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).

3 Hedley Byrne & Co Ltd v Heller & Part ners Ltd, [1964] AC 465 (HL) [Hedley

Byrne]; BG Ch eco International Ltd v Brit ish Columbia Hydro & Power Authority,

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

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).