It is well known that the international insurance market has suffered enormously from the flood of asbestos-related claims in the United States. Countless insurance and reinsurance companies have been forced into insolvency and liquidation, which has given rise to much litigation and court decisions that have brought the disputes into the public eye.

Several of the violent events that have marked recent history-such as the wars between Iran and Iran and Iraq and Kuwait, or the attack on the New York World Trade Center in September 2001-have likewise sent shock waves through the insurance industry, the effects of which are likely to continue in the years to come, generating further litigation and unwelcome publicity for those involved.

Whilst these disputes may be inevitable, the publicity could well be avoided if more discreet methods were chosen for settling them-such as amicable dispute resolution or arbitration. We therefore thought it would be instructive and hopefully of practical interest to arbitration practitioners-counsel and arbitrators alike-to look at two key concepts in insurance contracts and the disputes to which they give rise: utmost good faith and subrogation. These concepts will be examined in particular through recent rulings of the English House of Lords. The emphasis we put on the House of Lords comes from our belief that, despite the restructuring of Lloyd's of London, the international insurance market still predominantly follows London practice as determined by English courts. And it is a fact that important insurance contracts and many reinsurance treaties contain an English choice-of-law clause.

I. Utmost good faith

The utmost good faith doctrine requires that the insured should disclose all the facts in relation to the risk insured. This obligation is infringed in two ways: positive or active misrepresentation of a material fact, or concealment or non-disclosure of a material fact. The sanction for such infringement is the avoidance of the insurance contract at the request of the party against whom the infringement occurred.

This rule is necessary because the insurer is ignorant of the risk he is going to insure. It is only through the information given to him concerning that risk that he can calculate the premium. Lord Mansfield, the father of insurance law in England, explained this principle in 1766 in Carter v. Boehm:1[Page78:]

Insurance is a contract upon speculation. The special facts, upon which the contingent chance is to be computed, lie most commonly in the knowledge of the insured only. The underwriter trusts to his representation, and proceeds upon confidence that he does not keep back any circumstance in his knowledge to mislead the underwriter into a belief that the circumstance does not exist, and to induce him to estimate the risk, as if it did not exist. Keeping back such circumstance is a fraud and, therefore, the policy void. Although the suppression 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 . . .

The 1906 Marine Insurance Act expressed the doctrine of utmost good faith, under the heading uberrimae fidei ,2 in terms similar to those used by Lord Mansfield. Section 17 of the Act reads:

A contract of marine insurance is a contract based upon utmost good faith, and if the utmost good faith be not observed by either party, the contract may be avoided by the other party.

The Act has been applied to all categories of insurance, both marine and non-marine. However, it was felt to be insufficiently flexible and attracted criticism from those aware of legislative developments taking place in other jurisdictions, especially France. In particular, it was regretted that no distinction was made between non-disclosure and misrepresentation as grounds for avoidance of the contract, or between innocent and fraudulent non-disclosure or misrepresentation.3 Although a similar rule had also applied in many other European countries in the nineteenth century, its harshness was alleviated through legislative reforms in those countries in the twentieth century. For instance, in 1930, France introduced a distinction between innocent and fraudulent misrepresentation or concealment.4 Meanwhile, despite a number of attempts, English law remained unchanged. Judges sometimes expressed their dismay at the harshness of the doctrine of utmost good faith. In a number of decisions made during the last ten years, the House of Lords has opened a few avenues to alleviating that harshness.

Three recent House of Lords cases establishing a new trend for a more flexible, fair and just application of the principle of utmost good faith will be considered below. The first case concerns the facts to be disclosed by the insured and their influence over the mind of the insurer. The second case concerns what is called 'blind-eye knowledge' and whether the duty to disclose material facts extends beyond the conclusion of the contract. The third case concerns the duty to disclose imposed upon insurance agents and brokers and to what extent such duty could be waived.

A. Benchmarks for facts to be disclosed: the Pan Atlantic/Pine Top case

In Pan Atlantic Insurance Co. Ltd. v. Pine Top Insurance Co. Ltd .,5 the issue was what interpretation should be given to section 18(1) and (2) of the 1906 Marine Insurance Act 1906, the essence of which says:

(1) . . . the assured must disclose to the insurer, before the contract in concluded, every material circumstance . . .

