Introduction to the general principle of “Duty of the utmost Good Faith”
The Common law principle of “Duty of the utmost good faith” (also called uberrimae fidei) refers to the minimum legal obligation of the parties entering a contract to act honestly and not mislead or withhold critical information from each other. However, applied in various financial agreements, it is one of the most fundamental doctrines in insurance laws.
For instance, in an insurance agreement, the insured holds the legal obligation to act with the utmost good faith towards the insurer by apprising the latter with correct and accurate information. While the latter is also entrusted with the legal obligation to act with the utmost good faith in all its dealings with the former. Under various provisions of the Indian Penal Code, the term, “good faith” has been mentioned signifying doing of work with due care and caution.
The principle of Caveat Emptor or buyer beware under the Sales and Goods Act, 1860 explains the logic behind the principle of “good faith”. In the case of the former, the customer shall possess the reasonable opportunity to inquire about the goods or services available in the market and the seller holds the legal obligation to furnish the same with correct and genuine information. Therefore here, the buyer with utmost good faith shall take a reasonable time to inquire about the goods before purchasing and the buyer shall with utmost good faith apprise the former with correct information regarding the goods. It is thus clear that under any contract parties are not obliged to show anything beyond the ordinary good faith.
Meaning of Insurance, the landmark case law which established the Doctrine of the utmost good faith and few case laws related to the uberrimae fidei
Insurance is a contract or a legal agreement signed between parties with utmost good faith forming risk management, primarily used to safeguard against the risk of a contingent or uncertain loss. It comprises two parties, namely the insurer and insured. An insurer is the one who promises to save the insured by indemnifying the latter in case of any contingent or uncertain loss.
As mentioned earlier, in the case of insurance agreements the insured is entrusted with the legal responsibility to apprise the insurer with accurate information regarding the subject matter of the insurance. The liability of the insurer turns void if any information presented by the insured regarding the subject matter of the agreement is distorted, falsified, or presented in a wrong form. In order to avoid such unfortunate events, the insured must apprise the insurer with correct information regarding the subject matter, and also the insurer holds the legal obligation to make sure that the potential contract benefits and fits the need of the insured.
Carter v. Boehm is a landmark English contract law case, which Lord Mansfield established the duty of utmost good faith in insurance contracts. In the instant case, Mr. Carter was the governor of Fort of Malborough (now called Bengkulu), built by the British East India Company. He took out an insurance policy with Boehm against the fort being taken by a foreign enemy. A witness called Captain Tyron testified that Carter aware of the fact the fort could resist attacks from natives but not European enemies.
Lord Mansfield held that Carter, as the proposer held an obligation of utmost good faith (uberrimae fidei) to the insurer but he failed to disclose the information relating the subject matter of the contract or matter material to the risk.
He ruled by saying, “Insurance is a contract based upon speculation. The special facts, upon which the contingent chance is to be computed, lie most commonly in the knowledge of the insured only; the underwriter trusts to his representation and proceeds upon the confidence that he does not keep back any circumstance in his knowledge, to mislead the underwriter into a belief that the circumstance does not exist, and to induce him to estimate the risk as if it did not exist. Good faith forbids either party by concealing what he privately knows, to draw the other into a bargain from his ignorance of that fact, and his believing the contrary.”
He went out to hold that the obligation was reciprocal and that if an insurer withheld material facts, the example cited that an insured vessel had already arrived safely, the policyholder or insured could declare the policy void and recover the premium.
Some Indian Case Laws covering the Doctrine of the utmost Good Faith
There are some Indian case laws which cover the concept of the duty of the utmost good faith or uberrimae fidei. In the landmark decision of the LIG v. G.M Channabsemma (AIR 1991 SC 392) , the hon’ble Supreme Court of India has held that the onus to prove that the policy holder (insured) has failed to disclose information on material facts lies on the corporation. It is the fundamental principle of the insurance law that utmost good faith must be observed by the contracting parties and good faith forbids either party from non-disclosure of the facts which the parties know. From this judgement, it is clear that as a matter of utmost good faith it is not only important for the parties to the contract to disclose correct information on material facts but it is also essential not to reveal information or facts which either parties are aware.
In another judgment rendered by the Hon. Supreme court of India, in the case of Vikram Greentech (I) Ltd v. New India Assurance Co. Ltd. (2009)5 SCC 599, has explained that other than the requirement of uberrimae fidei or good faith on the part of the insured or policy maker, there is no difference between an ordinary contract and an insurance agreement. The relevant paragraph whereof stands extracted hereunder, “16. An insurance contract, is a species of commercial transactions and must be construed like any other contract to its own terms by itself. In a contract of insurance, there is a requirement of uberrima fides i.e., good fath on the part of the insured. Except that, in other respects…. 12…….there is no difference between a contract of insurance an any other contract”.
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