The life insurance requires that the principle of utmost good faith should be preserved by both the parties.
The utmost good faith says that both the parties, prosper (insured) and insurer, must be of the same mind at the time of contract because only then the risk may be correctly ascertained. They must make full and true disclosure of the facts material to the risk.
In life insurance material facts are age, income, occupation, health, habits, residence, family history and plan of insurance. Material facts are determined not on the basis of opinion, therefore, the prosper should disclose not only those matters which the prosper may feel are material but all facts which are material.
Duty of both parties
It is not only the prosper but the insurer also who is responsible to disclose all the material facts which are going to influence the decision of the prosper, whether apply or not to apply for insurance.
Since the decision is taken mostly on the basis of subject-matter, the life to be insured in life insurance, and the material facts relating to the subject-matter are known or is expected to be known by the prosper; it is much more responsibility of the proposer to disclose the material facts.
Full and True Disclosure
Utmost good faith says that there should be full and true disclosure of all the material facts. Full and true means that there should be no concealment, misrepresentation, half disclosure and fraud of the subject matter to be insured.
Extent of the Duty
The duty of disclosure finishes at the moment when the proposal form has been fully and correctly fulfilled provided there is no such facts which he considers or expected to be considered material and have not been disclosed.
The proposer cannot defend on the ground that he had omitted to disclose it by carelessness or by mistake or that he did not regard it material to the contract.
In the absence of utmost good faith the contract will be voidable at the option of the person who suffered loss due to non-disclosure.
The intentional non-disclosure counts fraud and is void ab initio and the unintentional non-disclosure is voidable at the option of the party not at fault.
Once the voidable contract has been validated by the party not at fault, the contract cannot be avoided by him later on.
For instance, if the insurer has continued to accept the premium when certain non-disclosure , say mis-statement of age, has been disclosed the insurer cannot invalid the contract and cannot refute to pay the amount of claim.
If the party not at fault does not exercise its option, the contract will remain valid.
Indisputability of Policy
The doctrine of utmost good faith works as a great hardship for a long period on the plea of misstatement at the time of proposal.
In such cases, it would be very difficult to prove or disprove whether a particular statement made at the time of policy was true. Therefore, to remove this hardship, certain sections in the concerned Act are provided.
In India, Section 45 of the Insurance Act 1938 deals with such dispute. It is called indisputable clause, “…..No policy of life insurance, after expiry of two years from the date on which it was effected, be called into question by an insurer on the ground that a statement made in the proposal for insurance or in any report of a medical office or referee or friend of the insured or in any other document leading to the issue of the policy was inaccurate or false, unless the insurer shows that such statement was on a material matter or suppressed facts which it was material to disclose and that it was fraudulently made by the policy-holder and that the policy-holder knew at the time of making it that the statement was false or that it suppressed facts which it was material to disclose.
Provided that nothing in this section shall prevent the insurer from calling for proof of age at any time if he is entitled to do so.
Facts Not Required to be Disclosed
The following facts are not required to be disclosed:
- Circumstances which are diminishing the risk.
- Facts which are known or reasonably should be known to the insurer in his ordinary course of business.
- Facts which the insurer should infer from the information given.
- Facts which are waived by the insurer.
- Facts which are superfluous to disclose by reason of a condition or warranty.
- Facts of public knowledge.