Concept of Utmost good faith in Transit Insurance

The function of Transit insurance (and all insurance actually) is to transfer the risk of physical loss/damage, liability arising from ownership or interest in the property to the insurers.  The insurer will make a decision about the level of the risk and will apply an appropriate premium accordingly.  The purpose of any form of insurance is to replace that which has been lost – in other words to indemnify the insured and put them into a financial position as though the loss had never occurred.

This process requires that the party wishing to take advantage of insurance cover needs to advise the potential insurer of the facts relating to the shipment for which they require Goods in Transit insurance. The level of the risk is determined by a number of factors, including the place of origin and destination of the shipment, the shipping method, the packing standards applied, the type of insurance cover required, etc.  Because of the concept of utmost good faith required with the Goods in Transit cover, then all information must be passed to the insurance company.

A normal contract is subject to the doctrine of good faith.  This means that if a question is asked, it needs to be correct but not 100% accurate and no information has to be volunteered.  Insurance contracts, on the other hand, are subject to the doctrine of utmost good faith (uberrima fides).  This means that all facts which might affect the judgement of the insurer must be revealed.  If there is any information missing, then the policy could become void immediately or voidable at the option of the insurer.

The English Marine Insurance Act of 1908 states that the doctrine of utmost good faith applies to both the insured and the insurer.  The insured must volunteer all facts that will allow the insurer to make a prudent judgement about the risk and arrive at a reasonable premium.  The insurer must disclose all the facts about the policy that the insured needs, to decide whether this is appropriate for their needs.  This requirement applies to any other party (such as brokers) involved in the transaction as well.

If it transpires that anyone has failed in their duty to reveal all material facts or has made a misrepresentation, then either party may void the contract of insurance without any penalty.  There are exceptions (see Brotherton v Aseguradora Colseguros SA (2001) EWHC 498 (Comm)) but this only applies in cases where such disclosure would diminish the risk that is known or presumed to be known to the insurer.

There are two further points which need to be stressed.  First, it is not allowed for a party to insure a cargo in which they have no interest and secondly, cargo should not be double insured, but if it is, it certainly cannot be claimed twice.

For anyone interested in more detailed information on this subject, I do recommend “Reeds Marine Insurance” by Barrie Jervis.  Please note that Marine Insurance (so very frequently used when colloquially talking about Goods in Transit insurance) is the insurance covering the hulls of vessels and most of this book covers this subject as opposed to Goods in Transit insurance, which most parties involved in International Trade, are more likely to be interested in.

Maria Narancic from Point to Point Export Services is an independent international trade adviser who assists organisations world wide with their international trade projects, documentation, Documentary Credits and import/export training.  She is based in the United Kingdom.  If you require any further assistance with the matters mentioned above, please do contact us by e-mail on info@point-point.com or check out other articles on International Trade on the Point to Point Export Services website at www.point-point.com
 

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