CHAPTER I

INTRODUCTION TO THE TOPIC

1.1 INTRODUCTION
A minimum standard that requires both the buyer and seller in a transaction to act honestly
toward each other and to not mislead or withhold critical information from one another. The
doctrine of utmost good faith applies to many common financial transactions.
In the insurance market, the doctrine of utmost good faith requires that the party seeking
insurance discloses all relevant personal information. For example, if one is applying for life
insurance, he is required to disclose any previous health problems he may have had. Likewise,
the insurance agent selling the coverage must disclose the critical information one needs to know
about the contract and its terms.
Insurance contracts are a special class of contracts which are guided by certain basic principles
like those of utmost good faith, insurable interest, proximate cause, indemnity, subrogation and
contribution. As such, an insurance contract is generally a combination of more than one of these
principles and no single principle can be used at one time. The rest is dependent on the contract
between the parties. These principles are mostly guided by common law principles from which
they have developed. They have also been modified by principles of contract and by statutes as
in the case of the Marine Insurance Act, 1963 which has to a certain extent relaxed the basic
principles of insurance law.

1.2 OBJECTIVE OF THE STUDY

1

The research project has been carried out with the following objectives:

The basic objective behind carrying out this research project is to analyze the concept of

utmost good faith with regards to financial transactions like insurance etc.
Also to analyze case laws with respect to the principle of utmost good faith.

1.3 HYPOTHESES
In order to conduct a research work, some important hypotheses are to be formulated. The focal
points and assumptions are normally available through the formulation of hypothesis. The major
hypotheses developed on the basis of study are as follows:
It is the insurer's duty to inform the insured of all the terms of the contract.
The principle of utmost good faith is more favourable to the insurer.

1.4 RESEARCH PROBLEM

Does the duty of utmost good faith continue even after the contract is made?
Researcher has taken up the following problem because it is very ambiguous that the duty of
good faith extinguishes with the performance of contract.

1.5 LITERATURE REVIEW

Books Referred
1

Gopinath, M.N., Banking Principles and Operations, Second Edition, Snow

White Publications, Mumbai, 2010

This book explains the basic concept and meaning of the doctrine of utmost good
faith.
Researcher would be introducing the doctrine with the help of this book.
2

Singh Avtar, Law of Insurance, First Edition, Eastern Book Company, Lucknow,
2004.

This book has emphasized on the principle of utmost good faith along with various
common law cases.
Researcher would be seeking help of this book to analyze the case laws with respect
to the doctrine of utmost good faith.
1.6 SCOPE
The scope of the present research is limited to: Utmost good faith in insurance contracts.
In this research project the researcher attempts to analyze the doctrine of utmost good faith in
insurance contracts because this doctrine forms an essential part of every contract therefore
researcher has mainly focused on insurance contracts. Looking at the vastness of the project the
researcher has confined the scope of the study to analyze the topic. The researcher has tried to
cover the aspects connected with the said topic and analyze them in an elaborative manner.
1.7 RESEARCH METHODOLOGY
The quality and value of research depends upon the proper and particular methodology
adopted for the completion of research work. Looking at the vastness of the research topic
doctrinal Legal research methodology has been adopted. The researcher has adopted both the
primary and secondary sources.

CHAPTER II
3

Evolution under Common Law

2.1 Evolution of the duty of utmost good faith

This doctrine first appeared in the seminal judgement of Lord Mansfield, sitting as Chief Justice
of the Court of Kings Bench, in Carter v Boehm 1 in 1766. The judgement itself contains no
specific citation of earlier authority, merely stating that the duty is derived from the law of
merchants2 Thus, is seems that the precise origin of the doctrine of utmost good faith will
probably never be known. It may have been created by the law merchant. The possibility that it
was originally a branch of the equitable jurisdiction to relieve against imposition cannot be
entirely discounted3
In Carter v Boehm, the brother of the Governor of Fort Marlborough in Sumatra took out a
policy against the taking of the fort by a foreign enemy. The fort was duly taken and the insurer
tried to avoid liability on the grounds of material non-disclosure. The outcome of the case is of
little historical interest; instead it is the obiter dicta of Lord Mansfield which we must focus on.
He stated that: good faith forbids either party by concealing what he privately knows, to draw
the other into a bargain, from his ignorance of that fact, and his believing the contrary.
Originally intended to apply to all contracts, the application of this statement was rejected by the
common law and only survives in respect of insurance law. In light of subsequent case law and
the discussion below, one of the most notable features of Lord Mansfields dicta was that he

