What the Principle of Utmost Good Faith is

13 April 2022

Utmost good faith is one of the basic principles that must be fulfilled in a contract or insurance agreement. Without the fulfillment of this principle, it is very wide open to the occurrence of disputes or disputes between the insured and the insurer.  So, the agreement of the principle of utmost good faith is to prevent the existence of malicious intentions to seek benefits that can come from either the insured or the insurer.

This utmost good faith is reflected in the honest disclosure of information that forms the basis of insurance contracts. Before starting an insurance contract, the prospective insured must honestly disclose his risk profile to the insurance company, while the insurance company must be honest regarding the profile of the insurance product offered.

As commonly known, insurance contracts are established based on trust to transfer risk from the insured to the insurer or insurance company. The customer or insured entrusts the insurance company to bear the risk by paying premiums. Meanwhile, insurance companies are willing to bear customer risks based on the actual conditions disclosed by the insured.

Practically, not all insurance policies lead to claims if the risks insured during the coverage period do not occur. An example is when we buy vehicle insurance for the risk of loss and damage over a period of one year.  If both parties hold the principle of utmost good faith, the insured will not make a claim if the insured risk does not occur. Conversely, if the risk is true, the insurance company will approve the claim filed.

However, if both parties do not hold the principle of good faith, the insured may manipulate the risk to make a claim. An example is the insured deliberately crashing his vehicle before the coverage period ends to get replacement vehicle spare parts. Instead, the insurance company can look for a thousand kinds of reasons to reject the claim filed by the insured.

  Then what exactly is the principle of utmost good faith in insurance practice? The term of principle of utmost good faith is also known as the principle of uberrima fidei or buying and selling contracts based on good intentions. In this context, both the insured and the insurer have the same obligation regarding the duty of full disclosure, which is the obligation to disclose material or important facts (all material circumstances) in full and honestly.

Article 251 of the Trade Code also regulates the principle of utmost good faith, namely "Any false or incorrect information, or every does not tell the things known to the Insured however good faith is in him, which is so nature that if the Insurer has known the true circumstances, the agreement will not be closed or not closed with the same conditions, resulting in the cancellation of coverage."

What stipulated in Article 251 of the Commercial Law Book is in accordance with the definition of experts in the UK.  The Duty of Utmost good faith is defined as a positive obligation to voluntarily disclose accurately and completely all material facts about the risk of being asked to close, whether they are asked or not. However, at first some Law Reform Committees, The Departement of Trade, and The Office of Fair Trading had judged that this obligation was too much charged to the insured. 

Along with the time and many complaints from the insured, the Law Reform Committees, The Department of Trades, and The Office of Fair Trading made a joint statement in January 1986 entitled "Statement of General Insurance Practice" which applies to general insurance whose policyholders are domiciled in the UK. One of the important points in the joint statement is that the duty of full disclosure is also charged to the insurer. Thus, the insurer is not allowed to hide an important information from the insured to make the insured enter into an agreement that is not good or detrimental to the insured.

·           Material Facts

Citing the Marine Insurance Act 1906 section 18 (2), every circumstance or fact is material/important if the condition or fact can affect the decision of the insurer who is careful in setting premiums or determining the insurer is willing to cover the risk.  Not all material facts must be disclosed, but there are material facts that may not be disclosed.

Based on this definition, the facts that must be disclosed to be good faith are:

a)    The facts indicate that the risk required to be closed internally is greater/higher than the usual size for the risk.

b)    The facts indicate that the risk asked to be closed is greater than normal due to external and external factors.

c)    Facts that can increase the amount of losses or make the amount of losses become greater than normal.

d)    Losses and claims records.

e)    Rejection or harsh/severe conditions imposed/imposed during the previous closure by the insurer or other insurers.

f)     Facts that limit the subrogation rights of the insurer because the insured reduces the responsibility of the third party.

g)    Complete facts related to the deprecation of the object of coverage.

Meanwhile, the facts that do not have to be disclosed to be good faith are:

a)    Legal facts.

b)    The facts that the insurer himself is considered to already know.

c)    Facts that have been submitted previously by the insured to the insurer at the request of the insurer.

d)    Facts that should have been recorded or known by the insurer at the time the insurer conducted a survey of the relevant risks.

e)    Facts that the insurer has included in the conditions or conditions of the policy.

f)     Facts unknown by the insured.


·           Violation of Principle of Utmost Good faith

As explained earlier, the principle of utmost good faith is an obligation and basic principle that must be fulfilled in the insurance contract. So, this violation of the principle of utmost good faith has the consequence of canceling the insurance contract. There are two things that violate the principle of utmost good faith, namely:

a.    Non-Disclosure

In the principle of utmost good faith, the obligation of full disclosure is mandatory and absolute. The insured is obliged to disclose in full or completely to the insurer, requested or not requested, all material/important facts.  By not performing such obligations (non-disclosure) is a violation/breach of the principle of utmost good faith.

Non-disclosure can occur due to disregards behavior, deliberate intention to deceive, indifference, lack of caution, mistakes/errors, and mistakes in making decisions to the party who is obliged to carry out the duty of full disclosure.  Even fraudulent non-disclosure or innocent non-disclosure remains a violation of the principle of utmost good faith.

b.     Misrepresentation

In addition to the duty of full disclosure, the insured is required to convey (representation) all material facts accurately to the insurer.  So, representation must be an accurate representation. Violation by the insured of the obligation to perform accurate representation is a violation of the principle of utmost good faith (breach of the doctrine of utmost good faith) in the form of misrepresentation of material facts.

Even misrepresentation is done with the intention of committing fraud against the insurer (fraudulent misrepresentation) and misrepresentation is done guiltily (innocent misrepresentation), still giving rights to the insurer to ask for the cancellation of the relevant policy.

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