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ANALYSING THE PRINCIPLES OF UBERRIMA FIDES IN INSURANCE CONTRACT

INRODUCTION

Insurance Contracts are governed by various principles. One of them is the Principle of Uberrima Fides[1] or utmost good faith. As per this doctrine, both the insurance company and the policyholder must be honest to each other and make true and full disclosure to each other of all the relevant facts and should not conceal or suppress any relevant fact. It is an exception to the caveat emptor rule which imposes a duty upon the buyer to beware and must purchase any goods after duly examining it.

GENESIS OF THE PRINCIPLE 

The principle of Uberrima Fides has its genesis in Carter v. Boehm,[2] where Lord Mansfield stated that Insurance requires observance of utmost good faith from both parties.[3] However, it is more burdensome on the insured as he has exclusive knowledge of many facts which cannot be ascertained by the insurer even by reasonable enquiry.[4]

APPLICATION OF THE PRINCIPLE

The doctrine of utmost good faith has been recognized both under English and Indian law under Section 17 of the Marine Insurance Act of 1906 and Section 19 of the Marine Insurance Act of 1963 respectively which lay down that if either party fails to observe this principle, other parties can repudiate the insurance policy. Though the doctrine of Uberrima Fides is expressly mentioned in marine insurance but as it is a beneficial doctrine it is applicable in all forms of insurance contracts whether life, fire or marine.[5]

WHAT THINGS OUGHT TO BE DISCLOSED BY THE INSURED?

Section 20 provides that the insured is bound to give information to the insured of all material facts and circumstances that are known to him.[6] Such disclosure should be made before the conclusion of the contract. [7]A person is deemed to know all facts and circumstances which he must know in the ordinary course of business.[8]Failure to disclose will lead to repudiation of policy by other party.[9]

Also, if any alteration takes place in material facts already disclosed before conclusion of the contract, then the same must be communicated to the insurer

 Prudent insurer test- This test is laid down under Section 20(2)which provides that every fact or circumstance is material which affects prudent insurer’s decision whether it should bear the risk or not or in determining  the rate of premium.[10]

CIRCUMSTANCES WHICH NEED NOT TO BE DISCLOSED

Section 20(3) provides that certain facts, though material, yet they need not to be disclosed unless the insurer explicitly asks for it. These facts are as follows-

(a) circumstance which reduces the risk.[11]

(b) circumstance which insurer knows or presumed that insurer must be knowing it as it being matters of common notoriety or knowledge or which in the ordinary course of business he should know[12]

(c)  circumstance, information of which is, waived by the insurance company.[13]

(d) circumstance which is superfluous to disclose by reason of any express or implied warranty.[14]

SCOPE OF DUTY OF DISCLOSURE

 Under the principle of Uberrima Fides, both insurer and insured are liable to give information to each other of all the material facts. The scope of duty of disclosure can be summarized as follows:

  • It is restricted to only material facts[15]– The insured’s liability to disclose is restricted only to material facts and not to immaterial facts. What is material fact depends upon nature of contract and facts and circumstances of each case.

In  Banarasi Das v. New India Assurance Co.,[16] the Court held that pendency of a criminal case against the assured is a material fact and assured must inform about it to the insurer. In the case of LIC v. Shakunthalabai,[17] the Court held that simple headache or indigestion is not a material fact.I n the case of Rohini Nandan v. Ocean Accident & Guarantee Corporation,[18] the Court held that a single incident of theft is not a material fact; rather a continuous incident of theft is a material fact.

  • It extends to material facts which policyholder knows or must know[19]– This doctrine casts duty upon the insurer to disclose all material facts which he knows or should know in ordinary course of business.
  • Duty of disclosure extends to authorized agents of the insured[20]– The policyholder’s liability to disclose also extends to its authorized agents  but their duty of disclosure is limited to only those facts which have been communicated to them by the principal in due course or which ought to come to their knowledge course of agency.[21]
  • Duty of disclosure also casts upon the insurer – This doctrine applies on the insurer and therefore the insurer is obliged to give all relevant information to the policyholder. [22]In case of Hanil Era Textiles Ltd v. Oriental Insurance Co. Ltd.,[23] the Insurance Company fails to give information to the  insured for the installation of TAC Approved Automatic Diversion System or CO-2 Flooding System and asked additional premium from him for not installing such device.[24] It was held that the insurance company cannot claim such premium as they had not informed to the informed as to installation of such device.[25]
  • It exists only before the formation of contract– This duty to disclose is limited to all those negotiations which comes to knowledge of either party before the conclusion of contract.[26] If any material fact comes to knowledge of either party after the conclusion of contract, then it is not obliged to disclose such fact.
  • Duty of disclosure also extends to such questions which are explicitly asked by the insurer– If the insurer explicitly asked a question then it is a material fact and if the insured gave a false or dubious answer then policy can be avoided by insurance company.[27]In case of Anglo African Merchants Ltd. v. Bayley[28], the insured mentioned new army jerkins in the subject matter column of policy form but in reality it was 20 years army jerkins. It was held that policy can be repudiated by insurer.

