Uberrimae Fidei Contract

What Is a Uberrimae Fidei Contract?

An uberrimae fidei contract is a legal agreement, common to the insurance industry, requiring the highest standard of good faith during disclosure of all material facts that could influence the decision of the other party. A failure to adhere to uberrimae fidei is grounds for voiding the agreement. Uberrimae fidei is also known as utmost good faith and is simply the Latin translation of this phrase.

Understanding Uberrimae Fidei Contracts

Uberrimae fidei or "uberrima fides" literally means "utmost good faith" in Latin. It requires parties to certain contracts to exercise the highest standard of full disclosure of any relevant conditions, circumstances, or risks to their counterparties. Failing to disclose material facts that might influence the other party's decision when entering into a contract where uberrimae fidei applies can result in the contract being rendered null and void and the other party being released from any obligations under the contract.

Insurance contracts are the most common type of a uberrimae fidei contract. Since the insurance company agrees to share the risk of loss with the policyholder, it is imperative that the policyholder act in good faith by fully disclosing all information that affects the insurance company's level of risk. Full disclosure allows the insurer to protect itself by charging the policyholder a premium that accurately reflects the level of risk it is undertaking or even refusing to issue a policy if the risk is too high.

Standards of disclosure in legal contracts, such as uberrimae fidei, are attempts to resolve economic problems that arise from information asymmetry. Particularly in the case of insurance contracts, the principle of uberrimae fidei is meant to protect the insurer against the problem of adverse selection because it is common for the insurance applicant to have more information about their own characteristics and past behavior with respect to risk that is being insured against than the insurer does.

The potential insured has an obvious incentive to withhold information from the insurer about existing circumstances or past risky behavior that would tend to lead the insurer to demand a higher premium payment (or refuse to insure at all). Uberrimae fidei requires that they disclose this information before they can be insured.

For example, someone applying for life insurance knows more about their eating habits, exercise patterns, risky behaviors, family medical history, and personal medical history than the potential insurer does. In order to determine how risky the applicant is, the insurer requires them to honestly answer a medical questionnaire and submit to a review of medical records before being approved for a policy. If the policyholder is later found to not have acted in utmost good faith at the time of application, the policy and benefits can be rescinded.

Special Considerations

Uberrimae fidei is seen as the foundation of a reinsurance contract. In order to make reinsurance affordable, a reinsurer cannot duplicate costly processes, such as insurer underwriting and claim handling costs. They must rely on the primary insurer’s ability to complete these tasks adequately. In return, a reinsurer must appropriately investigate and reimburse an insurer’s good faith claim payments. Uberrimae fidei is considered an implied term in reinsurance contracts.

Origin of Uberrimae Fidei

The principles of uberrimae fidei were first expressed by Britain's Lord Mansfield in the case of Carter v Boehm (1766). Mansfield said:

"Insurance is a contract of speculation... the special facts, upon which the contingent chance is to be computed, lie most commonly in the knowledge of the insured only. The underwriter trusts to his representation, and proceeds upon confidence that he does not keep back any circumstances in his knowledge, to mislead the underwriter into a belief that the circumstance does not exist... Good faith forbids either party by concealing what he privately knows, to draw the other into a bargain from his ignorance of that fact, and his believing the contrary."