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Good Faith and Application Of Uberrima Fides in Insurance and related contracts

In all the laws relating to contracts, the pressing covenant of good faith and the way to be dealing in a fair manner is just a presumption that the parties subject to that particular contract have to handle amongst themselves honestly and in good faith. This also keeps in check not to hamper each other's rights and take all the benefits related to the contract on one's own.
Even a cause of action based on the breach of the promise arises if one party to the contract claims to have been in an upper position by referring contractual terms and use it to runaway from his or her contractual obligation.[1]

When a court or trier of fact interprets a contract, there is always an “implied covenant of good faith and fair dealing” in every written agreement.[2]

Now narrowing down Good Faith to its application with the particular maxim used named “Uberrima fides” which is a Latin phrase which sums up to the meaning “utmost good faith”. This above mentioned doctrine governs insurance contracts. It essentially in literal terms means that all parties to an insurance contract have to deal in good faith and disclosing all material facts in the given insurance terms. [3]

Good Faith
History

In U.S. law, in the mid-19th century, the legal principle of the implicit bond of good faith and fair dealing emerged when contemporary legal interpretations of "the narrowly understood express contract language seemed to give one of the parties unbridled discretion.[4] In 1933, in the case of Kirke La Shellee Company v. Paul Armstrong Company et al. 263 N.Y. 79; 188 from N.E. 163; 1933 N.Y., as reported by the New York Court of Appeals:
“There is an implicit covenant in any contract that no party is to do something that would have the effect of destroying or harming the other party's right to enjoy the fruits of the contract. Every contract, in other words, has an implicit agreement in good faith and fair dealing.”

In addition, the covenant was debated by the American Law Institute in the First Restatement of Contracts, but the common law of most states did not accept an implicit covenant of good faith and fair dealing in contracts prior to the introduction of the Uniform Commercial Code in the 1950's. Some states have tighter compliance than others, such as Massachusetts.

For example, under Chapter 93A that regulates Unfair and Misleading Commercial Practices, the Commonwealth of Massachusetts will assess punitive damages, and a party found to have violated the good faith and fair dealing arrangement under 93A will be responsible for punitive damages, legal fees and treble damages. [5]

In USA
In United States law, the implicit bond of good faith and fair dealing is particularly relevant. It was adopted (as part of Section 1-304) into the Uniform Commercial Code and was codified as Section 205 of the Restatement (Second) of Contracts by the American Law Institute.

The violation of the implied agreement of good faith and fair dealing is treated by most U.S. jurisdictions solely as a variant of breach of contract, in which the implied covenant is merely a 'gap-filler' that allows for yet another contractual term, and breach of it simply gives rise to usual contractual damages. Of course, for claimants, this is not the most ideal law since consequential damages for breach of contract are subject to such restrictions.

Violation of the implied covenant may also give rise to a tort suit in some jurisdictions, e.g. A.C. A.C. 105 Nevada 913, 915, 784 P.2d 9, 10 Shaw Construction v. Washoe County (1989). In insurance law, this rule is most prevalent when the violation of the implied covenant by the insurer can give rise to a tort claim known as insurance bad faith. The benefit of tort liability is that it encourages wider compensatory damages and the chance of punitive damages.

Some plaintiffs have sought to force courts to expand tort liability from insurers to other important defendants such as employers and banks for breach of the implied covenant. Many U.S. courts, however, have followed the precedent of some seminal California court rulings, which dismissed such tort liability in 1988 against employers and in 1989 against banks.

In Canada
In 2014, the Canadian Supreme Court in its decision on the Bhasin v. Hrynew' [6] case established a new common law obligation of honest contractual performance.

In Europe
Traditionally, English private law has been averse to general clauses and has consistently opposed the acceptance of good faith as a core private law principle. [7] EU law has injected the notion of "good faith" into restricted areas of English private law over the past thirty years.

[8] Most of these EU initiatives concerned the safety of customers in the sense of their experiences with companies. Only Directive 86/653/EEC on the coordination of the laws of the Member States relating to self-employed business agents added 'good faith' to English commercial law. [9]

Good faith is also deeply embedded in the legal system on the European Continent. Treu und Glauben (Good faith) has a strong legal meaning in the German-speaking region, e.g. in Switzerland, where Article 5{12} of the Constitution specifies that state and private actors must behave in good faith. This leads, for example, to the presumption in contracts that both parties have signed a contract in good faith and that any incomplete or ambiguous element of the contract is to be understood on the basis of both parties' expectations of good faith.

In Australia
Following the events of Carter v Boehm (1766), the principle of good faith was developed in the insurance industry and is enshrined in the Insurance Contracts Act 1984 (ICA).[10] The Act stipulates the duties of all parties within the contract to act with utmost good faith under Section 13.

