Utmost Good Faith: a less understood notion in insurance regime

Concept

Looking back into the history, the concept of Utmost Good Faith goes back to the prominent English case ‘Carter V. Boehm’, 1776 where it was decided that both Insurer (Insurance Companies) and Assureds (Insured) owe good faith against each other and pre-contractual duty of disclosure equally applies to both the parties of Insurance.

Lord Mansfield, a British Barrister, in his judgment he explained this by saying “Insurance is a contract based upon speculation. The special facts, upon which the contingent chance is to be computed, lie most commonly in the knowledge of the insured only; the underwriter trusts to his representation and proceeds upon the confidence that he does not keep back any circumstance in his knowledge, to mislead the underwriter into a belief that the circumstance does not exist, and to induce him to estimate the risk as if it did not exist. Good faith forbids either party by concealing what he privately knows, to draw the other into a bargain from his ignorance of that fact, and his believing the contrary”.

Gradually, this concept became widely accepted and practiced in most of the jurisdictions where Insurance business exists, both in life and non-life insurance. The definition of Utmost Good Faith is neither singular nor complete because it has gradually evolved from the interpretation of the courts, mostly in the common law jurisdictions like English, Canadian etc.

This doctrine is defined as ‘of the greatest or highest degree; the greatest degree or amount; the highest, greatest or best of one’s power; the extreme limit or extent, honesty of purpose or sincerity of declaration: to act in good faith; expectations of such qualities in others, to take a job in good faith.

Insurance contracts are written and mostly standard form with regards to terms and conditions. Similarly, certain principles and customary practices are also implied to the insurance contracts and they apply when there is an insurance claim.

This doctrine seemingly simple Latin expression, which has both subjective and objective aspects. It suggests the notions relating to trust, fairness, honesty and equity as well.

Utmost Good Faith at Practice

Amongst such principles and practices “Uberrimae fidei” in Latin or simply Utmost Good Faith” principle is dominantly applied in the insurance business. Insurers generally apply this to exempt their liability against insured in case the insured has deliberately concealed any material facts or misrepresented while seeking the insurance coverage i.e. on the pre-contractual stage of insurance.

But, it is important that such facts are materially related to the life and article to be insured. For instance, when you are buying a health insurance, you should disclose all relevant information about your health, which can impact terms and rates of the insurance sought. An adverse health history could mean a higher premium, or even a rejection of your insurance proposal. Any such non-disclosure will lead to rejection of claims, as the contract becomes void.

Similarly, the insurer has to clearly and unambiguously spell out the terms and conditions of the policy coverage, most importantly exclusions, as a mater of full discloser to the insured. A good example of application of this principle on the insurer is the insurance case of twin towers after 9/11.

The debate was about the deductibles, whether the attack on the two towers part of one event or were two? The insurer said it was two and deductibles will be applied on each towers. The question is; was that explained to the insured? Certainly not. Eventually, the case was dragged to the court and the court decided it was single event, thus, single deductible.

The significant foundation of insurance is the principle of indemnity, which means compensation or reimbursement. An insurance claim makes good your financial loss, but is not meant to let you make any profit. Looking meticulously, your health is not covered or insured; the financial cost of regaining lost health is insured instead. Likewise, you insure the cost of a property or object. Whereas, when it comes to life insurance, you can’t place a value on human life. What is insured is not life, but the would-be future earnings of the insured person.

‘Uberrimae fidei’ at Nepalese Context

This concept has been incorporated in the English laws, like the Insurance Act, 2015 and the Marine Insurance Act, 1906 that makes the application of this principle easier and is known significantly to the English customers (Insured). On the other hand, Nepalese Parent Insurance legislations like Insurance Act, 2049 B.S. (1992 A.D.) and Insurance Regulation, 2049 B.S. (1992 A.D.) remains silent on this principle and its application.

Whereas, Beema Samiti (The Insurance Regulatory Authority of Nepal) the first instance court designated to settle the disputes between Insured and the Insurer, has widely accepted and applied the principle of utmost good faith both in life and non life insurance disputes.

Similarly, other higher courts and the Supreme Court of Nepal has adhered this principle in insurance related cases. It is expected that the proposed Bima Pradhikaran Ain (Insurance Authority Act) will contain this principle. Though, the Nepalese Insurers have been incorporating this principle expressly in the policy itself, mostly mentioning ‘any concealment of material facts or misrepresentation related to the insurance will lead to make the policy void resulting to non-liability of the insurer……’, more frequently in the life insurance policies.

Thus, both the parties of insurance have to be transparent with each other and material facts pertinent to the life and article to be insured must be disclosed before the issuance of policy, as well as after. Concealing and misrepresenting of information by one party will act against the interests of the other. This principle is believed to be driven by a positive spirit of faith and trust; failure could lead to fraud, negligence and conflicts undermining the basic objectives of the insurance.

(Writer is Deputy Director at Beema Samiti, Insurance Regulatory Authority of Nepal. Writer’s opinion is purely personal and doesn’t reflect the institutional views.)