Contracts of utmost good faith

Now let us try to relate the contract law with life insurance. You have learned about valid contracts, void contracts and voidable contracts. There are four types of contracts where law expects parties to disclose everything in their knowledge (pertaining to the subject) to the other party. They are known as contracts of utmost good faith or uberrima fides. If one party does not make a full disclosure, the contract can be repudiated by the other party. They are:

(i)                  Contracts of family arrangements

(ii)                Contracts of sale of land

(iii)               Company prospectus, and
(iv)       Contracts of insurance.

You may wonder whether in other contracts the duty of full disclosure does not exist. In contracts other than the above four, the general principle applied is that of ‘let the buyer beware’ or ‘caveat emptor’. This means that each party to the contract has a duty to verify what the other party says or act on what the other party says on his own risk.

We will now see as to how ‘utmost good faith’ works in life insurance. The two parties to a life insurance contract are the policyholder and the life insurance company (insurer). A person who desires to insure his life under a plan of life insurance proposes for life insurance cover based on the information given to him by the insurance company through its “prospectus”.

A life insurance company agrees to undertake the risk on the life of the proposer after going through the answers given by the proposer in the proposal form and assessing the risk on the basis of those answers. The company believes that all answers are given correctly and honestly.

A life insurance company cannot have hidden conditions. It shall disclose everything material to the contract through the prospectus. For example, the conditions of a policy, the benefits of a policy, what happens if premium is not paid timely etc.

Similarly the proposer has to disclose everything pertaining to his health, family history, occupation, personal history etc through the answers to the questions in the proposal form.

Each of the parties to the contract - the insurer and the proposer – takes decision or consents to enter into the contract of insurance believing that the other party has made a full disclosure of all facts material to his decision making. This is the concept of utmost good faith or uberrima fides. If the good faith is broken i.e., there is a willful suppression of facts, the other party to the contract can repudiate the contract. In other words, the contract becomes voidable.

Where a policyholder obtains life cover by suppressing material facts (e.g. he was suffering from cancer or AIDS or has undergone some medical investigation of his health or surgery) and he subsequently dies the insurance company repudiates the death claim.

Key words:

Contracts of utmost good faith
Full disclosure of facts
Suppression of facts
Repudiate the contract