PRINCIPLE OF UTMOST GOOD FAITH

The principle of utmost good faith is a fundamental doctrine in insurance law that requires all
parties to reveal any information that could feasibly influence their decision to enter into a
contract with one another. In the case of the insurance market, an agent must reveal critical
details about the contract and its terms. Applicants, on the other hand, are legally obliged to
present all material facts, including precise details on whatever needs to be insure and if they
have been refused insurance coverage in the past.
This principle assures and ensures that the parties involved in the contract are truthful as they
are legally obliged to act honestly and not mislead or withhold any critical information from one
another.
Based on the nature of the contract, violation of the principle of utmost good faith can result in
a number of consequences. The most common of them all is where a contract is created with
inaccurate information from deliberate misinformation or fraudulent concealment, the contract
may become voidable. Thus the contract is valid unless and until it is avoided or set aside by
the party entitled to do so. Further, in the case of the provision of goods or services before the
information is discovered or disclosed, the misinformed party may enforce legal action. Legal
action can include the right to sue for damages usually monetary compensation.
A perfect example is the case of Carter v. Boehm. In this case, Mr. Carter was the governor of
the Fort Marlborough in Sumatra and bought an insurance policy with Boehm against the risk of
attack of a foreign enemy. Carter knew that the Fort was not capable of resisting an attack by a
European enemy and further knew that the French were likely to attack but did not disclose this
information to Boehm at the formation of the policy. The French took Fort and Carter claimed
under the policy. Boehm refused to indemnify Carter and Carter subsequently sued. Lord
Mansfield held that Carter was responsible to follow his duty with utmost good faith and was
responsible for the disclosure of important information which would have, in general, decided
the outcome of the insurance policy to come into existence. He stated that “insurance is a
contract of speculation”.