The life insurance requires that both the parties should preserve the principle of utmost good faith.
The utmost good faith says that both the parties, proposer (insured) and insurer, must be of the same mind at the time of contract because only then the risk may be correctly ascertained.
They must make full and true disclosure of the facts material to the risk.
In life insurance, material facts are age, income, occupation, health, habits, residence, family history and plan of insurance.
Material facts are determined not on die basis of opinion, therefore, the proposer should disclose not only those matters, which the proposer may feel are material, but all facts which are material.
Duty of both parties
It is not only the proposer but the insurer also who is responsible to disclose all the material facts which are going to influence the decision of the proposer, whether apply or not to apply for insurance.
Since the decision is taken mostly on the basis of subject-matter, the life to be insured in life insurance, and the material facts relating to the subject-matter are known or is expected to be known by the proposer; it is much more responsibility of the proposer to disclose the material facts.
Full and True Disclosure
Utmost good faith says that there should be full and true disclosure of all the material facts.
Full and true means that there should be no concealment, misrepresentation, half disclosure and fraud of the subject matter to be insured.
Extent of the Duty
The duty of disclosure finishes the moment when the proposal form has been fully and correctly fulfilled provided there is no such facts, which he considers or expected to be considered material and have not been disclosed.
The proposer cannot defend on the ground that he had omitted to disclose it by carelessness or by mistake or that; he did not regard it material to the contract.
In the absence of utmost good faith, the contract will be voidable at the option of the person who suffered loss due to non-disclosure.
The intentional non-disclosure counts fraud and is void “ab initio” and the unintentional non-disclosure is voidable at the option of the party not at fault
Once the party not at fault has validated the voidable contract, he cannot avoid the contract later on.
if the insurer has continued to accept the premium when certain non-disclosure, say mis-statement of age, has been disclosed the insurer cannot invalid the contract and cannot refuse to pay the amount of claim.
If the party not at fault does not exercise its option, the contract will remain valid.
Indisputability of Policy
The doctrine of utmost good faith works as a great hardship for a long period on the plea of mis-statement at the time of proposal,
in such cases,
it would be very difficult to prove or disprove whether a particular statement made at the time of policy was true.
Therefore, to remove this hardship, certain sections in the concerned Act arc provided. The indisputable clause handles these kind of dispute.
FACTS NOT REQUIRED TO BE DISCLOSED
The following facts are not required to be disclosed:
- Circumstances which are diminishing the risk.
- Facts which are known or reasonably should be known to the insurer in his ordinary course of business.
- Facts which the insurer should infer from the information given.
- Facts which are waived by the insurer.
- Facts which are superfluous to disclose by reason of a condition or warranty.
- Facts of public knowledge.