Disclosure
Author | Denis Boivin |
Pages | 129-195 |
129
CHAPTER 5
DISCLOSURE
A. INTRODUCTION
Insurance contracts a re 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 dur-
ing the settlement process, after the contract is signed and a loss has
been sustained by the policyholder. This is when insureds are vulner-
able in relation to insurers. They have suffered losses and require in-
demnification 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 cla ims are processed
expeditiously and with fairness. In this context, bad faith occurs when
an insurer introduces improper considerations into the claims process
or handles the insured’s claim in an overwhelmingly inadequate man-
ner.1 This manifestation of uberrima fides will be addressed in Chapter 9,
which deals with the settlement of insurance claims.
From the perspective of the policyholder, the implications of the
duty are different. Good faith in this case is experienced mostly during
1 This definit ion of insurer bad faith was for mulated by McLachlin CJC and
Abella J in Fidle r v Sun Life Assurance Co of Canada, 2006 SCC 30 at par a 71.
This decision i s discussed in Chapte r 9, Sections C(2) and (3).
INSURANCE LAW130
contract 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. The underwriting process,
upon which the insurance industry is based, cannot function without
regular and reliable input. Some of this data is readily accessible, via
common knowledge or information databases sh ared between insurers.
However, many of the facts that are required by underwriters lie within
the exclusive knowledge of those who apply for insurance. Hence, in
this context, good faith takes the form of mandatory disclosure, and
bad faith takes the form of omissions and misrepresentations. Like the
requirement of an insurable interest, disclosure is a prerequisite of in-
surance law. Prospective insureds have a duty to share with the poten-
tial insurer all material 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. First, did the insured have a duty
to disclose the information that constitutes the subject matter of the
insurer’s complaint? Second, did the insured breach this duty by mis-
representing material facts or by omitting any of them? Third, was the
insurer induced into signing the contract on the basis of this material
misrepresentation or omis sion? Fourth, what are the remedies avai lable
to the insurer? The caselaw does not always discuss these questions
under separate headings bec ause they are interrelated — especially t he
first three. However, it is useful to treat these questions separately for
analytical purposes, that is, to organ ize the many legal issues raised by
mandatory disclosure.
B. DUTY TO DISCLOSE
1) Rationale
Mandatory disclosure is the exception in commercial and consumer
transactions. The law presumes that most legal entities, whether cor-
porate or otherwise, are capable of looking after their personal interests
during contract negotiations. They are free to make their own inquir-
ies and to share information with the other party to the agreement. If
they choose to speak, they must be honest — they cannot make any
Disclosure 131
fraudulent representations to one another.2 In some relationships, they
must also exercise reasonable care during pre-contractual discussions.3
But silence is not a typical concern of the common law, at least not in
the absence of actionable fraud or negligence. One party may w ithhold
a piece of information from the other, no matter how relevant this in-
formation 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!4
What makes the purchase of insurance different from most trans-
actions? The rationale for mandatory disclosure ha s been expressed on
many occasions and in various ways.5 One of the earliest explanations
is also one of the best. It comes from the judgment of Lord Mansfield in
Carter v Boehm.6 The facts are unique by today’s standa rds, but the legal
analysis has endured 250 years of caselaw and legislation. It is a case
worth reviewing in considerable detail.
a) Carter v Boehm
In Carter v Boehm, the insured was the governor of Fort Marlborough,
a trade settlement that was built by the East India Company between
1714 and 1719 in a city that is now known as Bengkulu, located in the
Republic of Indonesia. On 22 September 1759, the governor applied
for insurance with a London underwriter, located more than 11,000
kilometres away. In due course, a policy was issued covering Fort Marl-
borough against many perils, including the settlement’s capture or de-
struction by any European enemy. Alas, on 1 April 1760, during the
term of the policy, a group of sixty-four French soldiers attacked Fort
2 A contract may be re scinded in the event of fraud: Ab ram SS Co v Westville Ship-
ping Co, [1923] AC 773 (HL). In addition, there is the tor t of deceit: Derry v Peek
(1889), 14 App Cas 337 (HL).
Byrne]; BG Ch eco International Ltd v Brit ish Columbia Hydro & Power Authority,
Hedley Byrne doct rine in the insura nce context, see Fletcher v Manitoba Public
Insurance Corp, [1990] 3 SCR 191 [Fletcher]. Fletcher is discus sed in Section B(4),
below in thi s chapter.
4 For an excellent academ ic review of how the common law treat s silence in the
marketplace, s ee Kim Lane Scheppele, Legal Secrets: Eq uality and Efficiency in
the Common Law (Chicago: Universit y of Chicago Press, 1988).
5 See, for example, Greenhill v Federal Insurance Co, [1927] 1 KB 65 at 76 (CA),
Scrutt on LJ.
6 (1766), 97 ER 1162 (KB).
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