PRINCIPLE OF GOOD FAITH
The parties entering into a contract in general, owe no positive duty towards each other beyond
showing ordinary good faith. Each is expected to inform himself of all relevant facts, by making
such independent enquires as he may think prudent, as by their nature, they are or might be
equally accessible to both parties, in other hand the principle of caveat emptor which means, let
the buyer beware applies. A person seeking insurance is bound to disclose all material facts
relating to the risk involved, false answers to the questions in the proposal form given by the
assured relating to the state of his health vitiate the contract of insurance1
Law demands higher standard of good faith in their case. Lord Mansfield who remembered as
the father of English Commercial and Insurance Law stated the principle of good faith in Carter
v. Boehm2, thus: “Insurance is a contract upon speculation. The special facts upon which the
contingent chance is to be computed lie more commonly in the knowledge of the insured only,
the underwriter trusts to the insured’s representations and proceeds upon confidence that he does
not keep back any circumstances in his knowledge to misleading the underwriter into belief that
the circumstances does not exist, and to induce him to estimate the risk as if it did not exist, the
keeping back such circumstances is fraud and therefore, the policy is void”.3
Equal duty on both parties
The question is, who does act more good faith and to whom good faith apply?
In this concept and as discussed here above the answer as follows:
Each party to the insurance contract, the policyholder, the insurer and a third party benefits or a
person who is entitled to the benefits of the insurance policy, must act with fairness, decency and
fair dealing as well as honest in their dealings with one another. The duty to show good faith
falls on the insured as well as to insurer to an equal degree4, in the case of all types of insurance
contracts, this mutuality of the duty under common law was recognized by Lord Mansfield in
Carter v. Boehm (Supra) the policy would equally be void against the underwriter if he
concealed.
1
P. Sarojam v. LIC of India, AIR 1986 Ker 201, 203
2
(1758-1774) All ER Rep 183
3
By M. N. Srinivasan's, Principles of Insurance Law, Seventh Edition 2002, at p 62
4
Anstey v. British Natural Premium Life, (1908) 24 TLR 871, Provincial Insurance v. Morgan (1933) AC 240; AIR
1954 Mad 636
Insured’s and Insurer’s duty of disclosure and Remedy for Breaching of duty of outmost
good faith
What the Insured should disclose and what he need not disclose in the absence of inquiry are laid
down in, the law did not stipulate the duty to insurer to disclose as it is to insured, but material to
the insurance will ordinarily be known only to the proposed insured, there is only one remedy to
both parties after breaching the principle of good faith as confirming in appeal Lord
TEMPLEMAN “The only remedy open to the insured is to rescind the policy and recover the
premium. I agree with the Court of Appeal that breach of the obligation does not sound in
damages”
Differences between Warranty and Representation
A representation is a statement made by the proposer to the insurer relating to a proposed risk.
Such a representation may pertain to both material and immaterial facts.
If material, then the representation must be substantially true.
Any false statement on the material portion of the fact would render the contract voidable.
Insurance Warranties
A warranty, on the other hand, is an undertaking by the insured to the effect that he shall or
shall not do a certain thing or that some conditions shall be fulfilled or whereby he affirms or
negatives the existence of a particular state of affairs.
Distinction between Representations and Warranties in Insurance
It is necessary to understand the difference between representation and warranty and in this
regard making a mistake is quite likely.
Such a mistake would be indeed fatal particularly keeping in view that a breach of either
warranty or representation would have a different bearing on the insurance contract.
The differences are:
1. A representation is required to be substantially true, i.e., the material portion of the
statement must be literally true even though the immaterial portion of the statement need
not be true or correct. On the other hand, a warranty must be strictly and literally
complied with.
2. With regard to representation, if the insurers want to avoid the contract on grounds of
misrepresentation, it has to be proved by the insurers that the misrepresentation relates to
a material fact. On the other hand, with regard to warranty any breach whether material
or immaterial is enough for the insurers to avoid the contract.
3. A representation does not appear in the policy, but a warranty must appear in the policy
either expressly or by way of reference.
BIBLIOGRAPHY
Cases law.
P. Sarojam v. LIC of India, AIR 1986 Ker 201, 203
Anstey v. British Natural Premium Life, (1908) 24 TLR 871,
Provincial Insurance v. Morgan (1933) AC 240; AIR 1954 Mad 636
Carter v. Boehm (1758-1774) All ER Rep 183
Book.
By M. N. Srinivasan's, Principles of Insurance Law, Seventh Edition 2002, at p 62