Utmost good faith: Definition, example, exceptions of Insurance contract
October 26, 2021
Utmost good faith – Before Mr. Greg Mc was offered a life Insurance coverage by White-half Insurance company, it was on record that the underwriter made necessary enquiry about Mr. Greg’s health history upon which some were revealed premised on material fact.
Few months down the line it was discovered by the insurer that the insured is a chain smoker which was not disclosed by the client initially.
Sequel to this, the insured was said to had breached the law of utmost good faith as one of the core aspects of insurance policies, the contract thereafter was revoked and followed by legal proceedings.
Given this, if you’d want to understand the concept of utmost good faith as it concerns insurance contract, do pay attention as we explore the bounds.
What is utmost good faith?
Utmost good faith in insurance contract is a provision in which both the insured and the insurer are expected to make revelations in all honesty to each other about the contract.
You are saddled with the responsibility to reveal every material fact as may be required by the insurer, while the insurer in the other hand must not hide anything in the contract either.
Utmost good faith in simple terms means all parties involved in an insurance contract should be honest with every information provided and responses to questions as being asked.
Read also: Beginner’s guide to Insurance underwriting
The doctrine of utmost god faith ensures all parties act honestly without misleading or holding critical information from one another.
In a situation where it was found that any of the parties was not honest thereafter such contract can be nullified and legal proceeding instituted afterward by the offended party.
Utmost good faith in insurance with example
Assuming a small business “Mc Don” wants to buy a public liability insurance coverage with Stan Insurance Company, the insurer is subject to ask the insured sensitive questions which bothers on the financial outlay of the business and possible credit history and risks associated with a work place environment.
It’s binding on the insured to provide required answers either verbally or in writing as may be deem fit in completing the coverage form.
In the other hand, the insurer is not expected to hide any information arising from the questions asked by the insured.
Kindly understand that most questions being asked serve to guide the insurer on the appropriate premium the insured should pay for the coverage. The Insurer as you should know is into the business for profit, that said, the underwriter may through his assessment and classification of risks involved decide the company will not offer coverage for certain customers.
Exceptions to the rule of utmost good faith
There are instances where the doctrine of utmost good faith may not be adhere to, these are classified as facts of common knowledge, those facts which by reasonable thinking should be known by the insurer judging from the details made available to the underwriter may are not considered a breach afterward.
- Facts of public knowledge which are subject to be known by the insurer
- Facts considered to lessen the risk of a coverage
- Facts under legal requirements like company Act.
- Any fact not attached any importance by the insurer, etc.
Breach of utmost good faith
Breach of good faith is a situation where you are economical with the truth about material facts of the property or item being covered.
For example, if you have a life insurance cover having been diagnosed of a possible cancer without informing the insurance company as at the time of buying coverage that’s a breach of utmost good faith.
Utmost good faith vs. Caveat Emptor
While good faith applies in insurance contract and the totality of all parties involve to make available material facts in all honesty, caveat emptor is the case with commercial contracts, let the buyer beware, that’s the pointer.
Read also: What is Public liability insurance?
Caveat emptor refers to a disclaimer in legal law, therefore it is mostly a legal law with a principle that places responsibility on the buyer to perform his due diligence prior completing payment or making a purchase. Usually with cars, land and properties, etc.
Utmost good faith is one of the basic principles of insurance coverage, it forms the basis which both the insured and the insurer goes into a contract believing they have necessary information required to make sound judgment, which afterward evaluates risk to determine if a coverage should be offered.
Raphael Orji is a freelance writer, professional blogger and a content marketing consultant. I work with small businesses, startups and entrepreneurs in building their brand image with high quality blogging and content marketing strategy.
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