In India
In the Indian Penal Code, "good faith" is specified under section 52 as nothing is said to be done or believed in "good faith" that is done or believed without due care and attention.[11] In the case of Muhammad Ishaq v. The Emperor (1914), the Privy Council expanded on this definition in which it held that an action taken by the defendant was based on the belief that a decree had been passed in his favor .[12]

Uberrima Fides
A Latin term meaning "utmost good faith" is Uberrima fides (literally, "most abundant faith"). It is the name of a legal theory that regulates contracts for insurance. This implies that all parties to an insurance policy must negotiate in good faith, make a full statement in the insurance plan of all material facts. It is described as "firm compliance with promises made to another, including disclosure of all relevant facts and complete confidence in the fidelity of the other."

The insurance policy is governed by the "utmost good faith" legal maxim. For an insurance policy, the observance in the utmost good faith by the parties is important. Insurance is considered a UBERRIMAE FIDEI arrangement since the parties are bound to comply with a greater degree of good faith than the general contract law. Insurance stands on a different basis as a risk transfer device. The non-disclosure of a material fact, whether false or innocent, has the same effect as the avoidance of the contract. A strict obligation is placed on the insured to include all the material facts that could affect the insurer's decision. [13]

Insurance Contracts
In order to ensure the disclosure of all relevant details, a higher obligation is required from the parties to an insurance contract than from the parties to most other contracts, so that the contract will adequately represent the real risk being undertaken. Lord Mansfield stated the principles underlying this rule in the leading and often-quoted case of Carter v Boehm (1766) 97 ER 1162, 1164, “Insurance is a speculative contract...

Most commonly, the special facts on which the contingent opportunity is to be measured lie in the knowledge of the insured only:
the under-writer trusts his representation and continues to trust that he does not hold any circumstances in his knowledge, to trick the under-writer into a belief that there is no situation... By concealing what he privately knows, good faith forbids any party to lure the other into a deal out of his ignorance of that fact, and his belief in the contrary.”

The insured party must also disclose the precise existence and potential of the risks it passes to the insurer (which, in turn, can be sold to the reinsurer) and, at the same time, the insurer must ensure that the potential contract meets the needs and benefits of the insured party.

Reinsurance contracts involve the highest degree of ultimate good faith, and the cornerstone of reinsurance, which is an integral component of the modern insurance industry, is considered to be such ultimate good faith. A reinsurer should not duplicate expensive insurance underwriting and claim management costs in order to make reinsurance viable, and must rely on the insurer's utter honesty and candor. In exchange, a reinsurer must fully examine and refund the good faith claim payments of an insurer, following the fortunes of the cadent.

Section 45 Of Insurance Act, 1938
In the case of life insurance, pursuant to section 45 of the Insurance Act of 1938, a two-year period is enforced in order to call into question the validity of the policy by the insurer on the grounds of mistakes in the answers to questions in the form of the plan or in any report or document relating to the issue of the policy.

Section 45 states that no life insurance policy shall be called into doubt by the insurer after the expiry of two years from the date on which it was carried out on the ground that the declaration made in the insurance proposal or in any report of the insured's medical officer or referee or friend, or in any other document giving rise to the policy, was incorrect or false.

The insured cannot escape the implications of the insurance contract by merely proving the inaccuracy or falsity of the assertion presented in the form of the proposal, but must show, in compliance with section 45, that the life insurance policy was purchased by dishonest misrepresentation.

"It must be convincingly demonstrated that the matter in question was knowingly concealed in order to avoid the policy on the basis of fraudulent concealment under the provisions of section 45." The insurer also needs to show:
  1. That such a declaration applies to a subject matter or to suppressed evidence. Which it was necessary to reveal and,
  2. That the policyholder fraudulently made it and,
  3. At the time of making the declaration, the policyholder understood that the statement was misleading or that it suppressed evidence which was necessary to reveal.

Fiduciary Duties
However, the fact that a contract is one in the highest good faith does not indicate that it establishes a general fiduciary relationship. The relationship between the insured and the insurer is not identical to that between, say, the guardian and the ward, the principal and the agent,[3] or the trustee and the receiver. The intrinsic character of the partnership in these above instances is such that the statute has historically imported general fiduciary duties.

The arrangement between the insurer and the insured is contractual; the parties to an arms-length agreement are parties. The Uberrima Fides principle does not influence the arms-length aspect of the arrangement and cannot be used for the purpose of forming a general trust relationship.

The insurance policy, as noted above, imposes on its parties some specific obligations. However, these commitments should not import general fiduciary responsibilities into each and every partnership with insurers. There must be clear conditions in the partnership that allow for their imposition before such fiduciary liability can be imported.

7 N.E. In Murray v. Beard, "An agent is held to Uberrima fides in his dealings with his principal; and if he acts adversely to his employer in any part of the transaction … it amounts to such a fraud upon the principal, as to forfeit any right to compensation for services. An agent is held by Uberrima fides in his dealings with his principal; and if, in any part of the transaction, he acts adversely with his employer... it amounts to such a fraud on the principal as to forfeit any right to compensate for services.

