UTMOST GOOD FAITH

The commercial contracts are normally subject to the principle of “Caveat Emptor” i.e. let the buyer beware. In most of these contracts each party to the contract can examine the item or services which is the subject matter of contract.

For eg. If you go to the market to buy vegetables then you have to be careful yourselves about quality while buying the vegetables and after buying you cannot question the vendor.

Each party believes in the statement of the other party. So long as there is no attempt to mislead & the answers are given truthfully, the question of avoiding the contract would not arise. In the Insurance contract the product sold is intangible. It cannot be seen or felt.

Most of the facts relating to health, habits, personal history and family history are known to one party only, the proposer. The insurer can know most of these facts only if the proposer decides to disclose these facts.

It is true that the underwriter can have the assistance of medical report for life Insurance proposal. Sometimes, these aspects are not detected by the medical examination. e.g., a person suffering from high B.P. or diabetes can manage to hide these facts from the examining doctor. The history of past serious sickness, operations and injuries can be suppressed. These aspects may affect the life expectancy of the proposer.

Hence, these constitute material information from the underwriter’s point of view. Non-disclosure of such facts would put the insurer as well as the community of policyholders at a disadvantage. It is for these reasons that the law imposes a greater duty on the parties to an Insurance contract than in case of other commercial contracts.

This duty is one of utmost good faith (uberrima fides). It is the duty of the assured to make a full disclosure to the underwriter without being asked. In a contract of Insurance, there is an implied condition that each party must disclose every material fact known to him.

This type of contract is called uberrima fides i.e. contract of utmost good faith. Hence utmost good faith can be defined as a positive duty to disclose accurately & fully all facts material to the risk being proposed whether requested or not. The material fact is the material, which would influence the judgement of a prudent insurer in fixing the premium or determining whether he will cover the risk.

Therefore, facts regarding age, height, weight, previous medical history, smoking/ drinking habits, operations, details of earlier Insurances and hazardous occupation must be disclosed.

There are certain circumstances, which need not be disclosed e.g.:

• Facts which every one is supposed to know in general
• Facts of common knowledge
• Facts which lessen the risk
• Facts which could be reasonably discovered by reference to previous policies records of which are available with the insurer

In Insurance contract, the level of good faith above the level of what is in the usual commercial transaction is required.

Therefore, Insurance contracts are based on the principles of warranty, representation and concealment. We must understand the nature of warranty, representation and concealment.

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