Вы находитесь на странице: 1из 7

PRINCIPLE OF UTMOST GOOD FAITH/ UBERRIMA FIDES

Insurance contracts are a special class of contracts which are guided by certain basic
principles like those of utmost good faith, insurable interest, proximate cause, indemnity,
subrogation and contribution. As such, an insurance contract is generally a combination of
more than one of these principles and no single principle can be used at one time. The rest is
dependent on the contract between the parties. These principles are mostly guided by
common law principles from which they have developed. They have also been modified by
principles of contract and by statutes as in the case of the Marine Insurance Act, 1963 which
has to a certain extent relaxed the basic principles of insurance law. Insurance contracts are
a special class of contracts which are guided by certain basic principles like those of utmost
good faith, insurable interest, proximate cause, indemnity, subrogation and contribution. As
such, an insurance contract is generally a combination of more than one of these principles
and no single principle can be used at one time. The rest is dependent on the contract
between the parties. These principles are mostly guided by common law principles from
which they have developed. They have also been modified by principles of contract and by
statutes as in the case of the Marine Insurance Act, 1963 which has to a certain extent
relaxed the basic principles of insurance law.
Utmost Good Faith
Both the parties to a commercial contract are by law required to observe good faith. Let us
say that you go to a shop to buy an electrical appliance. You simply will not enter, pay and
pick up any sample piece but will check two, three or even more pieces. You may be even
ask the shopkeeper to give a demonstration to ensure that it is in working condition and also
ask several questions to satisfy yourself about what you are buying. Then when you go
home you find it does not work or is not what you were looking for exactly so you decide to
return the item but the shopkeeper may well refuse to take it back saying that before
purchasing you had satisfied yourself; and he is possibly right. The common law principle
Caveat Emptor or let the buyer beware is applicable to commercial contracts and the
buyer must satisfy himself that the contract is good because he has no legal redress later on
if he has made a bad bargain. The seller cannot misrepresent the item he has sold or deceive
the buyer by giving wrong or misleading information but he is under no obligation to
disclose all the information to the buyer and only selective information in reply to the
buyers queries is required to be given. But in Insurance contracts the principles of
Uberrima fides i.e. of Utmost Good Faith is observed and simple good faith is not
enough. Why this difference in Insurance contracts?

Firstly, in Insurance contracts the seller is the insurer and he has no knowledge about the
property to be insured. The proposer on the other hand knows or is supposed to know
everything about the property. The condition is reverse of ordinary commercial contracts
and the seller is entirely dependent upon the buyer to provide the information about the
property and hence the need for Utmost Good Faith on the part of the proposer.
It may be said here that the insurer has the option of getting the subject matter of Insurance
examined before covering the risk. This is true that he can conduct an examination in the
case of a property being insured for fire risk or of getting a medical examination done in the
case of a health policy. But even then there will be facts which only the insured can know
e.g., the history of Insurance of the property whether it has been refused earlier for
Page 1 of 7
Insurance by another company or whether it is also already insured with another company
and the previous claim experience. Similarly a medical examination may not reveal the
previous history i.e. details of past illness, accidents etc. Therefore Insurance contracts insist
on the practice of Utmost Good Faith on the part of the Insured.
Secondly, Insurance is an intangible product. It cannot be seen or felt. It is simply a promise
on the part of Insurer to make good the loss incurred by the Insured if and when it occurs.
Thus the Insurer is also obliged to practice Utmost Good Faith in his dealings with the
Insured. He cannot and should not make false promises during negotiations.
He should not withhold information from the Insured such as the discounts available for
good features e.g., fire extinguishing Appliances discount in fire policies or that Earthquake
risk is not covered under the standard fire policy but can be covered on payment of
additional premium.
In the recent Earthquake disaster in Gujarat a number of Insured failed to get any relief from
Insurance Companies as Earthquake risk was not covered. Utmost Good Faith can be
defined as A positive duty to voluntarily disclose, accurately and fully all facts material to
the risk being proposed whether requested for or not. In Insurance contracts Utmost Good
Faith means that each party to the proposed contract is legally obliged to disclose to the
other all information which can influence the others decision to enter the contract.
The following can be inferred from the above two definitions:
(1) Each party is required to tell the other, the truth, the whole truth and nothing but the
truth.
(2) Unlike normal contract such an obligation is not limited to any questions asked and
(3) Failure to reveal information even if not asked for gives the aggrieved party the right
to regard the contract as void.
How is this duty of Utmost Good Faith to be practiced? And what are the facts that the
proposer has to disclose? The answer to both the question is simply the proposer must
disclose to the insurer all material facts in respect of the subject matter of Insurance.
WHAT IS A MATERIAL FACT?
Material fact is every circumstance or information, which would influence the judgement of
a prudent insurer in assessing the risk.
Or
Those circumstances which influence the insurer decision to accept or refuse the risk or
which effect the fixing of the premium or the terms and conditions of the contract must be
disclosed.

