The History of the Equitable Remedy of Rescission

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The covenant of good faith and fair dealing was first reported in 1766 in the British House of Lords in Carter v. Boehm, S.C. 1 Bl.593, 3 Burr 1906, 11th May 1766, when Lord Mansfield decided against the insurer who claimed he was deceived by the insured because the insurer was not deceived and knew more about the risks than did the insured.

Even if the suppression of material facts should happen through mistake, without any fraudulent intention; yet still the underwriter is deceived, and the policy is void; because the risk run is really different from the risk understood and intended to be run, at the time of the agreement.

Good faith forbids either party by concealing what he privately knows, to draw the other into a bargain, from his ignorance of that fact, and his believing the contrary.

The underwriter at 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 might know everything which was known at Fort Marlborough in September 1759.

The underwriter, here, knowing the governor to be acquainted with the state of the place; knowing that he apprehended danger, and must have some ground for his apprehension; being told nothing of either set of facts; signed the policy, without asking a question.

Lord Mansfield found that an ethical underwriter with knowledge of the risks being taken, equal to or better than that of the person insured, could not, in good faith, claim that material facts were concealed from him because utmost good faith required the underwriter to use his superior knowledge to favor the insured.

The attempt at rescission failed but, simultaneously the 1766 decision setting forth the covenant of good faith and fair dealing implied in every contract of insurance has survived to this day as an effective tool for insurers to defeat attempts at insurance fraud. And the “marine rule” first enunciated by Lord Mansfield, that a misrepresentation or concealment of material fact, whether intentionally or innocently made, is a basis for rescission if the underwriter, the risk taker, is deceived.

(c) 2023 Barry Zalma & ClaimSchool, Inc.

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