Page 74 - DCOM309_INSURANCE_LAWS_AND_PRACTICES

Unit 5: Principles of Insurance

5.1.2 Breaches of Utmost Good Faith Notes

You must remember that breaches of Utmost Good Faith occur in either of 2 ways:
(1) Misrepresentation, which again may be either innocent or intentional. If intentional then
they are fraudulent.

(2) Non-Disclosure, which may be innocent or fraudulent. If fraudulent then it is called
concealment.
It is important to distinguish between the two: Misrepresentation and Non-Disclosure.

Misrepresentation
Innocent: This occurs when a person states a fact in the belief or expectation that it is right but it
turns out to be wrong. While taking out a Marine Insurance Policy the owner states that the ship
will leave on a specific date but in fact the ship leaves on a different date.
Intentional: Deliberate misrepresentation arises when the proposer intentionally distorts the
known information to defraud the insurer. The selfish objective is somehow to enter the contract
or to get a reduction in the premium e.g., If an applicant for motor Insurance stated that no one
under 18 would drive the vehicle when in fact his 17 years old son drives frequently. Such a
misrepresentation would be material as it would affect the decision of the insurer.

Non-Disclosure

Innocent: This arises when a person is not aware of the facts or when even though being aware
of fact does not appreciate its significance e.g. A proposer at the time of effecting the contract has
undetected cancer therefore does not disclose it, or A proposer had suffered from Rheumatic
fever in his childhood but he does not disclose this not knowing that people who have this are
susceptible to heart diseases at a later age.
Deliberate: This is done with a deliberate intention to defraud the insurer entering into a contract,
which he would not have done had he been aware of that fact.
A proposer for fire Insurance hides the fact knowingly by not disclosing that he has an outhouse
next to his building, which is used as a store for highly inflammable material.

How to Deal With Breaches

How breaches are dealt with depends upon whether the breaches are:

(1) Innocent
(2) Deliberate
(3) Material to the risk
(4) Immaterial to the risk
1. When Breach of Utmost Good Faith occurs the aggrieved party gets the right to avoid the
contract. The contract does not become automatically void and it must decide on the
course to be taken. The options available are on case-to-case basis like:
2. The contract becomes void from the very beginning if deliberate misrepresentation or
non-disclosure is resorted to with the intention of misleading the insurer to enter into a
contract.

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