QS Study

Utmost Good Faith

The doctrine of disclosing all material facts is embodied in the important principle “utmost good faith” which applies to all forms of insurance. Both parties of the insurance contract must be of the same mind at the time of contract. There should not be any misrepresentation, non-discloser or fraud concerning the material facts. In an insurance contract, the seller, i.e., the insurer will also have to disclose all tile material facts. An insurance contract is a contract of uberrimae i.e. of absolute good faith where both parties of the contract must disclose all the material fact truly and fully. The principle means that every person who enters into a contract of insurance has a legal obligation to act with the utmost good faith towards the company offering the insurance.

The following facts are required to be disclosed.

  1. Facts which would render a risk greater than normal. In the absence of this information, the insurers would consider the risk as normal and naturally deceived. For example, commercial storage of kerosene in a private dwelling house as a side business.
  2. Facts, which would suggest some special motive behind insurance. E.g., excessive over insurance.
  3. Facts, which suggest the abnormality of the proposer himself. E.g., making frequent-claims.
  4. Facts explaining the exceptional nature of the risk.

In the insurance market, the doctrine of utmost good faith requires that the party seeking insurance discloses all relevant personal information. For example, if you are applying for life insurance, you are required to; disclose any previous health problems you may have had. Likewise, the insurance agent selling you the coverage must disclose the critical information you need to know about your contract and its terms.

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