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Principle of utmost good faith - Meaning - Principles of Insurance
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Principle of utmost good faith – Meaning

Principle of utmost good faith

The contracts of insurance are contracts of Ubereimae fidei. Since insurance shifts risk from one party to another, it is essential that there must be utmost good faith and mutual confidence between the insured and the insurer. In a contract of insurance the insured knows more about the subject matter of the contract than the insurer. Consequently, he is duly bound to disclose accurately all material facts and nothing should be withheld or concealed. Any fact is material, which goes to the root of the contract of insurance and has a bearing on the risk involved. It is only when the insurer knows the whole truth that he is in a position to judge (a) whether he should accept the risk and (b) what premium he should charge.

If that were so, the insured might be tempted to bring about the event insured against in order to get money.

Under the contract of insurance, greater degree of good faith is expected from the proposer. He should disclose all material facts relevant to the subject matter. Insurance contracts are different from ordinary business contracts. Ordinary business contracts are based on the principle of ‘caveat emptor (let the buyer beware). The seller has no duty to disclose any information about the subject matter of the contract to the buyer. It is the responsibility of the buyer to take reasonable care to satisfy himself as to the genuineness of the material facts disclosed and he has to bear all the risks of loss. But in the case of insurance, both parties are required to disclose material facts relevant to the contract. Material information is that information which helps the insurance company to decide whether to accept or not accept any risk, if it is to De accepted what should be the rate of premium to be collected and on what terms and conditions. If at any time, it is found that the insured cancelled certain material facts related with the subject matter of insurance, then the contract of insurance become voidable at the option of the insurer. The utmost good faith mentions that all the material facts disclosed must be true and in full form. There should be no concealment, misrepresentation, mistake or fraud about the material facts. However the following facts are not required to be disclosed by the insured.

  1. Facts that may tend to reduce the risk.
  2. Facts which the insurer knows already.
  3. Facts of public knowledge.
  4. Facts waived by the insurer.
  5. Facts governed by the conditions of the policy.
  6. Facts which could have been secondary from the information supplied by the insured.
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