Utmost good faith is the positive duty to voluntarily disclose, accurately, and fully, all facts material to the risk being proposed,  whether or not it is requested.

It is the legal doctrine of the insurance contract that requires the insurer and the insured to act honestly, and not mislead or withhold from one another information that is necessary to the contract.

The principle of utmost good faith requires that the party seeking insurance coverage disclose all pertinent information, even if the opposing party does not specifically request it.

For example, If a person is applying for life insurance, then he is required to disclose any previous health issues that he may have had.

Likewise, an insurance agent selling an insurance policy must disclose the critical information that one needs to know about the contract and its terms.

The principle of utmost good faith is very important because it provides a general assurance that the parties involved in an insurance transaction are being truthful and acting morally.

The principle of utmost good faith is an important principle of insurance since it is concerned with the information that is disclosed by the parties who are involved in the insurance contract. 

If a party fails to adhere to the principle of utmost good faith, the outcome of the claim may be affected.

The principle of utmost good faith is sometimes also called  "uberrimae fidei," which is a Latin phrase that means "utmost good faith.".

In essence, it states that all parties to an insurance policy must disclose all material facts.

What is a material fact in Insurance?

According to Marine Insurance Act 1906, "a material fact is any circumstance which would influence the judgement of a prudent insurer in fixing the premium or determining whether he will take the risk".

In other words, a material fact is a fact that might alter an insurer's decision to agree to provide insurance to a person or alter the terms and conditions or the rate of premium on a policy.

Any circumstance that might influence the insurer's choice to issue coverage, the terms of the contract, or the cost of the premium is called a material fact.

Non-disclosure or misrepresentation of material facts could render an insurance contract null and void.

Facts that must be disclosed by the insured

According to the principle of utmost good faith, the insured must make a full and complete disclosure of all material facts.

These materials facts that should be disclosed by the insured are:

1. Previous claims or losses: Any previous claims that the policyholder has made on insurance policies in the past must be disclosed by the insured

2. Facts which make a risk greater than usual: Factors that could increase the risk of a claim being made, such as the location of the insured property or the type of work that the policyholder does, must be disclosed by the insured.

For instance, if the insured lives in an area prone to floods or fires, this information must be disclosed. In the same way, if the insured works in a high-risk profession, such as a firefighter or a miner, this information must be disclosed as well.

3. Pre-existing medical condition: For specific kinds of insurance, such as health or life insurance, the insurer is expected to disclose any pre-existing medical conditions that he has, which could affect or increase the insured risk.

4. Facts relating to the subject matter: The subject matter of an insurance policy is the thing that is being insured or covered by an insurance contract.

Fats relating to and descriptions of the subject matter of the insurance must be disclosed by the insured.

For example, if the insured is purchasing property insurance, he must disclose any known defects or issues with the property. 

If the insured is purchasing auto insurance, he must disclose any modifications made to the vehicle.

5. Existence of other policies: The insured is expected to disclose to the insurer any other insurance policy he has entered into.

Duties of the insurer

Under the principle of utmost good faith, the insurer has the following duties:

  • He must inform the insured about possible premium discounts.
  • He must accept only those risks that he is authorized to underwrite.
  • Untrue or misleading statements made by the insurer are a breach of utmost good faith So, the insurer has a duty to always make true and fair statements about the insurance contract.

Facts not required to be disclosed in an insurance policy

While the insured has a duty to disclose all material facts that are relevant to the insurance policy, there are certain facts that may not need to be disclosed. Such facts are:

1. Facts of common knowledge: The insured is not required to disclose information that is considered common or public knowledge or that the insurer could reasonably be expected to know.

For instance, if a person purchases life insurance and resides in the Nigerian state of Borno, he does not need to explain how risky Borno is because it is well known that Boko Haram's activities have made the northeastern region of the country insecure.

2. Immaterial information: Only facts that could reasonably have an impact on the insurer's decision to extend coverage or the conditions of the policy are required to be disclosed by the insured.

The insured may not need to disclose immaterial Information such as trivial or insignificant details.

3. Facts of law: The insured is exempt from disclosing information that is already covered by the law, such as rules and regulations.

4. Facts covered by policy terms: As the insurer is already aware of any facts covered by the policy's terms, the insured is not required to disclose these facts.

5. Facts that the insured does not know: As the insured was unaware of these details at the time he signed the insurance contract, he will not disclose them.

However, the insured is required to notify the insurer as soon as he learns of the fact.

6. Facts or circumstances that lessen or diminish the risk:  The insured is not required to disclose facts or circumstances that could reduce the risk associated with the policy. 

For example, if an insured is taking out property insurance and they have installed security systems such as alarms, sprinklers, or cameras to reduce the risk of theft or damage, he may not need to disclose this information.

Consequences of Non-disclosure and Misrepresentation

The consequence of non-disclosure and misrepresentation may vary depending on the extent of the non-disclosure.

1. If the insurer discovers that the insured party has intentionally and fraudulently concealed material information, the insurer may have the right to void the policy ab initio. That is, the insurer will treat the policy as if it never existed. 

In such cases, the insurer is not required to pay any claims, and the insured party may be required to repay any amounts already paid by the insurer.

So, If the insured is proven to be engaging in fraud, the insurer can keep the premium and sue for damages.

2. Where the misrepresentation is deliberately done by the insured( that is, the insured knew their statement was misleading or false), then the contract will be declared null and void.

3. Where the misrepresentation results from the policyholder's failure to check the validity of the facts given, then the action would be based on what the insurer would have done if they knew the correct information.

For instance, if the misrepresented facts have the potential to increase the risk beyond what was initially expected, the insurer may increase future premiums or require the insured party to buy extra coverage.

4. In a case where the insured party fails to disclose relevant information that could alter the insurer's decision to offer coverage, the insurer may reject any claims made by the insured party.