Principle of Utmost Good Faith in Insurance

Explanation of The Principle of Utmost Good Faith in Insurance with examples. Under the concept, doctrine and impact of the principle in practise.

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3 mins 2 secs
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Last Updated - July 27, 2023
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Principle of Utmost Good Faith is one of the basic features of an insurance policy. It means that both the policyholder and the insurer need to disclose all material and relevant information to each other before commencement of the contract. It means that both the Proposer (who wishes to buy the insurance plan) and the Insurer will be honest and not withhold critical information which is required to issue the insurance policy.

Responsibility of the insurance company

The insurer or its agent  should disclose all critical terms and conditions of the plan, including exclusions, so that the person taking the policy knows exactly what she or he is buying.  

Responsibility of the proposer

The person who wishes to take the policy should disclose all material facts which can impact the decision to issue the policy or impact the pricing decision of the insurance company.

Examples of Principle of Utmost Good Faith in Insurance

  • The life insurance applicant is asked to provide details of income, health, existing life insurance policies based on which the insurance company will decide to issue the policy or how much to charge for the same. If the applicant does not provide accurate information, then the insurance company can reject any claim arising in the policy
  • The insurance company has to disclose clearly the terms and conditions of the policy with details of exclusions. So if suicide as a mode of death is not covered in a life insurance policy in the first policy year, this has to be clearly mentioned in the proposal form. If not mentioned and in case a claim arises and get rejected on these grounds, the nominee can take legal action against the insurance company. 

Insurance Contract being a financial contract needs to follow Utmost Good faith. Commercial contracts are subject to the principle of Caveat Emptor i.e. let the buyer beware. Hence it becomes very important for the policyholder to disclose all relevant information at the time of commencement of the policy so that his family doesn’t have to face difficulty at the time of getting the claim in the unfortunate event of death of the life insured.

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Deepak Yohannan is the Founder & CEO of MyInsuranceClub. He enjoys writing on Personal Finance and focusses on explaining the basic concepts of insurance in simple language.