[HOUSE OF LORDS.]

AND

Insurance (Marine) - Concealment of Material Facts - Principal and Agent - Concealment by Agent through whom Policy not effected.

The plaintiffs instructed a broker to re-insure an overdue ship. Whilst acting for the plaintiffs the broker received information material to the risk, but did not communicate it to them, and the plaintiffs effected a re-insurance for £800 through the broker's London agents. Afterwards the plaintiffs effected a re-insurance for £700, lost or not lost, through another broker. The ship had in fact been lost some days before the plaintiffs tried to re-insure, but neither the plaintiffs nor the last-named broker knew it, and both he and the plaintiffs acted throughout in good faith:-

Held, reversing the judgment of the Court of Appeal and restoring the judgment of Day J. (17 Q. B. D. 553), that the knowledge of the first broker was not the knowledge of the plaintiffs, and that the plaintiffs were entitled to recover upon the policy for £700.

Fitzherbert v. Mather (1 T. R. 12); Gladstone v. King (1 M. & S. 35); Stribley v. Imperial Marine Insurance Company (1 Q. B. D. 507); Ruggles v. General Interest Insurance Company (4 Mason, 74; 12 Wheaton, 408); and Proudfoot v. Montefiore (Law Rep. 2 Q. B. 511) commented on.

APPEAL from the Court of Appeal.

The facts are stated in the judgments of Lord Esher M.R. and Lindley L.J. (1) The following outline will suffice for this report.

(1) 17 Q. B. D. 553.

The appellants having brought an action against the respondent upon a policy of re-insurance subscribed by him for £50, claiming for a total loss by perils of the sea, the substantial defence was that the defendant was induced to subscribe the policy by the wrongful concealment by the plaintiffs and their agents of certain material facts known to the plaintiffs or their agents and unknown to the defendant.

At the trial before Day J. and a special jury in July 1885 the following facts were proved or admitted.

The plaintiffs, underwriters and insurance brokers at Glasgow, had underwritten the steamship State of Florida for £1500, the policy having been effected by the usual brokers for the ship, Rose, Murison & Thomson, who were underwriters and insurance brokers in Glasgow. The ship had left New York on the 11th of April 1884 bound for Glasgow where she was due about the 24th or 25th. On the 30th the plaintiffs tried to re-insure through their London brokers Roxburgh, Currie & Co., but the terms asked were higher than the plaintiffs would give. On the next day, May 1st, the plaintiffs asked Rose, Murison & Thomson to effect a re-insurance for £1500 at fifteen guineas through Rose, Thomson, Young & Co., the London agents of Rose, Murison & Thomson. The latter telegraphed accordingly to Rose, Thomson, Young & Co. After the telegram and before any answer came Murison a member of the firm of Rose, Murison & Thomson became aware of certain facts concerning the ship which were material to the risk, but these facts were never communicated to the plaintiffs or to Roxburgh, Currie & Co. After learning these facts Rose, Murison & Thomson received the following answer to their telegram; "Twenty guineas paying freely and market very stiff; likely to advance before day is out." This answer they shewed to the plaintiffs, and then sent in the plaintiffs' names the following telegram to Rose, Thomson, Young & Co., "Pay 20 guineas." The answer to this was sent direct to the plaintiffs, who ultimately re-insured for £800 at 25 guineas through Rose, Thomson, Young & Co. This was not the policy sued on.

On the 2nd of May the plaintiffs through Roxburgh, Currie & Co. effected a policy of re-insurance for £700 at 30 guineas lost or not lost. This was the policy sued on. The ship had in fact

been lost some days before the plaintiffs tried to reinsure. It was admitted that the plaintiffs and Roxburgh, Currie & Co. acted in good faith throughout.

The jury having been discharged by consent Day J. gave judgment for the plaintiffs for the amount claimed.

The Court of Appeal (Lindley and Lopes L.JJ., Lord Esher M.R. dissenting) reversed this decision and gave judgment for the defendant.

Against this judgment the plaintiffs appealed.

