Cyprus Marine Insurance: Contract Formation and Uberrima Fides Impact

This report examines the formation of marine insurance contracts in Cyprus, influenced by English law and EU regulations. It details the essential elements of contract formation, including offer, acceptance, consideration, and the intention to create legal relations. The report emphasizes the principle...Read More

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Maritime Law and Marine Insurance

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Table of Contents
Introduction...............................................................................................................................2
Process of contract formation...................................................................................................3
Principles of Marine insurance...................................................................................................5
Uberrima fides........................................................................................................................5
Insurable Interest...................................................................................................................7
Conclusion..................................................................................................................................9
References................................................................................................................................10

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Introduction
During the British rule, the principles of the English legal system applied in Cyprus. After its
independence in 1960, the country retained most of the rules of the English legal system.
The provisions of the common law and principle of equity are incorporated in the legal
system of Cyprus. The implementation of these laws did not conflict which the provisions
and rights given under the Constitution of Cyprus. The laws which are passed by the House
of Representatives also did not conflict with these laws. Moreover, Cyprus becomes a
member of the European Union in 2004 based on which the EU law has shaped the legal
system of Cyprus (Lambrou, 2012). The marine insurance policies in Cyprus are heavily
influenced by the English law as well. These regulations were aimed to supervise the
operations of insurance companies and protect the rights and liabilities of the insured. No
subsequent legislation has superseded these laws. These policies provide key provisions
regarding the process of contract formation in marine insurance and their governance
(Bruce, 2016). The objective of this report is to evaluate the key legislation in Cyprus to
identify the process through which contracts relating to marine insurance are formed in the
country. This report will also focus on identifying two key principles of marine insurance law
and how they affect the parties who enter into contract for marine insurance.

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Process of contract formation
Similarly to common contract elements, the contracts which are formed for marine
insurance have similar elements as well which include offer, acceptance, agreement,
consideration and intention to create a legal relationship between parties. The parties must
enter into a clear legally binding agreement in order to bind each other in a legal
relationship. The agreement must contain relevant terms and conditions which affect the
interest or rights of the parties which include name of the parties, risks relating to the
subject matter, premium amount and others (Thomas, 2015). It is important that the parties
of the contract must understand these terms which become a part of the marine insurance
contract and these terms are binding upon the parties. The process of formation of a marine
insurance contract requires parties to comply with these essential elements to ensure that
they form a valid legal relationship between each other.
Due to characteristics insurance market, the marine insurance contracts have a higher
degree of credit based on which both parties have to maintain ‘uberrima fides’ or the ‘duty
of utmost good faith’ to ensure that their disclose all the material facts to each other and
avoid misrepresentation of pending negotiation of contract (Merkin, 2014). There are no
local legislation available in Cyprus based on which the principles of the English Marine
Insurance Act 1906 apply on the country. Section 17 to 20 of this Act provides key
regulations which govern the element of maintaining ‘utmost good faith’ along with a duty
to avoid making misrepresentations on the parties while negotiating the contract.
 Offer
An offer is a key element of an insurance contract which begins the process of formation of
the contract. The offer to form the contract can be made by the insurer or the prospective
insured. The practice of making an offer is made through giving a proposal form by the
parties (Lambrou, 2012). This offer can only be considered as valid and complete if it is
communicated by the party. It is necessary that the proposal form which contained the offer
is forwarded by the party to the insurer. While sending the proposal form, its content can be
varied based on the type of marine insurance and the practices of the insurance companies.
Although the terms and content of the proposal form can vary based on different type of

