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36
Utmost Good Faith
Introduction
Utmost good faith is a key principle of insurance. It is concerned with the information that
is disclosed by the parties who are involved in the insurance contract. If a party fails to
adhere to the principle of utmost good faith, the outcome of the claim may be affected.
This section explains what is meant by utmost good faith, how it is applied in practice and
what happens when it is breached.
Activity
Think about the type of information that might be relevant to an insurance
company when deciding whether to accept a risk or calculating the premium
to charge.
Consider a home buildings policy which provides cover against Fire, Theft
and Flood. What features of the building would be relevant to the insurance
company and why?
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CILA CH 1 Introduction to the Insurance Industry
The proposer does not need to disclose what the underwriter ought to know
The proposer is not required to disclose things he could not know.
These have been codified in the Marine Insurance Act 1906:
Clause 17 - A contract of marine insurance is a contract based upon the utmost
good faith, and, if the utmost good faith being not observed by either party, the
contract may be avoided by the other party.
Clause 18(1) - Subject to the provisions of this section, the assured must disclose
to the insurer, before the contract is concluded, every material circumstance
which is known to the assured, and the assured is deemed to know every
circumstance which, in the ordinary course of business, ought to be known by him.
If the assured fails to make such disclosure, the insurer may avoid the contract.
Clause 18(2) - Every circumstance is material which would influence the judgment
of a prudent insurer in fixing the premium, or determining whether he will take
the risk.
Clause 18(3) - In the absence of inquiry the following circumstances need not be
disclosed, namely:
(a) Any circumstance which diminishes the risk;
(b) Any circumstance which is known or presumed to be known to the insurer.
The insurer is presumed to know matters of common notoriety or knowledge,
and matters which an insurer in the ordinary course of his business, as such,
ought to know;
(c) Any circumstance as to which information is waived by the insurer;
(d) Any circumstance which it is superfluous to disclose by reason of any express
or implied warranty.
Clause 18(4) - Whether any particular circumstance, which is not disclosed, be
material or not is, in each case, a question of fact.
Clause 18(5) - The term circumstance includes any communication made to, or
information received, by the assured.
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Utmost Good Faith
Activity
Taking note of the above, consider a restaurant policy which provides cover
for contents, fixtures and fittings, and stock. Which of the following facts
must the restaurateur disclose to his Insurers:
1. The neighbouring properties are a hardware shop and a Post Office
2. The restaurant suffered a fire 2 years ago
3. A sprinkler system was installed after the fire
4. The value of the wines and spirits held on the premises
5. Agency waiting staff are used on a regular basis.
Activity
Obtain an insurance proposal form and review the questions asked by
Insurers. Look for any additional statements that ask the proposer to
provide any further information that is material or relevant.
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CILA CH 1 Introduction to the Insurance Industry
Activity
Consider the handling of a claim and how the process may reveal facts that
were not disclosed at proposal stage. In particular, think about the type of
information you obtain from a Policyholder either on the telephone, via
correspondence or during a visit to their property. How would you check
whether this information had previously been disclosed?
Ask your colleagues for examples of non-disclosed material facts. Find out
how they dealt with the issue and whether it had an impact on the claim.
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