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How breach of utmost good faith occurs in insurance

You smoke and fail to mention this fact to your health insurance provider. This is a case of breach of utmost good faith. For new insurance policy seekers, how a breach of utmost good faith occurs in a contract of insurance may be a foreign concept. This can lead to unintentional errors when applying for a policy.

Breach of utmost good faith is when the doctrine of utmost good faith is broken or when the trust is broken. This article will explore what utmost good faith is, different breaches, and remedies for the breach of faith.

What is utmost good faith?

Utmost good faith is a principle that binds both parties to act honestly and not mislead or withhold any information that is essential to the insurance contract. Both parties must disclose all relevant information.

For example, your insurance company has to honestly provide premium figures and coverage limitations, and you as an applicant must truthfully reveal all requested information.

What are representations?

Representations are details provided by the insurance applicant in the application form. These can vary according to the type of insurance.

  • If you’re applying for car insurance, you’ll be required to reveal information like traffic tickets, any prior accidents, information about your residence, education level, and income.
  • On the other hand, if you apply for life insurance, you’ll be required to disclose your health background and family health history.

Breach of honesty during this stage may leave your insurance null and void should the insurer come to notice the breach.

Types of breach of utmost good faith

Breach of utmost good faith is of four types:

  1. Fraudulent misinterpretation: This refers to the act of fraudulently or purposely giving false information to the other party.
  2. Non-fraudulent misinterpretation: Innocently or negligently giving false information to the other party.
  3. Fraudulent non-disclosure: Withholding of material facts to the other party to commit fraud.
  4. Non-fraudulent non-disclosure: Innocently or negligently withholding material facts to the other party.

In case a breach of utmost good faith occurs, any of the four types, there are only two remedies available in India, a reissue of the insurance and waiving the breach (which makes the policy active).

Section 45 and utmost good faith

The doctrine of utmost good faith, while protecting insurers, can affect the policyholder, as well. If the insurer claims there was misinformation in the policy application, policyholders stand to lose the assured sum. This can lead to a long dispute with equal difficulty to prove or disprove the claim.

Therefore, Section 45 of the Insurance Act was introduced to deal with cases where a breach of utmost good faith has occurred. According to this section, insurers cannot raise questions on policies after two years from the issue.

The theory of utmost good faith holds importance for the insurer to have a full and accurate picture of the risk involved. Through section 45 of the Insurance Act, the doctrine is upheld to reduce disputes between insurers and policyholders. However, it is always better, to be honest with your insurance provider for the process to go smoothly.

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