Insurance contracts are said to be based on "utmost good faith," which means that:
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Answer & full 3-part explanation (select an option above, or peek)
Why A is correct
Utmost good faith requires both the insurer and the applicant to deal honestly and openly with each other throughout the transaction. Because the insurer cannot personally observe every aspect of the risk, it must rely on the applicant's cooperation: the applicant must truthfully answer every question on the application and must not conceal material facts about the risk. In return, the insurer must not hide policy limitations, mislead the applicant about what is covered, or withhold information that affects the applicant's understanding of the contract. When either side conceals or misrepresents a material fact, the injured party may rescind the contract, because the foundation of the bargain was built on incomplete or false information.
Why the other options are wrong
- B) The duty of good faith runs in both directions; it is not imposed on the insurer alone merely because it drafts the policy language, since the applicant's honesty is equally essential to fair underwriting.
- C) The applicant has a duty to disclose material facts, but the insurer is equally bound to deal honestly and fairly with the applicant and cannot conceal facts that would affect the coverage decision.
- D) The insurer may not hide information that affects the applicant's understanding of the coverage being purchased; the duty of good faith is mutual and applies to both parties. Concealment by the insurer can also give the applicant grounds to rescind the contract, so neither side may withhold what matters.
Memory hook
Utmost good faith = no hiding what matters; both sides must come clean.