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insurances, risks involved and insurance companies; however, there are certain elements
that are present in all proposal forms. Following the key terms which are available in all
proposal forms (Baughen, 2015):
1. The description regarding type of proposed insured
2. The risk which parties wanted to insured through the marine insurance contract
3. The circumstances which might have a significant impact on the risks, and
4. The history of the proposed insured along with relevant details
 Acceptance
It is important that the insurer must accept the offer for marine insurance contract without
suggesting any changing or else it is considered as a counter offer. In the case of a counter
offer, the party who made the first offer has to give the acceptance to accept the terms of
the counter offer. It is important that the acceptance in a marine insurance contract must
be communicated as it is a general rule of acceptance in contract law (Stamatiou and
Christofides, 2016). Until the acceptance is communicated by the parties, a valid contract
did not construct between the parties. The insurer may communicate the acceptance
through formal mediums the case of a marine insurance contract. As per the Marine
Insurance Act, an obligation is imposed on the assured to disclose relevant information
relating to the risk associated with the subject matter. A relevant judgement in this context
was given in the case of Carter v Boehm (1766) 3 Burr 1905 in which it was held that the
parties must provide relevant details while forming a marine insurance contract to the
insurer to avoid misleading the insurer into signing the insurance contract (Thoyts, 2010).
 Other elements
A valid consideration must be present in the marine insurance contract which is referred to
the payment of premium by the parties. The consideration is set by the insurer based on the
risks faced by the party who wanted to protect themselves from the marine-related risks.
The parties must also have legal intention to bind themselves by the terms of the provision
of the marine insurance contract (Lambrou, 2012). By signing the marine insurance contract
after agreeing to its terms, the parties show their intention to bind by the contract terms.
 Pre-contract duty of disclosure by the assured

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A duty is imposed on the assured to provide the details regarding important facts are
disclosed by Lord Atkin in the judgment of Bell v Lever Brothers Ltd [1931] UKHL 2. In case
this duty is not maintained by the assured, then the insurer has the right to repudiate the
marine insurance contract (Waddams, 2013). The statutory provision which governs the
principle of pre-contract duty is given under section 18 of the Marine Insurance Act. As per
subsection 1, the assured has a duty to disclose to the insurer all the material circumstances
which are known to the assured or deemed to be known by the assured in the ordinary
circumstances before the contract is concluded (Jus, 2019). In case the assured has not
complied with this duty, then the insurer has the right to avoid the marine insurance
contract. In the judgement of Commercial Union Assurance (Cyprus) Ltd v Costas Stavrides
(1981) J.S.C. 1-2, it was held by the court that a contract become voidable if it is constructed
based on positive misrepresentation; however, there are only some contracts which are
considered as voidable in case a material fact is not disclosed by the parties. Subsection 2
provides that all those circumstances are relevant which would influence the judgement of a
prudent insurer in fixing the premium or determining whether the insurer will face the risk.
All these elements are a key part of the process of formation of marine insurance contract.
The parties of the contract have to comply with these common and statutory duties to
ensure that discharge their duties without adversely affecting the rights of others in the
insurance contract. In case these elements are not fulfilled by the parties, then a valid
contract is not formed between them, and they did not have the right to enforce the parties
into paying the insurance premium for the loss (Bruce, 2016). In case assured or insurer
engage in misconduct in relation to providing details regarding the marine insurance
contract which is relevant, then the aggrieved party has the right to repudiate the contract.
Principles of Marine insurance
There are certain basic principles of marine insurance which governs the insurance contracts
and the relationship between the parties.
Uberrima fides
Uberrima fides is referred to utmost good faith which is a duty imposed on the parties of a
marine insurance contract. As per this principle, each party of the contract has this duty to

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conduct their operations in good faith, and they have to disclose all material facts to the
other party. The material facts are referred to those factors which are likely to influence the
judgment of the other party (Thanasegaran, 2016). This is an important principle of marine
insurance which is applicable on all contracts which are formed to protect the loss of the
purchaser. Based on this principle, the party is allowed to avoid the contractual terms if
other party did not act in good faith. Lord Stephenson provided that only absence of bad
faith is not enough in a marine insurance contract. It is important that both parties should
comply with this principle while considering the interest of each other while forming an
insurance contract. The time of filling the marine insurance policy document, the applicant
has a duty to disclose correct information in order to avoid adversely affecting the interest
of the insurer (Theophanous, 2014). While forming the marine insurance contract, the
underwriter trusts the representations which are made by the parties and proceeds upon
the confidence that the information provided by the party is not misleading.
In case certain circumstances arise which were not mentioned by the party while forming
the marine insurance contract, and they are considered as reasonable information, then the
underwriter can avoid the contractual liability. On the other hand, the contract will be
considered as equally void in case relevant materials or information are concealed by the
underwriter while the contract for marine insurance is formed (Zaidan, 2009). Moreover,
the party has the right to recover premium paid to the insurer. A relevant judgement in this
context was given in Banque Keyser Ullmann SA v Skandia (UK) Insurance Co Ltd [1990] 1 QB
665 case. In this judgement, Justice Steyn provided a relenvat principle by providng that
only avoidance of bad faith is not enough. Parties owe a duty to maintain good faith which
they can discharge by providing complete and truthful information in relations to subject
matter of the marine insurance (Eggers, 2012). All the possible risks factors which are known
by the party or deemed to know by the party must be given to the insurer to maintain this
principle. Section 18 and 19 of the Marine Insurance Act provides that parties must disclose
all the material fact before the contract is concluded to ensure that they act in utmost good
faith.
They should provide every detail which they know, or it is reasonably expected by them to
know which can affect the decision of the parties in the contract. However, there are certain
factors which parties of a marine insurance contract did not have to disclose during the