Limitations
In English law, Uberrima Fides is specifically limited to the formation of an insurance policy. American courts extended it even further into a post-formation implicit covenant of good faith and equal dealing throughout the mid-20th century. Violation of the implicit covenant, now known as bad faith protection, came to be seen as a tort.


Carter V. Boehm Brief Analysis
Carter v Boehm (1766) 3 Burr 1905 is a landmark case in English contract law, in which Lord Mansfield defined in insurance contracts the duty of utmost good faith or Uberrima fidei.

Facts
Founded by the British East India Company, Carter was the Governor of Fort Marlborough (now Bengkulu, Sumatra). With Boehm, Carter took out an insurance policy against the fort being occupied by a foreign enemy. Captain Tryon, a witness, testified that Carter was aware that the fort was designed to withstand native attacks but would not be able to repel European enemies, and he knew it was inevitable that the French would attack. The French struck successfully, but Boehm declined to respect the compensator, Carter, who sued promptly.

Judgement
Lord Mansfield held that, because the proposer owed the insurer an obligation of utmost good faith (uberrimae fidei), Mr. Carter was required to report all relevant facts at risk:
“A deal based on speculation is insurance. Most generally, the precise details on which the contingent opportunity is to be measured lie in the knowledge of the insured only; the underwriter trusts his representation and proceeds to trust that he does not hold any circumstances in his knowledge, to deceive the underwriter into thinking that the condition does not exist, and to encourage him to measure the risk as if it did not exist. By concealing what he privately knows, good faith forbids any party to lure the other into a deal out of his ignorance of that fact, and his belief in the contrary.”

Lord Mansfield went on to claim that the responsibility was mutual and that if an insurer withheld relevant evidence, the example cited was that an insured vessel had arrived safely already, the policyholder might declare the policy invalid and recover the premium.

Lord Mansfield continued to describe the responsibility of disclosure:
“In order to exercise their judgment on grounds open to all, either party can be innocently silent.... An under-writer cannot insist that the policy is void, since he was not told by the insured what he really knew.... The insured does not need to mention what the under-writer should know; what information he takes on himself; or what he waives to be notified of. What lessens the risk accepted and known to be run by the express terms of the policy does not need to be told to the under-writer. It is not appropriate to tell him general speculative topics.”

On the grounds that the insurer knew or should have known that the danger existed because the political situation was public knowledge, Lord Mansfield ruled in favor of the policyholder:
“There was not a word said to him, of the affairs of India, or the state of the war there, or the condition of Fort Marlborough. If he thought that omission an objection at the time, he ought not to have signed the policy with a secret reserve in his own mind to make it void.”

Significance
Lord Hobhouse said in Manifest Shipping Co Ltd v Uni-Polaris Shipping Co Ltd that,
Lord Mustill points out that Lord Mansfield was at the time seeking to incorporate a general concept of good faith into English commercial law, an effort that was largely futile and survived only for small classes of transactions, one of which was insurance. His Carter v Boehm decision was an extension of his general theory to the formulation of an insurance policy. It was focused on the inequality of knowledge between the proponent and the underwriter and the existence of "speculation" insurance as a contract. He equated deception to non-disclosure.

At p.1909, he said:
"The keeping back [in] such circumstances is a fraud, and therefore the policy is void. Although the suppression should happen through mistake, without any fraudulent intention; yet still the underwriter is deceived, and the policy is void."

Therefore, as common law is understood, it was not actual fraud but a form of error that the other party was not permitted to take advantage of. Twelve years later, in Pawson v Watson (1778) 2 Cowp 786 at 788, he stressed that a rule of law resulted in the avoidance of the contract:
"But as, by the law of merchants, all dealings must be fair and honest, fraud infects and vitiates every mercantile contract. Therefore, if there is fraud in a representation, it will avoid the policy, as a fraud, but not as a part of the agreement."

Life Insurance Corporation V. Asha Goel

Facts
  • The insurance policy was taken by the respondent's husband and the insured died 1 and a half years after the policy was taken and the lawsuit was rejected on the grounds of non-disclosure and withholding of information on the health of the insured.
  • A written petition was lodged in the High Court pursuant to Article 226.
  • In view of the maintenance matter, the learned judge held that the corporation's liabilities under life insurance are statutory liability and that a written petition may lie under Article 226.
  • Company claimed that the argument was repudiated on the ground that the deceased gave incorrect responses because he stated that his health was good and during the last 5 years he had not seen a medical practitioner, and even for 13 days a few years ago he did not stay absent from work on health grounds.
  • The opportunity to lead the evidence by the single judge was not granted to the company and there was no adequate record brought by the corporation to determine the requirements referred to in the second part of Sec. 45 of the Insurance Act. Thirteen days' leave could not be fair to assume that the deceased suffered from a health problem in 1976.
  • The Division bench held that proof should be permitted to lead to the business because it would be useful for their argument that fraud was obtained by regulation. A new trial has begun.

