Utmost Good Faith
Overview
When you buy a shirt, the seller need not warn you that it shrinks; you can inspect it and decide for yourself. Insurance is different. The insurer cannot see inside your warehouse, read your medical history or watch how you drive, so it must trust what you tell it. That trust is not left to chance. The law raises every insurance contract to a higher standard of honesty called utmost good faith, and it places a positive duty on you to volunteer every fact that matters.
In this lesson you will learn what utmost good faith means and why insurance, above almost every other contract, demands it. You will learn how to tell a material fact from an unimportant one, which facts you must disclose and which you may keep to yourself, and exactly how a policy can collapse through non-disclosure, concealment or misrepresentation. Above all you will learn the distinction examiners test every year: innocent breach against fraudulent breach, and the very different remedy each one hands the insurer.
Objectives
- Define utmost good faith and explain why insurance contracts demand it
- Explain the duty of disclosure and identify what counts as a material fact
- Distinguish facts that must be disclosed from those that need not be
- Describe the breaches of utmost good faith: non-disclosure, concealment, innocent and fraudulent misrepresentation
- State the effect of each breach on the validity of the policy
Mind map
This topic is mapped out so you can see how the ideas connect.
Flashcards
Quick recall practice on the facts this topic is tested on.
Lesson Note
Sign Up to Continue
Create a free account to access all learning resources, practice questions, and track your progress.
Lesson Evaluation
Congratulations on completing the lesson on Utmost Good Faith. Now that youve explored the key concepts and ideas, its time to put your knowledge to the test. This section offers a variety of practice questions designed to reinforce your understanding and help you gauge your grasp of the material.
You will encounter a mix of question types, including multiple-choice questions, short answer questions, and essay questions. Each question is thoughtfully crafted to assess different aspects of your knowledge and critical thinking skills.
Use this evaluation section as an opportunity to reinforce your understanding of the topic and to identify any areas where you may need additional study. Don't be discouraged by any challenges you encounter; instead, view them as opportunities for growth and improvement.
- The principle of utmost good faith requires a proposer to: A. Disclose only the facts the insurer asks about B. Disclose voluntarily every material fact known to the proposer C. Disclose facts only after a claim is made D. Rely on the insurer to inspect the risk Answer: B
- A material fact is one which: A. The proposer personally considers interesting B. Would influence a prudent insurer in accepting or rating the risk C. Is written in every proposal form D. Only becomes relevant after a loss Answer: B
- Which of the following need NOT be disclosed to the insurer? A. A previous fire at the premises to be insured B. A previous policy cancelled by another insurer C. A newly fitted burglar alarm that reduces the risk D. A serious illness on a life proposal Answer: C
- A false statement of fact made honestly in the belief that it is true is: A. A fraudulent misrepresentation B. An innocent misrepresentation C. Concealment D. A warranty Answer: B
- Where a proposer is guilty of fraudulent misrepresentation, the insurer may: A. Avoid the policy but must return the premium B. Only reduce the claim proportionately C. Avoid the policy, refuse the claim and retain the premium D. Do nothing, as the policy is fully valid Answer: C
Sign Up to Continue
Create a free account to access all learning resources, practice questions, and track your progress.
Sign Up to Continue
Create a free account to access all learning resources, practice questions, and track your progress.
Recommended Books
Revision Questions
Wondering what past questions for this topic looks like? Here are a number of questions about Utmost Good Faith from previous years
Question 1 Report
List and explain five principles of insurance.
Answer Details
Five principles of insurance
- Utmost good faith (uberrimae fidei): Both parties to the contract, and especially the proposer, must disclose all material facts truthfully and completely. Concealment or misrepresentation of a material fact makes the contract voidable at the option of the insurer.
- Insurable interest: The insured must have a legal or financial relationship with the subject matter such that he benefits from its safety and suffers loss from its damage or destruction. Without insurable interest the contract is void because it would amount to gambling.
- Indemnity: The insurer undertakes to restore the insured, so far as money can, to the exact financial position he occupied immediately before the loss, no better and no worse. This prevents the insured from making a profit out of a loss. (It does not apply to life and personal accident.)
- Subrogation: After indemnifying the insured, the insurer takes over the insured's legal rights and remedies against any third party responsible for the loss, so that the insurer can recover its outlay. This supports the principle of indemnity.
- Contribution: Where the same risk is insured with more than one insurer, each insurer shares the loss rateably in proportion to the sum it insured, so that the insured recovers only the actual loss once and not more.
A further principle is proximate cause, under which the insurer is liable only where the nearest, most effective cause of the loss is a peril insured against.