If you have a life insurance policy in place, or if you’re thinking of getting one, you have probably heard the phrase ‘utmost good faith.’
Put very simply, utmost good faith means the two parties to a contract will be entirely and absolutely honest with each other. In insurance, the two parties are the insurer and the policyholder.
The duty of utmost good faith is a statutory one. This means that it exists because of an act of Parliament. In this case, the relevant parliament is the Federal Parliament (Canberra). Section 13 of the Insurance Contracts Act 1984 (Cth) states the following:
13 The duty of the utmost good faith
(1) A contract of insurance is a contract based on the utmost good faith and there is implied in such a contract a provision requiring each party to it to act towards the other party, in respect of any matter arising under or in relation to it, with the utmost good faith.
(2) A failure by a party to a contract of insurance to comply with the provision implied in the contract by subsection (1) is a breach of the requirements of this Act.
(3) A reference in this section to a party to a contract of insurance includes a reference to a third party beneficiary under the contract.
(4) This section applies in relation to a third party beneficiary under a contract of insurance only after the contract is entered into.
As you can see from subsection 2, if one or both parties to a contract does not act in utmost good faith, they have broken the law and penalties can be applied.
For the policyholder (that is, you) the duty of utmost good faith basically means that you have to tell the insurer everything and anything that would relate to their decision as to whether to offer you a policy.
When you take out an insurance policy, the insurer assesses how likely it is that you will make a claim on the policy. Some things make a claim more likely than others. For example, if you have a history of serious illness, such as cancer, then you are probably more likely to become unwell in the future and therefore to make a claim on any insurance policy. When faced with an applicant who has a history of illness, an insurer might choose either not to offer a policy at all or to offer a policy with exclusions or loadings. (An exclusion means that the policy will not cover certain kinds of events; a loading is an increase in the premium payable for the policy).
Obviously, a situation like this can create an incentive for a person not to disclose their full health history to the insurer. They may be tempted to keep their medical history secret from the insurer. However, if they do fail to disclose this information, they will breach the duty of utmost good faith. This breaks the law and, usually, voids the insurance contract. This means that any future claim would not be paid because the policyholder has basically been dishonest when the policy was created.
The duty of utmost good faith can also apply to an existing policy. If you experience a health event, you should let your insurer know. Almost all insurances are guaranteed renewable, which means that an insurer cannot decide to stop providing you with an insurance policy because you have experienced some poor health after that policy commenced. Provided the policy was in place before you first became unwell, you can generally continue to renew the cover each year.
The basic principle when dealing with an insurer is ‘if in doubt, declare.’ That is, tell the insurer everything that might be relevant to your insurance policy. You will never get in trouble for telling the insurer too much. However, if you tell the insurer too little, you might breach the duty of utmost good faith and basically render your policy useless.
So, if there is something that you think might be relevant to the insurer, please feel free to discuss it with us. We will always be discreet and, of course, everything we do is confidential and governed by strict privacy standards.