(2) Every circumstance is material which would influence the judgment of a prudent insurer in fixing the premium, or determining whether he will take the risk. [Page79:]

As Lord Mustill observed in this case, there was controversy over the benchmark to be used for deciding what material facts should be disclosed and what material facts should be capable of rendering the insurance contract avoidable. More specifically, the controversy was over whether reference should be made to the actual insurer or to a hypothetical prudent insurer, or whether a composite benchmark should be taken by referring to both. There are two schools of thought on the question, one known as the 'decisive influence test', and the other the 'actual inducement test'.

The majority of the House of Lords accepted the 'actual inducement test' and rejected the 'decisive influence test'.6 According to the majority opinion, the duty to disclose extends to all matters that would have been taken into account by a prudent underwriter when assessing the risk which he was consenting to assume. Moreover, the actual insurer should have been induced to accept the risk as a consequence of the non-disclosure. Lord Slynn expressed the opinion of the majority by saying:

a circumstance may be material for the purposes of an insurance contract (whether marine or non-marine) even though had it been fully and accurately disclosed it would not have had a decisive effect on the prudent underwriter's decision whether to accept the risk and if so at what premium, but that an underwriter who is not induced by the misrepresentation or non-disclosure of a material fact to make the contract cannot rely on the misrepresentations or non-disclosure to avoid the contract.

Addressing the question of inducement, Lord Mustill, for his part, equated misrepresentation with non-disclosure by requiring actual inducement of the insurer as a prerequisite for avoidance:

There is to be implied in the 1906 Act a qualification that a material misrepresentation will not entitle the underwriter to avoid the policy unless the misrepresentation induced the making of the contract using 'induced' in the sense in which it is used in the general law of the contract.

However, in Lord Mustill's view, a problem remained with regard to wrongful non-disclosure, given the lack of any general common law sanction for wrongful non-disclosure (the sanction only exists in equity). Lord Mustill drew the conclusion that the same element of inducement should be read into the Act for wrongful non-disclosure:

If the 1906 Act, which did not set out to be a complete codification of existing law, will yield to qualification in one case, surely it must in common sense do so in the other. If this requires the making of new law, so be it. There is no subversion here of established precedent. It is only in recent years that the problem has been squarely faced. Facing it now, I believe that to do justice, a need for inducement can and should be implied into Act [emphasis added] . . . If the misrepresentation or non-disclosure of a material fact did not in fact induce the making of the contract (in the sense in which that expression is used in the general law of misrepresentation) the underwriter is not entitled to rely on it as a ground for avoiding the contract.

The House of Lords is to be congratulated on its use of the term 'induce', employed by Lord Mansfield some two hundred years earlier, for it is through the idea of inducement that the difficulties relating to materiality and decisive influence may be overcome. By suggesting that a new rule of law is in the making, the House of Lords opens the door to a welcome development in English law. [Page80:]

B. 'Blind-eye knowledge' and the time scope of utmost good faith

In Manifest Shipping v. Uni-Polaris,7 the question of the time scope of utmost good faith and blind-eye knowledge was raised. Two specific issues were addressed: first, whether the insured shipowners, by turning a 'blind eye' to the unseaworthiness of the insured ship, were privy to that unseaworthiness; second, whether the requirement of utmost good faith extends beyond the stage at which the insurance contract is concluded to cover subsequent claims and litigation. We will address each of these issues in turn.

a) Blind-eye knowledge

The question was whether the insured knew of two facts that allegedly made the insured ship unseaworthy when it went to sea.8 Those two facts were (i) the incompetence of the master, and (ii) the defective state of the dampers, which contributed to the spread of the fire that so badly damaged the ship that it became a constructive total loss. In rejecting the argument put forward by the insurers, the House of Lords tried to define what is meant by 'blind-eye knowledge' and the extent to which this could be equated with actual knowledge.