WHEN POLICY CANNOT BE QUESTIONED?

Section 45 of the Insurance Act, 1938 states if the insured pays premium continuously for 2 years then the policy cannot be challenged on the ground that misstatement made in proposal form or in any report or any document related to issuance of policy,[29] unless the insurer shows that[30]

(1)The Policy holder made a false statement or suppressed material fact[31]

(2)It was made fraudulently by the policyholder.[32]

(3)The policy holder knows that it was false statement or was a material fact to be disclosed.[33]

EFFECT OF NON DISCLOSURE

In insurance agreements principle of Uberrima Fides is applicable, where insured is obliged to reveal all material facts and circumstances which are in his knowledge before the conclusion of the contract. However, problems arise when the insured fails to do so. There may be two circumstances in this regard:

(1) If the insured willfully suppresses any material facts which are known to him then it constitutes fraud and the insurer can repudiate the contract. Also, in cases of fraud, the insurance company can claim damages.[34]

(2)  Where insured fails to disclose material fact he has no malicious intention to defraud the insurer then it amounts to misrepresentation and insurer can repudiate the policy. But, in case of misrepresentation, insurer cannot claim damages from the insured.[35]

CONCLUSION

The principle of Uberrima Fides can be said to be most fundamental and important principle of Insurance Contract, which imposes an obligation on both parties to make true and full disclosure of all the relevant facts to each other and does not conceal The Principle of Utmost Good Faith is important because it promotes fairness, transparency, and trust in contractual relationships, especially in areas such as insurance. By requiring parties to act honestly and disclose all relevant information, it helps in making informed decisions, reducing information asymmetry, preventing moral hazard, and upholding the integrity of the contractual process. However, since there is no established principle or rule for determining what would constitute material fact and it is generally determined by the Courts taking into consideration facts and circumstances of each case, it may result in different interpretations and sometimes wrong interpretation might lead to suffering on part of the either party.

Author(s) Name: Priya Pal (Faculty of Law, University of Allahabad)

Reference(s):

[1] According to Black Law Dictionary, Uberrima Fides is a Latin term which means the most abundant good faith

[2] (1766) 3 Burr 1905

[3] Carter v. Boehm, (1766)  3 Burr 1905

[4] Ibid

[5] London Assurance v. Mansel (1879) 11 Ch. D 363

[6] The Marine Insurance Act 1963 s 20(1)

[7] Supra note 6 at 1

[8] Ibid

[9] Ibid

[10] The Marine Insurance Act 1963 s 20(2)

[11] The Marine Insurance Act 1963 s 20(3)(a)

[12] The Marine Insurance Act 1963 s 20(3)(b)

[13] The Marine Insurance Act 1963 s 20(3)(c)

[14] The Marine Insurance Act 1963 s 20(3)(d)

[15] K S N Murthy and K V S Sharma, Modern law of Insurance in India (5th edn, Lexis Nexis 2014) 33

[16] AIR 1959 Pat 540

[17] AIR 1975 AP 68

[18] AIR 1960 Cal 696

[19] Supra note 15

[20] K S N  Murthy and K V S Sharma, Modern law of Insurance in India (5th edn, Lexis Nexis 2014) 34

[21] Ibid

[22] Ibid

[23] (2001) 1 SCC 269

[24] Hanil Era Textiles Ltd v. Oriental Insurance Co. Ltd  (2001) 1 SCC 269

[25] Supra note 24 at 3

[26] Supra note 20 at 3

[27] K S N Murthy and K V S Sharma, Modern law of insurance in India (5th edn, Lexis Nexis 2014) 35

[28] [1969] 1 Llyod’s Rep 268

[29] The Insurance Act 1938 s 45

[30] Ibid

[31] Ibid

[32] Ibid

[33] Ibid

[34] K S N Murthy and K V S Sharma, Modern law on Insurance in India (5th edn, Lexis Nexis 2014) 38

[35] Ibid