What is the Principle of Utmost Good Faith

Insurance contracts are defined as contracts of utmost good faith or contract of “uberrimae fidei”.  Understanding the principle behind this term would be immensely beneficial for anyone interested in learning about contracts related to insurance.

It is a well known fact that there are two parties to an insurance contract named as insurer and the insured and in the insurance policy; the insurer undertakes to pay a certain sum of money on the occurrence of uncertain future event to the insured.

Utmost good faith generally means that the parties to an insurance contract must deal openly and honestly to each other without concealing the material information which could influence the decision of other party.

Generally, the insured knows more about the risks which are linked with the subject matter proposed to be insured. It can be a property of the insured or the life of the insured. But there is no doubt that the insured knows more details about the subject insured than the insurer.

Therefore it is a recognized duty of the insured to disclose all the material facts which enable the insurer to take his underwriting decision. For an instance,   in life insurance policy, suffering from diabetes is a material fact and insured must disclose the fact that he is suffering from diabetes before the insurance contract is concluded. 

Nevertheless, any fact came to the knowledge of the reasonable prudent insured’ after conclusion of the insurance contract need not be disclosed. But in short term contracts, the duty to disclose material facts is revived with every renewal of the policy and it is a duty of the insured to act in good faith in every stages.

However, the duty of utmost good faith applies to the insurer too. But this duty mainly rests on the insured as the insured usually knows or is deemed to know more about the subject matter than the insurer. 

Hence, the principle of utmost good faith is required to be observed in every insurance contract and its absence would render the contract void and unenforceable.

But, there are some material facts that need not be disclosed by the insured. Thus, there is no duty rest on the insured to disclose the following facts by complying with the principles of utmost good faith,

i) Any fact or circumstance which diminish the risk

ii) Any fact which is known or deemed to be known by the insurer. 

iii) Any fact which relates to the law of the country.

However the principle of utmost good faith is a basic requirement for every insurance contract and, it command both parties to act in good faith, openly and honestly.