Utmost Good Faith is one of the basic principle of Insurance which denotes that the parties are acting in good faith and it is understood that no material fact/information has been concealed. The contract of insurance is a contingency contract triggered if any of the event covered under the ambit of contract is triggered.
The reason for the importance of this principle comes into picture wherein there is a claim and the facts are cross verified by the Insurer. The insurer is supposed to know every relevant fact while under writing a risk so that the adequate calculation for the premium is being made or the most important aspect that any declaration may became a factor to decline a risk.
We need to know that the insurance coverage is under -written with a set of guidelines. There are formulas and calculations for covering every kind of risk based on the actuarial interpretation. The non declaration of any relevant material fact will keep the insurer in dark and the insurer will not be able to assess the risk.
I would try to explain the same by quoting some examples herein;
Example A:
A 45 years old person while filling the Proposal form for a health policy conceals his Hypertension disease and at the time of claim the insurance company repudiated the claim for the reason that the proper declaration has not been made and secondly there could be a direct co relation with the claim made and disease pre existing. In case the proper declaration has been made the insurance company has no reason to repudiate but the premium may go a little higher. The premium even if is litter higher make the insurance policy useful at the time of emergency.
Example B:
The Motor Insurance policy has a column of previous claim and "No Claim Bonus" . If a person has a claim in his previous year of policy and still the fact is concealed in obtaining the renewal. In case of claim, the insurance may repudiate the claim on this ground alone that a false declaration is being made while obtaining the insurance coverage. So, it always advised to honestly and attentively fill the proposal form at the time of obtaining the insurance policy.
