What does the principle of utmost good faith mean in an insurance contract?

The principle of utmost good faith, known as "uberrima fides," is a foundational concept in insurance contracts. It dictates that both the insurer and the insured must act honestly and disclose all relevant information when entering into an agreement. This means that each party trusts the other to provide accurate and truthful information vital to the insurance contract. For the insurer, this includes the obligation to clarify the terms and conditions of the policy, while the insured must disclose any material facts that could influence the insurer's decision to issue the policy or the terms therein.

In this context, trusting each other's word is essential because insurance is based on a mutual understanding comprised of risk-sharing where both parties are expected to disclose information fully. If one party conceals relevant facts or provides misleading information, it can lead to disputes over claims and potentially result in the cancellation of the policy, showcasing the high level of trust necessary in this contractual relationship.

Thus, the principle of utmost good faith emphasizes transparency and honesty, ensuring that the risk is accurately assessed on both sides, which leads to fair and equitable treatment in case of claims.