UTMOST GOOD FAITH

Ordinary Good Faith
At common law, most types of contracts are subject to the principle of good faith, meaning that the parties have to behave with honesty and such information as they supply must be substantially true. However, it is not their responsibility to ensure that the other party obtains all vital information which may affect his decision to enter into the contract, or may affect the terms on which he would enter into the contract. For example, if only after you have boarded a double-decker and paid the fare do you find that no seats on it are vacant, you will have no grounds for complaint. In technical terms, you are not entitled, in such circumstances, to avoid your contract with the bus company for its failure to voluntarily disclose to you the fact that all the seats have been taken on the bus.

Utmost Good Faith
Insurance is subject to a more stringent common law principle of good faith, often called the principle of utmost good faith. It means that each party is under a duty to reveal all vital information (called material facts) to the other party, whether or not that other party asks for it. For example, a proposer of fire insurance is obliged to reveal the relevant loss record to the insurer, even where here is not a question on this on the application form.

Note: 1 Insurers sometimes extend the common law duty of utmost good faith by requiring the proposer to declare (or warrant) that all information supplied, whether relating to ‘material’ matters or not, is totally (not simply substantially) true. For example, where a proposer for medical insurance enters ‘30’ as his current age on the proposal form when he is aged 31, this is a technical breach of the above kind of warranty, if any, although this inaccuracy is unlikely to be material in the eyes of the common law principle of utmost good faith as applied to medical insurance. 2 On the other hand, a policy provision may state that an innocent or negligent (as opposed to ‘fraudulent’) breach of the duty will be waived (excused).

Material Fact
(a) Statutory Definition: ‘Every circumstance which would influence the judgment of a prudent insurer in fixing the premium, or determining whether he will accept the risk’. From this definition, it can be seen that there are three categories of material facts, by reference to the kinds of decisions likely to be affected by their disclosure. The first one only concerns the decision to accept or to reject a proposed risk (e.g. the fact that a proposed life insured has an inoperable malignant brain tumour.) The second only concerns the setting of premium (e.g. the fact that the insured person of a proposed personal accident insurance is a salesperson). And the third concerns both (e.g. where a proposed life insured is a diabetic). You should also note that the law looks at an alleged ‘material fact’ in the eyes of a prudent insurer - not a particular insurer, a particular insured or a reasonable insured.

(b) Facts that need not be disclosed: In the absence of enquiry, certain facts need not be disclosed; they include: (i) matters of common knowledge (e.g. the explosive character of hydrogen); (ii) facts already known, or deemed to be known, to the insurer (e.g. the problem of piracy in Somalia); (iii) facts which diminish the risk.

[Example: A proposer for commercial fire insurance did not mention the fact that his premises were protected by an automatic sprinkler system, which fact, if disclosed, would have influenced the determination of the premium. This omission does not breach utmost good faith, as the fact (although very relevant) actually indicates a lower risk.]

When to Disclose Material Facts
It may be said that utmost good faith involves a duty of disclosure by the proposer/insured. Technically, the insurer is under the same duty, but here we will concentrate on the proposer's duty. This duty has some features that we should note:

(a) Duration (at common law): Those material facts which do not come to the proposer’s (or his agent’s) knowledge until the insurance contract has been concluded do not have to be disclosed. Suppose a proposal for a one-year medical insurance commencing on 15 January 2011 was accepted on 2 January, and the insured had a routine medical examination on 10 January, which revealed to him on 16 January the contraction of malaria. An important question to ask is: ‘Is the insured legally obliged to disclose such finding to his insurer?’ Applying the legal rule just said, the insured is not obliged to do so, assuming that the terms of insurance are silent on this point. Of course, the policy will normally contain an exclusion for preexisting diseases, in which case the insurer may rely on this exclusion rather than a breach of utmost good faith in trying to deny a claim in respect of malaria.

(b) Duration (under policy terms): Some non-life policies require the disclosure of material changes in risk happening during the currency of the contract, such as a change in occupation in the case of a personal accident insurance. At common law, such a change, which could at most represent an increase in risk, need not be notified until renewal.

(c) Renewal: when the policy is being renewed, the duty of utmost good faith revives. (Note: the duty of utmost good faith does not revive when a life policy is approaching its anniversary date.)

(d) Contract alterations: If these are requested during the currency of the policy, the duty of utmost good faith applies in respect of these changes. Where, for example, the insured of a fire policy is requesting an extension to cover theft, he is immediately obliged to disclose all material facts relating to the theft risk, e.g. the physical protections of the insured premises and his record of theft losses, if any.