Reliance as an Element of Utmost Good Faith
The doctrine of utmost good faith or uberrimae fidei is well known in two segments of the insurance industry: Marine Insurance and Reinsurance. The doctrine derives from marine insurance, but was adopted relatively early on in the reinsurance context. It has been characterized in the reinsurance context as an information forcing doctrine and is traditionally applied in the context of the information about the risk provided to the insurer or the reinsurer in the underwriting process of the insurance policy or the reinsurance contract.
The doctrine has morphed beyond its ancient foundations and has been expanded by the courts and commentators to a reciprocal doctrine that applies throughout the reinsurance relationship. What those courts and commentators are really doing is extending the common law duty of good faith and fair dealing implied in every commercial contract and making that common law duty sound special by calling it utmost good faith.
Utmost good faith in the traditional sense is different because it puts a special burden on the party seeking coverage (whether insurance or reinsurance) to disclose all relevant and material information about the risk to the assuming company whether requested or not. The reason for this requirement, which developed in the marine context, is because the party seeking coverage is most familiar with the risk (e.g. the owner of the cargo) and must exercise a high degree of good faith by informing the assuming company (which typically does not see the cargo) of anything and everything material that might be relevant to the nature of the risk and the underwriting decision.
Just recently, the 8th Circuit Court of Appeals had the opportunity to revisit the doctrine in the context of a marine policy. In St. Paul Fire & Marine Ins. Co. v. Abhe & Svoboda, Inc., No. 14-2234 (8th Cir. Aug. 20, 2015), the court was asked to determine if reliance was an element that had to be proven to sustain a marine insurer’s defense of utmost good faith. The insurer disclaimed coverage for the loss of a barge because the insured allegedly failed to disclose material facts in its insurance application. The district court granted the insurer’s motion for summary judgment, but the circuit court reversed and remanded. The circuit court concluded that reliance is an element of the defense and because there were disputed issues of fact, summary judgment could not be granted.
The opinion provides a short but useful summary of the doctrine of utmost good faith in the marine context. It then goes into the law on reliance. In the reinsurance context, there have been some arguments about whether the mere failure to disclose material information is sufficient to sustain the utmost good faith defense (or typically to rescind the reinsurance contract because of fraud or material misrepresentation). That information, of course, has to be objectively material and, according to the 8th Circuit (following a 2nd Circuit marine decision), must have been relied upon by the insurer. In other words, reliance is relevant to whether there is a causal connection between the misrepresentation and concealment of that material fact and the actual underwriter’s decision to issue the policy.
It’s helpful to have a case come down that goes back to the roots of such an iconic doctrine and addresses an issue where there has not been a lot of case law. This decision, while in the marine context, helps provide some clarity to those using the utmost good faith defense in the reinsurance context.