ExtraMileIssue11

Insurance Built Around Faith
GOOD FAITH
matter whether you think George Michael or Limp Bizkit
No said it best, we can all agree: “Got to have faith, gotta
have faith.”
It forms the basis of trust upon which all mutually beneficial
relationships are built. The insurance context is no exception. In fact,
good faith and fair dealing are the hallmarks of a strong business
and insurance relationship.
Even if you have heard George Michael’s 1987 original “Faith” or
the 1997 Limp Bizkit cover, chances are you probably have not
heard the Latin phrase uberrimae fidei (yoo-ber--may fi-dee). Literally
translated, it means “most abundant faith” or “utmost good faith.”
Black’s Law Dictionary (10th Ed. 2014).
The doctrine of utmost good faith in commercial transactions has
been recognized since antiquity, including endorsement by the
Greeks and Romans. Arnaldo Biscardi, “On Aequitas and Epieikeia,”
Aequitas and Equity: Equity in Civil Law and Mixed Jurisdictions, ed.
Alfredo Mordechai Rabello (Jerusalem: Hamaccabi Press, 1997), 2.
In more modern times, the doctrine first appeared in the insurance
context in England, where the Chief Justice of the King’s Bench,
Lord Mansfield, held that neither the insured nor the insurer may
exploit the other by failing to disclose relevant facts to draw the
other into a bargain. Carter v. Boehm, 97 E.R. 1162, 1164 (1766).
The purpose of the doctrine, as explained by Lord Mansfield, is to
encourage good faith and prevent fraud. Id.
The doctrine navigated the Atlantic Ocean and found support in the
U.S. Supreme Court in the 1828 case of McLanahan v. Universal Ins.
Co., 26 U.S. 170, at 185, which the Supreme Court reinforced 100
years later in Stipcich v. Metropolitan Life Ins. Co., 277 U.S. 311,
316 (1928). In both cases, the Supreme Court cited approvingly of
the doctrine of utmost good faith in insurance contracts, holding
that the principles governing insurance are those of an enlightened
moral policy. Since then, courts throughout the U.S. have affirmed
the doctrine. Shipley v. Arkansas Blue Cross & Blue Shield, 333 F.3d
898, 903 (8th Cir. 2003) (citations omitted).
Some states have modified the duty of utmost good faith to demand
proof of fraudulent intent and misrepresentation of a material
fact before an insurer may assert rights against an insured. Other
states require a material misrepresentation but disregard the
insured’s intent in failing to disclose a material fact. However, the
consequence is often the same: the insurer may rescind the policy
and avoid payment of claims when the insured’s failure to provide
material information had an impact on the nature of the risk.
The foundation of the underwriting process requires an insured
to provide a prospective insurer all facts relevant to the proposed
risk. In commercial transportation property and casualty insurance,
this often requires accurate details of an insured’s assets, revenue
sources, employee count, the number and location of the insured’s
offices, branches, or terminals, miles and routes driven by an
insured’s fleet, management experience and prior claims history,
among other information. When an insured suppresses information
that would have disclosed a different kind of risk than the one
submitted through concealed facts, the insurer may argue that
the insured fraudulently induced it to issue an insurance policy,
affording the insurer the right to void the policy. A leading insurance
treatise asserts that because each party to the insurance contract
is at the mercy of the other, a breach of the special duty of utmost
good faith warrants punishment and deterrence. Couch on Ins. §
198:12 (3d ed. 2001).
Because the consequences of an insured’s failure to abide by the
duty of good faith can be extreme, it is important for applicants
to understand the duty of good faith. Insureds should work closely
with their insurance broker and the underwriter to seek clarification
when a question arises concerning the extent of the disclosures
required or information requested by the underwriter. An open
dialogue and clarification of questions helps avoid situations where
facts are uncovered at the time of loss indicating an insured omitted
important information during the underwriting process.
When parties to an insurance contract are well meaning and
demonstrate good faith by recognizing the special relationship and
obligations owed to one another, the insured obtains the benefits
of the coverage it seeks to protect its assets, reputation and more.
Without good faith, an insured may be exposed to an uninsured, and
unexpected, loss.
The next time you complete an insurance application, it might do
some good to pull out that old cassette tape or CD, turn up the
volume, and play your favorite version of “Faith.” I can just hear
Fred Durst’s earsplitting voice in risk managers’ and brokers’ offices
across the country.
THOMAS J. KING
Corporate Attorney
26
27