Utmost Good Faith in Insurance (Meaning, characteristics & Examples)

There are a few core principles of insurance that every insurer and insurance company must adhere to. Any violation of these core principles can lead to the termination of the insurance contract. Let us talk about one of the most important principles of insurance, the principle of utmost good faith.

What is utmost good faith in insurance?

• The principle of utmost good faith states that both the insurer and the insured must be transparent with each other, and must reveal all pertinent and valid information to each other before the inception of the policy agreement.
• The complete truth must be revealed about the subject matter of insurance and the conditions surrounding it.
• For instance, if you buy a life insurance policy, it is your duty to disclose all correct and relevant details pertaining to your health to the insurance company. Details such as any pre-existing conditions, medical history, etc must be truthfully mentioned to the insurer.
• Intentional withholding of relevant details is considered a strong breach of utmost good faith and can lead to the termination of the policy agreement.
• Also, it is equally important that the policyholder is well aware of the insurance cover that they are buying. The insurance company also be equally truthful about the policy they are selling to the insured.

Characteristics of utmost good faith in insurance

The insured and insurer are legally bound to make full and truthful disclosure about the insurance contract. This responsibility applies to all kinds of insurance.

How breach of utmost good faith occurs

Breach of utmost good faith in Life insurance

Section 45 of the insurance Act 1938 states that If the insurance company finds out that the policyholder has misrepresented relevant details or provided false disclosure of facts, the insurer can deem the policy null and void. This can only be done within 2 years of the inception of the policy.

Breach of utmost good faith in Life insurance with an example

Example

Mr. Manilal bought a life insurance policy for himself. Mr. Manilal is a heavy smoker and he has not disclosed this fact to the insurance company, and within 2 years Mr. Manilal is diagnosed with lung cancer and passes away. In this case, the insurance company can reject the claim on the ground of non-disclosure or misrepresentation of facts. This would be a breach of utmost good faith.

Breach of utmost good faith in health insurance with an example

Let us assume, Mrs. Sushiladevi bought a health insurance policy for herself. Mrs. Sushiladevi deliberately chooses to withhold her diabetic status from her insurance company to reduce the premium sum.

Example

Let us now assume that Mrs. Sushiladevi gets admitted into the hospital due to complications caused by high blood pressure and sugar. The insurance company may choose to reject her claim on the ground of non-disclosure of facts, as her medical reports would indicate that she was already a diabetic and blood pressure patient before buying the policy.

Breach of utmost good faith in motor insurance

The principle of utmost good faith not only applies to life or health insurance, but all types of insurance agreements, including motor insurance.

Example

Let us assume that Mr. Joy bought a motor insurance policy. In order to pay less premium, Mr. Joy deliberately hid the information that his car had an externally fitted CNG kit.

Let’s further assume that Mr. Joy’s car caught fire due to some complications in the CNG kit. The insurance company will reject Mr. Joy’s claim on the ground of non-disclosure of material facts. This would also lead to termination of the policy by breach of utmost good faith.