The doctrine of caveat emptor (let the buyer beware) applies to commercial contracts, but insurance contracts are based upon the legal principle of uberrimae fides (utmost good faith). If this is not observed by either of the parties, the contract can be avoided by the other party.
The duty of the utmost good faith applies also to the insurer. He may not urge the proposer to affect an insurance which he knows is not legal or has run off safely.
But the duty of disclosure of material facts rests highly on the insured, because he is aware of the material common in other branches of insurance are not used in the marine insurance.
Ships and cargoes proposed for insurance may be thousands of miles away, and surveys on underwriters’ behalf are usually impracticable. The assured, therefore, must disclose all the material information which may influence the decision of the contract.
Any non-disclosure of a material fact enables the underwriter to avoid the contract, irrespective of whether the non-disclosure was intentional or inadvertent.
The assured is expected to know every circumstance which in the ordinary course of business ought to be known by him. He cannot rely on his own inefficiency or neglect.
The duty of the disclosure of all material facts falls even more heavily on the broker. He must disclose every material fact which the assured ought to disclose and also every material fact which he knows.
The broker is expected to know or inquire from the assured all the material facts.
Failure in this respect entitles the underwriter to avoid the policy and if negligence can be held against the broker, he may be liable for damages to his client for breach of contract. The contract shall be ab-iniiio if the element of fraud exists.
Exception: In the following circumstances, the doctrine of good faith may not be adhered to:
- Facts of common knowledge.
- Facts which are known should be known to the insurer.
- Facts which are not required by the insurers.
- Facts which the insurer ought reasonably to have in ferred from the details given to him.
- Facts of public knowledge.