Duty of utmost good faith is defined in the common law as a requirement for both parties to a contract to disclose all material facts. In an insurance contract (policy), the onus is on the insured or proposer as the contract starts with a proposal from someone (or organization) who wants to be insured and the insurer assesses and prices the risks based on the information provided by the applicant. That is why proposers must disclose all material facts to the best of their knowledge so that insurance contract negotiations can be concluded successfully. The idea is that the insurer is provided with all the relevant facts to allow them to give a fair quote.
Once a quote is accepted by the insured, all the details provided in application forms become part of the policy contract and binding for the proposer. Therefore, the law allows insurance companies to void the contract if they find that the insured failed their duty to fully disclose every detail that can affect their insurability and premiums charged, even if it was an innocent misrepresentation on the part of the policyholder. In the same way, if the insurer fails their duty of full disclosure, the policyholder is entitled to full premium refund.
Duty of utmost good faith requires that both the policyholder and insurer conduct themselves with a high level of honesty and integrity right from the first contact until the end of the insurance policy.
Essentially, duty of utmost good faith establishes the responsibilities of both parties. Insurance companies manage this process by asking the applicants requiring coverage to answer a set of questions relevant to the required policy. The answers are recorded, relied upon in the quote process as the material factors and rated. Then, the company offers a quote in which they detail all the relevant details like the coverage, deductibles, limitations of the policy and conditions. If both parties are happy with the details, they sign a policy contract.
Insurance proposal forms outline the information required by providers. Often state laws regulate the amount of disclosure as well. Depending on the insurance product, there may be certain questions companies cannot ask or include in their premium calculations as it is prevented by state laws to protect the consumer and regulate the rating of insurance products. This sets the boundaries of the disclosure requirements.
In layman’s terms, the information you exchange with the underwriter must be absolute truth. Both parties should be open and honest with each other to the best of their knowledge. You cannot help if you didn’t know about an issue but you should have taken all the measures to make sure nothing was omitted. In the same way, vehicle insurers should take every step to explain the terms plainly for their customers.
The duty of disclosure doesn’t end with filling a quote form and requires applicants to inform their agents of any material changes to their circumstances while the insurance policy in effect. If you know about something you should tell and tell it in a timely fashion. In case of auto insurance, things like change of vehicle, address, additional drivers, any modification to the vehicle, accidents involved and traffic tickets received during the policy period should be disclosed to the company so that adjustments can be made to the premium accordingly.
In simple terms, applicants and policyholders must not knowingly withhold information or provide misleading and incomplete details. And the schedule must clearly document under which circumstances you may not be covered and how claims work. If there are any conditions and exclusions, they should be clearly stated in the policy documents. Policies should be unambiguous and not open to subjective interpretations. And motorists should not have a secret agenda of avoiding higher premiums by withholding or omitting information.
Especially hiding or knowingly misrepresenting facts can amount to insurance fraud, which has legal consequences. Also, insurance companies can ask for additional premiums after discovering a new information that wasn’t disclosed, decline to renew policies or even deny a claim. So, failures in duty of utmost good faith and disclosure have consequences.