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negotiation stage of the contract such as factors which resulted in reducing the risk,
common knowledge or unnecessary details about the type of contract (Rose, 2013). Section
18 (1) provides that a positive duty is owed by the parties of a marine insurance contract to
disclose material information. Furthermore, section 18 (2) provides key provisions regarding
a duty owed by the parties to not make any material misrepresentations in the contract
which could negatively affect the interest of the parties. Thus, it can be said that the good
faith should be carried out by the parties in a marine insurance contract until it is
constructed and contractual liabilities cannot enforced on parties in case one party is found
guilty of violating this principle.
Insurable Interest
The principle of insurable interest provides that the insured party must have an interest in
the subject matter for which the insurable policy is taken. While forming a contract for
marine insurance, it is possible that the insured did not have an insurable interest on the
subject matter. However, it is important that the insured must have a reasonable
expectation of acquiring such interest in the future. In simple words, this principle provides
that the policyholder should be benefited based on the fact tht the goods are safely arrived.
The policyholder should also suffer losses in case the goods are damaged during the transit
(Borscheid and Haueter, 2012). There are many incidents where parties applied for marine
insurance when insurable interest is not present; however, they are expected to receive
such interest in the near future. In case the policyholder did not have an insurable interest
in the marine insurance contract, then the insured is not able to get the claim settled from
the insurer. In case the principle of insurable interest is not present in a particular case, then
the policyholder is not entitled to indemnification (Hodges, 2013). In a marine insurance
contract, it is utmost importance insurable interest must be present when the loss is
occurred.
In marine insurance contracts, there are three key variants which are necessary to be
present. The first variant is available in the case of ships. In case a marine insurance contract
is formed for the insurance of a ship, then the owner of the ship only has the right to form
such contract for the full value of the ship. The insurable interest is available in this case
based on which only the owner has the right to claim the premium in case the loss is

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suffered to the ship (Atmeh, 2011). The second variant of insurable interest is in the case of
cargo. In this case, the contract can be formed by the owner of the shipment and this
contract for insurance can be constructed for full value. Another key element in this case is
that if the owner has paid freight charges, then the amount of the contract also includes the
charges for the freight. The third variant of insurable interest is in the case of store keeping
goods in case those goods are in transit, or the owner of the goods is transferring them to
another place (Lobo-Guerrero, 2012). Therefore, the principle of insurable interest is a
fundamental condition of a marine insurance contract, and it is legally binding to ensure
that the marine insurance policy is valid. It is necessary that this principle must be definite
which means without any ambiguity. An estimated value of the goods should be attached to
it, and it must be legally binding on the parties to ensure that the policy is legally valid.

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Conclusion
Based on the above observations, it can be concluded that the process of formation of
marine insurance contract in Cyprus is heavily influenced by the principles of English legal
system. There are certain key elements which are necessary to be present in order to
ensure that a valid contract has formed between the parties. There must be a valid offer,
acceptance, consideration and intention of parties to form a legal relationship. The parties
of the contract also have pre-contractual duty based on which they are obligated to provide
all the relevant information about the risk to the insurer. Parties have to maintain utmost
good faith to ensure that they did not adversely affect the interest of the insurer and the
policyholder. The principle of uberrima fides and insurable interest are evaluated in this
report in order to understand their impact on the marine insurance policies in Cyprus. The
principle of uberrima fides provides that the parties of marine insurance contract must
maintain the utmost good faith which does not mean non-involvement in practices involving
bad faith. The presence of insurable interest is fundamental in a marine insurance contract
which provides that only the party who would suffer loss should be entitled to receive
benefits of the contract. Evaluation of these principles is necessary to understand the legal
environment which affects the formation and enforcement of marine insurance contract in
Cyprus.

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