CHAPTER III.

CONCEALMENT, REPRESENTATIONS AND WARRANTIES.

10. Introduction.-In the law of insurance, concealment, representations and warranties are closely related, and can be most easily distinguished by illustrations and comparisons.

Suppose that A sells B some flour and conceals the fact that it is unfit for any use. In the law of sales, we say that A is guilty of a breach of an implied warranty, but in insurance law, when A conceals the fact that his house is near a gunpowder factory, we say that he is guilty of concealment. The difference is merely one of terminology. The term "implied warranty" in insurance law is used in another connection, to be noted presently.

Representations are of the same character in the law of sales and in insurance law. They are collateral inducements to the making of the contract, but form no part thereof. Much of the talk preceding a sale or the issuance of an insurance policy is, at most, nothing more than matter of inducement.

Warranties in sales and in insurance are quite different. In many states, if a breach of warranty occurs in the sale of a chattel, the purchaser cannot rescind and demand the return of the purchase money, at least if the seller acted in good faith and

the sale has been executed. To give the purchaser a right to rescind, the term in question should have been made a condition forming a part of the basis of the contract. In the law of insurance, if the insured is guilty of a breach of warranty he cannot recover his insurance even though he has acted in good faith. Hence, is it sometimes stated that all warranties in insurance law are conditions. This statement is misleading, however. The effect of warranties in insurance and conditions in sales is the same. But such conditions are distinguished from warranties in insurance in that insurance companies, when sued on the policy, must plead and prove breaches of warranty and the insured need not allege and prove compliance with all warranties as in the case of conditions.

11. Concealment.-A offers B, a perfect stranger to A, a low price for his farm and conceals the fact that the land contains valuable mineral deposits of which A knows that B is ignorant. B accepts the offer. A is not guilty of fraud, in a legal sense, in concealing the value of the land from B. Such parties, as attorneys say, deal at arm's length. But if A had recently been the guardian of B's estate, the rule would be otherwise. If A occupies a position of trust towards B in respect to the land it is A's duty to make full disclosure to B before purchasing.

All insurance contracts resemble the latter class of agreements. The insured must exercise the utmost good faith in procuring a policy of insurance. He cannot recover his insurance if he deliberately conceals a fact, which he knows he should disclose,

on the shallow ground that the company did not ask him about it.

Good faith and materiality. In England, the insured must disclose all material facts in order that he may be entitled to recover his insurance. The fact that he acted in good faith in failing to disclose a material fact is immaterial.

In the United States, this rule is adopted only in marine and not in fire and life insurance. If, in obtaining fire and life insurance, the insured acts in good faith in failing to disclose a fact about which the company has made no inquiry, the insurance company cannot defeat a recovery on this ground. Two reasons for the American rule may be suggested: (1) The company can always examine a man or a house, whereas a ship is frequently insured while at sea and inspection is impossible. (2) The insured who takes out fire or life insurance is compelled to answer such a multitude of questions before he gets his policy that he has a right to feel that he has told all he could possibly know or find out. A word as to materiality. The insured may conceal from the company his knowledge that his ship was not sighted off Halifax on October tenth, as she should have been. The insurance is effected on the twentieth of October. On the twenty-first, the ship is sighted and is in perfect condition. On the twenty-fifth, she is lost in a gale. The insured cannot recover, because of material concealment. Whether or not a fact is material is determined solely by the situation at the time the contract of insurance is made. The subsequent course of events is of

no consequence in this respect. Had the insured disclosed his information he might have been unable to obtain insurance, or, he would probably have been charged a higher premium.40

Special inquiries. Failure to make full disclosure in answer to a question put to the insured by the company avoids the policy, unless the company waives the right to a complete answer. If inquiry be made, the insured cannot willfully conceal his knowledge on the ground that the matter is of no consequence and that the company should not have asked the question.

Assume that the question is, What mortgages on the property exist? An answer that the property is mortgaged to X for a thousand dollars, when there is also another mortgage, entitles the company to avoid the policy. But if the question asks for the amount of the mortgage, if any, an answer that the property is mortgaged without disclosing the amount is incomplete on its face. If the company proceeds to issue the policy without objecting to the answer, it cannot then avoid its contract on the ground of concealment. We may say that in the first answer there is a latent, in the second a patent lack of responsiveness.

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Termination of duty to disclose. The duty to disclose ends as soon as the contract is complete, even though the policy is not issued until several weeks later, or even though the policy is never issued. It is interesting, in this connection, to contrast the

40 Lynch v. Dunsford, 14 East 494 (Eng.).

41 Phoenix Mut. Life Ins. Co. v. Raddin, 120 U. S. 183, LEADING ILLUSTRATIVE CASES.

delivery of a conveyance of real estate with the delivery of an insurance policy. The legal title to real estate cannot pass by act of the parties until a duly acknowledged deed has been delivered to the grantee. Such grantee may then, by his own deed, pass on the legal title to a third party. On the other hand, an insurance contract need not be reduced to writing and a person insured does not generally contemplate transferring his rights to a third party, and even if he does, a new policy must frequently be issued and the old one delivered up and cancelled.

Duties of agents. Three well-known cases involving the duty of the insured's agent to make disclosure have been adjudicated.

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In the first of these, the master of a vessel purposely delayed sending the news of the loss of the ship, so that the owner might have time to effect insurance. The United States Supreme Court allowed a recovery on the theory that the instant the ship was lost, the master ceased to be the agent of the insured and that insuring the vessel did not fall within the scope of the master's duties.

The decision was criticized and contradicted by later English authority.43 However, the House of Lords twenty years thereafter said, virtually, that the American decision is perfectly sound as far as insurance law is concerned if the assumption in reference to the termination of the agency is correct, though the holding in this regard is not very satisfactory.44

42 General Int. Ins. Co. v. Ruggles, 12 Wheat. 408 (U. S.).

48 Proudfoot v. Montefiore, L. R. 2 Q. B. 511 (Eng.).

44 Blackburn, Low & Co. v. Vigors, 12 App. Cas. 531 (Eng.).