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Utmost Good Faith in Insurance

Utmost good faith is required in contracts of insurance, meaning absolute honesty and transparency is expected from both parties. This is because insurance contracts are aleatory, meaning the insurer's liability depends on conditional factors that the insured is typically in the best position to disclose. Concealment, defined as the failure to disclose a known fact that one has a duty to communicate, violates this duty of utmost good faith and allows the injured party to void the contract. Both the insured and insurer are equally obligated to act with utmost good faith.

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71 views3 pages

Utmost Good Faith in Insurance

Utmost good faith is required in contracts of insurance, meaning absolute honesty and transparency is expected from both parties. This is because insurance contracts are aleatory, meaning the insurer's liability depends on conditional factors that the insured is typically in the best position to disclose. Concealment, defined as the failure to disclose a known fact that one has a duty to communicate, violates this duty of utmost good faith and allows the injured party to void the contract. Both the insured and insurer are equally obligated to act with utmost good faith.

Uploaded by

Taerongsaurus Im
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Utmost Good Faith (Uberimei Fidei)

The contract is the law between the contracting parties, and they are enjoined to

comply with it in good faith. In a contract of insurance, the law does not require only

ordinary good faith but utmost good faith.

What is utmost good faith? It means absolute and perfect candor, openness and

honesty. It is the absence of any deception or concealment however slight.

The parties to a contract of insurance must act in utmost good faith. There

should be no concealment. There should be no misrepresentation. What is the reason

for utmost good faith? A contract of insurance is an aleatory contract.

By an aleatory contract, one or both of the contracting parties reciprocally bind

themselves to give or to do something in consideration of what the other party shall give

or do.

Being an aleatory contract, the insurer's liability is conditional. The parties,

especially the insurer, relies on the representation and statements made by the other

party. In life insurance, the insurer will not just issue a policy. The insured may be asked

to give statements or to answer questions. The insured, next to his doctor, is in a better

position to know the state of his health. So, he should not in any way misrepresent the

state of his health.

The principle of utmost good faith applies to both parties. If information is

withheld, then it follows that there was no meeting of the minds.


What is concealment?

Concealment is a neglect to communicate that which a party knows and ought to

communicate.

What are the requisites of concealment?

There can be no concealment unless:

1. A party knows the fact which he neglects to communicate or disclose to the

other;

2. Such party concealing duty bound to disclose such fact to the other

3. Such party concealing makes no warranty of the fact concealed; and

4. The other party has no means of ascertaining the fact concealed

Where a warranty is made of the fact concealed, the non-disclosure of such fact

is not concealment but constitutes a violation of warranty. (Title 7.)

SECTION 27. A neglect to communicate that which a party knows and ought to

communicate, is called a concealment.


What is the effect of concealment?

1. By the insured – As a rule, failure on the part of the insured to disclose

conditions affecting the risk of which he is aware, makes the contract voidable at

the insured’s option. The reason is that insurance policies are traditionally

contracts uberrime fidae, that is, contracts of the outmost good faith.

This doctrine is essential on account of the fact that the full

circumstances of the subject-matter of insurance are, as a rule, known to the

insured only, and the insurer, in deciding whether or not to accept a risk, must

rely primarily upon the information supplied to him by the appellant.

2. By the insurer – The contractual duty of disclosure is imposed by utmost good

faith is not required of the insured alone but is imposed with equal stringency

upon the insurer; in fact, it is more upon the latter, since his dominant

bargaining position carries with it stricter responsibility.

The duty of utmost good faith is breached by concealment or

misrepresentation. (Sees. 44, 45.) Section 27 "entitles" the injured party to

rescind a contract of insurance by reason of concealment, implying that it is

optional on his part whether or not to exercise his right of rescission.

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