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Utmost Good Faith in Insurance Contracts

Introduction

Insurance contracts are a special class of contracts which are guided by certain basic principles like those of utmost good faith, insurable interest, proximate cause, indemnity, subrogation and contribution. As such, an insurance contract is generally a combination of more than one of these principles and no single principle can be used at one time. The rest is dependent on the contract between the parties. These principles are mostly guided by common law principles from which they have developed. They have also been modified by principles of contract and by statutes as in the case of the Marine Insurance Act, 1963 which has to a certain extent relaxed the basic principles of insurance law.

General Principle of Utmost Good Faith

Out of all the abovementioned principles, the principle of utmost good faith remains one of the most important doctrines underlying the law of insurance. In Banque Finaciere de la Cite v. Westgate Insurance Co. Ltd., (1989) 2 All ER 982, it was held that-The duty of disclosure is neither contractual, nor tortuous, fiduciary or statutory in character but is founded on the jurisdiction originally exercised by the courts of equity to prevent impositions.

The term good faith has been mentioned in the Indian Penal Code and it signifies good intention and due care and caution. However, this principle under insurance law needs to be examined in the contractual context. In every contract in general, both parties owe no positive duty toward each other beyond showing ordinary good faith. This emanates from the right of every person to know about every material fact associated with the subject matter of the contract and there is no escape to this. This follows from the maxim Caveat Emptor or buyer beware as under the Sale of Goods Act. It means that each party must be given a reasonable opportunity to make independent enquiries about the subject matter in question so that they may take a decision. Thus, all material facts must be disclosed or made available to the party so that he or she may reasonably enquire about the same. This further puts a duty on the party making the subject matter accessible to the person enquiring, not to play fraud or misrepresent the same, else it would be hit by S.19 of the Indian Contract Act, making the contract voidable at the option of the innocent party. But, S.19 also clarifies that misrepresentation or even silence amounting to fraud will not entitle a party to avoid the contract if he had the means of discovering the truth with ordinary diligence and did not do so. Hence, there must thus be free consent and the parties must understand the same things in the same sense.

The burden of proof to show non-disclosure or misrepresentation is on the insurance company and the onus is a heavy one. The duty of good faith is of a continuing nature in as much no material alteration can be made to the terms of the contract without the mutual consent of the parties.

Good Faith expected from both parties

Good faith is expected from the insured or assured as well as the insurer. It is the buyer's duty to disclose all facts related to the risk to be covered. Similarly, it is the insurer's duty to inform the insured of all the terms of the contract. However, it is generally the assured person on whom there is a bigger duty to disclose. This is primarily because very often the insurer has to depend upon what details the insured mentions in his form. If the insured gives wrong details or details of goods which are actually not in existence, the insurer may end up paying for the wrong claims in the future. The insurer faces a lot of problems trying to verify all such details, even though the advent of technology has made the task comparatively easier now a days. Wrong information given not only affects the insurer but also the other people involved in the insurance pool whose premiums may be wrongly utilized to satisfy the claims. It is therefore an implied condition or principle of insurance that the Assured be required to make a full disclosure of all material particulars within his knowledge about the risk. Further, considering the increase in new businesses in which insurance is being taken, it becomes mandatory for the assured to inform the insurer if there are any alterations or changes to the business which increases the risk during the validity of the policy and get his permission. If no disclosure is made, the insurer has every right to avoid the contract.