1 [1766] 3 Burr. 1905

2 Pawson v Watson [1778] 2 Cowp. 785
3 Bennett, Mapping the doctrine of utmost good faith in insurance contract law
[1999] L.M.C.L.Q. 165 p177.
4

intended for only the pre-contractual period to be governed by the duty. This was confirmed by
Lord Blackburn in Brownlie v Campbell4 over a hundred years later.

CHAPTER III
General Principle of Utmost Good Faith

3.1 Doctrine of Utmost Good Faith

Under Section 13 of Insurance Contracts Act 1984 writes into every insurance contract a
statutory obligation on both parties to act with the utmost good faith.
Doctrine of Utmost good faith derives also known in its Latin form as "uberrimae fidei".
The principle of utmost good faith remains is the most important doctrines underlying the law of
insurance.
In the case of Banque Finaciere de la Cite v. Westgate Insurance Co. Ltd.5, it was held by the
court that the duty of disclosure is neither contractual, nor tortuous, fiduciary or statutory in
character but is founded on the jurisdiction originally exercised by the courts of equity to prevent
impositions.
In the case of Brownlie v. Campbell6
If one knows any circumstance at all which may influence the underwriters opinion as to the risk
he is incurring, there is an obligation to disclose that which one knows and the concealment of
any material circumstance whether you thought of it as being material or not, avoids the policy.
4 [1880] 5 App Cas 925, 954.
5 (1989) 2 All ER 982
6 1880), 5 App Cas 925
5

In the case of Rozanes v. Bowen7

The principle of utmost good faith was laid down here. It was said that since it is to be presumed
that the underwriter knows nothing and the assured knows all, the latter must disclose the same.
Thus, an insurance contract is a contract uberrima fides.

3.2 Good Faith expected from both parties

Good faith is expected from the insured or assured as well as the insurer. It is the buyer's duty to
disclose all facts related to the risk to be covered. Similarly, it is the insurer's duty to inform the
insured of all the terms of the contract. However, it is generally the assured person on whom
there is a bigger duty to disclose.
This is primarily because very often the insurer has to depend upon what details the insured
mentions in his form. If the insured gives wrong details or details of goods which are actually not
in existence, the insurer may end up paying for the wrong claims in the future. The insurer faces
a lot of problems trying to verify all such details, even though the advent of technology has made
the task comparatively easier now a days.
Wrong information given not only affects the insurer but also the other people involved in the
insurance pool whose premiums may be wrongly utilized to satisfy the claims. It is therefore an
implied condition or principle of insurance that the Assured be required to make a full disclosure
of all material particulars within his knowledge about the risk.
Further, considering the increase in new businesses in which insurance is being taken, it
becomes mandatory for the assured to inform the insurer if there are any alterations or changes to
the business which increases the risk during the validity of the policy and get his permission. If
no disclosure is made, the insurer has every right to avoid the contract.
In the case of United India Insurance Co. Ltd. v. MKJ Corpn.8
7 (1928), 32 L.I.L.R. 98
6

Just as the insured has a duty to disclose, it is the duty of the insurers and their agents, to
disclose, all material facts within their knowledge, since obligation of good faith applies to them
equally with the assured.
In the case of Banque Finaciere de la Cite v. Westgate Insurance Co. Ltd.9
The plaintiff bank had agreed to lend some 30 million pounds securities in the form of some
gemstones and some credit insurance policies. The gemstones when valued did not prove to be
worth much. So, the bank sought to rely on the insurance policies. The policies had been
brokered by a major firm of brokers who resorted to a series of false covers due to inability to
obtain full cover. On making claims under the policies, the bank discovered severe shortage in
cover. It was held that the insurers were under an obligation to disclose the same. It was also held
that the only remedy available to the insured is to rescind the policy and claim the premium. No
other damages may be awarded.
In the case of Joel v. Law Union10
The duty to show good faith falls on the insured as well as the insurer to an equal degree in all
types of insurance contracts.
3.3 Material Fact
What may be material for one may be immaterial for the other and vice-versa. But, generally
speaking, a material fact is one which affects the judgmental capacity of a person. It must be
such that a different consequence would have occurred had it not been disclosed. The following
cases illustrate the different theories evolved by the judiciary regards this.

