What is good faith?



Good faith or disclosure of all material facts : An insurance contract is a contract of good faith. Both parties to the contract are bound to disclose all material facts which are likely to affect the acceptance of the proposal by the insurance company. It is known as a contract uberrimae fidie, i.e. contract requring absolute good faith and the disclosure of all material facts. In ordinary contracts, when consent to an agreement is caused by mis-representation, the agreement is avoidable. But in an insurance contract, there should not only be no mis-representation but also no concealment of any material fact, otherwise, the policy becomes void. According to Lord Mansfield, "Good faith forbids either party by concealing what he privately knows, to draw the other into a bargain from his ignorance of the fact and his believing the contrary."
The proposer is liable to disclose all material facts before the insurance company which are known to him. Every fact which is likely to influence the mind of prudent insurers in deciding whether to accept the proposal or not or in fixing the rate of premium is material fact. Similarly, the insurer is bound to exercise the same good faith in disclosing the scope of the insurance which he is prepared to grant. The duty of disclosure is absolute. It is positive and not negative. Non-disclosure of any material fact gives the insurer an option to avoid the contract. According to Arnold, “The principal law is firmly established that mis-representation or concealment of material fact, whether accidental or intentional, will void the policy.”