I started this article on the topic: 6 FUNDAMENTAL PRINCIPLES OF INSURANCE you need to know. The first principle I wrote about was INSURABLE INTEREST.
I talked on the need for an insured to have an insurable interest on the subject matter of insurance before a valid insurance contract must be in force. I also discussed the elements of insurable interest.
Today I want to discuss the second fundamental principle of insurance which is utmost good faith.
UTMOST GOOD FAITH
This principle confers a duty on the insured to disclose all material fact about the risk to be insured. It is a duty of disclosure.
Material facts are all relevant information the insured knows or have about the risk to be insured.
If you have read the first article, by now you will be familiar with whom an insured is. If you are yet to read the first principle, kindly ensure you read it in order to have full understanding of these concepts.
Now to understand what material facts are, let’s examine the case-study of Ade and his new car which he wishes to insure from the first principle we have discussed. We understand by now that Ade is the insured, the car is the subject matter of insurance and he has legal right to insure his car as the owner and also has financial interest in the car.
The principle of utmost good faith confers a duty on Ade to provide the insurer all relevant information about his car. Information such as:
- The name of the car
- The color of the car
- The year the car was manufactured
- The engine number of the car
- The chassis number of the car
- The plate number of the car
- The purpose of use i.e. private or commercial purpose
- Type of insurance cover
The insurer will also want to know who Ade is. He will need to provide the following information about himself:
- Ade’s full name
- Source of income
- Office address
- House address
- Driving experience
Insurer will also want to know where Ade will be keeping his car at night, whether in a garage or in an open space without any form of security in place.
Insurer will require Ade to provide information about having fire extinguisher in his car in case of fire accidents.
This information is meant to influence the decision of the underwriter (i.e. the insurance company) in the underwriting process. The information helps the underwriter to decide on the premium to charge and to consider giving the insured some discounts. Hence they are material information.
This principle of utmost good faith became necessary in insurance contracts because the underwriter knows nothing about the nature of the subject matter of insurance and the circumstances surrounding it. Whereas the insured knows everything about the risk he is bringing to the insurer. This is why a duty of disclosure is conferred on the insured to disclose all material information about the risk he brings to the insurer for an insurance contract.
On the other hand, the insurer also has a duty of disclosure to the insured. Therefore, the insurer also must behave with utmost good faith.
The policy document which is given to the insured after a valid insurance contract has been consummated is the full representation of the insurer’s disclosure to the insured.
TYPES OF NON-DISCLOSURE
There are three types of non-disclosure on the part of both the insured and the insurer. These are:
- Misrepresentation: This is false information. It could be wrong information or exaggerated information. The insured can give false information about the risk to be insured. The insurer also can give false information about the insurance cover he is giving to the insured
- Concealment: This is a fraudulent act. A situation where the insured deliberately provide misleading information with the intention to defraud the insurer. Concealment usually comes from the insured. For example, If Ade comes to the insurer to give misleading information that his car has been stolen, with the intention to make a fraudulent claim from the insurer.
- Non-disclosure: This is a deliberate act of withholding material information about the risk to be insured or failure on the part of the insurer to tell the insured the full benefits of the insurance cover the insured is entitled to.
CONSEQUENCES OF NON-DISCLOSURE
If the insured is in breach of the duty of non-disclosure the insurer may:
- Avoid the contract entirely
- Not pay claim
- Sue the insured
If the insurer is in breach of duty of disclosure, the insured may also sue the insurer.
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