8 (1998) 92 Comp Cases 331 (333)

9 (1989) 2 All ER 982
10 77 LJKB 1108
7

In the case of Marine Life Insurance Co. v. Ontario Metal Products11 The test of materiality is the
judgment of the prudent insurer and it is not what is material in the opinion of a reasonable
assured.
In the case of Reynolds v. Phoenix Assurance Co.12
The test is whether the circumstance in question would influence the prudent insurer and not
whether it might influence him.
In the case of Lindenau v. Desborough13
The question is whether any particular circumstance is infact material and not whether the
proposer believed it to be so.
In the case of St. Paul Fire and Marine Insurance Co. (UK) Ltd. v. Mc Connell Dowell
Constructors Ltd,14
Two major questions were decided in this case. The first was the test of materiality according to
which the fact in question must have been of interest to a prudent insurer. Secondly, as regards
the presumption of inducement, it was held that the test would be satisfied if the insurer could
show that he was influenced in whole or in part by the assureds misleading presentation of the
risk.
The law relating to utmost good faith:
1. The common law imposes a reciprocal duty of good faith on the parties to insurance and
reinsurance contracts at the time the contract is made (pre-contractual duty) and (ii) following
the making the contract (post-contractual duty). The nature and extent of the pre-contractual duty
and the post-contractual duties are, however different.
11 94 LJPC 60
12 (1978) 2 Lloyds Rep 440
13 (1828) 8 B & C 586
14 45 Con LR 89
8

2. At the pre-contractual stage, there is a positive obligation on the parties" to disclose all facts
material to the risk and to refrain from material misrepresentation. The only remedy the common
law allows for breach of the duty of good faith is avoidance of the contract of insurance or
reinsurance. Damages for breach of the duty of good faith are not available.
3. There does not appear to be a general duty that the parties perform the contract of insurance or
reinsurance in good faith. Thus there is no basis under English law for awarding damages against
an insurer or a reinsurer for "bad faith" in relation to the handling of claims.
4. However, there does appear to be a continuing duty on the parties not to be materially
fraudulent in relation to the performance of the contract. After the contract has been made, the
duty of good faith includes but is not confined to cases analogous to the pre-contractual context,
such as variation of the risk, and a requirement that the assured refrain from making fraudulent
claims.
5. In a post-contractual case, the underwriter is entitled only to avoid the contract with
retrospective effect if he can show that the fraudulent conduct of the assured was relevant to the
underwriter's ultimate liability under the contract and was such that it would entitle him to
terminate the contract for breach.
6. When a claim is made, the assured is, as a matter of principle, under an obligation to disclose
all material facts to the underwriter's agents investigating the claim. However the failure to make
full disclosure, unless it was materially fraudulent, does not entitle the underwriter to deny an
otherwise valid claim. Once a writ is issued, the obligation of disclosure is governed by the
relevant procedural rules and the consequences of a failure to disclose relevant documents are
also determined by reference to those rules.
3.4 Facts which need to be disclosed and facts which need not be disclosed3.4.1 Facts required to be disclosed
1. A fact which is earlier immaterial but becomes material later on must be disclosed if it has
been expressly mentioned in the terms and conditions of the policy. Eg. Fire insurance of ones
house. Earlier, vacant plot located nearby. Later on a petrol pump is constructed on such plot.

