Acting in Good Faith Is of Utmost Importance

An insurance policy is a contract between the policyholder and the insurer. The policyholder pays a premium. In return the insurer provides the agreed insurance cover.

The parties to an insurance contract must be honest with each other and must not hide any information relevant to the contract from each other. This is known as the principle of Utmost Good Faith.

It is important to the insurer that they have a full and accurate picture of the risk that is proposed to them. Most of us will have bought car and/or home insurance and will be familiar with the type of questions asked by insurers, relating to the person making the proposal, details of any other drivers (in the case of car insurance) and regarding the property (the car or the home) to be insured.

It is equally important that the policyholder is informed about the insurance cover that they are buying. The product and cover offered by the insurer should meet the proposers’ needs, based on the information disclosed by them on their proposal.

The requirement to act in good faith applies throughout the duration of the insurance contact, including to claims. When presenting a claim the policyholder is required to present the circumstances and the details of any loss or damage honestly and fully.

The requirement for both parties to act in good faith does not mean that either must accept without question what the other tells them. The insurer may check to verify information disclosed. They may, for example, request your driver licence number to check information you disclosed against the relevant central database. On Home insurance, they may request a valuation for an insured item of jewellery.

What happens if either the policyholder or the insurer believes that the other has failed to act in good faith? A breach of the principle of utmost good faith is likely to mean a breach of the contract of insurance. This can have serious consequences: it could lead to an insurer not dealing with a claim and/or refusing to continue with policy cover.

At all times both parties must act in a reasonable manner. Where a policyholder believes that an insurer has acted unreasonably (in refusing to deal with a claim or in refusing to continue cover) then, depending on the circumstances, there could be several courses of action available to them. These may include legal action, making a formal complaint to the insurer (all insurers are required to have a formalised complaints handling procedure), referral to arbitration, referral to the Financial Services and Pensions Ombudsman (ROI) / Financial Ombudsman Service (UK).


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