April 28, 29. Sir C. Russell Q.C. and Hollams for the appellants:-

The decision of the Court of Appeal was wrong because the material information was not known either to the plaintiffs or to anyone who was their agent to effect the insurance in question, or whose knowledge was the knowledge of the principal. The knowledge of Rose, Murison & Thomson was not the knowledge of the plaintiffs so far as the insurance in question was concerned. Concealment of a material fact by the agent through whom the policy is effected avoids the policy. and so will concealment by some other agents: but no case decides that concealment by every agent avoids. The agent must be the master of the ship, or the agent at the port where she is, or in a similar position. He must be in control of and in direct relation to the subject-matter: the alter ego of the principal; an "habitual," a "general" agent; - expressions used in the various authorities. Here the agent was not the "habitual" or "general" agent, and he did not effect the policy. To sustain the judgment the respondent must contend that the broker is bound to send his principal every rumour he hears, for which proposition there is no authority. The cases of Fitzherbert v. Mather (1), Gladstone v. King (2), and Proudfoot v. Montefiore (3), are discussed and exposed in the judgment of Lord Esher (4). If their effect is what was supposed by the Court of Appeal they are contrary to principle and may be overruled in this House. Stribley v. Imperial Marine Insurance Company (5) only followed Gladstone v.

(1) 1 T. R. 12.

(2) 1 M. & S. 35.

(3) Law Rep. 2 Q. B. 511.

(4) 17 Q. B. D. 553.

(5) 1 Q. B. D. 507.

King (1). Whether the decision of Story J. or of the Court in Error was the right one in Ruggles v. General Interest Insurance Company (2) the case does not throw much light on the present point. The question is also discussed in 1 Phillips Ins. ss. 531, 543 and in 2 Duer Mar. Ins. Lect. 13, Part 1, ss. 23-32, pp. 413, 427.

Sir R. Webster A.G. and J. Gorell Barnes for the respondent:-

It is a condition of the contract of insurance that there is no misrepresentation or concealment either by the assured or anyone who ought, as a matter of business or fair dealing, to have disclosed the material facts. The plaintiffs having been left in ignorance of the material facts by their agents whose duty it was to inform them cannot take advantage of a concealment without which the insurance could not have been effected. The material facts became known to Rose, Murison & Thomson while acting as the plaintiffs' agents to reinsure their whole line. Murison went on acting as the plaintiff's agent after he knew those facts; and so long as an agent acts he is bound to communicate material facts to his principal. On what ground is the policy for £800 different from that for £700? A distinction is attempted to be drawn between a risk sought to be covered and one not sought to be covered, but the risk was indivisible, though split up into different policies. No part of the risk was insured when Murison knew the facts. He by his London agents did effect an insurance on part on May 1, which was vitiated by his knowledge. How can the principal validly insure the remainder the next day? To vitiate the contract fraud is not necessary: whether the misrepresentation or concealment be the result of ignorance, mistake or misadvertence, whether it be intentional or accidental, the result is the same: 2 Duer Mar. Ins. Lect. 1 3 Part 1, ss. 3, 23, pp. 381, 415; 1 Phillips Ins. ss. 543, 549, 562, 564; 1 Arnould Mar. Ins. (4th ed.) pp. 481, 490. The duty to communicate is equally binding whether the agent be the habitual or general agent or not. Where two innocent persons contract the loss must fall on him who trusted the person who knew the truth. [They also discussed at length the above cases, and Lord Macnaghten

(1) 1 M. & S. 35.

(2) 4 Mason, 74; in error, 12 Wheaton, 408.

referred to Wyllie v. Pollen (1), per Lord Westbury on the subject of constructive notice to a principal.]

Hollams for the appellants in reply cited 2 Duer Mar. Ins. p. 788.

The House took time for consideration.

Aug. 9. LORD HALSBURY L.C.:-

My Lords, in this case the plaintiffs sue upon a policy of marine insurance, and the only question arises upon the statement of defence that the defendant was induced to enter into the contract by concealment of material facts by the plaintiffs and their agents.

The facts are not in dispute. Neither the plaintiffs nor the agent through whom the policy was effected had any knowledge of the material fact the concealment or non-disclosure of which is relied on as vitiating the policy; but an agent, who did not effect the policy, at an earlier period received information, admitted to be material, while he was acting as agent to effect an insurance for the plaintiffs, which he did not communicate.

Day J., before whom the case was decided without a jury, held that this did not affect the validity of the policy. A majority of the Court of Appeal reversed Day J.'s judgment, and held that the non-disclosure was fatal to the plaintiffs' claim.

So far as I can understand the judgment of the Court of Appeal, it is intended to lay down a principle that would not, I think, be contested, but it applies that principle to a state of facts to which I think it is inapplicable. Lindley L.J. says, I think correctly: "It is a condition of the contract that there is no misrepresentation or concealment either by the assured or by any one who ought as a matter of business and fair dealing to have stated or disclosed the facts to him or to the underwriter for him (2)." And Lopes L.J. after stating the principle upon which the knowledge of the agent is the knowledge of the principal, explains it to mean that the principal is to be as responsible for any knowledge of a material fact acquired by his

(1) 32 L. J. (Ch.) 782.

