Understanding utmost good faith in insurance

This blog posts contains a detailed guide on utmost good faith in insurance, understanding how it works and its meaning.

The general rule guiding most commercial contracts is the principle of caveat emptor.

Under this principle, the parties involved in the contract are expected to provide information on the state of the subject of the matter of the insurance.

The buyer also examined the goods and satisfy himself as he is making a reasonable bargain before purchasing the goods.

If after the purchase of the goods he discovered he has not made a good bargain, he does not have any legal right against the seller.

In this process, each party should not make statements that will mislead each other in bargaining, and they must be truthful in their business transactions.

Any mistake made in the purchase of such goods and services could not lead to legal redress as such transaction is under the doctrine of caveat emptor.

What is utmost good faith in insurance

Utmost good faith in insurance is defined as a minimum standard that requires both buyer and seller in a transaction to act honestly towards each other and not to mislead or withold critical information from each other.

The insurance contract requires both the insurer and the insured to observe the doctrine of utmost good faith in their transactions.

This principle requires mutual Trust and confidence between the insurer and the insured.

Part IX of insurance act 2003 describe the right and duties of the insured and the insurance agent regarding disclosure of material fact through the completion of proposal form or other application forms which are expected to be drafted in such a way that the information considered to be material fact in accepting the application for insurance on the risk would be elicited and any other information not specifically requested shall not be deemed to be material fact.

Material Fact in utmost good faith in insurance

Before going into ultimate good faith in insurance, let’s face know what is material fact.

A material fact is the material which will influence the judgement of a prudent insurer in fixing premium or determining whether he will take the rules or not.

In other words, it is a fact which expression would reasonable result in a different decision.

Fast which needs to be disclosed must be included such fast which would guide the insurer in rejecting or accepting a risk as in determining the premium chargeable.

Facts that needed to be disclosed

In utmost good faith in insurance, below are the fast that needed to be disclosed;

1. Previous proposal made by the proposal but declined by insurer.

2. Information on special terms imposed in previous insurance proposal if any.

3. Factswwhich lesson or improve the risk. For example, the existence of burglar alarm in a burglary/theft risk or sprinkler system in premises propose for fire insurance.

4. Those that will make the risk to appear higher externally than expected.

5. The previous losses or claims made under other insurance policies.

6. Those that are likely to increase the amount of loss that normally expected.

7. Facts capable of discovery by the insurer from information supplied.

8. Those relating to the full description of the subject matter of the insurance.

9. The existence of other non indemnity insurance policies if any in utmost good faith in insurance.

These are the facts that needed to be disclosed in utmost good faith in insurance.

Facts needed not to be disclosed

The purpose of disclosing facts by the insured is to ensure that the insurer is not put at an advantage. But there are still some facts that can improve the risk exposure of a proposer.

Such facts will not affect the insurer if the proposal does not disclose them. The following facts even if they are material, needed not to be disclosed.

1. Facts about law: It is presumed that everybody knows what the law requires.

2. Facts of which the insurer deemed to know: h there are some facts which by nature of a particular trade is known to the insurer.

3. Those that lessen or improve the risk: The existence of alarm and fence erected around the building.

4. Facts about which the insurer has been put on inquiry: Example is where the proposer has referred the insurer to the claims record under its previous policy with a previous insurer and they do not follow up this line of enquiry.

5. First which insurance surveyor should have noted: These deals with those facts which in ordinary surveyor a professional should have noticed.

6. Those that are unknown to the proposal: The knowledge of a fact is required by the proposal for him or she to be able to disclose such fact as one is not expected to say what he does not know.

So these are the facts that needed not to be disclosed in utmost good faith in insurance.

Breach of utmost good faith

utmost good faith in insurance

The breach of utmost good faith in insurance may be classified in the following ways;

1. Non disclosure: This is the failure to disclose material fact, either by accident or because the fact is not considered to be important.

2. Concealment: This is the failure to disclose a material fact willfully which is fraudulent.

3. Fraudulent misrepresentation: u this constitutes deliberate supply of false or intentionally misleading information in a material fact.

4. Innocent misrepresentation: This occurs when incorrect information is given about material facts, but where the error is unintentional.

Effects of breach of utmost good faith

It gives the aggrieved party the right to avoid the contract. The contract is not automatically made void but they aggrieved party must decide on his course of action with a reasonable time.

The options open to him in the utmost good faith in insurance are;

1. To sue for damages: If the breach was fraudulent, the insured will be guilty of the tort of deceit, which could give rise to an action for damages.

2. To waive the breach:  The insurer may overlook the breach if he so desires, in which case of the breach never legally occurred. If the insurance takes no action within a reasonable time, he will be deemed to have taken this course.

3. To consider the correct void: This requires notification to the offending party. It is virtually unknown for a breach to be committed by the insurer, who is there for almost invariably the aggrieved party.

The insurer will state that he is coming off risk. If the policy had already matured, example is the life insurance, no payment will be made.

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This is where i wrap it up on utmost good faith in insurance is, your suggestion or question is welcomed.

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