Canadian Accredited Insurance Broker (CAIB) One Practice Exam

What does utmost good faith mean in insurance contracts?

1. A lower standard of honesty than in ordinary contracts

2. A commitment to keep all terms confidential

3. A higher standard of honesty is required from all parties

4. A principle allowing for flexible interpretations

The correct answer is: A higher standard of honesty is required from all parties

The concept of utmost good faith, or "uberrima fides," is a fundamental principle in insurance contracts, which indicates that both parties involved in the contract—namely the insurer and the insured—are required to act honestly and disclose all relevant facts. This higher standard of honesty goes beyond that of ordinary commercial contracts, where good faith is often defined in a more flexible manner. In insurance, this means that the insured must provide complete and accurate information to the insurer about their risk profile, while the insurer is expected to clearly communicate the terms, conditions, and limitations of the policy. Any omission or misrepresentation by either party could lead to disputes and potentially void the contract. Therefore, the expectation of utmost good faith establishes a trust-based relationship that is crucial for the effective functioning of the insurance market. This accountability fosters transparency and protects both parties’ interests, ensuring that claims are processed fairly based on the information exchanged. This principle underlines the importance of integrity in insurance transactions, distinguishing it from general contracts where the requirement for disclosure might not be as rigorous.