What Does Contract of Utmost Good Faith Mean?
A contract of utmost good faith is a principle employed in insurance contracts that legally oblige all parties to reveal to others necessary information that can influence other parties’ decision to enter into a contract. Most insurance contracts are agreements that are drafted in utmost good faith. This means that honesty is required when making all types of contracts, particularly commercial contracts. Insurance policies are voidable if the contract of utmost good faith is not honored by both entities involved.
Insuranceopedia Explains Contract of Utmost Good Faith
A contract of utmost good faith, also called uberrimae fidei, is the minimum standard requirement expected from transacting parties, to be honest and avoid misleading or withholding important information against one another. It does not apply to insurance law but on everyday financial transactions.
For instance, if someone is applying for a health insurance, the contract of utmost good faith expects the policyholder to divulge his or her previous health problems to the insurer. Likewise, the insurance agent needs to reveal all information about the terms of the contract. It provides assurance that the parties involved in transactions are truthful and act ethically. Violation of this contract often leads to different consequences such as voiding the contract and deeming the contract fraudulent.