Issues
  1. If the high court should entertain a written petition with factual and evidence disputes?
    The matter relating to contractual liability should not be heard by the High Court. For the SMT case. "Patna High Court's Kiran Sinha Vs LIC wrote jurisdiction no. 1620 of 1981, that the Supreme Court issued an order that "the High Court could not have ordered the payment of money stated in the petition under Article 226 of the Constitution under the insurance policies in question. In this case, the only recourse open to the respondent was a complaint before a civil court. The High Court's decision is therefore set aside.

  2. If the division bench's decision is correct in canceling the claim's repudiation?

Note
The appeal to the division bench in the following case was allowed on the basis that the company was not allowed to produce evidence. The Division Bench permitted this. Therefore, when the business begins to present proof, it would defeat the stance that states that if it becomes appropriate to investigate evidence, the proceedings should not be entertained pursuant to Article 226 of the Constitution and the matter should go to an alternative venue that is a civil action and not a written petition pursuant to the High Court. In such cases, where there is no disagreement about the facts and no need to file evidence, a formal request should be filed. The matter should therefore be resolved in a civil suit and not in a written petition.

Judgement
Because of the following points, the division bench's judgment upholding the single judge's decision to pay the alleged is supported:
  1. That the argument was repudiated on the basis that the medical history of the ailment was not disclosed and that the policy was repudiated after the limitation period of 2 years had expired. Where Sec. 45 specifically states that, after a term of 2 years has elapsed from the date of issuance of the regulation, the claim cannot be called into doubt.
     
  2. The protection taken under the second section of the policy will not be accepted since the organization must show that a false statement was made by the deceased and that such a statement was material in nature and fraudulently made. The company submitted a claim form B-1 that indicated that the deceased had a myocardial infarction given to Dr. Kowde by the patient.

  3. The petitioner (widow) had 2 documents annexed to it. First, Dr. P.S. Kulkarni's medical attendant certificate claiming that he had no heart disease prior to the policy, and secondly, another form of claim B-1 obtained by Irwin hospital group indicating that he had no heart disease.
For the following reasons, it is clear that there is insufficient proof to suggest that he suffered from heart disease. There is also no question of repudiation by dishonest means on the grounds of non-disclosure. Taking these points into account, the repudiation of the allegation appears to be performed wrongly, unjustly and arbitrarily. It should pass the argument.

Conclusion
The word good faith has been referred to in the Indian Penal Code and it means good intention and due care and caution. Insurance contracts, including the life insurance policy, are contracts Uberrima fides, which implies a contract based on "utmost good faith" so that all relevant data must be revealed and any material information must be withheld or any false or incorrect information given. This stems from every individual's right to know and there is no escape from every material reality connected with the subject matter of the contract.

Concealment of any material fact entitles the insurer to deprive the arrangement of the benefits of the insureds. It was noted that the object of taking an insurance policy is not very material. It can serve the function of social security, but with a dishonest act by the insured, the same should not be accomplished. If a fraudulent act is found, the idea will be repudiated. The proposer must demonstrate that he was bona fide in his intent. From the face of the record, it must appear.

This concept therefore forms an integral part of the law of insurance. It provides the insurer with a reasonable chance of risk assessment and also guarantees that all the contract terms and conditions are well understood by the insured.

However, this concept is more beneficial to the insurer since it is the insured who has to make all the reports in general. Additionally, two years after it has been in effect, the Insurance Act stipulates that an insurance policy should not be called into question. This was intended to avoid the difficulties of the insured because, on the grounds of misrepresentation, the insurance provider decided to avoid a policy that had been in effect for a long time. However, where a statement has been made fraudulently, this clause is not applicable. Furthermore, technical developments have made it possible for both sides to ensure that their needs are taken care of. But, there are a few other grey areas to this as well.

First, there is still no strong differentiation of what is substantive or immaterial, and the same depends mainly on the insurers' whims and the contract terms. By treating them as promises, it is still very straightforward for an insurer to repudiate the contract at the slightest point of non-disclosure, thereby placing the insured in an even more difficult role.

Second, although all parties are under an obligation of utmost good faith, it is unclear on behalf of the insurer what this means. In essence, the insurer is left with a minimal or no responsibility other than the obligation to ask any questions at all. These questions are also unclear and the assured person is not clear what he is being asked or what to reveal. The insured will therefore find himself in a role where he is expected to reveal material information.

Considering that the principle of utmost good faith is one of the most basic concepts synonymous with insurance regulation, an appropriate remedy must be given in Indian Contract Act (1872).

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