Watch the full video at https://rumble.com/v2qq2lu-the-history-of-the-equitable-remedy-of-rescission.html and at https://youtu.be/Kcuc5uYEw6c
The Covenant of Good Faith and Fair Dealing was first reported in 1766 in the British House of Lords in the Carter v. Boehm, SC 1 Bl.593, 3 Burr 1906, 11 May 1766, when Lord Mansfield decided against the insurer who claimed that he had been defrauded by the insured because the insurer was not defrauded and knew more about the risks than the insured.
Lord Mansfield noted that the insurance agent, who produced the memorandum given by the governor’s brother (the plaintiff and the insured) to him: and the use of these instructions was to show that the insurance was made for the benefit of Governor Carter, and to insure him against the taking of the fort by a foreign enemy. The insurer argued that the plaintiff should have discovered the weakness and absolute unjustifiability of the fort. In this case, as against the insurer, he was bound to make such a discovery, although he was acting for the Governor.
Lord Mansfield noted that the particular facts on which the conditional chance is to be calculated are usually within the knowledge of the insured alone: the insurer relies on his representation and proceeds from the confidence that he does not withhold any circumstance within his knowledge, to mislead the insurer into believing that the circumstance does not exist, and to induce him to appreciate the risk, as if it did not exist. To withhold such a circumstance is, observed Lord Mansfield, a fraud. Therefore, the policy is invalid.
Even if the suppression of material facts were to be by mistake, without any fraudulent intent; yet the insurer is defrauded and the policy is void; because the risk really differs from the risk that was understood and intended to run, at the time of the contract. The policy would likewise be void against the insurer, if he conceals; as, if he insured a ship on her voyage, which he privately knew to have arrived: and an action would lie to recover the premium.
Good faith forbids either party, by concealing what he privately knows, to draw the other into a bargain, from his ignorance of this fact and his belief to the contrary.
The policy insured against the risk of loss to Fort Marlborough, from being destroyed by, taken off, or surrendered to any European enemy, between October 1, 1759, and October 1, 1760. It was written on May 9, 1760. The underwriter knew at the time that the policy was to to indemnify Roger Carter, the Governor of Fort Marlborough, to that amount, should the event insured occur.
Lord Mansfield observed that the underwriter knowing that Carter was Governor, at the time he took the premium—and the claimant proved without contradiction, that the fort was only intended and built with the intention of keeping the country out, and that the only security against European vessels of war, consisted in the difficulty of entering and navigating the river, for want of proper pilots.
That the general state and condition of the said fort, and its strength in general, were well known to most persons acquainted with or conversant with Indian affairs, or the condition of the company’s factories or settlement; and could not be kept secret or concealed from persons who should endeavor by proper inquiry to inform themselves.
The calculation of the risk depended on the chance, “if any European power should attack the place by sea.” If they did, it was unable to resist. The underwriter in London in May, 1760, could judge much better of the probability of the contingency than Governor Carter could at Fort Marlborough in September, 1759. He knew or could know all that was known at Fort Marlborough in September, 1759. The contingency, therefore, which the underwriter assured himself against is “if the place should be attacked by a European force; and not if it could resist such an attack, if the ships could ascend the river.”
Lord Mansfield found that the Governor could not be imputed with any intent to defraud. The reason for the anti-disclosure rule is to prevent fraud and encourage good faith. If the defendant’s objections were to prevail, Lord Mansfield concluded, the rule of non-disclosure would be transformed into an instrument of fraud.
The guarantor, here, who knows the governor to be acquainted with the state of the place; knowing that he was apprehended by danger and must have some ground for his apprehension; not being told anything about either set of facts; signed the policy, without asking a question.
Lord Mansfield found that an ethical insurer with knowledge of the risks being taken, equal to or better than that of the insured, could not in good faith claim that material facts were withheld from him because utmost good faith required the insurer to use his superior knowledge to benefit the insured.
The repeal attempt failed, but at the same time the 1766 decision, establishing the covenant of good faith and fair dealing inherent in every insurance contract, has survived to this day as an effective tool for insurers to defeat attempts at insurance fraud. And the “naval rule” first enunciated by Lord Mansfield, that a misrepresentation or concealment of material fact, whether willfully or innocently made, is a ground of rescission if the insurer, the risk-taker, is misled.
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