Understanding Insurance – The Principle of Utmost Good Faith


Jeff, the word ‘faith’ is probably not something most businesses would want to use in a contract, yet it’s a crucial principle of insurance. 

But how do you know all those things are true?

We don’t know it’s true, but when we’ve asked for details while creating your car insurance policy, you’ve said it’s true. When you finally make a claim, we find out you’ve got one arm missing, you’re blind in one eye and you’re the world’s worst driver. So we have a right then to A/ completely reject the policy; and B/ not pay the claim. It’s the client’s responsibility to provide us with the material facts. A material fact is something that would affect the risk.

But it’s a two-way street.

Right. Our duty is to tell the client, as clearly as possible, what is covered, and more importantly, what is not covered. If the client isn’t sure, we need to explain it. A lot of policies now include definitions – it’s like a glossary in a policy. I believe this is very important. Why? Because I feel it’s fulfilling the Utmost Good Faith on our part.

What happens if there’s a breach on both sides?

But as you’ve mentioned, it’s far more likely for the client to break this rule of Utmost Good Faith.

According to Swiss Re, 30% of all claims worldwide are fraudulent in some way. But it’s not just the clients we have to deal with. People & Partners clients who have medical cover get a card which ensures they’re covered in the case of an emergency. But what if the hospital or clinic overcharges or over-treats the client? It’s the clinic or hospital we then have an issue with. We have a doctor who looks at all our medical claims. We’re always looking for fraudulent claims.

But there are going to be honest mistakes. There will be varying levels of criminality. 

Of course. That’s why we reserve to right to either reject the claim, warn the client, or cancel the policy. There are a whole range of circumstances.

There’s a big difference between someone lying about the age of their TV and, let’s say, arson.

In general, do you weigh up each case on an individual basis?

There are many types of misrepresentation. There’s fraudulent – you do it deliberately. There’s innocent – you don’t think it’s a material fact. And then there’s negligent – you can’t be bothered to tell us. Then we must decide what to do after a client has lied. We have the right to avoid the claim and avoid the policy. If it’s fraudulent, we may even have the right to claim damages.

I imagine it’s often an honest mistake.

Most times, unless it’s serious, I’ll ignore the breach. You can mess around with this principle for commercial reasons. We don’t like fraud but sometimes it’s hard to prove, and if you have a great client it’s better to just say, okay I’ll forgive you.

And has this principle been a part of the industry for a long time?

Basically, since the beginning. It might be put in the policy or not, but at the bottom of the contract where you sign, it will say that you declare all the information is correct to the best of your knowledge. It’s an interesting principle because it causes court cases on both sides, but I think it’s a principle that shows good spirit – we trust you and you trust us. We have a legally binding contract with certain expectations, and you can’t always put it all into writing, so that’s why I love this principle.

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