THE POLICYHOLDER’S KNOWLEDGE
THE POLICYHOLDER’S KNOWLEDGE AND SECTION 20
6.79 So far, we have only considered the policyholder’s knowledge in relation to the duty of disclosure under section 18 of the Marine Insurance Act 1906. Section 20 of that Act sets out an additional duty on the policyholder, namely not to make a misrepresentation.
45 [1960] 2 Lloyd’s Rep 241; see Arnould’s Law of Marine Insurance and Average (17th ed 2008), para 16-38; Legh-Jones, Birds and Owen, MacGillivray on Insurance Law, (11th ed 2008), para 17-013.
The current law
6.80 Section 20 deals with the issue of knowledge in a different way. Under section 20(3), a representation may either be “a matter of fact”, or “a matter of expectation or belief”. If it is a matter of fact, it must be true.46 If it is a matter of expectation or belief, it must be “made in good faith”.47
For matters of expectation or belief, good faith is sufficient
6.81 The leading case on this issue is a consumer decision, Economides v Commercial Union Assurance Co Plc.48 The policyholder, a 21 year old man, undervalued the contents of his flat after his parents moved in with him. Following a suggestion from his father that the additional belongings were worth a few thousand pounds, he increased the household contents valuation to only
£16,000. The flat was burgled. Most of the items stolen belonged to his parents and their replacement cost was £30,970.
6.82 The court found that the insurers did not have a right to avoid the policy. Instead, an average should apply. As the policyholder’s statements were a matter of opinion rather than fact, it was sufficient that they were held in good faith. It was not necessary that they should be based on reasonable grounds.49 Lord Justice Peter Gibson put the point as follows:
Once statute deems an honest representation as a matter of belief to be true, I cannot see that there is scope for inquiry as to whether there were objectively reasonable grounds for that belief. Of course the absence of reasonable grounds for that belief might point to the absence of good faith for that belief. But in a case such as the present where the bad faith of the plaintiff is not alleged, I can see no basis for implication of a representation of reasonable grounds for belief.50
6.83 Subsequent commercial cases have followed this approach. In “The Game Boy”,51 the policyholder had expressed the opinion that the vessel which he had purchased as a floating casino was worth US$1.8 million. In fact, the vessel was worth something between US$100-150,000 for scrap. Mr Justice Simon took the above statement by Lord Justice Peter Gibson to be an accurate expression of the law. He concluded that the policyholder could not have genuinely believed in the truth of his stated opinion. The evidence showed that he had even produced a variety of fake documents to support it.
46 See s 20(4), set out in Part 2, para 2.43.
47 See s 20(5), set out in Part 2, para 2.44.
48 [1998] QB 587.
49 Above by Simon Brown and Peter Gibson LJJ. Sir Iain Glidewell preferred to leave the matter open. See H Bennett “Statements of Facts and Statements of Belief” (1998) 61 MLR 886; J Cartwright, Misrepresentation, Mistake and Non Disclosure (2nd ed 2007) para 2.14.
50 As above, at 606.
51 Eagle Star Insurance Co Ltd v Games Video Co (GVC) SA (“The Game Boy”) [2004]
EWHC 15; [2004] Lloyd’s Rep IR 867.
6.84 In Rendall v Combined Insurance Co of America,52 an employer insured the lives of its employees while they travelled on business, estimating 160,000 days travel.
The insurer sought to avoid the contract on the basis that this had been a misrepresentation. Mr Justice Creswell held that this had been a statement of expectation, and that such an expectation need not be based on reasonable grounds. In any event, the policyholder did have reasonable grounds for making the statement, having taken into account relevant sources of information.
When is a statement one of fact, and when of expectation or belief?
6.85 The distinction between a representation of fact and one of belief is a matter of construction. In Economides, Lord Justice Simon Brown accepted that something which at first glance may appear to be a statement of belief may actually be a statement of fact.53 Moreover, a statement of fact cannot be disguised as a statement of belief by using words such as “I think” or “in my opinion”.54 In Sirius International Insurance Corp v Oriental Assurance Corp,55 for instance, Mr Justice Longmore held that a statement about the existence of fire hydrants on the premises was a representation of fact, even though it commenced with “we had been informed”.
