TRUST ME

Insurance contracts are built on trust. The law imposes a higher duty of Utmost Good Faith (Uberrimae Fidei) on the parties to an insurance contract.

The contract of insurance is fiduciary in nature. The fiduciary duties include: a duty of loyalty, a duty of care, a duty of prudence, and a duty of confidentiality.

The two parties to the insurance contract, namely the insured and the insurer, certainly do not enjoy equal status in terms of knowledge of all the circumstances of the risk based on which the contract has to be entered into. Understandably, the insured would know much more about the proposed risk than the insurer.

Thus, the duty of utmost good faith (uberrimae fidei) goes beyond the duty of good faith applied in non-insurance commercial contracts. In non-insurance contracts, Caveat Emptor (let the buyer beware) generally prevails.

It is imperative to note here that both the parties to the insurance contract are subject to the duty of utmost good faith.

In Joseph Muscat v. Joseph Gasan et noe (1998), an insurance claim for loss of a diamond ring, the court held that there is an obligation of the insured to disclose every material fact whether or not requested explicitly by the insurer, and furthermore the obligation of the insurer is to request those material facts which the insurer view as important.

There are three elements to the duty of utmost good faith.

Representations are statements made by a party to the contract that are true, or at least the party believes them to be true. Then there are “material” representations that must be true (or believed to be true by the party making the representation). An insured lying about the risk or the subject matter of insurance in a manner that is material to the insurance underwriting can render the policy null and void since inception, notwithstanding whether the representation made is relevant to the cause of loss or not (in a claim scenario, whereby the claim maybe denied).

Non-disclosure of material fact(s), inadvertently or intentionally (when done intentionally, it is also called concealment), is considered to be a breach of the duty of utmost good faith.

Finally, warranties are representations made by the insured which become an integral part of the insurance policy, are fundamental to the existence of the contract of insurance, and a misrepresentation may allow the aggrieved party to completely repudiate the contract, retrospectively.

Differences between representations are warranties are: Representations are required to be substantially/broadly correct and must be material to the contract of insurance. On the other hand, warranties are fundamental conditions to the contract of insurance and must be strictly and literally complied with. A breach of a warranty is considered, always, a material misrepresentation, allowing the aggrieved party to repudiate the contract in its entirety, and retrospectively since inception of the contract. Furthermore, representations do not appear on the policy contract while warranties (except for implied ones) form part of the insurance policy wordings.

Generally, a proposal form is given to the insured (by the insurer) enabling the declaration of all material facts about the subject matter of insurance. This declaration forms the basis of the contract of insurance.

In Antonio Zammit v. Joseph Micallef ne (1952), the insurer was able to prove that the information provided by the insured, in the proposal form, was factually incorrect. Thus, the court stressed the contract was invalid because of the false declaration.

The duty of disclosure, is reciprocal in nature, and thus also lies with the insurer.

In Carter v. Boehm (1766), Lord Mansfield held that the duty of utmost good faith was reciprocal and that if an insurer withheld material facts, the policyholder (insured) could declare the policy void and recover the premium.

One example of such a breach by an insurer could be the failure to disclose that a sprinkler system entitles an insured for a premium discount. Using ambiguous or too restrictive terms in the policy wordings that are unfavorable to the insured is another example of such a breach.

To conclude, Utmost Good Faith is one of the most important element of any contract of insurance.