Principles of Insurance
The principle of utmost good faith is a fundamental principle of insurance. As per this principle, an insurance contract must be duly signed by both the contracting parties in a supreme good faith or be- lief or trust. As per this principle, it is a contractual obligation on the part of a customer to completely disclose facts asked in the proposal form or other additional information asked by the insurance company.
Similarly, it is the duty of an insurance company to disclose all information regarding the premium charges, policy terms, claim payments and procedures to customers. This principle advocates that both the parties, the insured and the insurer, are bound together in a bond of honesty and fairness. It originates from the doctrine of ‘Uberrimae Fides,’ which is a Latin phrase and means ‘utmost good faith’. This phrase is essential for a valid insurance contract.
The term ‘material fact’ means every piece of information, which may impact decisions with respect to the evaluation of the severity of risk involved and the amount of premium to be charged. The disclosure of material facts determines the terms of coverage of the policy. Any concealment of material facts is considered intentional and if it is later on discovered, the policy may be considered void. This may lead to a negative effect on the company’s normal business. The intentional non-disclosure amounts to fraud and unintentional non-disclosure amounts to void contract.
For example, disclosure in health insurance can be pertaining to age, history of medication, history of pre-existing diseases, etc. Similarly, in the case of property or general insurance, material facts pertain to the details of the property (vehicle) such as year of make, usage, model, seating capacity, etc.
The insurance company in the case of health may always not be in a position to identify if an individual is suffering from any ailment and it relies solely on the facts provided by the insured. Hence, it is the duty of insured to disclose all the facts voluntarily. Utmost good faith principle holds true for responsibility of disclosure on both the insurance agent and the company authorities also. Any laxity at this point may lead to judgments in favour of the insured in the case of a dispute.
The facts that must be disclosed are as follows:
- External factors that will enhance the degree of risk
- Earlier losses and claims under other insurance policies
- Any decline of the risk or insurance granted on special terms by other insurers
- Particular risks that represent higher exposure to the class of insurance applied for
- Complete facts and information pertaining to the subject matter of insurance whether asked or not
However, not all facts need to be disclosed all the time. Such facts include:
- Any precautions taken by the insured to diminish the risk (methods of preventive care like yoga, etc.)
- Facts that are common knowledge and expected to be known to the insurer in his/her ordinary course of business
- Facts about conditions which are waived by the insurer
- Facts of public knowledge
- Facts of law
- Facts covered by policy conditions
Breach of Duty of Utmost Good Faith
Any or both of the following shall be considered as the breach of duty of utmost good faith:
- Misrepresentation that can be either innocent or fraudulent with reference to falsification and alteration of facts to make the risk insurable.
- Non-disclosure that may be either innocent or fraudulent, which implies avoidance to disclosing certain facts within the knowledge of the first party to the second party.
Principle of Insurable Interest
The principle of insurable interest implies that an individual getting insured must have an insurable interest in the subject matter of insur- ance. An insurable interest shall arise when an individual will obtain some type of financial benefit from the preservation of the object to be insured or will sustain pecuniary loss from its destruction or damage in the event of a catastrophe.
An individual is said to have an insurable interest when the substan- tial existence of the insured object provides an individual more gain and the individual is better off with its existence whereas its non-ex- istence will make an individual worse off and the loss will be gigantic.
Therefore, the essentials of insurable interest include:
- Existence of some asset, interest or liability capable of being insured
- Asset, interest or liability etc. must be the subject matter of insurance
- The insured must have a valid and legal relationship with the subject matter of insurance
- The individual should benefit from the well-being of the subject matter and should be interested in its upkeep
- Damage to the subject matter may result into a pecuniary loss to the insured
Insurable interest will arise or be limited in a number of ways, which can be:
- By common law: Insurable interest gets automatically created by ‘ownership’ rights. For example, a shop owner may incur a financial loss if the shop gets destroyed by a fire as his business will come to a standstill. Thus, the owner has an insurable interest in the asset, i.e., his shop. In this case, the shop forms the subject matter when if an insurance is purchased on it.
- By contract: Sometimes, insurable interest arises as the by-product of a contract between two parties. For example, a lease agreement between a landlord and a tenant may make a tenant responsible for the maintenance or repair of the building. The tenant acquires a legally recognised relationship with the building.
- By statute: Sometimes, a legislative decision creates an insurable interest which may be either by granting a benefit or imposing a duty.
A few examples of insurable interest include:
- A merchant has an insurable interest in his business of trading.
- A creditor has an insurable interest in his debtor.
- An individual has an insurable interest in the house he lives.
- An individual will have an unlimited insurable interest in his or her own life.
- A person will have an insurable interest in the life of his or her spouse.
- Employers have insurable interest in the lives of their employees.
- Partners have insurable interest in the lives of each other.
