The Good, the Bad & the Ugly: #18 (The Good). Carter v Boehm (1766)

Welcome to the latest in the series of blogs from Fenchurch Law: 100 cases every policyholder needs to know. An opinionated and practical guide to the most important insurance decisions relating to the London / English insurance markets, all looked at from a pro-policyholder perspective.

Some cases are correctly decided and positive for policyholders. We celebrate those cases as The Good.

Some cases are, in our view, bad for policyholders, wrongly decided, and in need of being overturned. We highlight those decisions as The Bad.

Other cases are bad for policyholders but seem (even to our policyholder-tinted eyes) to be correctly decided. Those cases can trip up even the most honest policyholder with the most genuine claim. We put the hazard lights on those cases as The Ugly.

#18 (The Good): Carter v Boehm (1766)

Carter v Boehm is a landmark case in English contract law. The judgment by Lord Mansfield established the duty of utmost good faith on each party to a contract of insurance. The duty is placed on both the insured and the insurer, and as such the case (and establishment of the principle) can be considered ‘Good’ for policyholders.

Facts

The case concerned Fort Marlborough in Sumatra. Mr Carter was the Governor of the Fort and bought an insurance policy with Boehm against the risk of attack by a foreign enemy. Carter knew that the Fort was not capable of resisting an attack by a European enemy and further knew that the French were likely to attack but did not disclose this information to Boehm at the formation of the policy. The French duly took the Fort and Carter claimed under the policy. Boehm refused to indemnify Carter and Carter subsequently sued.

Judgment

With regard to the actual decision, Lord Mansfield found in favour of Carter. The reasoning was nestled in the context of 18^th century geopolitics and the state of affairs between Britain and France at that time: the two nations had been at war and Lord Mansfield held that Boehm knew (or ought to have known) the political situation. As the conflict was public knowledge, the judge held that Carter not informing Boehm of the likely attack could not amount to non-disclosure:

“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.”

More significantly, however, the case established the duty of utmost good faith in insurance contracts, specifically in regard to disclosure, which Lord Mansfield explained as follows:

“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 under-writer trusts to his representation, and proceeds upon confidence that he does not keep back any circumstance in his knowledge, to mislead the under-writer into a belief that the circumstance does not exist, and to induce him to estimate the risk, as if it did not exist.

The keeping back of such circumstance is a fraud, and therefore the policy is void. Although the suppression could happen through mistake, without any fraudulent intention; yet still the under-writer is deceived, and the policy is void; because the risk run is really different from the risk understood and intended to be run, at the time of the agreement.

The policy would equally be void, against the under-writer, if he concealed; as, if he insured a ship on her voyage, which he privately knew to be arrived: and an action would lie to recover the premium. The governing principle is applicable to all contracts and dealings.

Good faith forbids either party by concealing what he privately knows, to draw the other into a bargain, from his ignorance of that fact, and his believing the contrary.”

Analysis

The standard position in English contract law is ‘caveat emptor’, meaning buyer beware. There is no implied duty of good faith, unlike, for example, the French Civic Code. This differs, however, in insurance law, and Carter v Boehm was the case that established that.

The case is Good for policyholders because it established the contractual environment in which insurance policies could successfully operate. The historical context of insurance law is important to grasp in this point: in the 17^th, 18^th, 19^th and majority of the 20^th century there was no way for the London Market to know the specific details of risks in far flung corners of the world (albeit Lord Mansfield differentiated well known geopolitical realities in this specific case). The insurer had to rely on honest disclosure by the insured. Carter v Boehm provided the legal framework in which the insured was under a duty to disclose facts that only he knew but would be material to an insurer when assessing a risk. Lord Mansfield concluded that this duty went both ways – an insurer could not “insure a ship on her voyage which he privately knew to be arrived”. Without the principle established in Carter v Boehm, it is arguable that the placing of insurance would for a long period have been weighed too much in favour of insureds as to make insurance a commercially viable business.

It is important to note how the information imbalance between an insured and insurer has shifted dramatically since Carter. In 1766, an insurer was heavily, if not entirely, reliant on the open and honest disclosure of an insured when considering a risk (especially in an overseas context). Unfortunately, for policyholders in the 21^st century, insurers have considerable ability and appetite to scrutinise what the insured knew or ought to have known at the formation of policy, with the means and resources to question whether the policyholder had indeed complied with his duty disclosure.

The fact that the pendulum had swung too much towards the interests of insurers explains why it became necessary to ameliorate the position in the shape of the Insurance Act 2015 and its well-known reforms of the scope of disclosure and, even more so, of the consequences of a non-disclosure.

Dru Corfield is an Associate at Fenchurch Law