Contribution

This principle applies to all contracts of insurance and can be relatively easily explained as being about trust.

When an insurer is approached for insurance, what do they know about the proposer? They only know what the customer or proposer chooses to tell them.

Similarly, the customer must trust that the policy provided covers their needs and provides what they understand it to.

So, we can see the principle of Utmost Good Faith applies to both the customer and the insurer but the greater duty lies with the customer to be open and honest with the insurer. After all, the insurer only has the information the customer provides on which to base their decision regarding whether to offer cover and on what terms and premium level.

Facts which would influence an underwriter's decision are known as "material", defined in the Marine Insurance Act 1906 as:

• "Every circumstance is material which would influence the judgement of a prudent insurer in fixing the premium or determining whether he will take the risk"

As said before, insurance contracts are about honesty and trust from both sides. This principle has long been known by its Latin name "uberrima fides".

This places an obligation on:

• The proposer, and
• The Insurer

To disclose accurately and fully any fact material to the cover being provided, which includes:

• Anything that a proposer should know from normal day to day activity even if not the subject of a specific question on the proposal or application form.

It goes without saying that the specific questions that normally form a part of the proposal known, as the declaration, must be answered fully and truthfully.

A number of insurers no longer use a proposal form as such and rely on information provided over the telephone. Utmost Good Faith is no less important in this situation.

The insurer will typically issue what is known as a statement of facts to the insured which states that the information shown, detailing the information provided by the proposer, forms the basis of the contract and must be read and checked for accuracy.

Many insurers, through the technology available today, now record and keep on file the conversation to assist should any dispute arise.

There are normally considered two aspects to a breach of the principle of Utmost Good Faith:

• Non-disclosure
• Misrepresentation

Non-disclosure

This is where the proposer is aware of something that is unknown to the insurer, which would affect either the acceptance of the proposal or the rating. If he fails to inform the insurer it would be non-disclosure.

Misrepresentation

This relates to the provision of information that is false. If the proposer or in some cases the insurer provides false information, this misrepresents the facts. If these facts would have made a difference to cover either being purchased, provided or the extent of cover or premium being charged this is misrepresentation.

In both of these situations, there is a breach of the duty to disclose. This can be either:

• Deliberate
• Innocent

In either case the implications could be serious.

If the insurer would not have provided the policy if they had known the full facts, they have a number of options available:

• If the misrepresentation or non-disclosure is for fraudulent reasons they can sue the policyholder
• They can void the contract "ab initio" (from the beginning) returning all premiums
• They can repudiate a claim if the non-disclosure is material to that particular claim but choose to continue cover
• They can choose to take no action if the misrepresentation or non-disclosure is minor.
• They can continue to provide cover with additional terms imposed e.g. increased premium, or settle the claim on a proportional basis of the original premium paid against the correct premium due.
• As motor insurance is compulsory by law, the insurer maybe legally bound to pay for any third party claims. They may seek recovery from the driver.

There are some facts, where there is no duty to disclose:

• Any facts that are either law or common knowledge
• Any facts that lessen the risk
• Any facts which an insurer fails to follow up on from information on a proposal
• Any facts that the proposer could not be expected to know
• Any criminal convictions considered spent under the Rehabilitation of Offenders Act 1974

The duty to disclose exists:

• At the time of completing a proposal, through to policy issue
• Throughout the term of the policy
• At each renewal