Understanding the Principle of Utmost Good Faith in Insurance Applications

What principle do insurance applications adhere to?

a) Utmost good faith
b) Strict liability
c) Caveat emptor
d) Precedent

Answer:

In insurance applications, the principle of utmost good faith (uberrima fides) applies, requiring honest and complete disclosures to accurately assess risks and set premiums, vital for maintaining actuarial fairness.

Statements made in an insurance application are held to a principle of utmost good faith. This principle, known as uberrima fides, requires that all parties involved in an insurance contract must act honestly and disclose all relevant information accurately. The principle ensures that the insurance company can assess the risk accurately and set premiums fairly. This is crucial to maintaining the fundamental law of insurance, where the average payment from the insured must not be less than the average payout to the insured. Charging an actuarially fair premium to each risk group separately helps to avoid problems such as moral hazard, a situation where those insured might not take necessary precautions against risks since they are protected by insurance.