UTMOST GOOD FAITH

The general rule guiding most commercial contracts is the principle of caveat emptor (let the buyer beware) .Under this principle, the parties involved in the contract are expected to provide information on the state of the subject matter of the insurance .The buyer should also examine the goods and satisfy himself as he is making a reasonable bargain before purchasing the goods. If after the purchase of the goods he discovers he has not made a good bargain, he does not have any legal right against the seller. In this process, each party should not make statements that will mislead each other in bargaining, and they must be truthful in their business transactions. Any mistake made in the purchase of such goods and services could not lead to legal redress as such transaction is under the doctrine of caveat emptor.

DEFINITION OF UTMOST GOOD FAITH

It can be defined as a minimum standard that requires both buyer and seller in a transaction to act honestly toward each other and not to mislead or withhold critical information from each other.

THE INSURED AND INSURER DUTY OF DISCLOSURE

The insurance contract requires both the insurer and the insured to observe the doctrine of utmost good faith in their transactions. This principle requires mutual trust and confidence between the insurer and the insured.

PART IX of Insurance Act 2003 describes the right and duties of the insured and the insurance agent regarding disclosure of material facts through the completion of proposal form or other application forms which are expected to be drafted in such a way that the information considered to be material facts in accepting the application for insurance of the risk would be elicited and any other information not specifically requested shall not be deemed tobe material fact.

MATERIAL FACT

A material fact is the material which will influence the judgment of a prudent insurer in fixing premium or determining whether he will take the risk or not. In other words, it is a fact which expression would reasonably result in a different decision. Facts which need to be disclosed must include such facts which would guide the insurer in rejecting or accepting a risk as in determining the premium chargeable.

FACTS THAT NEED TO BE DISCLOSED

1. Previous proposal made by the proposer but declined by insurer.
2. Information on special terms imposed in previous insurance proposal if any.
3. Facts which lessen or improve the risk. For example, the existence of burglar alarm in a burglary/theft risk or sprinkler system in premises proposed for fire insurance.
4. Those that would make the risk to appear higher externally than expected.
5. The previous losses or claims made under other insurance policies.
6. Those that are likely to increase the amount of loss than normally expected.
7. Facts capable of discovery by the insurer from information supplied.
8. Those relating to the full description of the subject matter of the insurance.
9. The existence of other non-indemnity insurance policies if any.

EXAMPLES OF FACTS THAT MUST BE DISCLOSED IN DIFFERENT CLASSES OF INSURANCE

A) MOTOR INSURANCE

1. The use to which the vehicle will be put, whether for the carriage of goods belonging to the insured or general carriage in which the insured will receive money in return.
2. Whether the vehicle will be driven regularly by another person other than the insured.
3. Modification to the vehicle.

B) LIFE INSURANCE: Previous medical history.

C) PERSONAL ACCIDENT: Nature of occupation, salaries and wages, age.

D) THEFT ASSURANCE: Previous theft cases in the premises, nature of the stock, method of packaging, employment of night watchmen.

E) FIRE INSURANCE: The material used for construction, what the building is used for, and location of the building.

F) MARINE INSURANCE: The mode of packaging with respect to marine cargo.

FACTS THAT NEED NOT BE DISCLOSED

The purpose of disclosing facts by the insured is to ensure that the insurer is not put at a disadvantage. But there are still some facts that can improve the risk exposure of a proposer. Such facts will not affect the insurer if the proposer does not disclose them. The following facts, even if they are material, need not be disclosed:

1. Facts about law: It is presumed that everybody knows what the law requires.
2. Facts of which insurer deemed to know: There are some facts which by nature of a particular trade is known to the insurer.
3. Those that lessen or improve the risk: The existence of alarm and fence erected around the building.
4. Facts about which insurer has been put on enquiry: Example is where the proposer has referred the insurer to the claims record under its previous policy with a previous insurer and they do not follow up this line of enquiry.
5. Facts which insurance survey should have noted: These deal with those facts which in ordinary survey, a professional should have noticed.
6. Those that are unknown to the proposal: The knowledge of a fact is required by the proposer for him to be able to disclose such fact as one is not expected to say what he does not know.