Lord Scott of Foscote explained the concept of blind-eye knowledge by referring to Nelson at the Battle of Copenhagen 'when he made a deliberate decision to place the telescope to his blind eye in order to avoid seeing what he knew he would see if he placed it to his good eye'. He went on to say that 'an imputation of blind-eye knowledge requires an amalgam of suspicion that certain facts may exist and a decision to refrain from taking any step to confirm their existence'.9

Addressing the facts of the case, Lord Scott of Foscote held that there was no basis for attributing blind-eye knowledge to those in charge of the company owning the ship in question, considering that the findings of the trial judge 'go to negligence, perhaps gross negligence, but they are, in my opinion, no basis for a finding of blind-eye knowledge'. He concluded with what we consider to be the ratio decidendi of the case:

blind-eye knowledge requires, in my opinion, a suspicion that the relevant facts do exist and a deliberate decision to avoid confirming that they exist. But a warning should be sounded. Suspicion is a word that can be used to describe a state-of-mind that may, at one extreme, be no more than a vague feeling of unease and, at the other extreme, reflect a firm belief in the existence of the relevant facts. In my opinion, in order for there to be blind-eye knowledge, the suspicion must be firmly grounded and targeted on specific facts. The deliberate decision must be a decision to avoid obtaining confirmation of facts in whose existence the individual has good reason to believe. To allow blind-eye knowledge to be constituted by a decision not to inquire into an untargeted or speculative suspicion would be to allow negligence, albeit gross, to be the basis of a finding of privity. That, in my opinion, is not warranted by section 39(5).

Whether this rationale could be of general application to cases other than marine insurance, only the future will tell. Our feeling is that we have here a rule that is likely to stay and be applied generally to all categories of insurance. [Page81:]

b) Time scope of the duty to disclose

The second issue in Manifest Shipping was the time span and scope of the duty to disclose in good faith-in other words, whether it extends to the period of litigation. In resolving this issue, the House of Lords elaborated on the general question of whether the duty of utmost good faith continues to apply to both insurer and insured after the conclusion of the insurance contract.

The insurer argued that the insured did not disclose to them two expert reports concerning the cause of two fires on two sister ships of the ship insured. These two reports showed the defective operations of the dampers and the incompetence of the masters who did not know how to use the fire-fighting equipment.

Tuckey J, the trial judge, decided that the duty to disclose in good faith under section 17 of the 1906 Marine Insurance Act comes to an end once court proceedings have commenced.10 Arriving at the same result as the trial judge, the Court of Appeal considered that at the claim stage and after the claim had been made the duty to disclose in good faith required no more than that the claim should be made honestly, i.e. not made, or persisted in, fraudulently.

Addressing the question of whether the obligation of good faith and disclosure continues to apply unqualified once the parties are engaged in hostile litigation before the courts, Lord Hobhouse of Woodborough said '[t]here is no authority directly on this point'. He noted that once litigation had started, there was no longer a community of interest, for the parties were then in dispute and their interests opposed. His view was that once parties are in litigation, the procedural rules, not section 17 of the Marine Insurance Act, govern the extent of the disclosure, although section 17 may influence the court in the exercise of its discretion. Lord Hobhouse concluded that 'suitable caution should be exercised in making any extensions to the existing law of non-disclosure and that the courts should be on their guard against the use of the principle of good faith to achieve results which are only questionably capable of being reconciled with the mutual character of the obligation to observe good faith'.

Lord Hobhouse's conclusions are comforting. The developments reflected in Manifest Shipping, as well as in Pan Atlantic, testify to the vitality of English law and help to dispel the feelings of shock and dismay we felt some forty years ago when comparing English law on the duty to disclose as applied to insurance contacts with French, Swiss and Egyptian law.11

C. The truth of statement clause and the effect of a waiver

Section 19 of the 1906 Marine Insurance Act provides:

where the insurance is effected for the assured by an agent, the agent must disclose to the insurer:

Every material circumstance which is known to himself, and an agent to insure is deemed to know every circumstance which in the ordinary course of business ought to be known by, or to have been communicated to, him; and [Page82:]

Every material circumstance which the assured is bound to disclose, unless it came to his knowledge too late to communicate it to the agent.

