What Is an Uberrimae Fidei Contract?

What Is an Uberrimae Fidei Contract?

Let me explain what an uberrimae fidei contract is. It's a legal agreement, especially common in the insurance world, that demands the highest standard of good faith when disclosing all material facts that could affect the other party's decision. If you fail to stick to this, the agreement can be voided. Uberrimae fidei is just Latin for 'utmost good faith'.

Understanding Uberrimae Fidei Contracts

Uberrimae fidei, or 'uberrima fides,' translates directly to 'utmost good faith' in Latin. It requires parties in certain contracts to fully disclose any relevant conditions, circumstances, or risks to the other side. If you don't disclose material facts that could sway the other party's choice in a contract where this applies, the contract can become null and void, freeing the other party from any duties.

Uberrimae Fidei in Insurance Contracts

You'll find insurance contracts as the prime example of uberrimae fidei agreements. Since the insurer shares the risk of loss with you, the policyholder, you must act in good faith by revealing all info that impacts the insurer's risk level. This full disclosure lets the insurer charge a premium that matches the real risk or even decline to issue the policy if the risk is too great.

These disclosure standards, like uberrimae fidei, tackle economic issues from information asymmetry. In insurance, this principle shields the insurer from adverse selection, as applicants often know more about their own risks and behaviors than the insurer does.

The applicant has a clear motive to hide info about current situations or past risky actions that might lead to higher premiums or denial of coverage. Uberrimae fidei forces you to reveal this before getting insured.

Take life insurance, for instance: you know your eating habits, exercise routine, risky behaviors, family medical history, and personal health better than the insurer. To assess your risk, the insurer makes you answer a medical questionnaire honestly and submit records for review before approval. If later it's found you didn't act in utmost good faith, the policy can be rescinded along with any benefits.

Special Considerations

Uberrimae fidei forms the basis of reinsurance contracts. To keep reinsurance affordable, the reinsurer avoids repeating expensive tasks like underwriting and claims handling that the primary insurer does.

Instead, they depend on the primary insurer to handle these properly. In exchange, the reinsurer must investigate and reimburse the insurer's good faith claims appropriately. This principle is implied in reinsurance deals.

Origin of Uberrimae Fidei

The ideas behind uberrimae fidei came from Britain's Lord Mansfield in the 1766 case of Carter v Boehm.

Mansfield stated: 'Insurance is a contract of speculation... the special facts, upon which the contingent chance is to be computed, lie most commonly in the knowledge of the insured only. The underwriter trusts to his representation, and proceeds upon confidence that he does not keep back any circumstances in his knowledge, to mislead the underwriter into a belief that the circumstance does not exist... Good faith forbids either party by concealing what he privately knows, to draw the other into a bargain from his ignorance of that fact, and his believing the contrary.'

What Is an Example of a Breach of Utmost Good Faith?

A breach happens anytime one party in the contract fails to disclose all material info that would alter the contract's nature. For example, if you're applying for health insurance and don't mention you're a regular smoker, which raises the risk for the insurer, that's a breach of utmost good faith.

What Is the Difference Between Caveat Emptor and Uberrimae Fidei?

Uberrimae fidei and caveat emptor are opposites: two sides of the same coin. Uberrimae fidei means 'utmost good faith,' requiring both parties to share all info, while caveat emptor means 'buyer beware,' where not all material info is disclosed, and the buyer alone must uncover risks.

What Is the Major Reason for a Breach of Utmost Good Faith?

Breaches often stem from withholding key info or lying, either of which can void a contract requiring utmost good faith.

The Bottom Line

Common in insurance, an uberrimae fidei contract demands full disclosure of material info in good faith, and not doing so can end the contract. It's vital in reinsurance, where insurers pass some risk to reinsurers.