Page 72 - DCOM309_INSURANCE_LAWS_AND_PRACTICES

Unit 5: Principles of Insurance

Appliances discount in fire policies or that Earthquake risk is not covered under the standard Notes
fire policy but can be covered on payment of additional premium. In the recent Earthquake
disaster in Gujarat, a number of insured failed to get any relief from Insurance Companies as
Earthquake risk was not covered.
Utmost Good Faith can be defined as “A positive duty to voluntarily disclose, accurately and fully all
facts material to the risk being proposed whether requested for or not”. In Insurance contracts Utmost Good
Faith means that “each party to the proposed contract is legally obliged to disclose to the other all information
which can influence the others decision to enter the contract”.
The following can be inferred from the above two definitions:
1. Each party is required to tell the other, the truth, the whole truth and nothing but the truth.

2. Unlike normal contract such an obligation is not limited to any questions asked.
3. Failure to reveal information even if not asked for gives the aggrieved party the right to
regard the contract as void.

How is this duty of Utmost Good Faith to be practiced? And what are the facts that the proposer
has to disclose? The answer to both the question is simply the proposer must disclose to the
insurer all material facts in respect of the subject matter of Insurance.

5.1.1 What is a material fact?

Material fact is every circumstance or information, which would influence the judgement of a
prudent insurer in assessing the risk.
Or

Those circumstances which influence the insurer decision to accept or refuse the risk or which
effect the fixing of the premium or the terms and conditions of the contract must be disclosed.
Following are the facts, which must be disclosed:

(i) Facts, which show that a risk represents a greater exposure than would be expected from
its nature e.g., the fact that a part of the building is being used for storage of inflammable
materials.
(ii) External factors that make the risk greater than normal e.g. the building is located next to
a warehouse storing explosive material.
(iii) Facts, which would make the amount of loss greater than that normally expected e.g. there
is no segregation of hazardous goods from non-hazardous goods in the storage facility.

(iv) History of Insurance (a) Details of previous losses and claims (b) if any other Insurance
Company has earlier declined to insure the property and the special condition imposed
by the other insurers; if any.

(v) The existence of other insurances.
(vi) Full facts relating to the description of the subject matter of Insurance.
Some examples of Material facts are:

(a) In Fire Insurance: The construction of the building, the nature of its use, i.e. whether it is
of concrete or kucha having thatched roofing and whether it is being used for residential
purposes or as a godown, whether fire fighting equipment is available or not.

(b) In Motor Insurance: The type of vehicle, the purpose of its use, its age (Model), Cubic
capacity and the fact that the driver has a consistently bad driving record.

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