The duty of the insured to disclose, what he ought to disclose and in what circumstance there is no need to disclose are set out in section 18:

1. Subject to the provisions of this section, the assured must disclose to the insurer, before the contract is concluded, every material circumstance which is known to the assured, and the assured is deemed to know every material circumstance which, in the ordinary cause of business, ought to be known by him. If the assured fails to make such disclosure, the insurer may void the contract.

. . .

2. In the absence of inquiry the following circumstance need not be disclosed, namely -

. . .

c) any circumstance as to which information is waived by the insurer

These provisions were recently at the heart of a very important case before the House of Lords: HIH Casualty and General Insurance Limited and others v. Chase Manhattan Bank and others.12 This case related to a new form of insurance, called 'time variable contingency insurance', devised to support loans for the financing of film productions. Chase Manhattan Bank was the leader of a syndicate of lenders that agreed to provide the finance needed for the making of two films, The Mirror Has Two Faces and The People vs. Larry Flynt. Lord Hobhouse of Woodborough explained this high risk, high premium insurance product as follows:

The commercial purpose of the insurance was to protect the Bank against the risk that the assigned revenue would be insufficient to secure the repayment of the loan. This risk the bank (unlike the brokers) was itself no better placed to assess than the underwriters; any facts which the bank provided would have to be obtained from others. The bank's lack of knowledge of the material facts lay at the heart of the need for the insurance contract and is a primary source of the risk which it was seeking to insure. An essential part of the certainty of the security thus provided is that the insurance contract should contain an appropriate clause negativing the bank's duty to ascertain and disclose all material facts.

The appropriate clause, called the 'truth of statement clause', provided in sections 7 and 8 that (1) Chase was relieved of any duty to disclose; (2) Chase would have no liability of any nature to the insurers for any information provided by any other party; (3) any such information provided by or non-disclosure by other parties, including but not limited to the insurance broker, would not be grounds for avoiding the insurers' obligations under the policy or for cancelling the policy.

It subsequently transpired that the agent and broker through which the insurance was negotiated and concluded had intentionally not disclosed important material facts to the insurers.13 Fraud was alleged against the agent, but not against Chase, the insured. The question therefore arose as to whether the insurer could consequently avoid the insurance contract and obtain damages from the insured and the agent notwithstanding the disclaimer in the truth of statement clause. The majority of the House considered that the truth of statement clause as drafted was not sufficient to relieve Chase of liability for its agent's fraud.14

In the words of Lord Hobhouse,[Page83:]

Section 7 and 8 (of the truth of statement clause) can sensibly be construed as covering honest errors and honest misrepresentations whether negligent or not. But there is no justification to construe them as covering fraudulent misrepresentation and they should not receive that construction without express words which necessitate giving that meaning to them or clearly disclose such an intention. Despite the commercial importance of the 'truth of statement clause' in this transaction which I have earlier emphasized and the need to give it a construction which recognizes that importance, it is quite another matter to use it as a means of holding insurers liable on an insurance contract even though that contract has only been procured by means of a fraud practiced on them by the proposer's agent.

II. Subrogation

Subrogation, according to Black's Law Dictionary,15 is an 'equitable remedy borrowed from civil law'16 It is a vital tool in insurance law,17 as testified by the extracts from ICC arbitral awards reproduced in this issue, most of which concern subrogation. Below, we shall consider the legal nature and application of subrogation as illustrated by insurance disputes.

A. Definition and legal nature

In its simplest form, subrogation is a device whereby an insurer, after indemnifying the insured, acquires the rights and remedies of the insured towards the wrongdoer who was at the origin of the loss. Section 79(1)18 of the 1906 Marine Insurance Act provides:

Where the insurer pays for a total loss, either of the whole, or in the case of goods of any apportionable part, of the subject matter insured, he thereupon becomes entitled to take over the interest of the assured in whatever may remain of the subject-matter so paid for and he is thereby subrogated to all the rights and remedies of the assured in and in respect of that subject-matter as from the time of the casualty causing the loss.

