Utmost Good Faith in Insurance Contract
According to this principle, both the parties to the insurance contract must disclose all facts material to the risk voluntarily to each other.
Any breach of this duty shall render the contract voidable at the option of the aggrieved party, i.e., the party who has suffered as a result of this breach.
Although insurance contract is a simple commercial contract, it differs from other commercial contracts with regard to the application of this principle.
In other commercial contracts, unlike insurance contracts, the rule of “let the buyer beware (Caveat emptor)” applies.
This means that the parties to the contract need not disclose facts, which would influence the other party.
This means each of the parties can remain silent even in a matter of fact, which he thinks might influence the decision of the other party.
Therefore, under usual circumstances, the seller of goods is not under any obligation to disclose any defect in the goods. It is the duty of the buyer to examine the goods before purchase.
If he is not satisfied he may not buy it, but once bought it is over, and he cannot change it or return it simply because he has discovered a defect after purchase, i.e., after completion of the contract.
The reason for such a provision of law is this that the goods are tangible and visible. These can be very well examined before purchase.
If the buyer is not an expert on the thing he is going to buy he may very well engage an expert to examine the thing on his behalf.
But the question remains that once the purchase is made the buyer cannot take the defense of any defect that is discovered afterward. Sometimes it is seen that at the bottom of a Cash memo it is written, ’’goods sold are not taken back”.
Even though there is no notice as such the legal position is the same. However, the seller must not take the shelter of any fraud, which means that normal good faith is required to be observed.
Duration of the Duty of Disclosure
The duty of disclosure must be observed throughout the negotiations and continues until the completion of the contract.
Usually, there is no such duty to be observed during the continuation of the policy period unless by means of a policy condition it is made continuous or contractual when it becomes a contractual duty of utmost good faith.
For example, in general, insurance, when an alteration is made to the existing policy, the duty applies in so far as the alteration is concerned.
The duty revives at renewal if it is a fresh contract.
Otherwise, where the renewal is regarded as a continuation of the original contract, or where there is a long-term agreement for continuation of the insurance for a number of years, as is in case of life assurance contracts, the duty of disclosure does not apply afresh.
In general insurance contracts, the contract is completed on acceptance of the risk by the insurer, but in life, it is usually from the time of payment of the premium.
Facts which are required to be Disclosed and which are not
The following facts are required to be disclosed:
i. 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.
ii. Facts, which would suggest some special motive behind insurance, e.g., excessive over-insurance.
iii. Facts which suggest the abnormality of the proposer himself e.g., making frequent claims.
iv. Facts explaining the exceptional nature of the risk.
The following facts need not be disclosed unless specifically asked for by the insurers:
i. Facts which lessen the risk, e.g., the existence of a fire brigade near the premises, in case of a fire insurance.
ii. Facts of public knowledge or facts, which are reasonably supposed to be known by the insurers in the ordinary course of their business. For example, a big cyclone passing over a particular area in the past or earthquake or say war etc. These being matters of common public knowledge should reasonably be known by the insurers.
iii. Facts pertaining to matters of law, e. g, precautions necessarily required to be taken by the factory owners as per Factory Act.
iv. Facts possible of discovery through inquiry provided reasonable provocation has been made through some other information already given by the proposer.
v. Facts which should be reasonably inferred by the insurers on the context of the particulars disclosed, For example, with regard to a fire proposal for a certain type of risk, the insurers should reasonably be able to understand the normal risks associated with that type of trade.
vi. Facts to which the insurers do not attach much importance, e. g., if against the question in a proposal form the proposal puts a dash and the insurers do not make further queries it would be assumed that the insurers are not attaching much importance on it and the same may be ignored.
vii. Facts which are superfluous to disclose because of the application of warranty.
Application of the Doctrine in Underwriting and Claims
As already explained, because of the intangible nature of insurance contracts, this doctrine is very much vital in insurance contracts.
The insurers will not be able to underwrite a risk properly, or cannot even give a proper judgment on the question of underwriting unless all facts material to the risk are voluntarily disclosed.
This is important because the insurers are in the position of trustees and therefore must see that fair & equitable treatments are given to all of their clients.
Indiscriminate underwriting or underwriting without due regards to the importance of disclosing material facts would certainly impair the rating and consequently, the amount available from premium would definitely fall short of claims emanating from the policies.
This will also create a condition whereby good clients would go out of the insurance scheme because of the increased cost of insurance thereby making insurance business impossible.
