Utmost Good Faith (Uberrima Fides)

Why insurance needs it

Uberrima fides is Latin for utmost good faith. The principle requires both parties to an insurance contract, the insured and the insurer, to deal with each other in absolute honesty and transparency.

The reason lies in who knows what. The person proposing for insurance knows their own health, property and habits; the insurer has to price the risk largely on what it is told. The buyer, in turn, relies on the insurer to explain what the policy does and does not cover.

The duty comes from English insurance case law of the eighteenth century, notably Carter v Boehm (1766). It was later written into marine insurance statutes, the Marine Insurance Act, 1906 in England and the Marine Insurance Act, 1963 in India, and it applies to all classes of insurance.

What the insured owes: material facts

The insured must disclose all material facts. A material fact is one that could influence the insurer's decision to accept the risk or to determine the premium. In health insurance, pre-existing diabetes and a smoking habit are material, because they bear directly on the risk. A person's favourite colour is not.

Other insurance on the same subject matter is material too, and leaving it out of a new proposal form is a breach of the duty. So is a change that alters the risk. A vehicle owner who fits a CNG or LPG kit, which must also be endorsed on the registration certificate, has made what insurers usually treat as a material alteration to the vehicle.

What the insurer owes

The duty runs both ways. The insurer must clearly communicate the terms, conditions and exclusions of the policy. In health insurance this takes a concrete form: every policy must come with a Customer Information Sheet setting out its main features.

An intermediary is bound by honesty as well. A Point of Sales Person whose client refuses to disclose a pre-existing condition should explain the consequences and should not process an application containing information known to be false. Submitting it can expose both the client and the intermediary to rejected claims and to regulatory or legal action.

When the duty is broken

Non-disclosure or misrepresentation of a material fact makes the policy voidable at the option of the innocent party. In practice this usually means the insurer may avoid the contract and reject claims.

Outcomes still depend on the policy wording and the facts. An undisclosed CNG kit may lead an insurer to reject or reduce a claim, especially where the loss is linked to the kit. In health insurance there is also a time limit: after 60 continuous months of cover, a policy or claim cannot be contested for non-disclosure or misrepresentation unless fraud is established.

Rules at a glance

Key points

• Utmost good faith binds both the insured and the insurer.
• A material fact is one that could influence acceptance of the risk or the premium.
• The insurer's side of the duty is to communicate terms, conditions and exclusions clearly.
• Non-disclosure of a material fact makes the policy voidable at the insurer's option.
• In health insurance, non-disclosure cannot be raised after 60 continuous months unless fraud is established.

Common misunderstandings

• The duty is not one-sided: the insurer must be as open about terms and exclusions as the insured is about the risk.
• A breach does not make the policy void by itself: it becomes voidable, and the innocent party decides whether to avoid it.
• Section 45 of the Insurance Act, with its three-year limit, is not the health rule: it applies to life insurance, while health insurance has the 60-month moratorium.

Questions people ask