This provision goes well beyond marine insurance. All other categories of insurance, with the exception of life insurance, are subject to the concept of subrogation. The insurer takes the place of the insured with regard to any indemnity claims the latter might have against third parties. The insured is thus prevented from obtaining damages from a third party as well as an insurance payment. As for the insurer, it is an established rule that it cannot, through subrogation, obtain from third parties more than it had paid to the insured. In other words, the maximum sum that an insurer may recover by way of subrogation is the amount it has actually paid to the insured.

Although these principles are generally accepted, there was for a long time controversy in English law that has been settled only in the last ten years. It concerned whether subrogation is a principle of the common law or a creation of equity. In 1961, in Yorkshire Insurance Co. Ltd v. Nisbet Shipping,19 Diplock J (as he then was) considered it to be a principle of the common law that could be implemented 'without recourse to equity'. In 1993, the House of Lords took the view that subrogation was a creation of equity in Lord Napier and Ettrick v. Hunter and others.20 Lord Browne-Wilkinson rejected Lord Diplock's dicta as 'not well founded'. One of the authorities cited in support of this view was a case decided by Lord [Page84:] Mansfied in 1783: London Assurance Co. v. Sainsbury.21

Having established subrogation as an equity doctrine, the House of Lords had to decide by what equitable means the insurer's right was to be protected. The choice was between the concept of trust and a lien or charge. The House of Lords decided on the latter.22 In the words of Lord Templeman:

In order to protect the rights of the insurer under the doctrine of subrogation, equity considers that the damages payable by the wrongdoer to the insured person are subject to an equitable lien or charge in favour of the insurer. The charge is imposed by equity because the insurer, once he has paid under the policy, has an interest in the right of action against the wrongdoer and an interest in the establishment, quantification, recovery, and distribution of the damages awarded against the wrongdoer.

The insurer's right over any money recovered by the insured having been established in Napier, the question remained as to the insured's right over any money recovered by the insurer. This situation would arise if the insurer, by exercising the rights of the insured, recovers a sum in excess of the amount it has paid to the insured. What, in that case, is the legal nature of the insured's right over the sum recovered by the insurer. Is it an equitable or a common law right? In other words, does the insurer hold the money on trust for the insured, or does it rather owe the money to the insured as a debt or as monies had and received? The importance of this question lies in the fact that if the sum is regarded as a debt towards the insured, then it will form part of the insurer's assets available to its creditors. This would be an inequitable solution and in contradiction with the protection afforded to the insurer in Napier in respect of moneys recovered by the insured. It was not until three years after Napier that the question was resolved in Lonhro Exports Ltd v. ECGD.23 After noting the lack of any authority offering guidance on the matter, Lightman J. said that it was thus necessary to turn to principles, which in this case were to be found in the law of mortgages. Under such law, if a lienor in the exercise of his rights as security holder obtains a payment or realization exceeding his debt (e.g. by sale of the charged property), he holds the surplus on trust for the mortgagor. By analogy, he concluded that the insurer holds the surplus on trust for the insured:

The monies in the hands of the insurer belong to the assured, subject only to the right of the insurer to retain the sum secured in his own favour. He is duty-bound to divide up the monies in his hands between the assured and himself in the shares reflecting their [Page85:]respective entitlement and to hold the insured's entitlement on trust for the insured.

B. Waiver and other limitations

Under the doctrine of subrogation, the insurer assumes the rights and remedies of the insured. If those rights and remedies are subject to limitations, the rights and remedies of the insurer will be similarly limited. The extracts from ICC arbitral awards reproduced on the following pages give some examples of such limitations.

In ICC case 9102, the monies recovered by the insurer, as subrogee, were reduced because the insured was in part responsible for the loss due to its negligence. It may be said to be a general principle of law that the rights acquired by the insurer through subrogation are no greater than or different from those of the insured. The insurer has no independent rights against the third-party wrongdoer.24

The award in ICC case 9724 recognized the effectiveness against the insurer, as subrogee, of a clause excluding the liability of the insured for consequential or punitive damages and an express waiver of any reliance on implied warranties.