Therefore, it is necessary that the proposer, throughout the negotiation period, must disclose all facts material to the risk voluntarily to the insurers.
It is no defense that certain facts have not been asked by the insurers. Whether asked or not, if a fact is thought to be material it must be disclosed.
Sometimes lot many questions are asked through the proposal forms.
Even if all the questions are answered truthfully, nevertheless if something is not asked and the proposer thinks it to be material, he must disclose it.
He must allow the underwriters to apply their judgment in deciding the question of acceptability or otherwise of the risk.
It is quite natural and equitable that bad risks should pay more than good risks and, therefore, unless facts are disclosed properly how this philosophy can be maintained?
Nevertheless, breaches of this duty do take place and then it becomes imperative to examine the legal status of the insurance contract vis-a-vis the legal position of a claim arising out of such a contract.
The legal position, however, varies with the nature of the breach and this is examined below;
Breaches of the Duty
(i) Non-disclosure: This means omission to disclose a material fact inadvertently or because he innocently thought the information to be immaterial.
(ii) Concealment: This means concealing or suppressing a material fact intentionally, knowing it to be material.
(iii) Innocent misrepresentation: This means, making an inaccurate or false statement pertaining to material facts innocently and believing it to be true.
(iv) Fraudulent misrepresentation: This means making false statements, pertaining to facts material to the risk intentionally and with the intent to deceive the insurers.
The maker of such a statement knows it to be false, but nevertheless, he makes it recklessly with a careless disregard for the veracity. This is actionable not only under the law of contract but also under the law of tort.
Effects of Breaches of the Duty
It should be clearly remembered that any breach, as mentioned herein, renders the contract voidable at the option of the aggrieved party, i.e., the party who has suffered as a result of this breach. Therefore, if the insured makes a breach, the insurers may;
i. Repudiate liability with regard to any claim,
ii. Cancel the policy is still in force, or
iii. Overlook the breach. When the breach is overlooked as such, the contract remains absolutely unaffected.
Normally, it is at the time of claims that the information as to possible breach of this duty comes to light through the surveyors or other personal references, unless of course, it comes to light beforehand through some other media.
Whatever it is, within a reasonable time of acquiring such knowledge of breach the insurers must decide the course of action they are going to take.
Otherwise, Lapsation of an unreasonable time, or a behavior indicating waiver, would mean that the insurers have overlooked the breach.
General Good Faith
Apart from what has been said so far as to the duty of utmost good faith, the insured is always expected to act towards insurer in normal good faith throughout the tenure of the contract.
This would usually mean that the insured must take reasonable precaution in preventing or minimizing losses.
Full and True Disclosure
Utmost good faith says that there should be full and true disclosure of all the material facts.
Full and true means that there should be no concealment, misrepresentation, half disclosure and fraud of the subject matter to be insured.
The extent of the Duty of Disclosure
The duty of disclosure finishes the moment when the proposal form has been fully and correctly fulfilled provided there are no such facts, which he considers or expected to be considered material and have not been disclosed.
The proposer cannot defend on the ground that he had omitted to disclose it by carelessness or by mistake or that; he did not regard it material to the contract.
Legal Consequence of utmost good faith
In the absence of utmost good faith, the contract will be voidable at the option of the person who suffered loss due to non-disclosure.
The intentional non-disclosure counts fraud and is void “ab initio” and the unintentional non-disclosure is voidable at the option of the party not at fault
Once the party not at fault has validated the voidable contract, he cannot avoid the contract later on.
For instance, if the insurer has continued to accept the premium when certain non-disclosure, say misstatement of age, has been disclosed the insurer cannot invalid the contract and cannot refuse to pay the amount of claim.
If the party not at fault does not exercise its option, the contract will remain valid.
Indisputability of Policy (utmost good faith)
The doctrine of utmost good faith works as a great hardship for a long period on the plea of misstatement at the time of proposal, in such cases, it would be very difficult to prove or disprove whether a particular statement made at the time of policy was true.
Therefore, to remove this hardship, certain sections in the concerned Act arc provided. The indisputable clause handles these kinds of dispute.
Facts not required to be disclosed (utmost good faith)
The following facts are not required to be disclosed:
i. Circumstances which are diminishing the risk.
ii. Facts which are known or reasonably should be known to the insurer in his ordinary course of business.
iii. Facts which the insurer should infer from the information given.
iv. Facts which are waived by the insurer.
v. Facts which are superfluous to disclose by reason of a condition or warranty.
vi. Facts of public knowledge.
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