6.86 The courts are heavily influenced by whether the matter is one which the policyholder knew about or should have known about. If the representation was one which the policyholder should have known about, the court is likely to hold that the statement must be true. If it is outside the matters which the policyholder could be expected to know about, it is probably a matter of expectation or belief.
6.87 For example, in Bowden v Vaughan56 a broker who insured goods on a ship represented to the insurer that the ship would “sail in a few days”. The ship did not sail for a month. The court held that as the owner of the goods had no control over the ship, this statement must be taken as a matter of expectation. Similar conclusions were reached in Hubbard v Glover57 and Brine v Featherstone,58 which both concerned representations about the position of a ship. As the brokers who made those representations could not have known the precise position of the ships,59 these were deemed to be statements of expectation.
6.88 Arnould comments on this line of cases as follows:
52 [2005] EWHC 678 (Comm).
53 [1998] QB 587, at 598.
54 Ionides v Pacific Fire and Marine Insurance Co (1871) LR 6 QB 674.
55 [1999] Lloyd’s Rep IR 343.
56 (1809) 10 East 415.
57 (1812) 3 Camp 313.
58 (1813) Taunt 869.
59 This is a consequence of the limited means of communication available at the time.
[T]here is an emphasis on the insurer being able to distinguish between matters that the policyholder might be expected to know about and those which it might not, with the onus being on the insurer to make further enquiries into the latter category.60
6.89 Take a case, for example, where a company is asked whether a particular employee has a non-spent criminal conviction. The company answers in the negative. If the court considers that the company knew or should have known about the conviction, then this would almost certainly be considered an issue of fact. As the answer was not true, the company will have breached its duty under section 20 of the 1906 Act and the contract can be avoided.
6.90 It may be, however, that the company followed reasonable procedures and failed to find out about the conviction. Suppose, for example, that the employee lied and, as the conviction occurred abroad, it did not appear on the criminal record check the company carried out. In these circumstances, the court may well find that the statement that the employee did not have a criminal record was no more than a statement of belief. In this case it is sufficient for the company to have acted in good faith.
Proposals for reform
6.91 We think the different treatments of knowledge under sections 18 and 20 of the 1906 Act are overly complex. In practice, the dividing line between a non-disclosure and a misrepresentation can be narrow. If, for example, an insurer asks “is there any other information regarding the risk which would influence our decision?” and the policyholder answers “no”, it is possible to argue that any non-disclosure is also a misrepresentation. It would be unfortunate if the standard of knowledge required differed according to whether the insurer did or did not ask a general question of this type.
6.92 We think that the law would be clearer and simpler if the same standard of knowledge applied to both section 18 and section 20.
6.93 We seek views on whether section 20 should be amended to distinguish not between “matters of fact” and “matters of expectation or belief” but between matters which the policyholder “knew or ought to know” about (as defined in paragraph 6.75) and other matters. We think the courts already decide cases in this way, and that it would be simpler to recognise this.
6.94 We propose that where the matter is one which the policyholder knew or ought to know about (as previously defined), then the representation must be true. If it is not true, the insurer should have an appropriate remedy. If, however, the matter is not one the policyholder had any reason to know about, then it would be sufficient if the representation was made in good faith.
60 Arnould’s Law of Marine Insurance and Average, (17th ed 2008), para 17-45.
6.95 Do consultees agree that:
(1) Rather than distinguish between “matters of fact” and “matters of expectation or belief”, section 20 of the 1906 Act should be amended to distinguish between matters which the policyholder knew or ought to know about (as previously defined) and other matters?
(2) Where the representation is one which the policyholder knew or ought to know about, it must be true?
(3) Where the representation is not one which the policyholder knew or ought to know about, it must be made in good faith?