In ICC case 8383, the request for arbitration was filed jointly by the insurer and the insured because the sum claimed exceeded the sum paid by the insurer. This was therefore partial subrogation. After considering the evidence and finding that the cause of the fire could not be established with certainty, the arbitral tribunal decided that each party should bear its share of responsibility.

Conclusion

During the last ten years, the House of Lords has made an important contribution to the development of English insurance law by making several long-awaited decisions on issues arising out of the doctrine of utmost good faith and subrogation. From these decisions, we may draw the following conclusions.

First, it has sought to lessen the harshness of a doctrine that required an insurance contract to be avoided in the event of non-disclosure of material facts by the insured or his agent to the insurer, even if such material facts had no influence whatsoever on the insurer's decision to cover the risk. The gist of its decisions in this regard may be summarized as follows:

1. In order to seek avoidance of an insurance contract for non-disclosure of material facts, an insurer must prove that he was actually induced to enter into the contract by the non-disclosure or the misrepresentation of a material fact. In addition to this subjective test, it must also be shown that a (hypothetical) prudent insurer would have been influenced by the non-disclosure or misrepresentation of such material facts.

2. The duty of disclosure ends once the insurance contract has been entered into. In other words, it concerns the pre-contractual stage and does not continue to subsequent stages. Hence, at the stage of litigation, the insured is not obliged to [Page86:] disclose anything other than what is required through the procedural discovery process.

3. In assessing the insured's knowledge of a material fact, turning a blind-eye could be equated with effective knowledge. However, this requires that the insured had a suspicion of the existence of a fact which should have been declared to the insurer and abstained or refrained deliberately from asking questions about the existence of such fact to avoid confirming such suspicion.

4. The duty to disclose in good faith could be waived. However, a waiver or disclaimer-in insurance parlance 'truth of statement clause'-does not cover fraud on the part of the insured. Such a waiver would be effective in the event of negligence by the agent, but would cover the agent's fraud only if there were express wording to that effect.

Second, as to subrogation, the House of Lords, in Napier, finally settled the legal nature of the right of the insurer over any money obtained by the insured from a wrongdoer. The insurer has a lien or charge over such money, but that does not make the insured a trustee subject to a fiduciary duty. In Lonrho-a first instance decision-it was held, however, that the insurer would be a trustee for any monies that exceed the amount paid to the insured. This analysis is important to protect the insured in the event that the insurer-as is not uncommon-goes into liquidation or insolvency.

Third, the global nature of the insurance business, with widely spread risks and international players, has made insurance law into a more unified and recognized set of rules and concepts. Although some countries have undertaken reforms more quickly than others, there is a definite trend towards the unification of insurance law as an international corpus of rules. This will hopefully make the job of mediators and arbitrators easier, although no less challenging.

1
3 Burr. 1905. Some forty years ago, acknowledging with admiration the work of Lord Mansfield, we traced the source of his inspiration, through his acquaintance with the French insurance author Emerigon, to Colbert's 1681 Marine Ordinance, which led to Napoleon's 1808 Commercial Code. See B. Atallah, Le droit propre de la victime et son action directe contre l'assureur de la responsabilité automobile obligatoire. Etude critique et comparative des systèmes juridiques de l'Angleterre, de la France, de la R.A.U. et de la Suisse, foreword A. Besson (Paris: LDGJ, 1967) at 20 and 152-53. In the most important recent case on the subject, Manifest Shipping v. Uni-Polaris, [2001] All E.R. 743 at 757, Lord Hobhouse remarked as follows on the origin of utmost good faith: 'The acknowledged origin is Lord Mansfield's judgement in Carter v Boehm . . Lord Mansfield was at the time attempting to introduce into English Law a general principle of good faith, an attempt which was ultimately unsuccessful and only survived for limited classes of transactions, one of which was insurance.'

2
Although the Latin was thought to have been inspired by similar language in the Codex of Justinian, this was rejected by Lord Hobbouse of Woodborough in Manifest Shipping v. Uni-Polaris.

3
Under general contract law in England, failure to disclose a material fact is, as a rule, unobjectionable, whereas actual misrepresentation, even if innocently done, can be a ground for avoiding the contract if the false statement was material and had induced the party to enter into the contract. See Cheshire, Fifoot & Furmston's Law of Contract, 14th ed. (Oxford University Press, 2001). the Misrepresentation Act 1967 should also be noted.

