Disclosure

• Author: Denis Boivin
• Pages: 99-145

A. INTRODUCTION

Insurance contracts are said to be uberrima fides — that is, they require

utmost good faith from both parties. The law imposes a duty on the

insurer and the insured to act in good faith during negotiations and

during performance. The implications of this duty are manifold. From

the perspective of the insurer, the duty is experienced primarily during

the settlement process, after the contract is signed and a loss has been

sustained by the insured. This is when insureds are vulnerable in rela-

tion to their counterparts. They have suffered losses and require

indemnification to get on with their lives. Insurers have the resources

to meet their needs and have accepted premiums on this basis. The law

commands good faith on their part to ensure that claims are processed

expeditiously and with fairness. In this context, bad faith denotes an

unreasonable refusal to fulfill an insured’s contractual expectations.

This manifestation of uberrima fides will be addressed in Part Three,

which deals with the enforcement of insurance contracts. In particular,

it will be the focus of Chapter 9.

From the perspective of the insured, the implications of the duty

are different. Good faith in this case is experienced mostly during con-

tract negotiations — before any agreement is reached and before any

expectations are created. Insurers, not the insureds, are the vulnerable

ones at this stage. The former require information in order to evaluate

the nature and extent of the risks involved, in order to conduct their

99

DISCLOSURE

chapter 5

business. The underwriting process, upon which the insurance indus-

try is based, cannot function without regular and reliable input. Some

of this data is readily accessible, via common knowledge or informa-

tion databases shared between insurers. However, many of the facts lie

within the exclusive purview of the people who apply for insurance.

Hence, in this context, good faith takes the form of mandatory disclo-

sure, and bad faith takes the form of omissions and misrepresentations.

Like the requirement of an insurable interest, disclosure is a prerequi-

site of insurance law. Prospective insureds have a duty to share with the

potential insurer all relevant information regarding the risks they

intend to transfer. Lack of disclosure constitutes grounds for nullifying

an insurance contract.

Generally speaking, when an insurer alleges a failure to disclose,

four questions must be addressed: (1) Did the insured have a duty to

disclose the information that constitutes the subject matter of the com-

plaint? (2) If in the affirmative, did the insured breach this duty by mis-

representing relevant facts or by omitting any of them? (3) If in the

affirmative, was the insurer induced into signing the contract on the basis

of this misrepresentation or omission? (4) If in the affirmative, what

are the remedies available to the insurer?

The case law does not always discuss these questions under sepa-

rate headings because they are interrelated — especially the first three.

However, it is useful to treat these questions separately for analytical

purposes — that is, to organize the many issues raised by mandatory

disclosure.

B. DUTY TO DISCLOSE

1) Caveat Emptor

Mandatory disclosure is uncommon in commercial and consumer trans-

actions. The law presumes that most legal entities, whether corporate or

otherwise, are capable of looking after their personal interests during

contract negotiations. They are free to make their own inquiries and to

share information with the other party to the agreement. If they choose

to speak, they must be honest.1In some relationships, they must also

exercise care during pre-contractual discussions.2But silence is not a typ-

100 Insurance Law

1Derry v. Peek (1889), 14 A.C. 337 (H.L.).

2Hedley Byrne & Co. v. Heller & Partners Ltd., [1964] A.C. 465 (H.L.) [Hedley

Byrne]; BG Checo International Ltd. v. B.C. Hydro & Power Authority, [1993] 1

ical concern of the law — at least not in the absence of actionable fraud

or negligence. One party may withhold a piece of information from the

other, no matter how relevant this information is to the decision-making

process. As a result, silence may give one party a strategic advantage over

the other. Silence may even deceive the other party. Still, the common

law’s response is the same — caveat emptor, or let the buyer beware!3

2) Rationale for Mandatory Disclosure

What makes the purchase of insurance different from most transac-

tions? The rationale for mandatory disclosure has been expressed on

many occasions and in various ways.4One of the earliest explanations

is also one of the best. It comes from the judgment of Lord Mansfield

in Carter v. Boehm.5The facts are unique by today’s standards, but the

legal analysis has endured more than 225 years of case law and legisla-

tion. It is a case worth reviewing in considerable detail.

a) Carter v. Boehm

In Carter v. Boehm, the insured was the owner of a British fort, captured

by the French. The fort was insured at the time of the hostilities under

a multi-peril policy. However, the insurer denied liability on the basis

that all relevant facts were not disclosed.6In particular, the insured had

written two letters around the time when the contracts were signed. In

these letters, he made three incriminating statements to a third party:

(1) he stated that the fort did not have much fortification — in fact, the

fort was little more than a common market; (2) he stated his fears of

an attack by the French; and (3) he stated that the French government

had, in the previous year, declared its intention to capture the fort. The

insurer claimed that the letters, including all three statements, should

have been disclosed during negotiations.

Disclosure 101

S.C.R. 12; Queen v. Cognos Inc., [1993] 1 S.C.R. 87. For an application of the

Hedley Byrne doctrine in the insurance context, see Fletcher v. Manitoba Public

Insurance Corp., [1990] 3 S.C.R. 191 [Fletcher]. Fletcher is discussed below,

notes 43–43 and accompanying text.

3 For an excellent review of how the common law treats silence in the market-

place, see K.L. Scheppele, Legal Secrets: Equality and Efficiency in the Common

Law (Chicago: University of Chicago Press, 1988).

4 See, for example, Greenhill v. Federal Insurance Co., [1927] 1 K.B. 65 at 76, per

Scrutton L.J. (C.A.).

5 (1776), 97 E.R. 1162 (K.B.).

6 Note that Carter v. Boehm involves individual underwriters — that is, people

entitled to accept risks on their own behalf. I use the term insurer for reasons of

simplicity and consistency. The same principles of law apply to both.