Insurance Principles -
Utmost Good Faith
One of the important basic principles of insurance is known as 'utmost good faith'. The Insurance contract being a promise to pay in the case of a peril operating is a unique type of contract between the Assured and the Insurer.
Very often, the Insurer has to rely only on the description and details filled in the proposal form. The Insurer has no way of verifying these details and after an insured peril has operated, the subject matter of the insurance may very well have gone up in smoke or washed away. Therefore any mis-description, misrepresentation or blatantly false declarations made by the Assured would result in the Insurer paying wrong claims.
Obviously, in the longer term no Insurer can survive payment of wrong claims or charging of wrong premiums for the risk. Such payment of claims also imposes a burden on the rest of the premium paying community, since ultimately claims have to be paid out of the premium pool.
It is therefore an implied condition or principle of insurance that the Assured be required to make a full disclosure of all material particulars within his knowledge about his risk.
However today, especially with imminent privatization, it would be logical to expect that insurers would attempt to become increasingly more customer friendly and provide risk survey and assessment, appraisal, etc. services, either directly or through brokers, surveyors, etc. Whether these factors may dilute this principle and to what extent remains to be seen. Our opinion yet would be that the Assured knows his business and risk best and whenever in doubt, must attempt to disclose that particular aspect.
A corollary to this would be that even after taking out an insurance policy, during its validity period, if there are any alterations or changes to the business or risk - say alteration of process or storage of any hazardous material - which increases the risk, the Assured must inform the Insurer of the same and get their acceptance for the same. At times, additional premium payment may be required.
If it is found that an Assured has not disclosed or attempted to conceal any material aspects of the risk, the Insurer would obviously be entitled to avoid any payment of claims or monies under the Policy.
If it is found that the Assured had misrepresented any aspect of the risk, then the Insurer would again obviously be entitled to avoid any payment of claims or monies under the Policy. However, in certain cases of misrepresentation, where the effect may only have been increased premium, it is possible that the Insurer may partly pay the claim.
It is therefore apparent that the correct filling up of a proposal form is quite important for the Assured and should not be taken lightly.
Copyright © 2010 Padamsey P. Shah & Co.