Which of the following sentences explains the principle of utmost good faith in insurance?
A person who enters into contract has a legal obligation honesty.
Understanding the Principle of Utmost Good Faith in Insurance
The principle of utmost good faith is a fundamental concept in insurance contracts. It is also known by its Latin name, uberrima fides.
This principle means that both parties involved in an insurance contract — the insured (the person buying the insurance) and the insurer (the insurance company) — have a legal obligation to act with absolute honesty and disclose all material facts relevant to the risk being insured.
Analysing the Options for Utmost Good Faith
Let's look at the given options to see which one best explains the principle of utmost good faith:
- Option 1: Premium is computed on the basis of the assessment of the proposal form.
This statement describes the process of premium calculation, which is influenced by the information provided in the proposal form. While the information on the proposal form relates to the duty of disclosure under utmost good faith, the statement itself describes the premium calculation process, not the principle of honesty and disclosure. - Option 2: A person who enters into contract has a legal obligation honesty.
This statement directly aligns with the principle of utmost good faith. In an insurance contract, both the insured and the insurer are legally bound to be completely honest and disclose all facts that might influence the other party's decision or the terms of the contract. This includes the insured disclosing all known risks and the insurer disclosing all relevant terms and conditions. - Option 3: It is mainly concerned with how the losses or damages happen.
This statement relates more to the concept of peril (the cause of loss) and risk assessment or claims investigation. While knowing how losses happen is important in insurance, the principle of utmost good faith is about the honesty and disclosure of facts leading up to and during the contract, not primarily the mechanism of loss occurrence.
Based on the analysis, Option 2 most accurately describes the core idea behind the principle of utmost good faith in insurance.
Important Questions from Insurance
Given below are two statements
Statement I: In the case of Life Insurance, the insurable interest must be present in the person insured at the time when the event happened.
Statement II: In the case of Fire Insurance, the insurable interest must be present in the object insured at the time when the policy is taken and the event has happened.
In light of the above statements, choose the correct answer from the options given below
‘Average clause’ in insurance is applicable for which one of the following cases?
Who among the following relatives of a deceased insured person is not “dependent” under the Employees’ State Insurance Act, 1948?
When did Life Insurance Corporation come into existence ?
In the format of an account in the ledger, the columns usually do NOT contain the __________.