4
M. Picard & A. Besson, Les assurances terrestres en droit français, vol. I (Paris: LGDJ, 1970).

5
[1994] 3 All E.R. 581

6
Those wishing to know more about the genesis of this position are referred to the following remark by Lord Mustill in Pan Atlantic: 'I consider that the instinct of Kerr J. in Berger v. Pollock [1973] 2 Lloyd's Report 442 was right, and that the adoption of the contrary view by the Court of Appeal in the CTI case [1984] 1 Lloyd's Report 476 should not now be followed.' It was in the CTI case that the decisive influence test had been adopted.

7
[2001] 1 All E.R. 743

8
According to section 39 of the 1906 Marine Insurance Act: '(1) In a voyage policy there is an implied warranty that at the commencement of the voyage the ship shall be seaworthy for the purpose of the particular adventure insured. . . . (5) In a time policy there is no implied warranty that the ship shall be seaworthy at any stage of the adventure, but where, with the privity of the assured, the ship is sent to sea in an unseaworthy state, the insurer is not liable for any loss attributable to unseaworthiness.'

9
For Lord Hobhouse of Woodborough the so-called blind-eye knowledge expression was used by Lord Denning in Compania Maritime San Basilio SA v. Oceanus Mutual Underwriting Association (Bermuda) Ltd ('The Eurysthenes'), [1976] 3 All E.R. 243 at 251, [1977] Q.B 49 at 68, in relation to a defence of privity under section 39(5) of the 1906 Marine Insurance Act against a claim under a policy of marine insurance. Lord Denning said: 'To disentitle the shipowner, he must, I think, have knowledge not only of the facts constituting the unseaworthiness, but also knowledge that those facts rendered the ship unseaworthy, that is, not reasonably fit to encounter the ordinary perils of the sea. And, when I speak of knowledge, I mean not only positive knowledge, but also the sort of knowledge expressed in the phrase "turning a blind-eye". If a man, suspicious of the truth, turns a blind eye to it, and refrains from enquiry-so that he should not know it for certain-then he is to be regarded as knowing the truth. This "turning a blind-eye" is far more blameworthy than mere negligence. Negligence in not knowing the truth is not equivalent to knowledge of it.'

10
He found support for his opinion in a judgment of the Supreme Court of Connecticut in Rego v. Connecticut Insurance Placement Facility (1991) 593 A 2d 491, where Callahan AJ said at 497: 'If the insurer denies liability and compels the insured to bring suit, the rights of the parties are fixed as of that time for it is assumed that the insurer, in good faith, then has sound reasons based upon the terms of the policy for denying the claim of the insured. To permit the insurer to await the testimony at trial to create a further ground for escape from its contractual obligation is inconsistent with the function the trial normally serves.'

11
See supra note 1.

12
20 February 2003 [2003] UKHL 6. The full text of the opinions of the Lords of Appeal is available at: <www.parliament.the-stationery-office.co.uk/pa/ld200203/ldjudgmt/jd030220/hih-1.htm>.

13
Several untruths were alleged against the broker. In particular, it was said to have presented the risk as being similar to another that had not given rise to a claim, whereas in fact there had been a claim, which it had settled itself. The broker was also said to have concealed material pieces of information, including unfavourable views expressed about the terms of the revenue participation agreement assigned to Chase, which made a shortfall almost certain, and the fact that other insurers had withdrawn for precisely this reason.

14
As regards the question of whether the insured could recoup its loss from the agent, the recent case Aneco Reinsurance Underwriting Ltd. v. Johnsons & Higgins, [2002] UKHL 51, gives a positive answer, the agent being liable for the entire foreseeable loss suffered by the insured. Space limitations prevent us from elaborating upon this question

15
Revised 14th edition (West, 1968).

16
The term comes from the Latin subrogo, are,'to substitute'. See Ph. Malaurie & L. Aynes, Les Obligations, 10th ed. (Paris: Cujas, 1999/2000) at 721, n.1.

