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The nexus between trust and uberrima fides- the principle of utmost good faith in insurance

 Insurance is a contract, by which one obtains financial protection, by payment of a fixed amount called a ‘premium’, in exchange for payment of a certain fixed amount (which is a multiple of the premium) known as the ‘sum assured’ under the policy, upon the happening of a certain event. Insurance, like every other contract is also governed by the Indian Contract Act, 1872. It is a mechanism for protection and risk management for contingent or uncertain losses. The parties to such a contract are (i) the Insured/ Assured, i.e. the person who obtains or buys the insurance for protection of its risk, and (ii) the Insurer, which is usually a company or an entity that is providing the said protection and undertaking to indemnify the risk in the form of an insurance. In simple words, insurance is a contract of indemnity. Generally, the terms, “Policyholder” and “Insured” are used interchangeably, however, the distinction arises in cases where a person/ entity, other than the one who has purchased the insurance is also covered under the policy. This person will then also be the Insured. 

The foundation for insurance is guided by certain principles, which among the insurance industry, are, or at least, used to be, considered sacrosanct. One of the most important principles, is the latin principle of “Uberrima Fides” which means “utmost good faith”. This fundamental principle of insurance implies that both parties, i.e. the insurer and the insured must at all times operate in a manner that is truthful and ensure transparency in respect of the terms and conditions. Given the asymmetry of information, the principle requires the insured to voluntarily disclose all facts that may give rise to or increase the risk (also known as material facts) for the insurer. In the event of a nondisclosure of a material fact or any misrepresentation, the policy will not respond. This principal basically insures trust between the insured and the insurer, in the operation of the policy and their inter-se relation. 

In the scenario that is prevalent in India today, insurance is still considered an expense and the incentive to purchase an insurance policy is generally restricted to contractual obligations or tax benefits. The innovations in terms of the possible risk covered is infinite, however its recognition, while it is increasing, is impeded by several factors. While our country is still at the dawn of discovering the significance of insurance and its indispensability in relation to a risk mitigation and balance sheet protection tool, the market is fast reaching a position of distrust i.e. the insurers will to settle commercial liability claims in good faith is fast eroding. Such erosion of trust impedes the development of the industry. However, this is not always on account of the insurer and it is also the insured that is treating insurance very casually by suppression of material facts, non-disclosure of material facts at the relevant time, misrepresentation, not notifying claims on time etc., all of which also lead to repudiation of the claim. Having said that, claims are also being rejected for spurious reasons/hyper technical- interpretation of wordings, repeated questions from surveyors and inordinate delay in claims settlement. This is leading to a sense of disappointment and resignation amongst the insured. 

It has been observed on several occasions that the insurers are declining claims, which are prima facie covered, for reasons that are incomprehensible. The insurer is hiding behind gaps in a promised coverage and relying upon novel interpretations of the policy terms and conditions, which reinvent the wheel and aid the insurers to reject the claim. The insurers are declining claims for covered losses, both, from the point of admissibility of the incident and from the point of the permissible amount under the policy. 

At other times it is observed that instead of seeking the relevant documents and speedily paying off the insured’s claims, the insurer/surveyor, for extended lengths of time, seek additional documents, which may not even be relevant for the assessment of claims and offer no explanation for their requests. Thus, playing a game of hide and seek. This delays settlement of the claim for several years, which, in many cases, eventually ends up getting declined. 

Another worrying development is insurers taking advantage of their dominant position and partially paying the claims subject to execution of waivers and final settlement agreements, even though the claim is fully covered. The insureds, who are already facing tremendous financial constraints on account of the incident are constrained to accept the partial amount and waive rights. 

If insureds continue to increasingly hold the view that the risk mitigation/balance sheet protection they were seeking through insurance is not likely to be available when a claim arises, the market will turn to self-insurance, seriously impeding the development of the industry as a whole with significant costs and increased risk to the economy. 

However, this is only one side of the coin. 

On the other side, we have, insureds who are breaching the principal of utmost good faith by suppressing/ concealing necessary and true information that ought to be given to the insurer for underwriting the risk. It is the duty of the insured to disclose such information to the insurer including any contingent risk that may give rise to an incident under the policy and ensure that there is no misrepresentation on its part. However, it has been observed that the insured are often overlooking the same under the presumption that the insurer will not find out or that the same is irrelevant and filling out proposal forms dishonestly without disclosing the true and correct position and misrepresenting facts. Such honest and true disclosure in the proposal form is essential as the insured is transferring the risk and consequences arising therefrom to the insurer. This duty of the insured does not cease to exist upon purchasing the policy and is a continuous obligation during the entire policy period. 

It is pertinent to note that this principle can be preserved only when both parties are true, honest and transparent with each other. The disclosure helps the insurer to protect itself by underwriting the necessary risk at an appropriate premium or refusing to undertake the risk. 

What is sometimes also overlooked is the important role that a broker plays in this relationship. Many a times, the insured heavily rely upon the broker to communicate the essence of the product, without the insured actually closely assessing and examining the coverage and exclusions under the policy. However, often, the broker is not aware of certain situations and material facts in respect of the risk that the insured wishes to cover and the relevant disclosures and its relevance are not communicated at the right time. This misunderstanding also leads, albeit inadvertently, to misrepresentation, thereby, acting in breach of the principle of “uberrima fides”. 

Insurance is eventually a contract and therefore, open to interpretations. It is commonly noted that the insurer and the insured read the policy differently and that is where many issues arise. Similarly, the question as to what information would be classified as material and what would not, is once again open to interpretation. This has caused disputes between the insurer and insured in respect of such issues to be on the rise. 

It is, therefore, the need of the hour that the regulatory authorities recommend guidelines on providing better claims services to the insured, such that the insurers invest in a strong and robust insurance structure for all possible risks. It is time for the insurer to focus and invest on creating a mechanism to assist and support the insured in mitigating its loss through timely claim settlement. India has a long way to go in terms of meeting its full potential of exploring and exploiting the insurance market. However, if claims, being one of its most important facets, is the one that is causing the snag, it is pertinent to revisit and imbibe the fundamental principle of “uberrima fides” to re-establish the trust in the industry. 

Whether we are able to do so, only time will determine success! 

Sakate Khaitan

Senior Partner
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