The principle that both the applicant and the insurer must act honestly and disclose all material facts is known as:
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Answer & full 3-part explanation (select an option above, or peek)
Why A is correct
Utmost good faith requires both parties to an insurance contract to be completely honest and to disclose every material fact. Because the insurer relies on the applicant's statements to decide whether to accept the risk and what premium to charge, the applicant has a duty to reveal matters the insurer cannot easily discover. The insurer, in turn, must deal fairly with the applicant. This principle underpins the doctrines of concealment and misrepresentation and explains why an insurer may rescind a policy obtained through material nondisclosure, even when the omission was unintentional.
Why the other options are wrong
- B) Indemnity is the principle that insurance should restore the insured to the pre-loss financial position rather than pay more than the loss; it is a different concept.
- C) Adhesion describes a contract drafted entirely by one party and offered on a take-it-or-leave-it basis.
- D) Subrogation is the insurer's right, after paying a claim, to pursue the third party responsible for the loss.
Memory hook
Utmost good faith = full disclosure on both sides of the desk, no hiding cards before the deal is made.