Test of Determination- Whether a particular fact is material depends upon the


circumstances of a particular case. The test to determine materiality is whether the fact has
any bearing on the risk undertaken by the insurer. If the fact has any bearing on the risk it is
a material fact, if not it is immaterial. Only those facts, which have a bearing on the risk, are
material facts. Otherwise, they are not material facts, which need to be disclosed. (Rohini
Nandan V/s. Ocean Accident and Guarantee Corporation AIR6 1960 Kolkata 696)
Materiality is a question of fact, to be decided in the circumstances which would influence
the judgment of a prudent insurer in fixing the premium on determining whether he will
take the risk and if so, at what premium and on what conditions
FACTS, WHICH MUST BE DISCLOSED

Page 2 of 7
i. Facts, which show that a risk represents a greater exposure than would be expected
from its nature e.g., the fact that a part of the building is being used for storage of
inflammable materials.
ii. External factors that make the risk greater than normal e.g. the building is located
next to a warehouse storing explosive material.
iii. Facts, which would make the amount of loss greater than that normally expected e.g.
there is no segregation of hazardous goods from non-hazardous goods in the storage
facility.
iv. History of Insurance (a) Details of previous losses and claims (b) if any other
Insurance Company has earlier declined to insure the property and the special
condition imposed by the other insurers; if any.
v. The existence of other insurances
vi. Full facts relating to the description of the subject matter of Insurance
Some examples of Material facts are
(a) In Fire Insurance: The construction of the building, the nature of its use i.e. whether it
is of concrete or Kucha having thatched roofing and whether it is being used for residential
purposes or as a godown, whether fire-fighting equipment is available or not.
(b) In Motor Insurance: The type of vehicle, the purpose of its use, its age (Model), Cubic
capacity and the fact that the driver has a consistently bad driving record.
(c) In Marine Insurance: Type of packing, mode of carriage, name of carrier, nature of
goods, the route.
(d) In Personal Accident Insurance: Age, height, weight, occupation, previous medical
history if it is likely to increase the choice of an accident, Bad habits such as drinking etc.
(e) Burglary Insurance: Nature of stock, value of stock, type of security precautions taken.
As mentioned this is not an exhaustive list but only a few examples.
Details of previous losses is a material fact which is relevant to all policies.

