The assured’s post-contractual duty of good faith

The English and Scottish Law Commissions have published their Issues Paper 7, discussing the assured’s continuing duty of utmost good faith. The Issues Paper is perhaps slightly misleading in its title, in that it is for the most part concerned with the complex law surrounding fraudulent claims. The Law Commissions’ tentative conclusions would merely clarify, rather than radically alter, the existing law.

Fraudulent claims and utmost good faith

The Law Commissions correctly identify fraudulent claims as a problem which is expensive to insurers and thus to honest policyholders, and recognise that the police generally have better things to do than to chase anything other than large-scale fraudsters. For that reason, the civil law needs to have something to say about them. It is settled law that fraud in any part of a claim taints the entirety of the claim, with the result that nothing is recoverable. Were it otherwise, there would be no sanction against an assured who chanced his arm by adding a non-genuine claim to a genuine one, so that if the former is discovered the latter is still paid and he is no worse off. Thus in Galloway v Guardian Royal Exchange (UK) Ltd [1999] Lloyd’s Rep IR 209 an assured who suffered a genuine loss of goods to the value £16,000 was refused all recovery because he added an additional claim for £2,000 for a computer which had not been lost. The Law Commissions do not attempt to define what a ‘claim’ is for this purpose. If the assured suffered loses under two different sections of the same policy (eg, material damage and business interruption), does he lose both claims if there is fraud in one. The most recent authority, Yeganeh v Zurich plc [2010] EWHC 1185 (QB) indicates that a claim is not divisible, and that an assured who is guilty of fraud in his contents claim will lose any right to recover for damage to the premises in which the contents were housed.