The Court of Appeal, composed of Chief Justice Silvio Camilleri, Mr Justice Albert J. Magri and Mr Justice Tonio Mallia on March 25, 2011, in the case “Joseph Muscat vs Albert Formosa and Walter Camilleri as directors of Formosa & Camilleri Ltd as agents of Guardian Royal Exchange Assurance plc” held, among other things, that an insurance policy was invalid if the assured failed to disclose “material” information.

The facts in this case were as follows:

Joseph Muscat purchased an insurance policy, a Family Guardian Plan Policy, as well as a policy to cover the contents from Formosa & Camilleri Ltd, who acted as agents of the Foreign Company Guardian Royal Ex-change Assurance plc.

The name of the company, Formosa & Camilleri Ltd, was later changed to Atlas Insurance PCC Ltd. The policy was issued on January 14, 1993, valid up to June 13, 1994.

It so happened that between December 24, 1993 and December 25, 1993, Mr Muscat’s house was extensively damaged by fire. The incident was reported to the police, and a claim was later filed with the insurance company.

The insurance company, however, discovered that the proposal form was misleading as it did not contain certain material information. It decided to return the premium, and to cancel the policy.

Mr Muscat failed to disclose that he had made other claims in the last three years and that two other insurance companies had previously refused to insure him the very same risk.

The insurance company offered him Lm3,500 to cover the damages, but Mr Muscat refused its offer.

Faced with this situation, he proceeded to file legal proceedings against the insurance company requesting the court to:

1. Declare that the insurance policy was still valid;

2. Declare the insurance company to be responsible and to compensate him for all damages;

3. Liquidate the damages and to condemn the insurance company pay him damages.

The insurance company, in reply, contested the legal action, which it said, was unfounded. It claimed that the insurance policy was invalid, as incorrect information was given on the proposal form.

On November 27, 2008, the Court of First Instance dismissed Mr Muscat’s requests.

The First Court considered the principles regulating a contract of insurance. In the first place in a contract of insurance, the assured had to act with the utmost good faith (uberimae fidei), re: M. Tanti vs O.F Gollcher & Sons Ltd noe CPA (RCP) dated April 30, 2004. It was held that:

“The contract of insurance is the primary illustration of a class of contracts described as uberimae fidei that is, of the utmost good faith. As a result, the potential parties to it are bound to volunteer to each other before the contract is concluded information that is material.’’

The basis effect of this duty can be stated quite simply. An insurer, prior to the conclusion of the contract, but only up to this date, has to disclose all material facts within his knowledge, which the latter does not or is deemed not to know. A failure to disclose, however innocent, entitles the insurer to avoid the contract ab initio, and upon avoidance it is deemed never to have existed. The insurer must avoid within a reasonable time of becoming aware of the non-disclosure. The duty arises whenever a fresh contract is concluded, and most importantly, this includes upon a renewal of any contract except that of life insurance.

The assured had to act honestly and had to provide all material information. In Rozanes vs Bowen (1928), the English Court said: “It has been for centuries in England the law in connection with insurance of all sorts, that as the underwriter knows nothing and the man who comes to him to ask him to insure knows everything, it is the duty of the assured, the man who desires to have the policy, to make a full disclosure to the underwriters, without being asked, of all the material circumstances... That is expressed by saying that it is a contract of the utmost good faith. Now, insurance is a contract of the utmost good faith, and it is of the gravest importance to commerce that the position should be observed.

The underwriter knows nothing of the particular circumstances of the voyage to be insured. The assured knows a great deal, and it is the duty of the assured to inform the underwriter of everything that he has not taken as knowing, so that the contract may be entered with an equal footing.”

These principles were accepted by our courts.

In Camilleri noe vs Bartolo dated March 23, 1982, an insurance policy was invalidated as the assured failed to provide full information.

A “material fact” was that which will influence a prudent insurer to accept to take the risk.

In Degiorgio vs Agius dated June 25, 1962, the court said that a contract of insurance was a contract of utmost good faith. The assured was obliged to give clear details and answers. He was duty bound to mention any fact that was relevant to the insurance company, even if not asked. The proposal form was an integral part of the insurance policy and a false statement on the proposal form was deemed to be a false declaration.