FACTS, WHICH NEED NOT BE DISCLOSED


a) Facts of Law: Everyone is deemed to know the law. Overloading of goods carrying
vehicles is legally banned. The transporter cannot take excuse that he was not aware
of this provision.
b) Facts which lessen the Risk: The existence of a good fire-fighting system in the
building.
c) Facts of Common Knowledge: The insurer is expected to know the areas of strife
and areas susceptible to riots and of the process followed in a particular trade or
Industry.
d) Facts which could be reasonably discovered: For e.g. the previous history of
claims which the Insurer is supposed to have in his record.
e) Facts which the insurers representative fails to notice: In burglary and fire
Insurance it is often the practice of Insurance companies to depute surveyors to
inspect the premises and in case the surveyor fails to notice hazardous features and
provided the details are not withheld by the Insured or concealed by him them the
Insured cannot be penalized.
f) Facts covered by policy condition: Warranties applied to Insurance policies i.e.
there is a warranty that a watchman be deployed during night hours then this
circumstance need not be disclosed.
Page 3 of 7
Duration of Duty of Disclosure
The duty of disclosure remains in force throughout the entire negotiation stage and till the
contract is finalized. Once the contract is finalized than the contract is subject to ordinary
simple good faith. However when an alteration is to be made in an existing contract then
this duty of full disclosure recovers in respect of the proposed alteration.
Ratan Lal Vs. Metropolitan Insurance Co. Ltd.:- Pyare Lal (insured) died on 19-4-1946,
plaintiff in this case were his sons (successors and heirs). On accord of his policy, it so
happened that before the acceptance could be supplemented with regular policy, the assured
died on 19-4-1946. But the amount which had been paid up by the deceased was first kept in
suspense account and thereafter on 28-3-1946 was adjusted it first annual premium.
Therefore it could be said that on the date of adjustment of account, the policy was deemed
to be a binding contract between the parties.
But the company contended that though deceased died after the acceptance of policy but
illness which was responsible for bringing about his death had already set in since 23-3-
1946, much within the time the policy was still under consideration before the company. On
this, plaintiff replied that the illness had set in for the first time on 23-3-1946 and not any
time before that, and the intimation was made to the company about the illness.
Trial court held the company liable to pay the sum to the insured, but defendants didnt find
their way to make any payment to the plaintiffs and hence this appeal came before the High
Court. Court on the facts observed that: -
Principle of uberrima fidea would follow till the conclusion of the contract is made by the
company. And if breach occurs the contract would be voidable the instance of the party to
whom ubarrima fides is due.
Great care must be taken in deciding the difference as to what would be mere illness or
whats ordinary simple disorder, and what would constitute material change in health
theres a great danger for one being take for another. Therefore, if in his honest judgment
there was no illness or any change of health but only an ordinary disorder, the mere non-
communication of that event to the company cannot be a ground for the insurer to avoid the
policy. Therefore, the moment the proposal was accepted by the company, the condition as
to the remittance of the first instalment by the assured and the acceptance of the same by the
company also automatically stood complied with, 26th March, 1946. He had already sent
for the doctor on the previous evening, namely, on 27th March, 1946, but on that day the
complaint, if any, was nothing more than exhaustion or what we may call ordinary simple
disorder otherwise had there been anything serious, the doctor should have undoubtedly
prescribed some medicine to the patient. And therefore the complaint was of an ordinary
disorder character and not illness. If that is so then there was no breach of warranty by Pyare
Lal if he did not send any information of his illness which began on the 28th March, 1946
and wherein the policy had already been accepted by company.

The duty of disclosure also revives at the time of renewal of contract since legally renewal
is regarded as a fresh contract. For example: a landlord at the time of proposal has disclosed
that the building is rented out and is being used as an office. If during the continuation of
the policy the tenants vacate the building and the landlord subsequently rents it out to a
person using it as a godown then he is required to disclose this fact to the Insurer as this is a
change in material facts and effects the risks.

Page 4 of 7
(Note: Please note that in long term Insurance Business the Insurer is obliged to accept the
renewal premium if the Insured wishes to continue the contract and there is no duty of
disclosure operating at the time of renewal. Normally Insurer arranges inspection on each
renewal.)
BREACHES OF UTMOST GOOD FAITH
Breaches of Utmost Good Faith occur in either of 2 ways.
(1) Misrepresentation, which again may be either innocent or intentional. If intentional
then they are fraudulent
(2) Non-Disclosure, which may be innocent or fraudulent. If fraudulent then it is called
concealment.
It is important to distinguish between the two:
Misrepresentation and Non-Disclosure
Misrepresentation:
Innocent: This occurs when a person states a fact in the belief or expectation that it is right
but it turns out to be wrong. While taking out a Marine Insurance Policy the owner states
that the ship will leave on a specific date but in fact the ship leaves on a different date.
Intentional: Deliberate misrepresentation arises when the proposer intentionally distorts the
known information to defraud the insurer. The selfish objective is somehow to enter the
contract or to get a reduction in the premium e.g., If an applicant for motor Insurance stated
that no one under 18 would drive the vehicle when in fact his 17 years old son drives
frequently. Such a misrepresentation would be material as it would affect the decision of the
insurer.
Non-Disclosure
Innocent: This arises when a person is not aware of the facts or when even though being
aware of fact does not appreciate its significance e.g. A proposer at the time of effecting the
contract has undetected cancer therefore does not disclose it or A proposer had suffered
from Rheumatic fever in his childhood but he does not disclose this not knowing that people
who have this are susceptible to heart diseases at a later age.
Deliberate: This is done with a deliberate intention to defraud the insurer entering into a
contract, which he would not have done had he been aware of that fact. A proposer for fire
Insurance hides the fact knowingly by not disclosing that he has an outhouse next to his
building, which is used as a store for highly inflammable material.
How to Deal With Breaches
How breaches are dealt with depends upon whether the breaches are
1) Innocent
2) Deliberate
3) Material to the risk
4) Immaterial to the risk
When Breach of Utmost Good Faith occurs the aggrieved party gets the right to avoid the
contract. The contract does not become automatically void and it must decide on the course
to be taken. The options available are on case-to-case basis like: -
1) The contract becomes void from the very beginning if deliberate misrepresentation or
non-disclosure is resorted to with the intention of misleading the insurer to enter into
a contract.
2) To consider the contract void, the bereaved party, must notify the offending party
that breach has been noticed and as per the conditions of the contract he is no longer
Page 5 of 7
governed with the terms of the contract agreed upon in covering the risk. In case the
breach is discovered at the time of claim he will refuse to honour his promise and
will not pay the claim. This again occurs when there has been a deliberate breach.
3) When the breach is innocent but it is material to the fact then the insurer may impose
a penalty in the form of additional Premium.
4) Where the breach is found to be innocent and is not material the insurer can choose
to ignore the breach or waive off the breach.

