When a man’s word was ‘worth a tonne in gold’

My story this week is inspired by a clip that has been appearing on social media recently about a lawyer and a box of very rare and expensive cigars which he bought and insured against, amongst other things, fire. Within a month, he had smoked all 24 of these great cigars and without even having made his first premium payment on the policy, the lawyer filed a claim against the insurance company. In his claim, the lawyer alleged that the cigars were lost in a series of small fires.

The insurance company refused to pay citing the obvious reason that the lawyer had consumed the cigars in the normal fashion. The lawyer sued and won. Delivering the ruling, the judge agreed with the insurance company that the claim was frivolous. Nevertheless, the judge noted that the lawyer had a policy from the company in which it had warranted that the cigars were insurable and also guaranteed that it would insure them against fire, without defining what would be considered acceptable fire and was obligated to pay the claim.

Rather than endure the lengthy and expensive appeal process, the insurance company accepted the ruling and agreed to pay the lawyer $15,000 for the cost of 24 cigars lost in the fires. After the lawyer cashed the cheque, the insurance company had him arrested on 24 counts of arson!

While I have nothing against lawyers in general, this lawyer was extremely economical with the truth and clearly intended to take advantage of the insurance company who themselves were delinquent in agreeing to this rather unusual cover. In the end, the insurance company had the last laugh.

In law, insurance contracts are said to be subject to the doctrine of “uberrimae fidei.” They are contracts of utmost good faith obliging both the insurer and the insured to conform to a high standard of conduct, especially regarding the disclosure of material facts affecting appreciation of the risk to be covered.

In theory, this doctrine applies equally to the insured and the insurer, but in practice it has come to mean that the insured is under a heavy onus of disclosure when he applies for insurance coverage of any type, either personally or through an agent (the doctrine of principal and agent applies).

The modern doctrines of disclosure originated in the law of marine insurance in 16th century England. At that time, it was not unfair to expect a high standard of disclosure from the insured, because as the owner of the vessel or cargo to be insured, he was in a better position than the underwriter to know the nature and the extent of the risk to be covered.

The duty of disclosure is a positive duty to disclose material facts, and a mere omission constitutes a breach of duty. The doctrine of uberrimae fidei is a broad concept from which the duty of disclosure flows as a corollary. As it developed, the doctrine required utmost good faith on the part of the contracting parties in contracts of insurance. Failure to observe disclosure by either party gave the other party the right to void the contract regardless of the innocence of the other party.

During the 1766 landmark decision in Carter vs Boehm, Lord Mansfield held that the withholding of material facts is a fraud and therefore voids an insurance policy.

The situation is vastly different today, since the insurance industry is wealthy, large, and supremely organised with tonnes of data available in its archives. Its expertise in matters of risk assessment and its corps of trained personnel give it an undoubted advantage over the lay consumer of insurance services. Most risks of an ordinary consumer type are highly standardised, such as motor coverage, home-owners’, and life insurance packages but, they still require full disclosure by the insured in answering the standard questionnaire.

While the anecdote of the lawyer and cigars may provide some much needed amusement and relief from the “cabin fever” inflicted by the ongoing Covid-19 crisis, it reflects on a deeper problem in society today.

There was a time when a man’s word was worth a tonne in gold. I remember during my time in the bank, we would be requested for banker’s opinions on our customers by other banks on behalf of their customers and if the opinion was favourable, those businesses would extend credit to our customers purely on the strength of our banker’s opinion. “Unlikely to extend himself beyond his means”, “Considered good for normal business engagements”; these were some of the recommendations I can recall. Of course, if the bank considered you were a bad risk, the opinion would be suitably worded.

It all boils down to integrity which I like to define as “What you do when no one is looking”. Sadly, integrity is lacking in our homes, in our workplace, in our places of worship, in our institutions and, in our political leadership.

The absence of personal integrity leads to subjectivity and partiality, which means decisions are influenced by nepotism, favouritism and most of all corruption. Lack of personal integrity leads people to be accountable only to their own desires at the expense of an entire community. Ethics and moral obligation (that which we know to be innately right) should be at the core of our very existence.