“A fact is material for the purposes of both non-disclosure and misrepresentation if it is one which would influence the judgment of a reasonable or prudent insurer in deciding whether or not to accept the risk or what premium to charge or possibly, whether to impose particular terms in the contracts such as exclusion or an excess.”

In the circumstances, Mr Muscat had requested the subagent to complete the proposal form. Allegedly he gave him all information; though this was denied by the sub-agent. Mr Muscat who was illiterate signed the proposal form.

An assured’s accident history policy was very relevant to the insurer. As Mr Muscat did not disclose material information, this amounted to misrepresentation of a material fact which could bring about the nullity of the contract C. Parnis vs Fava PA dated October 26, 2001. The insurance company had also been deceived, and induced to cover the risk it would not have insured. The failure to disclose that an assured had made claims in the last three years also brought about the invalidity of an insurance policy: R. Borg vs J. Formosa.

In modern insurance law (John Birds – 4th Edition 1989) it was stated: “A fact is material for the purposes of both non-disclosure and misrepresentation if it is one which would influence the judgment of a reasonable or prudent insurer in deciding whether or not to accept the risk or what premium to charge.

The court said that Mr Muscat should have realised that he was not providing the insurance company with all relevant information. He was well aware of the difficulties he had with other insurance companies.

The court said that even if it was true that the sub-agent had told him that he should have no problems, he should have realised that this was not correct.

The Court of First Instance concluded that Mr Muscat acted deceitfully as well as negligently. He should not have signed the proposal form before ascertaining the correctness of the statements.

The court said that it should apply the principles enunciated in the English case Newsholme Bros vs Road Transport and General Insurance Co., by the Kings’ Bench and confirmed by the Court of Appeal.

The First Court maintained that Mr Muscat violated the principle of utmost good and that such incorrect information induced the insurance company to issue the policy. For these reasons it dismissed Mr Muscat’s claims.

Aggrieved by the decision of the First Court, Mr Muscat entered an appeal, calling for its revocation.

On March 25, 2011, the Court of Appeal gave judgment by dismissing the appeal and by confirming the decision of the Court of First Instance.

The following reasons were given for the court’s decision.

The court noted that this case concerned the validity of an insurance policy on grounds of non-disclosure of a material fact. It noted that a contract of insurance required the assured to act in the utmost good faith, for it to be valid. The assured was obliged to give full disclosure of any material fact which may influence its decision to cover the risk; re: Camilleri vs Bartolo (PA) dated March 23, 1982.

The court considered the three grievances raised by Mr Muscat.

Mr Muscat complained that the insurance company cancelled the insurance policy after receiving information from the Association of Insurance Companies by fax on December 28, 1993 following the presentation of his claim for re-imbursement, and not after being notified directly by the other two insurance companies, which had refused to insure the risk.

The court dismissed this grievance. The fact that these two insurance companies confirmed what the association said did not affect the company’s decision.

Mr Muscat submitted that the first court failed to consider whether the earlier claims were “material” for the risk to be covered by this policy.

The court noted that a fact was “material” if it would influence the insurance company to accept the risk. It had no doubt that Mr Muscat had failed to disclose material information.

It was true that the insurance company could have investigated the veracity of the statements. However, it was not practical for an insurance company to investigate each proposal and this was why good faith was very relevant. If it later resulted that the assured lied or did not reveal material information, he had to suffer the consequences. It accordingly rejected his second grievance.

Mr Muscat in addition questioned how the First Court found him liable for fraud when he made no declaration as well as for negligence, by asking the sub-agent to complete the proposal form.

The court pointed out that Mr Muscat should have realised that his previous claims were indeed relevant, as other insurance companies had refused to cover the risk.

He should have taken more care in completing the proposal form and by his silence, he became an accomplice in deceiving the insurance company.

The court concluded therefore by rejecting Mr Muscat’s grievances.

Dr Grech Orr is a partner at Ganado & Associates.