Statutory Recognition/Requirement:
India Marine Insurance Act, 1963
Section 19. Insurance is uberrimae fidei. - A contract of marine insurance is a contract
based upon the utmost good faith, and if the utmost good faith, be not observed by either
party, the contract may be avoided by the other party.
Section 20. Disclosure by assured.
(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 to him. If the assured fails to make
such disclosure, the insurer may avoid the contract.
(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.
(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.
(4) Whether any particular circumstance, which is not disclosed, be material or not is,
in each case, a question of fact.
(5) The term "circumstance" includes any communication made to, or information
received by, the assured.
Section 21. Disclosure by agent effecting insurance. - Subject to the provisions of the
preceding section as to circumstances which need not be disclosed, where an insurance is
effected for the assured by an agent, the agent must disclose to the insurer-
a) every material circumstance which is known to himself, and an agent to insure
is deemed to know every circumstance which in the ordinary course of
business ought to be known by, or to have been communicated to, him, and
b) every material circumstance which the assured is bound to disclose, unless it
comes to his knowledge too late to communicate it to the agent.
Section 22. Representations pending Negotiation of contract.

Page 6 of 7
(1) Every material representation made by the assured or his agent to the insurer
during the negotiations for the contract, and before the contract is concluded, must
be true. If it be untrue the insurer may avoid the contract.
(2) A representation is material which would influence the judgment of a prudent
insurer in fixing the premium, or determining whether he will take the risk.
(3) A representation may be either as to a matter of fact, or as to a matter of
expectation or belief.
(4) A representation as to a matter of fact is true, if it be substantially correct, that is to
say, if the difference between what is represented and what is actually correct
would not be considered material by a prudent insurer.
(5) A representation as to a matter of expectation or belief is true if it be made in good
faith.
(6) A representation may be withdrawn or corrected before the contract is concluded.
(7) Whether a particular representation be material or not, is, in each case, a question
of fact.
Thus, this principle forms an integral part of insurance law. It gives a fair chance of risk
assessment to the insurer and also ensures that the assured fully understands all the terms
and conditions of the contract. But, this principle is more favourable to the insurer as it is
the assured who has to generally make all the disclosures. This is primarily because when
this doctrine was evolved in the 18th century, the insurance market was in its infancy and
thus required protection. However, the enactment of the English Unfair Contract Terms Act,
1977 has considerably alleviated the position of the assured who is now protected against
unfair contractual terms. Further, the Insurance Act lays down that an insurance policy
cannot be called in question two years after it has been in force. This was done to obviate
the hardships of the insured when the insurance company tried to avoid a policy, which has
been in force for a long time, on the ground of misrepresentation. However, this provision is
not applicable when the statement was made fraudulently. Never the less, technological
advancements have further made it possible for both parties to see to it that their interest is
taken care of. But, there are several other grey areas to this doctrine as well. There is still no
clear cut distinction between as to what is material or immaterial and the same is largely
dependent on the whims of the insurers and the terms of the contract. It is still very easy for
an insurer to repudiate the contract on the slightest point of non-disclosure by treating them
as warranties, thereby putting the assured in an even more difficult position. Another
problem is with regards to as to what duration does the disclosure(s) need to be made.
Common law cases may somewhat seem to have settled this point but the Indian Marine
Insurance Act still shows a confusion regards the same as it says that duty of disclosure
shall end with the conclusion of the contract. Thus, all these problems need to be taken care
of and an effective solution must be provided considering the principle of utmost good faith
is one of the most fundamental principles associated with insurance law.

It is suggested to go through class notes also.

Page 7 of 7

Вам также может понравиться