Utmost Good Faith – One of the Principles of Insurance

Generally speaking, Insurance in simple terms is nothing but the “losses of few shared by many”. Another easy definition of Insurance is the transfer of risk (the risk is transferred from the insured to the insurance company also known as insurer). The purpose of insurance is to provide financial protection and security to the insured from uncertainties or unforeseen events.

Motor insurance is progressing at a rapid pace as most of the governments are struggling to expedite the cases pertaining to the liability claims related to motor accidents. Motor insurers are taking the risks of their insured, which are unpredictable and very high. 

So much so that customers are even allowed to get now and pay later auto insurance. However, by virtue of their technical expertise, they are able to contain the costs of the risks due to their effective handling of fraud, negotiations with the garages, third parties, and encouragement in risk management. 

Motor Portfolio

The motor portfolio is termed as attrition portfolio and it requires the skills and experience of the insurance company to make the portfolio profitable. Usually, most motor insurance policies do have different kinds of deductibles, which help the insurers in controlling the administrative and claim costs. 

In spite of major precautions, motor insurers have a high loss ratio hence they normally protect their losses through strict underwriting, efficient claims handling, and reinsurance program. The reinsurance program helps them in reining the losses if by chance the portfolio becomes bad. 

Example – Mr. K is a 40-year-old man and works as a cashier at one of the departmental stores. The departmental store does not provide any kind of insurance to its employees. He had an old Honda car. Two years ago, and due to a major accident, his car was scrapped and at the time of the accident, he did not have any insurance. 

He buys a new car and one of his friends suggested him to buy a comprehensive insurance policy to cover his losses due to accidents. He goes to Rodney Young Insurance company and fills the proposal form. He dutifully fills the proposal form with correct answers, however, in the proposal form there was one of the questions asking him “Please give details of claims/accidents in the last five years on your vehicles, as under”. 

He decided not to disclose his previous accident under the proposal form. He put a remark stating that “No accidents during last 5 years”. This is a clear violation of the principle of utmost good faith and any violation of utmost good faith will harm his claim settlement and even make the contract voidable. 

Facts that need not be disclosed by the insured 

There are four Facts that need not be disclosed by the insured to the insurance companies. The facts are as follows, 

  • Facts of law 
  • Facts of common knowledge
  • Facts of lessening the risk 
  • Facts of waiver

Facts of law  

Everyone is supposed to know the law of the land. The insured need not disclose if anything pertaining to the law which everyone is supposed to know. The failure of non-disclosure of facts of law will not go against the insured. 

Facts of common knowledge  

The Insurer is supposed to know the areas prone to accidents or other risks like floods, volcanic eruptions and if the insured does not disclose the perils in his area and the insurer accepts the risk. The insured is free from blame. 

Facts of lessening the risk 

The elements which will reduce the risk exposure need not be disclosed. Suppose the insured has installed anti-theft protection on his car, then he need not disclose it to the insurer. The installation of a theft guard will reduce the risk of vehicle theft. 

However, let’s say he wants to get a first month free auto insurance, and so he decides to hide the fact that he has replaced the existing low-powered engine with a high-powered engine. The replacement of high-powered engine will definitely increase the risk of accidents and he could be missing out on getting the plan he craves. However, he should disclose it to the insurer. 

Facts of waiver  

The information which has been waived by the insurer cannot be used as an excuse by the insurer against the insured. Suppose for the above question “Please give details of claims/accidents in the last five years on your vehicles, as under”, the insured puts a dash mark and does not provide the details and the insurance company accepts and issues the policy. In such a situation, if the claim is lodged then the insurer cannot at a later date blame the insured for not providing the necessary information. 

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