(2) 17 Q. B. D. 578.

agent employed to obtain the insurance as if he had acquired it himself (1). To the propositions thus stated I think no objection could be made; but it is obvious that the words in the one judgment "agent employed to obtain the insurance," or in the other judgment the words "the underwriter," import that the particular contract obtained was, in the language of the statement of defence, a policy which the defendant was induced to subscribe by the wrongful concealment by the plaintiffs and their agents of certain facts then known to the plaintiffs or their agents, and unknown to the defendant, and which were material to the risk.

I doubt very much whether the solution of the controversy as to what is the true principle upon which the contract of insurance is avoided by concealment or misrepresentation, whether by considering it fraudulent or as an implied term of the contract, helps one very much in deciding the present case. If one were to adopt in terms the language of Lord Ellenborough in Gladstone v. King (2), I do not think it could justify the judgment of the majority of the Court of Appeal. In that case a policy lost or not lost was effected on the 25th of October. On the previous 25th of July the ship had run upon a rock. On the 5th of August the captain wrote to his owners, the plaintiffs; they received his letter on the 5th of October. Whatever may be said of the logic of that case, which acquitted the captain of all ill intention, but decided upon the ground that otherwise owners might direct their captains to remain silent, and which upon a policy lost or not lost assumes any antecedent damage to have been an implied exception out of the policy, it does not proceed upon any such ground as the Court of Appeal appear to rely on here. Lord Ellenborough says: "No mischief will ensue" (a somewhat strange mode of enunciating a proposition of law) "from holding in this case that the antecedent damage was an implied exception out of the policy. If the principle be new, it is consistent with justice and convenience." Unfortunately his Lordship does not state what is the principle which he apparently admits to be new. I can quite understand that when a man comes for an insurance upon his ship he may be expected to know

(1) 17 Q. B. D. 579.

(2) 1 M. & S. 35.

both the then condition and the history of the ship he seeks to insure. If he takes means not to know, so as to be able to make contracts of insurance without the responsibility of knowledge, this is fraud. But even without fraud, such as I think this would be, the owner of the ship cannot escape the necessity of being acquainted with his ship and its history because he has committed to others, - his captain, or his general agent for the management of his shipping business, - the knowledge which the underwriter has a right to assume the owner possesses when he comes to insure his ship.

With respect to agency so limited, I am not disposed to differ with the proposition laid down by Cockburn, C.J. in Proudfoot v. Montefiore (1). A part of the proposition is "that the insurer is entitled to assume as the basis of the contract between him and the assured that the latter will communicate to him every material fact of which the assured has, or in the ordinary course of business ought to have knowledge." I think these last are the cardinal words and contemplate such an agency as I have described above. I am unable however to see that the present case is governed by any such principle.

A broker is employed to effect a particular insurance. While so employed he receives material information - he does not effect the insurance and he does not communicate the information. How is it possible to suggest that the assured could rely upon the communication to the principal of every piece of information acquired by any agent through whom the assured has unsuccessfully endeavoured to procure an insurance? I am unable to accept the criticism by the Master of the Rolls upon the proposition that the knowledge of the agent is the knowledge of the principal. When a person is the agent to know, his knowledge does bind the principal. But in this case I think the agency of the broker had ceased before the policy sued upon was effected. The principal himself and the broker through whom the policy sued on was effected were both admitted to be unacquainted with any material fact which was not disclosed. I cannot but think that the somewhat vague use of the word "agent" leads to confusion. Some agents so far represent the principal that in all

(1) Law Rep. 2 Q. B. 511, 521.

respects their acts and intentions and their knowledge may truly be said to be the acts, intentions, and knowledge of the principal. Other agents may have so limited and narrow an authority both in fact and in the common understanding of their form of employment that it would be quite inaccurate to say that such an agent's knowledge or intentions are the knowledge or intentions of his principal; and whether his acts are the acts of his principal depends upon the specific authority he has received.

In Fitzherbert v. Mather (1) the consignor and shipper of the goods insured was the agent whose knowledge was in question. In Gladstone v. King (2) the master of the ship was the agent; and in Proudfoot v. Montefiore (3) the agent was the accepted representative of the principal, in effect trading and acting for him in Smyrna, the owner himself carrying on business in Manchester. And though the decision in Ruggles v. General Insurance Co. (4) before the Supreme Court of the United States may not be very satisfactory in what they held under the circumstances of that case to be the relation between the captain of the ship and his owners, the principle upon which that case was decided was the supposed termination of the agency between them.

