Utmost Good Faith – the UK’s biggest change to its Insurance Laws
If you have ever carefully read a proposal form of any type of insurance you are or were considering taking, you may have noticed a statement (usually in the Declaration) which goes:
“Any detail submitted through this proposal form will be considered as the basis of the Contract of Insurance between the Insurer and the Proposer, subject to the acceptance of the proposal.”
Or
“I/we have clearly understood the terms and conditions … shall be the basis of the insurance contract between me/us and the Insurer and the Insurer shall have no liability under the insurance contract if it is found that any of my/our statements or particulars or declarations in this proposal form or other documents are incorrect and or untrue…”
Such statements arise from the principle of ‘utmost good faith’ (Uberrimae fidei in Latin) which requires both the proposer and the insurer to act honestly and not mislead or withhold material information (which could influence the other party’s decision to enter into a contract) from one another.
For life Insurance policies in India, Section 45 of the Insurance Act, 1938 explicitly embodies this principle of Utmost Good Faith by articulating the conditions under which a life insurance policy cannot be contested, thus providing a shield against arbitrary claim rejections by insurers. (See our post on Section 45 – Incontestability clause here)
Irrespective of whether it is life or general insurance, there remains a significant burden of disclosure on the proposer.
It was the same in the United Kingdom until a few years ago when the Consumer Insurance (Disclosure and Representations) Act 2012 (CIDRA) and the Insurance Act, 2015 were passed, making some of the biggest changes to their insurance laws since 1906.
The UK felt that that such conditions found on proposal forms turn everything on that form into a warranty – i.e. effectively giving the insurer the right to reject a claim if ANY information on the form, however immaterial, is inaccurate which usually resulted in a lot of court cases.
So, what did they do?
Well, under CIDRA, the duty of utmost good faith ceased to apply to consumer (personal/ individual) contracts.
Now this does NOT mean that proposers are no longer required to disclose material information. This only applies in case of honest misrepresentations and not fraudulent ones.
The insurer must be able to show that it would have acted differently had there been no misrepresentation. Or if an insurer can prove that a proposer withheld information with fraudulent intent, then a claim would not be paid out in any case.
This change requires Insurers to now ask specific questions about any material facts if they are to rely on non-disclosure as a reason to repudiate a claim and/or avoid a policy.
How does this help the policyholder?
This switches the onus from proposers having to volunteer the required information to the insurer having to ensure that the right questions have been asked.
This ensures that insurers can no longer avoid claims for honest or reasonable misrepresentations in the proposal form or any documents relevant to the insurance contract.
Do you think Indian insurance laws need to take a similar route in favour of the insured?
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