What Is the Doctrine of Utmost Good Faith in Insurance?

What Is the Doctrine Of Utmost Good Faith?

The doctrine of utmost good faith, also known by its Latin name uberrimae fidei, is a minimum standard, legally obliging all parties entering a contract to act honestly and not mislead or withhold critical information from one another. It applies to many everyday financial transactions and is one of the most fundamental doctrines in insurance law.

How the Doctrine Of Utmost Good Faith Works

The doctrine of utmost good faith requires all parties to reveal any information that could feasibly influence their decision to enter into a contract with one another. In the case of the insurance market, that means that the agent must reveal critical details about the contract and its terms.

Applicants, meanwhile, are legally obliged to present all material facts, as they are known, including precise details on whatever needs to be insured and if they have been refused insurance coverage in the past. This information is used by insurers to decide whether to insure the applicant and how much to charge for a policy.

The doctrine of utmost good faith provides general assurance that the parties involved in a transaction are truthful and acting ethically. Ethical transactions include assuring all relevant information is available to both parties during negotiations or when amounts are determined.

Repercussions for Violations of Good Faith

Depending on the nature of the transaction, violations of the doctrine of good faith can result in a variety of consequences. Most commonly, a contract created with inaccurate information from intentional misinformation or fraudulent concealment may cause the contract to become voidable.

Further, in the case of the provision of goods or services before the information is discovered or disclosed, the misinformed party may enforce legal action. Legal action can include the right to recoup costs associated with the fulfillment of the contract that could be deemed fraudulent.

Example of the Doctrine of Utmost Good Faith

An applicant for a life insurance policy will be asked to provide information about their health and family history. Based on these responses, the insurer will decide whether to insure the applicant and what premium to charge.

Concealing facts, such as for instance a smoking habit, is deemed a material misrepresentation that can lead the insurer to void the contract. If the insurer had known that the applicant smoked, the premium would likely have been significantly higher.

The Doctrine of Utmost Good Faith vs. Caveat Emptor

Unlike insurance contracts, most commercial agreements do not subscribe to the doctrine of utmost good faith. Instead, many are subject to caveat emptor, or "buyer beware." 

This principle of contract law places the onus on the buyer to perform due diligence before making a purchase. In other words, a seller need only disclose information requested by the buyer.

Special Considerations

Outside of the insurance market, individuals exercise good faith while completing various financial transactions. This includes businesses or individuals seeking finance from banks, or financial institutions providing fee estimates.

Often, estimates provided by individual service providers, such as plumbers and electricians, are made in good faith. Good faith estimates suggest the service provider is confident in the cost estimate based on the known factors surrounding the transaction.

In this context, it is not legally binding as not all variables are known. Specific issues may not be discoverable by either party until work has begun.