Utmost Good Faith is also known as Uberrimae fidei. Okay, may the demystification commence: when you’re buying or selling insurance, you’re buying or selling a promise – a piece of paper. When selling something like this you are putting in place an alleatory contract – another big word with a relatively simpler meaning. An alleatory contract is one where one party may get something significantly more during the currency of the contract – or nothing at all. The literal consideration of the contract is not quite fixed. And when this happens, there is a serious moral hazard – a risk that one party to the contract may try and influence the result on the contract when they’re technically not supposed to. In insurance, you may have a liability cover of a million dollars and yet pay only a few hundred dollars for the policy. In this context, it is assumed as a basic principle of insurance that you are acting in utmost good faith and basically not creating a loss that the insurance company would have to pay for.
The big question is how do you actually ‘act in utmost good faith’? Well, basically you’ve to make sure that you do not non-disclose or misrepresent a material fact! Ah – some more beautiful insurance words here! Firstly, what is a material fact? This is any bit of information that can influence an underwriter’s view of the risk. At the end of the day, the underwriter takes risk on behalf of the insurance company he or she is working for and does so on the basis of various bits of information provided. All the information is key to the pricing of the risk and also key to determining whether cover will be offered and to what extent, is material. If, during placement, a material fact is not disclosed or, even worse, misrepresented i.e. incorrectly disclosed, then the insurance contract itself becomes invalid as a fundamental principle has been breached.
Okay chaps, I know this is a bit complicated. This is why the successful brokers have written tens of exams to get where we are. As long as you’ve a qualified, reputed and experienced insurance advisory firm by your side, you can be confident that you’re not going to be in breach of a fundamental insurance principle! But of course, we still require that you act in utmost good faith hence this explanation!
So the next time you insure your car, do make sure you let you provide your advisor with as much information as possible – it might well come in handy at the time of a claim because you acted in good faith and disclosed everything you know accurately! Interestingly, this would also usually help to understand your requirement better so that we can offer or structure the appropriate policy at the best possible price point.