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06th
March 2010
The duty
of utmost good faith
Before
a contract of insurance is concluded, it is
vital that both parties to the contract, the
insurer and the insured are open and honest
in revealing all the material facts to each
other pertaining to the contract. In Latin,
this is called uberrimae fidei; utmost good
faith.
In the leading case of Carter v. Boehm, Lord
Mansfield explained:
Insurance is a contract of speculation. The
special facts upon which the contingent chance
is to be computed lie most commonly in the knowledge
of the assured only; the underwriter trusts
to his representation and proceeds upon confidence
that he does not keep back any circumstance
in his knowledge to mislead the underwriter
into a belief that the circumstances do not
exist. The keeping back of such circumstances
is fraud, and therefore the policy is void.
Although the suppression should happen through
mistake, without any fraudulent intention, yet
still the underwriter is deceived and the policy
is void; because the risque run is really different
from the risque understood and intended to be
run at the time of agreement.... The policy
would be equally void against the underwriter
if he concealed. ... Good faith forbids either
party, by concealing what he privately knows
to draw the other into a bargain from his ignorance
of the fact, and his believing the contrary.
Lord Mansfield’s definition of disclosure
in 1766 should be taken within the context of
modern society. Information is more accessible
and the insurer is not as reliant on the insured
to supply all material facts without the possibility
of seeking further information elsewhere. In
addition, such a wide ranging duty of disclosure
is no longer generally relied on by the insurer.
This pre-contractual duty of disclosure applies
equally to insurers and insured. In terms of
the insured, an applicant for insurance is under
a duty to disclose all material facts, up to
the date that the contract is signed. This duty
is continual, as long as the contract is active;
both parties have a duty to disclose any new
information that comes to light which could
affect the contract.
The expectation of the insurer is that the insured
has been truthful about all statements made
in relation to the insurance contract. Further,
the insured would not have withheld any critical
information which the insurance company would
subsequently rely on in the insurance contract. |
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If the insured does not disclose
all material facts within his or her knowledge,
this is fraud and the contract would be void.
All information not given at the time that
the contract has been signed but done by mistake
and not with the intention to mislead the
insurer is a defence for fraud.
The insured has a duty to disclose all material
facts, and not opinions. It is not always
clear what is considered a fact or an opinion.
For example, if a question on the insurance
form asked whether the potential insured is
a good driver, and he or she answered in the
affirmative, is this a matter of opinion or
a fact. Another question could be how many
accidents has the potential insured been in
the last five years. Would a good driver be
an individual who has not been in any accidents
in the last five years, if so, what if the
accidents were deemed the fault of the other
driver involved in the accident?
It is also a question of knowledge, the insured
has a duty to disclose all material facts
which he or she knows, and cannot reveal facts
which are not known to him or her. Further,
an individual may innocently not reveal a
particular fact because he or she does not
think it is relevant to the application for
insurance.
The duty of utmost good faith is a legal doctrine
that governs insurance contracts. It is based
on the full declaration of all material facts
outlining the exact nature and potential risks
for the insurer. It does not give rise to
a fiduciary relationship between the insurer
and the insured. Therefore, it is not similar
to the relationship between a principal and
an agent or a trustee and a beneficiary.
Ms. Trudy O. Glasgow is a practising attorney
at the law firm Gordon, Gordon & Co.,
(and has also taught law at University level
in the UK)*
This column is for general use only, for advice
specifically for your case, please see your
lawyer.
Next week: The difference between a condition
and a warranty
Discuss
Story
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