2. A fact which increases the risk must be disclosed in all circumstances. E.g. in case of theft
insurance, if a person lives alone in an isolated place, the same needs to be compulsorily
disclosed as it increases the risk.
3. Previous losses incurred and claims under previous policies needs to be disclosed. This is
mainly in case of double insurance where it needs to be ascertained as to whether the subsequent
insurance company is willing to insure and to what extent.
4. Special terms and conditions under previous policies if any.
5. Fact of existence of non-indemnity is to be disclosed. This relates to any charge or
encumberance on the policy in the form of a loan security or otherwise.
6. The description of the subject matter must be stated properly. This is mainly to locate the
property if it is immovable and to recognize it if it is movable.
7. Facts which suggest any special motive to take the insurance.
8. Facts which suggest the existence of any moral hazards which relate to the moral integrity of
the proposer, etc.
1. Economides v. Commercial Union Assurance Co. plc15
It was held that the duty of the assured to disclose all material facts required an assured only to
disclose facts known to him. There is no obligation on the assured to make enquiries as to the
factual basis of his belief.
3.4.2 Facts which need not be disclosed
1. Fact lessening the risk need not be disclosed.
2. Public knowledge. e.g. facts regarding govt. policies, taxes, subsidies, etc. which are expected
to be known to all.
3. Fact of law like rules, regulations, etc. which have already been made available to all by way
of the notification in the official gazette.
15 (1997) 3 All ER 636
10

4. Superfluous facts or such information which is not logical.

5. Facts which are inferred information.
6. Fact waived by the insurer himself.
7. Facts governed by the policy itself.
In the case of LIC v. Shakunthalabai16
The insured had failed to disclose that he suffered from indigestion for a few days and took
chooram from an ayurvedic doctor. He died within that year due to jaundice. The insurer
repudiated the claim on this account. The court did not approve of the repudiation as the insurer
did not establish by clear and cogent evidence that the question was properly explained to the
insured and that he was told that illness included such casual disturbances to health and
medicines included tablets that could be purchased at the nearest coffee store.
Bhagwani Bai v. LIC of India, 17
The insurer cannot avoid or repudiate an insurance policy on the ground of non-disclosure of
lapsed policies by the assured which had no bearing on the risk taken by the insurer.

16 AIR 1975 AP 68
17 AIR 1984 MP 126(130)
11

CHAPTER IV
CONCLUSION

The doctrine of utmost good faith forms an integral part of insurance law. It gives a fair chance
of risk assessment to the insurer and also ensures that the assured fully understands all the terms
and conditions of the contract. But, this doctrine is more favorable to the insurer as it is the
assured who has to generally make all the disclosures. This is primarily because when this
doctrine was evolved in the 18th century, the insurance market was in its infancy and thus
required protection. However, the enactment of the English Unfair Contract Terms Act, 1977 has
considerably alleviated the position of the assured who is now protected against unfair
contractual terms. Further, the Insurance Act lays down that an insurance policy cannot be called
in question two years after it has been in force. This was done to obviate the hardships of the
12

insured when the insurance company tried to avoid a policy, which has been in force for a long
time, on the ground of misrepresentation. However, this provision is not applicable when the
statement was made fraudulently.
The doctrine has problem with regards to as to what duration does the disclosure(s) need to be
made. Common law cases may somewhat seem to have settled this point Thus, all these
problems need to be taken care of and an effective solution must be provided considering the
principle of utmost good faith is one of the most fundamental principles associated with
insurance law.

BIBLIOGRAPHY

BOOKS REFERRED
Gopinath, M.N., Banking Principles and Operations, Second Edition, Snow White
Publications, Mumbai, 2010
Singh Avtar, Law of Insurance, First Edition, Eastern Book Company, Lucknow, 2004.

CASES REFERRED:
Carter v Boehm [1766] 3 Burr. 1905
13

 Brownlie v Campbell [1880] 5 App Cas 925, 954

Banque Finaciere de la Cite v. Westgate Insurance Co. Ltd., (1989) 2 All ER 982

Joel v. Law Union, 77 LJKB 1108

Marine Life Insurance Co. v. Ontario Metal Products, 94 LJPC 60
Reynolds v. Phoenix Assurance Co. (1978) 2 Lloyds Rep 440
Lindenau v. Desborough, (1828) 8 B & C 586
St. Paul Fire and Marine Insurance Co. (UK) Ltd. v. Mc Connell Dowell Constructors

Ltd, 45 Con LR 89
LIC v. Shakunthalabai AIR 1975 AP 68
Bhagwani Bai v. LIC of India AIR 1984 MP 126(130)

14