Good Faith

Good faith in insurance refers to the mutual trust and honesty between the insurance company and the policyholder. Both parties are expected to act honestly and not mislead or withhold critical information from each other. This principle ensures fairness and reliability in the insurance contract, forming the foundation of all insurance relationships.

What is Good Faith in Insurance?

In the context of insurance, good faith is a fundamental principle that dictates that both the insurer and the insured must act honestly and transparently throughout the insurance process. This includes the period before the policy is issued, during the term of the policy, and when making and processing claims.

For example, when a business owner applies for an insurance policy, they must provide accurate and complete information about their business operations and risks. If they knowingly omit information about a high-risk activity, they are not acting in good faith. Similarly, the insurance company must clearly outline the terms, conditions, and coverage limits of the policy without hiding critical details in fine print.

The principle of good faith is legally recognised and forms part of insurance law in many jurisdictions, including New Zealand and the United Kingdom. Breaching this duty can have serious consequences, potentially voiding coverage or resulting in claims being denied.

Key Components of Good Faith

Full Disclosure

• Both parties must fully disclose all relevant information that could affect the insurance contract.


• The insured must provide accurate details about their business, risks, and any past claims history.


• The insurer must clearly state the terms, coverage, exclusions, and limitations of the policy in accessible language.


• Material facts must be disclosed even if not specifically asked about during the application process.

Honest Representation

• All information provided must be truthful and accurate to the best of the party's knowledge.


• The insured should not exaggerate or downplay risks, claims history, or business operations.


• The insurer should not misrepresent the coverage, terms, or benefits of the policy.


• Marketing materials and policy documents must align and provide consistent information.

Fair Dealing

• Both parties must act fairly and reasonably in all aspects of the insurance relationship.


• The insurer should process claims promptly and fairly, without unnecessary delays or obstacles.


• The insured should adhere to the terms of the policy and report claims honestly with supporting documentation.


• Communication should be clear, timely, and in good faith throughout the policy term.

Types of Good Faith

Utmost Good Faith (Uberrimae Fidei)

This is the highest standard of honesty and requires both parties to disclose all material facts that could influence the insurance decision. In business insurance, this means the business owner must reveal any information that could influence the insurer's decision to provide coverage or set premiums, such as previous claims, known risks, or changes in business operations. This duty applies even to information the insured might consider insignificant.

Contractual Good Faith

This involves adhering to the terms and conditions set out in the insurance contract. Both parties must respect the agreements made in the policy, such as the insured paying premiums on time and maintaining accurate records, whilst the insurer provides coverage as specified. This ongoing duty ensures the contract remains valid and enforceable throughout its term.

Claims Good Faith

This focuses on the handling of claims with honesty and fairness. The insurer must investigate and settle claims promptly and fairly, assigning appropriate resources and expertise to assess each claim. The insured must report claims honestly, provide all necessary documentation, and cooperate fully with the investigation process. Exaggerating claims or providing false information violates this duty.

Pre-Contractual Good Faith

This applies to the period before the insurance contract is finalised. Both the insurer and insured must provide truthful information during the application and underwriting process to ensure the policy is accurately tailored to the insured's needs. The insurer must ask relevant questions, whilst the insured must answer them completely and honestly. This sets the foundation for the entire insurance relationship.

How Insurance Embodies Good Faith

Insurance policies are designed to embody the principle of good faith in several ways:

Transparency

Policies are written in clear language, outlining the coverage, exclusions, and procedures for filing claims. This transparency helps prevent misunderstandings and ensures that both parties are aware of their obligations. Policy summaries and key facts documents provide accessible overviews of complex insurance contracts.

Claims Process

A good faith approach in claims handling involves a clear and efficient process for reporting and resolving claims. Insurers are expected to investigate claims thoroughly and pay valid claims without unnecessary delays. This includes providing clear timelines, keeping claimants informed, and explaining any decisions made during the claims assessment.

Dispute Resolution

Insurance contracts often include mechanisms for resolving disputes fairly, such as mediation, arbitration, or access to ombudsman services. These processes help maintain trust and ensure that disagreements are settled in a reasonable manner without resorting to costly litigation. Many jurisdictions require insurers to participate in alternative dispute resolution schemes.

Regulatory Oversight

Insurance regulators in New Zealand and other jurisdictions enforce good faith requirements, ensuring that insurers maintain high standards of conduct. This includes regular monitoring, complaint handling procedures, and penalties for breaches of good faith duties, providing additional protection for policyholders.