What is meant by the 'principle of utmost good faith'?

The principle of utmost good faith, also known as "uberrima fides," is foundational in insurance contracts. It requires that both parties – the insured and the insurer – act honestly and disclose all relevant information that could affect the agreement. This principle is crucial because insurance relies heavily on information exchanged between the parties. The insured must provide complete and accurate details about risks and circumstances to enable the insurer to assess risk appropriately and set premiums. Similarly, the insurer must openly communicate policy terms and any endorsements relevant to the coverage.

When parties adhere to this principle, it fosters trust and transparency, essential for a fair insurance marketplace. Failure to uphold this duty can lead to disputes, potentially resulting in claims being denied or contracts being voided. Thus, the principle of utmost good faith ensures that both sides engage honestly, ultimately promoting fairness in the insurance transaction.