond unfavorably to such acts of the other party. In case the affected party does not respond unfavorably, and ignores such acts may be for some other reasons, the suffering party becomes less responsible and sincere to discharge the duties. In such cases the execution of contract become either difficult or the level of efficiency falls. So to avoid such conditions it is important that both the parties maintain utmost good faith.

Conflict

Conflict is very important part of any contract. In case of marine insurance, when either party is found to be involved in breach utmost good faith, the party that suffers from such breach of utmost good faith often found to respond against such activities either by concealing the contract of marine insurance or by suing the other party to the court of law for damage claims. In case of cancelation of the contract of legal actions for the damage claims, often it has been seen that there arise huge conflict between these parties and scene becomes uglier. In such cases cost of legal actions turns out to costlier than the costs of the benefits the breaching party has enjoyed. To avoid such situation, it is important that both the parties discharge their duties properly and maintain utmost good faith. By maintaining utmost good faith, both the parties enjoy the trust and confidence of each other.

Decrease in trust and confidence between the parties

The case of breach of the utmost good faith by either party, the level of trust and confidence in each other falls significantly. This has huge impact on the future relationship between the two parties. In case of breach utmost good faith, it is seen that the parties often result into ending all kind of future insurance contracts. This results into loss of trusted business partner for both the parties.

Damage to Image or Brand Value

The involvement in any act of breach of utmost good faith by either party has negative impact on the image or the brand value of both the parties. Both the parties in market suffer from a negative image regarding the unethical business practices. Both parties may have to be situation of losses because of the damage to the brand value. Especially the insurer often suffers more than the assured usually from such involvement in the act of breach of utmost good faith. Many ethical customers prefer to shift to other insurers to avoid any future inconveniences. Also the assured too suffers because of loss in trust on the party in the market.

Misrepresentation of economic values

Because of the misrepresentation of the assets values or creation of fake assets that do not exist, the economic products of the nation get either inflated or deflated than the actual levels. This leads to miscalculation of many economic factors that lead problems in the economy. This is harmful to overall economic health. In case if the both the parties would strictly follow the principals of utmost good faith, there would have not been any misrepresentation of the economic variables.

Loss of Opportunities

On the overall basis, the misrepresentation of the facts and information and the avoidance of the utmost good faith results into losses of opportunities as the misrepresentation of facts would result into negatively affecting the industries in terms of financial capacities and production as well as demand supply balance. This has impact on the economic activities the actual value of the assets in economy is more than the reported or less than the reported in case of avoidance of the doctrine of utmost good faith. This in other words is loss of opportunities.

Decrease in trust and confidence in overall economy

In case of avoidance of utmost good faith, there will be an environment of distrust and there will be lack of confidence. The decrease in the level of confidence may have negative impact on the overall economic activities. Also the confidence of the market will be lower as the market cannot certain about the future trends because of lack of trust and confidence as a result of the avoidance of utmost good faith.

The above mentioned reasons are very important and vital for the proper execution of the marine insurance. The utmost good faith increases the confidence and trust on each other. But in case of avoidance of the utmost good faith, the level of confidence and trust between the parties and on overall basis in the economy decreases. This has negative impact on both the parties and the economy. The misrepresentation of facts and figures results into misstatement of the economic variables that have huge impact on the economic activities. Though, this misrepresentation has very little role to play in the economy depending on the size of economy and can have marginal impact on the economic variables. Other reasons like loss of opportunities,

Conclusion

Utmost good faith is imperative for the contract of marine insurance. The practice of utmost good faith benefits both the parties as both the parties have access to the right kind of information. This increases trust and confidence. The practice utmost good faith helps the assured as well as the insurer to get the best deal to mitigate the risk. In case avoidance of the utmost good faith, there would be many problems.

[1] Marine Insurance Act 1906

[2] Sec 17, Marine Insurance Act 1906

[3] Marine Insurance Act 1906

 

[4] Hodges, S., 1996, Law of marine insurance, Routledge, 1996

[5] Hodges, S., 1996, Law of marine insurance, Routledge, 1996

[6] Huebner, S.S., 2008, Marine Insurance, BiblioLife, 2008

[7] Winter, W.D., 1919, Marine insurance: its principles and practice, McGraw-Hill book company, inc., 1919

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