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Insurance Contracts and Good Faith

Good Faith with Insurance Contracts

The doctrine of the “Utmost Good Faith” and “Duty of Disclosure”- sometimes referred to by its Latin name, uberrimae fides – is a contractual legal doctrine that requires contracting parties to act honestly and not mislead or withhold any information that is essential to the contract.

With insurance, “utmost good faith” means that both parties (the insurer and the insured) are obliged to observe and honour the contract (policy) conditions. Any information you exchange with your insurer must be absolutely truthful to the best of your knowledge, and vice versa.

As the customer, your “duty of disclosure” is to inform the insurer of any relevant information (the insurance industry calls this “material facts”‘) that could affect their assessment of the risk they are taking in insuring your property. If the insurer thinks you did not disclose some material facts they can invalidate your policy and deny your insurance claim. The Insurance and Financial Services Ombudsman has a factsheet about non-disclosure and it’s consequences.

Good faith works both ways, the insurance company also has obligations. They must tell you of any situation in which your property will not be covered, and give you information about how your insurance policy works.

Remember to:

  1. Answer all of the questions on your insurance application, even if you do not think they are relevant.
  2. Contact your insurance company if you forgot to include something on your application.
  3. If your financial adviser/broker filled in your insurance application for you, read through it carefully before you sign it.
  4. When you renew your house, contents or car insurance, tell your insurer about any new events (convictions, accidents, losses etc)
  5. If you can’t remember your full medical history, ask your doctor for a copy of your medical notes, and double-check your insurance application.

What is in an insurance contract?

An insurance contract, or policy, is made up of three main parts:

  • a statement describing exactly what is covered by the insurance policy. It will specify, for example, the address of the building or the registration number of the vehicle to be insured. It also details what level of cover applies on the policy – for instance, whether your vehicle insurance is third party or comprehensive;
  • your personal details, based on the answers you’ve given (in good faith), to questions which help the insurer assess the insurance risk factor. This information tells the insurer anything in your personal history that might affect the agreement – for instance, how many insurance claims you have made in the last three years or whether or not you have a criminal record;
  • the policy document details exactly what compensation (i.e. how much money you can claim for) is available under the policy and the exact circumstances under which this compensation will be available.

You are only covered for the specific events listed on your insurance policy. It is very important that you understand the terms of your policy and how your insurance cover is provided because it is a binding contract. If there is anything in the policy that you are not sure about, ask your insurance company to explain it to you.

Good Faith works Both Ways

And remember, ‘good faith’ works both ways, the insurance company will normally honour their obligations under contract when there is no evidence of non-disclosure.

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