What Does Utmost Good Faith Mean?
Utmost good faith, uberrimae fedei in Latin, refers to the principle of honesty expected from both the insured and the insurer when in the process of transacting a policy. For the former, it means total disclosure about facts that may affect the purchase of the policy or the need for claims in the future. For the latter, it means telling the insured about the exact extent of the coverage and its exclusions, and not concealing a feature in the policy that might discourage the purchase.
Insuranceopedia Explains Utmost Good Faith
In an ideal world, an insurance company has prior access to all pertinent information about a person who wants to purchase a policy to determine whether that person is eligible for it or not. In the same ideal world, the potential policyholder can be left by himself or herself to find out everything there is to know about a policy. However, in real life, both the insurer and the insurance client have limitations to getting all the necessary information. Both must operate on the principle of utmost good faith. In other words, both parties should share data that might affect either or both of them.
Furthermore, data or the necessary facts must be shared even if a party (which can refer either to the insured or the insurer) didn't ask. Violation against this principle includes not just lying. It also includes concealment.
When a person wants to buy a life insurance, for instance, he or she must tell the insurer all of their health issues, including those that might raise the premium or make them ineligible for the policy. On the other hand, the insurer, which is often represented by an agent who is also responsible for carrying out the principle, must tell the person about the features of the policy that they intend to buy including limitations and exclusions which might prevent them from buying it.
The insurer can void the policy (not honor any claims) if, upon investigation, it finds the insured to have violated this principle. The insured can file a case against the insurer and seek damages if the latter has violated it, and vice versa.