17
See e.g. the French Insurance Code, Art. L, 121-12 of which states: 'The insurer who has paid an insurance indemnity is subrogated, up to the amount of that indemnity, in the rights and actions of the insured against third parties who, by their acts, have caused the damage giving rise to the insurer's liability.' See also Art. 1250-51 of the French Civil Code.

18
Section 79(2) provides: 'Subject to the forgoing provisions, where the insurer pays for a partial loss, he acquires no title to the subject-matter insured, or such part of it as may remain, but he is thereupon subrogated to all rights and remedies of the assured in and in respect of the subject-matter insured as from the time of the casualty causing the loss, in so far as the assured has been indemnified, according to the Act, by such payment for the loss.'

19
[1961] 2 All E.R. 487

20
[1993] 1 All E.R. 385. Lord Napier and Ettrick was the case in which the 'Names' at Lloyd's claimed against their stop-loss insurers after the asbestos disaster in the United States.

21
(1783) 3 Dong 245, 99 E.R. 638. Another case, Mason v. Sainsbury (1782) 3 Dong 61, 99 E.R. 538, also decided by Lord Mansfield, was referred to by Lord Templeman in Napier and Ettrick.

22
It is interesting to quote the following passage from Lord Browne-Wilkinson's speech to show how old concepts are re-moulded in new settings: 'In my judgment, therefore, an insurer who has paid over the insurance moneys does have a proprietary interest in moneys subsequently recovered by an assured from a third-party wrongdoer. Although many of the authorities refer to that right as arising under a trust, in my judgment the imposition of a trust is neither necessary nor desirable: to impose fiduciary liabilities on the assured is commercially undesirable and unnecessary to protect the insurers' interests. In my judgment, the correct analysis is as follows. The contract of insurance contains an implied term that the assured will pay to the insurer out of the moneys received in reduction of the loss the amount to which the insurer is entitled by way of subrogation. That contractual obligation is specifically enforceable in equity against the defined fund (i.e. the damages) in just the same way as are other contracts to assign or charge specific property, eg equitable assignments and equitable charges. Since equity regards as done that which ought to be done under a contract, this specifically enforceable right gives rise to an immediate proprietary interest in the moneys recovered from the third party. In my judgment, this proprietary interest is adequately satisfied in the circumstances of subrogation under an insurance contract by granting the insurers a lien over the moneys recovered by the assured from the third party. This lien will be enforceable against the fund so long as it is traceable and has not been acquired by a bona fide purchaser for value without notice. In addition to the equitable lien, the insurer will have a personal right of action at law to recover the amount received by the assured as moneys had and received to the use of the insurer.'

23
[1996] 4 All E.R. 673. The case concerned export credit insurance covering a Lonrho loan to Zambia. After Lonrho had been indemnified by the insurer ECGD for 95% of the loan, funds were obtained from Zambia. Thereupon, Lonrho claimed the portion of the debt not covered by the insurance (5%) plus interest. The case should be read in conjunction with L Lucas Ltd v. Export Credit Guarantee Dept., [1974] 2 All E.R. 889. After Lucas, ECGD introduced into its insurance policy a clause entitling it to share the benefit of any currency exchange profits. Such a clause existed in the Lonrho case. See B. Atallah, 'Export Credit Insurance: Policies and Principles' in Arbitration, Finance and Insurance, ICC ICArb. Bull. Special Supplement 2000, 55 at 65. For an exemple of an ICC arbitration relating to export credit insurance, see the extract from the final award in case 7870 reproduced on the following pages.

24
The basic agreement between the insured and its supplier provided for the application of New York law, with an exception relating to any claim for damages to the insured's customer. The arbitral tribunal decided that French law was the most appropriate substantive law applicable to the dispute, on the basis that the place of arbitration was Paris, and France was the place where the manufactured product was delivered and where the insured had its place of business. It may be assumed that the parties to the basic agreement wished to escape the stringent product liability rules of New York law and for this reason left open the question of the law governing claims for damages paid to the insured's customer. The solution as to subrogation would have been the same irrespective of whether New York law or French law applied, since it may be considered to be a general principle of law.