DURATION OF DUTY OF DISCLOSURE

At the common law, the duty of disclosure commences when the discussion to establish the contract relationship begins, which will be concluded when the contract is formed. Once the contract is in force, the contract is subject to only ordinary good faith. However, upon the creation of an insurance contract, both parties are enjoined by the policy condition to further observe the duty of disclosure while the contract is on and when changes are to be effected following the disclosure of new information.

INSURANCE INTERMEDIARIES AND INFORMATION DISCLOSURES

Insurance intermediaries are made up of agents and brokers.

Agents are usually agents of the insured while brokers in most cases act as agents for the insurer. In fact, it is no longer uncommon to see brokers who act for both insured and insurer. Legally, agents are intermediaries that represent the interest of the principal. The principal will be held liable for the actions of the agents in situations involving frauds, concealment or misrepresentation.

At common law, an agent is a person appointed by another person called the principal to bring the principal into legal relations with the third parties. An agent must act within the scope of the authority. Information acquired by the agent in the course of his duty is regarded as information acquired by his principal.

In Insurance business transaction, it is important to differentiate between agent acting on behalf of the proposer (insured) and that of the insurer.

An agent is considered to be agent of the proposer if the following features are present:

1. Provide the insured with advice on claims with the insurer.
2. Carrying out alteration as well as providing additional information on behalf of the proposer.
3. By completing the insurance proposal form with the knowledge of the proposer.
4. Offer advice to the proposer on his insurance needs such as forms of cover required, taking decision as to the insurance market to which the business should be placed with, etc.
5. Provide answers to the questions asked in the proposal form on behalf of the proposer.

DUTIES OF AGENTS TO PRINCIPAL

1. He must act with due care and for that class of agent. For example, there is high duty of skill resting on an insurance broker since he has considered himself to be insurance expert than a solicitor or an accountant acting as an agent whose expertise lies in other areas.
2. Handling the insurance contract along with the terms of his agency either orally, written or implied.
3. Carrying out all lawful instructions.
4. He must account to the principal for all money on his behalf.
5. Acting in perfect good faith with his principal by making available all information essential to the insurance contract.
6. Avoiding the acceptance of secret commission.
7. He must not delegate his duties to another person.

DUTIES OF PRINCIPAL TO AGENTS

1. Ensuring the payment of agreed commission.
2. Avoiding the payment of secret commission.
3. Settling all the expenses incurred by the agents in the discharge of their duties, although it is assumed that the commission paid to the agent by the principal is meant to take care of such expenses.
4. Settling the premium paid by the agent on behalf of the principal where the insured is the principal.

LIABILITIES OF AGENTS

1. He is liable for breach of warranty of authority. If an agent proposes to act as an agent when he has not been given that authority, he is liable to compensate the principal for breach of warranty such as acting outside his authority.
2. He is liable to compensate the principal if he commits fraud, thereby exposing the principal to loss.

BREACH OF UTMOST GOOD FAITH

This may be classified in the following ways:

1. Non-disclosure: This is the failure to disclose material fact, either by accident or because the fact is not considered to be important.
2. Concealment: This is the failure to disclose a material fact willfully which is fraudulent.
3. Fraudulent misrepresentation: This constitutes deliberate supply of false or intentionally misleading information in a material fact.
4. Innocent misrepresentation: This occurs when incorrect information is given about material facts, but where the error is unintentional.

EFFECTS OF BREACH OF UTMOST GOOD FAITH

It gives the aggrieved party the right to avoid the contract. The contract is not automatically made void but the aggrieved party must decide on his course of action within a reasonable time. The options open to him are:

1. To sue for damages: If the breach was fraudulent, the insured will be guilty of the tort of deceit, which could give rise to an action for damages.
2. To waive the breach: The insurer may overlook the breach if he so desires, in which case the breach never legally occurred. If the insurer takes no action within a reasonable time, he will be deemed to have taken this course.
3. To consider the correct void: This requires notification to the offending party. It is virtually unknown for a breach to be committed by the insurer, who is therefore almost invariably the aggrieved party. The insurer would state that he is coming off risk. If the policy had already matured e.g. in life assurance, no payment will be made.