Doctrine of Utmost Good Faith – Definition & Explanation

Cite this article as:"Doctrine of Utmost Good Faith – Definition & Explanation," in The Business Professor, updated March 2, 2020, last accessed May 31, 2020, https://thebusinessprofessor.com/lesson/doctrine-of-utmost-good-faith-definition/.

Back To: COMMERCIAL LAW: CONTRACTS, PAYMENTS, SECURITY INTERESTS, & BANKRUPTCY

What is the Doctrine Of Utmost Good Faith?

The doctrine of the utmost good faith, known in latin as “uberrimae fides”, is a legal doctrine stating that parties in a contract must act honestly without withholding any information from each other or misleading each other.  This doctrine is the minimum standard that parties must adhere to in a contractual agreement and it is applied to all phases of human activities.

The Doctrine of Utmost Good Faith is held in high esteem in transactions in insurance, financial markets, real estate, and other businesses.

How the Doctrine Of Utmost Good Faith Applies in Insurance Contracts

In an ordinary commercial contract, the doctrine of utmost good faith mandates parties to bargain fairly and honestly without misleading one another. This doctrine serves as the basis of trust in a contractual agreement, where both parties believe that the transaction is truthful and ethical.

In the insurance, this doctrine of utmost good faith is a law that mandates the insurer and the insured to disclose all the facts needed in a policy. The doctrine bars any the parties from withholding any information that is essential to the contract. While the insured must provide all details including health history and other contingencies, the insurer must disclose all the details of the policy, including the terms and conditions.

This doctrine first originated in the case between Carter and Boehm, before it was developed in common law and subsequently added in the Marine Insurance Act 1906.

What happens if you violate the Doctrine of Utmost Good Faith?

Violations of the doctrine of good faith in a contract often has legal consequences depending upon the nature or degree of the violation. The injured party can take legal actions against the other party that provides inaccurate information. This can lead to contract damages. Also, the contract is voidable by the injured party. The same conduct may constitute criminal fraud.

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