June 2016

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French attack heralds hallmark of British law


By Kate Tilley, Resolve Editor

This year is the 250th anniversary of the famous insurance case Carter v Boehm.

Lord Mansfield’s 1766 judgement is frequently cited as establishing the principle that parties to an insurance contract owe each other duties of utmost good faith (uberrimae fidei).

George Carter was Governor of Fort Marlborough in Sumatra, Indonesia, built by the British East India Company. His brother Roger, on his behalf, purchased an insurance policy from Charles Boehm.

The policy, from 16 October 1759 to 16 October 1760, insured against Fort Marlborough being taken by a foreign enemy. The loss occurred on 1 April 1760 when the fort was taken by Frenchman Count D'Estaigne, with the help of the Dutch.

Boehm refused to pay, arguing “circumstances were not sufficiently disclosed". After a trial before Lord Mansfield, a jury of merchants found for Carter. Boehm’s move for a new trial was rejected.

Boehm had argued Carter had concealed the fort’s weakness and the probability of it being attacked by the French. Carter’s counsel argued letters from the governor to his brother Roger and to the British East India Company showed the fort would be hard to defend.

The parties agreed Fort Marlborough was not a proper fort nor designed to resist European enemies, but was only for defence against the natives of Sumatra; the governor's office was not military, only mercantile; and Fort Marlborough was subordinate to Fort St George.

Carter argued no concealment that amounted to a fraud sufficient to vitiate the contract.

Boehm’s counsel argued the insurer had a right to know as much as the insured himself knew and the broker, who under cross-examination had said he did not believe the insurer would have “meddled with” the insurance even if he had known the letters’ contents at the time, was the sole agent of the insured.

Lord Mansfield summarised the arguments. Boehm supported the motion for a new trial, arguing “some circumstances in the knowledge of Governor Carter, not having been mentioned at the time the policy was underwrote, amount to a concealment, which ought, in law, to avoid the policy".

Carter’s counsel argued: “Not mentioning these particulars, does not amount to a concealment, which ought, in law, to avoid the policy, either as a fraud or as varying the contract."

Lord Mansfield then defined concealments that could avoid a policy. “Insurance is a contract upon speculation. The special facts, upon which the contingent chance is to be computed, lie most commonly in the knowledge of the insured only. The underwriter trusts to his representation and proceeds upon confidence he does not keep back any circumstance in his knowledge to mislead the underwriter into a belief the circumstance does not exist, and to induce him to estimate the ‘risque’ as if it did not exist.”

Even if suppression happened by mistake, with no fraudulent intention, the underwriter was deceived and the policy voided because the risk was different from that understood and intended at the time of the agreement.

“The governing principle is applicable to all contracts and dealings. Good faith forbids either party concealing what he privately knows, to draw the other into a bargain, from his ignorance of that fact, and his believing the contrary. But either party may be innocently silent, as to grounds open to both, to exercise their judgement upon.”

Lord Mansfield said an underwriter could not insist a policy was void because the insured did not tell him information the underwriter knew. “The insured need not mention what the underwriter ought to know, what he takes upon himself the knowledge of, or what he waives being informed of. “
The disclosure rule existed to prevent fraud and encourage good faith. “It is adapted to such facts as vary the nature of the contract, which one privately knows and the other is ignorant of, and has no reason to suspect.

“The question therefore must always be whether there was, under all the circumstances at the time the policy was underwritten, a fair representation or a concealment; fraudulent, if designed; or, though not designed, varying materially the object of the policy and changing the ‘risque’ understood to be run."

The policy against the loss for Fort Marlborough from being destroyed by, taken by or surrendered to any European enemy was underwritten on 9 May 1760.

Lord Mansfield said the only security against European warships reaching Fort Marlborough was the difficulty of navigating the river and its entrance without proper pilots. The fort’s condition was “well known by most persons conversant or acquainted with Indian affairs, or the state of the company's factories or settlements, and could not be kept secret or concealed from persons who should endeavour by proper inquiry to inform themselves”.

He said there were no suggestions of a potential French attack before February 1760. But Boehm relied on a letter written to the East India Company, dated 16 September 1759, that arrived in England by ship in May 1760, and the instructions for insuring, dated 22 September 1759, sent to Carter at the same time.

Boehm argued the letters disclosed the fort’s poor condition, that the French had tried to take it by surprise in 1758 and it was “very probable they might revive that design”.

The governor’s letter to his brother said he was "now more afraid than formerly, that the French should attack and take the settlement; for, as they cannot muster a force to relieve their friends at the coast, they may, rather than remain idle, pay us a visit. It seems they had such an intention, last year", hence his desire for his brother to insure his property at the fort.

Lord Mansfield said the underwriter in London in May 1760 could better judge the probability of an attack than Governor Carter could at Fort Marlborough in September 1759.

Boehm knew the success of the war in Europe. “He knew what naval force the English and French had sent to the East Indies. He knew, from a comparison of that force, whether the sea was open to any such attempt by the French.

“He knew what probability there was of the Dutch committing hostilities. Under these circumstances and with this knowledge he insures against the general contingency of the place being attacked by a European power.

“The underwriter knew the insurance was for the governor. He knew the governor must be acquainted with the state of the place. He knew the governor could not disclose it, consistent with his duty. He knew the governor, by insuring, apprehended at least the possibility of an attack,” Lord Mansfield said.
“With this knowledge, without asking a question, he underwrote. By so doing, he took the knowledge of the state of the place upon himself. It was a matter as to which he might be informed various ways: it was not a matter within the private knowledge of the governor only.”

Lord Mansfield said the jury had found the contingency insured against was "whether the place would be attacked by a European force; not whether it would be able to resist such an attack if ships could get up the river”. The governor’s idea the French may visit was “mere speculation … dictated to him from his fears”.

“It is a bold attempt for the conquered to attack the conqueror in his own dominions. The practicability of it depended on the English naval force in those seas; which the underwriter could better judge than the governor.”

Lord Mansfield said Boehm had “every opportunity of discovery and nothing has come out upon it”.

The jury considered the nature of the governor's silence, thought it innocent and omitting to mention the French’s prior attack did not vary the contract.
Lord Mansfield said there was no imputation of fraud by the governor. “By the same conveyance which brought his orders to insure, he wrote to the company everything he knew or suspected. He desired nothing [he wrote to his brother or the company] be kept a secret.

“The reason for the rule against concealment is to prevent fraud and encourage good faith. If [Boehm's] objections were to prevail, the rule would be turned into an instrument of fraud.

“The underwriter, knowing the governor to be acquainted with the state of the place; knowing he apprehended danger and must have some ground for his apprehension; being told nothing of either; signed this policy without asking a question.”

Lord Mansfield said if Boehm’s objection he was not told was sufficient to vacate the policy, he took the premium, knowing the policy to be void, to gain and drew the governor into a false confidence that, if the worst should happen, he had provided against total ruin, knowing the indemnity to which the governor trusted was void.

“There was not a word said to him of the affairs of India or the state of the war there or the condition of Fort Marlborough. If he thought that omission an objection at the time, he ought not to have signed the policy with a secret reserve in his own mind to make it void. If he dispensed with the information and did not think this silence an objection, he cannot take it up now, after the event.”

Click here for Lord Mansfield’s judgement.

Click here to read Allens partner Malcolm Stephens’s commentary about the duty of utmost good faith becoming the primary legal weapon against life insurers who have allegedly failed to comply with the duty in handling claims.

 
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the New Zealand Insurance Law Association.