We have
seen in Unit I that for an insurance
contract to be valid and enforceable there has to be a proposal by a the insured, its acceptance by the insurer and the payment of the a consideration
to the insurer, Many commercial
contracts go by the caveat emptor principle
(meaning let the buyer
beware) , which presupposes that the parties to the contact should not mislead the other party, but does not make up it imperative to
disclose more than what is asked for .
However for the insurance contract , the
buyer is buying a promise based on certain information declared by him, and the
seller sells that promise and charges
the considerations based on and
believing the information furnished by the proposer. Non-discolour of some facts can make the value of the promise much costlier
than the considerations charged
and even change the fundamentals
based on the which the insurer gave the promise. At this point the situations is one-sided and heavily prejudiced against the insurer because the
proposer has full knowledge about the risk offered for insurance while the
insurer does not have any knowledge of
it. An argument that the insurer could have
a good study of the risk before accepting it is only technical and does not really
match with the overall philosophy of
insurance
The fact remains that with any amount of investigation , it many may not be
practically possible for an insurer
to develop a reasonable understanding
of every risk, before accepting
it. Further , the cost and time involved in the process would
heavily add to the insurer’s expenditure.
These practicalities make it
imperative for the insurer to have
utmost good faith on the insured.
Overall insurance has to be understood
as an honest deal for a noble cause between two gentlemen. Further the humanitarian idea of the community contributing to alleviate the financial loss an unfortunate member, which
forms the bedrock of the insurance system,
envelops the insurance contract in
an atmosphere of trust. Though trust or good faith is cardinal to all financial
transactions , the above positions emphasizes, the importance of trust in
insurance. Hence the insurer expects a
higher degree of good faith, termed as utmost good faith from the proposer of
insurance. Lord justice, Scrutton,
defined the principle of utmost faith
(or uberrima fides) in the case of Rozanes V
Bowen (1928) as follows:. As the
underwriter knows nothing and then man who comes to him to insure knows
everything it is duty the assured, the
man who desires to have a policy. to make a full disclosure to the underwriters without being asked of all the material
circumstances, because the underwriter
knows nothing and the assured knows
everything. That is expressed by saying that it is a contract of utmost good faith.
Any circumstance which is within
knowledge of the insuring person and is
likely ti influence the insurer in
deciding whether he will accept of refuse the risk, or influence
to the insurer before the contract is concluded . Sections 19 to 23 of
the Marine insurance Act, 1963, provide
that every contract of insurance requires
an insured to make all a full
disclosure of all material facts to the
insurer. For instance, when a ship is proposed for insurance, the proposer
states the details such as a age, tonnage, vessel class, sea worthiness
certifications etc., to the
insurers
The insurer would insure it with terms and rates applicable to any other vessel of the same class,
tonnage age, etc., However the proposer would have an intimate knowledge of the actual physical condition of the ship, details of the repairs that it
underwent details of worn out machinery
, or details of repair that are a due but postponed for some reason or
other which the insurer cannot be the reasonably expected to know. It is possible that the
proposer has intentionally not disclosed
some negative details about the
ship to the insurer. If the insurer had
come to know of these details about the he might have insured it only with
some additional conditions, or with an
additional premium or even he might not have insured the ship at all. In such a
case, the action of the proposer in
within with holding these vital details
from the insurer is not in keeping with
the principle of utmost good faith. In the context of insurance covering Consequential Loss,
which protects against loss of profits and loss of expenses such as a rent etc., emanating put of the
insured event (The concepts of Consequential
Loss or Loss of profits insurance are described in detail in Unit 5, ), the doctrine of
utmost good faith gives a clear understanding
that in the event of damage the insured will follow sound
accounting procedures and take all
reasonable steps to minimize the
resulting loss. In other words, if and when a loss or occurs, the insured are
expected to perform all the actions
normally expected of them, as though they were not insured.