Where the employment of the agent is such that in respect of the particular matter in question he really does represent the principal, the formula that the knowledge of the agent is his knowledge is I think correct, but it is obvious that that formula can only be applied when the words "agent" and "principal" are limited in their application.

To lay down as an abstract proposition of law that every agent, no matter how limited the scope of his agency, would bind every principal even by his acts, is obviously and upon the face of it absurd; and yet it is by the fallacious use of the word "agent" that plausibility is given to reasoning which requires the assumption of some such proposition.

What then is the position of the broker in this case, whose knowledge, though not communicated, is held to be that of the principal?

(1) 1 T. R. 12.

(2) 1 M. & S. 35.

(3) Law Rep. 2 Q. B. 511.

(4) 12 Wheaton, 408.

He certainly is not employed to acquire such knowledge, nor can any insurer suppose that he has knowledge in the ordinary course of employment like the captain of a ship, or the owner himself, as to the condition or history of the ship. In this particular case the knowledge was acquired, not because he was the agent of the assured, but, from the accident that he was general agent for another person. The reason why, if he had effected the insurance, his knowledge, unless he communicated it, would have been fatal to the policy, is because his agency was to effect an insurance, and the authority to make the contract drew with it all the necessary powers and responsibilities which are involved in such an employment; but he had no general agency - he had no other authority than the authority to make the particular contract, and his authority ended before the contract sued on was made. When it was made no relation between him and the shipowner existed which made or continued him an agent for whose knowledge his former principal was responsible. There was no material fact known to any agent which was not disclosed at the point of time at which the contract was made; there was no one possessed of knowledge whose duty it was to communicate such knowledge.

For these reasons, I am of opinion that the judgment of the Court of Appeal should be reversed, and the judgment of Day J. restored; and I move your Lordships accordingly.

LORD WATSON:-

My Lords, this is a case of considerable nicety; but I have ultimately come to the conclusion, for the reasons already stated by the Lord Chancellor, that the appeal ought to be allowed.

It is, in my opinion, a condition precedent of every contract of marine insurance that the insured shall make a full disclosure of all facts materially affecting the risk which are within his personal knowledge at the time when the contract is made. Where an insurance is effected through the medium of an agent, the ordinary rule of law applies, and non-disclosure of material facts, known to the agent only, will affect his principal, and give the insurer good ground for avoiding the contract.

In the case of insurance by a shipowner, it has been decided

that he is affected by the knowledge of a class of agents other than those whom he employs to insure. In the ordinary course of business, the owner of a trading vessel employs a master and ship-agents, whose special function it is to keep their employer duly informed of all casualties encountered by his ship, which would materially influence the judgment of an insurer. On that ground it has been ruled that the insurer must be held to have transacted in reliance upon the well-known usage of the shipping trade, and that he is consequently entitled to assume that every circumstance material to the risk insured has been communicated to him, which ought in due course to have been made known to the shipowner before the insurance was effected. Accordingly if a master or ship-agent, whether wilfully or unintentionally, fail in their duty to their employer, their suppression of a material fact will, notwithstanding his ignorance of the fact, vitiate his contract.

I do not think it necessary to notice in detail the authorities which bear on this point. I desire to say, however, that I have difficulty in comprehending the principle upon which the Court in Gladstone v. King (1) and Stribley v. Imperial Marine Insurance Company (2) held that the innocent non-communication of a material fact by an agent who was the alter ego of the shipowner merely created an exception from the policy. In both these cases the Court appears to me to have undertaken the somewhat perilous task of settling the terms of the contract which the insurer would have made for himself if the fact had been communicated to him.

In the present case it is sought to extend the imputed knowledge of the insured to all facts which during the period of his employment became known to any agent, other than the agent effecting the policy in question, who was employed at any time, successfully or unsuccessfully, to insure the whole or part of the same risk with that covered by the policy. This is a case of re-insurance; but it is obvious that the principle, if admitted, would be equally applicable to the original contract.

I am of opinion, with your Lordships, that the responsibility of an innocent insured for the non-communication of facts which

(1) 1 M. & S. 35.

