Disclosure

• Author: Denis Boivin
• Pages: 129-195

129

CHA PTER 5

DISCLOSURE

A. INTRODUCTION

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

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

insurer and the in sured to act in good faith during negotiations a nd

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

the perspective of the insurer, the duty is ex perienced primar ily dur-

ing the settlement process, a fter the contract is signed and a loss ha s

been sustained by t he 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 live s. 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 wit h fairness. In th is context, bad faith occurs when

an insurer introduces i mproper considerations into the claims process

or handles the insured’s claim in an overwhelmingly in adequate man-

ner.1 This m anifestation of uberrima f‌ides w ill be addressed in Chapter 9,

which deals with t he settlement of insurance claim s.

From the perspective of the policyholder, the implications of the

duty are different. Good faith i n 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 insured s, are the vulnerable

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

the nature and extent of the risks involved. The underwriting proces s,

upon which the insurance indust ry is based, ca nnot function without

regular and reliable input. Some of thi s data is readily acces sible, via

common knowledge or information databases sh ared between insurers.

However, many of the facts that are required by underwriters lie w ithin

the exclusive knowledge of those who apply for insurance. Hence, in

this context, good faith t akes the form of mandatory disclosure, and

bad faith takes t he form of omissions and misrepresent ations. Like the

requirement of an insurable interest, d isclosure is a prerequisite of in-

surance law. Prospective insureds have a duty to share with the poten-

tial insurer a ll material inform ation regarding the risks t hey intend

to transfer. Lack of disclosure const itutes grounds for nullifyi ng an

insurance contract.

Generally speak ing, when an insurer alleges a failure to d isclose,

four questions must be addressed. Fir st, did the insured have a duty

to disclose the inform ation that constitutes the subject matter of the

insurer’s complaint? Second, did the insured breach this duty by mis-

representing materi al 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 di scuss these quest ions

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. DUT Y TO DISCLOSE

1) R a tio na l e

Mandatory disclosure is the exception in commercial and consumer

transactions. The law presumes that most legal entities, whether cor-

porate or otherwise, are c apable of looking after their personal intere sts

during contract negotiations. They are free to make their own inquir-

ies and to share information with the other party to the ag reement. If

they choose to speak, t hey must be honest — they cannot make any

Disclosure 131

fraudulent representations to one another.2 In some relationships, they

must also exercise rea sonable 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-maki ng process. As a result, silence may

give one party a strategic advant age 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 purcha se of insurance different from most trans-

actions? The rationale for mandatory disclosure ha s been expressed on

many occasions and in va rious ways.5 One of the earliest expla nations

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 ha s endured 250 years of caselaw and legislation. It is a case

worth reviewing in con siderable detail.

a) Carter v Boehm

In Carter v Boehm, the insured was the governor of Fort Marlborough,

a trade settlement that was bui lt by the East India Company between

1714 and 1719 in a city that is now known as B engkulu, located in the

Republic of Indonesia. On 22 September 1759, the governor applied

for insurance with a London underw riter, located more than 11,000

kilometres away. In due course, a policy was issued covering Fort Marl-

borough against many peril s, 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 [Fletch er]. Fle tcher 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).