Insurance is a contract of utmost good faith (three)

Justice Peprah AGYEI  --The author is a Chartered Insurer and an Associate of the Chartered Insurance Institute of United Kingdom and also Ghana (ACII-UK, ACIIG), +233 (0) 549705031 [email protected]

A contract has been defined as a legally enforceable agreement. We have explained in our earlier write-ups the elements that make a contract be legally enforceable agreement. These we said include agreement (offer and acceptance), capacity (the competence of all parties), mutual assent, consideration, legal purpose, and the form required by law.

Insurance contracts should have all the necessary elements of a legally enforceable contract, so they are similar to other contracts in many ways. Nonetheless, insurance contracts have distinctive features and their own body of law. In addition to having the necessary elements of all contracts, valid insurance contracts have certain special characteristics. Last week we discuss the element of adhesion. Today we discuss insurance as a contract of Utmost Good Faith. 

Utmost Good Faith

Insurance is a service that involves a promise to pay compensation in the future. This means it requires complete honesty and full disclosure of all vital facts by both parties (insured and insurer). Insurance contracts are considered contracts of utmost good faith because of this reason. Both parties to an insurance contract are expected to be honest and truthful with each other.

The insured has a right to trust the insurer to fulfill its future promises to him/her. Hence, the insurer is expected to treat the insured with utmost good faith. An insurance company that acts in bad faith, such as by repudiating coverage for a claim that it knows is undoubtedly covered, could receive serious penalties under the law or by its regulator.

The insurer also has a right to believe that the insured will act in good faith. A proposer who purposely hides certain information or misrepresents certain particulars does not act in good faith. An insurance contract requires utmost good faith from both parties in all circumstances. An insurer could be released or discharged from a contract because of non-disclosure or misrepresentation by the insured.

We will kindly explain further the two main underlining concepts more closely. These two principles are non-disclosure or concealment and misrepresentation.

Non-disclosure / Concealment

Concealment is a purposeful failure to disclose a material fact. There are a lot of case laws and most Courts have held that the insurer must prove two things to establish that non-disclosure has occurred. First, it must establish that the failure to disclose information was intentional, which is often difficult.

The insurer must usually show that the insured knew that the information should have been given and then intentionally withheld it. Second, the insurer must establish that the information withheld was a material fact. From the legal definition, a material fact is a fact that would be important to a reasonable person in deciding whether to engage or not to engage in a contract.

In the case of motor insurance, for example, material facts include the use of the car – you cannot insure your car private and use it as hiring or taxi. The age of the driver and the driving records of the driver are also material. If an insured intentionally withheld the material fact that her saloon car would be used as a taxi instead she insure it private, the insurer could avoid (reject) the policy based on that concealment.

Insurers carefully design proposal forms for insurance policies to include questions regarding facts material to the underwriting process. The proposal form includes questions on specific subjects, which the applicant must answer. These questions are designed to encourage the applicant to reveal all relevant information.


Traditionally, a misrepresentation is a false statement. In insurance, a misrepresentation is a false statement of a material fact on which the insurer relies and provides cover. The insurer does not have to prove that the misrepresentation is intentional. For instance, assume that a proposer for motor insurance has been arrested on ten (10) different occasions for over-speeding during the last eighteen (18) months before he submitted his proposal form for insurance. When asked whether any driving violations have occurred within the past three years, the proposer giving either of these answers would be making a misrepresentation:

“I remember having been arrested for overspeeding once two years ago.”

“I’ve never been cited for a moving violation—only one no parking offense.”

The first response provides incorrect information, either intentionally or unintentionally. The false statement made in the second response is probably intentional. The direct question posed in the application requires a full and honest response from the proposer because the insurer relies on the information. Anything less is a misrepresentation, intentional or not.

As with non-disclosure, if a material fact is misrepresented, the insurer could choose to avoid the policy because of the violation of utmost good faith. The laws regarding non-disclosure and misrepresentation can vary by jurisdiction. An insurance practitioner should consult with competent legal counsel before attempting to avoid an insurance contract. Kindly follow and learn more about insurance as a contract!.

The writer is a Chartered Insurer and an Associate of the Chartered Insurance Institute of United Kingdom and also Ghana (ACII-UK, ACIIG),.

+233 (0) 549705031                     

[email protected]


Navigating the Legal Landscape of Insurance, American Institute for Chartered Property and Casualty Underwriters. Edited by Martin J. Frappolli,but%20of%20substance.%20When%20a%20bill…%20More%20

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