(2) 1 Q. B. D. 507.

happen to be within the private knowledge of persons whom he merely employs to obtain an insurance upon a particular risk, ought not to be carried beyond the person who actually makes the contract on his behalf. There is no authority whatever for enlarging his responsibility beyond that limit, unless it is to be found in the decisions which relate to captains and ship-agents; and these do not appear to me to have any analogy to the case of agents employed to effect a policy. There is a material difference in the relations of these two classes of agents to their employer. The one class is specially employed for the purpose of communicating to him the very facts which the law requires him to divulge to his insurer; the other is employed, not to procure or furnish information concerning the ship, but to effect an insurance. There is also, as the Master of the Rolls pointed out, an important difference in the positions of those two classes with respect to the insurer. He is entitled to contract, and does contract, on the basis that all material facts connected with the vessel insured, known to the agent employed for that purpose, have been by him communicated, in due course, to his principal. So, also, when an agent to insure is brought into contract with an insurer, the latter transacts on the footing that the agent has disclosed every material circumstance within his personal knowledge, whether it be known to his principal or not; but it cannot be reasonably suggested that the insurer relies, to any extent, upon the private information possessed by persons of whose existence he presumably knows nothing.

In the circumstances of this case I have come to the conclusion that whilst it might be the moral duty of Mr. Murison to communicate to the appellants the information which he received on the forenoon of the 1st of May 1884, he was under no legal obligation to do so. There may be circumstances which impose upon agents in the position of Mr. Murison an express or implied duty to communicate their own information to their principal: but nothing of that sort occurs here. I must in fairness to Mr. Murison say that I can find no warrant for the inference of fact drawn by Lindley L.J. that he purposely omitted to impart his knowledge to the appellants, in order that they might re-insure on more favourable terms. No such imputation was made at the

trial; and, if it had been made, it ought to have been submitted to the jury, and their verdict taken upon it.

I concur therefore in the judgment which has been moved.

LORD FITZGERALD:-

My Lords, in this very interesting case I concur in the order which will presently be proposed by my noble and learned friend the Lord Chancellor. I adopt entirely the reasons which have been given by the Lord Chancellor and by my noble and learned friend opposite (Lord Watson). The judgment delivered by the Master of the Rolls was one of more than usual ability - it was a considered judgment, prepared with care and upon a critical examination of the authorities; and I am prepared to adopt that judgment and substantially the reasons given by the noble and learned Lord for the conclusion at which he arrived, though not every portion of those reasons.

LORD MACNAGHTEN:-

My Lords, I agree.

It has frequently been said by eminent judges that the doctrine of constructive notice ought not to be extended. It seems to me that the decision under appeal involves a great and a dangerous extension of that doctrine.

There is nothing unreasonable in imputing to a shipowner who effects an insurance on his vessel all the information with regard to his own property which the agent to whom the management of that property is committed possessed at the time and might in the ordinary course of things have communicated to his employer. In such a case it may be said without impropriety that the knowledge of the agent is the knowledge of the principal. But the case is different when the agent whose knowledge it is sought to impute to the principal is not the agent to whom the principal looks for information but an agent employed for the special purpose of effecting the insurance. It is quite true that the insurance would be vitiated by concealment on the part of such an agent just as it would be by concealment on the part of the principal. But that is not because the knowledge of the agent

is to be imputed to the principal but because the agent of the assured is bound as the principal is bound to communicate to the underwriters all material facts within his knowledge. Concealment of those facts is a breach of duty on his part to those with whom his principal has placed him in communication: Lynch v. Dunsford (1).

It was argued that in the present case Murison was under a legal obligation to communicate to the appellants the knowledge which he acquired while employed as their agent. But the learned counsel for the respondent produced no authority for that proposition, nor did they, I think, satisfy your Lordships that such an obligation flowed from Murison's employment. The majority of the Court of Appeal say that whether there was a legal obligation on the part of Murison or not there was a moral obligation on his part to communicate this information to his employers. But I apprehend that it is not the function of a Court of Justice to enforce or give effect to moral obligations which do not carry with them legal or equitable rights. Whatever may be thought of Murison's conduct from a moral point of view, it would, in my opinion, be a dangerous extension of the doctrine of constructive notice to hold that persons who are themselves absolutely innocent of any concealment or misrepresentation, and who have not wilfully shut their eyes or closed their ears to any means of information, are to be affected with the knowledge of matters which other persons may be morally though not legally bound to communicate to them.

Solicitors for appellants: Hollams, Son & Coward.

Solicitors for respondent: Waltons, Bubb & Johnson.

(1) 14 East, 494.