What is Utmost Good Faith?

If you have been following CCW’s recent exploration of the Principles and Theories of Insurance in Hong Kong then you will know that in the past few weeks we have covered:

• What is a Risk
• What is a Contract
• How Agency is created
• The application of Insurable Interest
• How Proximate Cause applies to claims.

Last week we investigated how these different principles were applied to the handling of Pre-existing conditions under health insurance policies. In that article we noted that, because of the complex nature of pre-existing medical conditions, and the fact that these conditions are normally excluded from coverage, some applicants may attempt to hide the existence of a condition when applying for insurance coverage.

Today we will be looking at Utmost Good Faith, and why not disclosing material facts on an insurance application is actually harmful to your interests. It should be understood that the principle of Utmost Good Faith applies to all policy types and insurance product classes.

What are “Ordinary Good Faith” and “Utmost Good Faith”?

Under common law in Hong Kong contracts are subject to the principle of “good faith.” This means that both parties (the offeror and the offeree) are expected to be honest, and supply information which is substantially true. This is “ordinary” good faith – while both parties must supply contractual information which is substantially true, it is neither party’s responsibility to ensure that the other entity obtains all relevant information that may affect the contract.

Under Ordinary Good Faith the responsibility for ensuring that both parties are happy with the contract being forward is borne by the parties creating the contract. One party may be much happier with the contract than the other.

However, Insurance is far stricter than this. Remember, that in order for a policy of coverage to truly be insurance, there must be equity on both sides of the contract. In Hong Kong rather than ordinary good faith, insurance contracts are subject to the principle of Utmost Good Faith. Under insurance law, each party involved in a contract of coverage has a legal duty to reveal all necessary information (also known as Material Facts), whether or not the other party has asked for that information.

Further to this, many insurers will extend this principle by requiring applicants to warrant (or declare) that all of the information supplied on a proposal form (whether it relates to material facts or not) is totally true. This is a fundamental difference from the understanding of ordinary good faith as the information supplied by both parties must be wholly and completely true, not just substantially true.

What are Material Facts?

If Utmost Good Faith is concerned about the disclosure of material facts, then it is important that we understand what those are. In Hong Kong the statutory definition of a material fact is: Every circumstance which would influence the judgement of a prudent insurer in fixing a premium, or determining the acceptance of a risk.

Remember, Utmost Good Faith dictates that you are required to disclose these facts, whether asked for or not, to the insurer.

Matters of common knowledge (gravity exists, for example) do not need to be disclosed as material facts, neither do facts which are deemed to be “known” (the issue of the Covid-19 pandemic). Furthermore, applicants do not need to disclose facts which may diminish the risk in question – a fire insurance policyholder who does not mention the installation of a sprinkler system at the insured location does not breach Utmost Good Faith, as the relevant fact decreases the fire risk.

Both the insurer and the policyholder must disclose all material facts as the contract of insurance must be equitable. While the policyholder must disclose the information in relation to the risk they are covering, the insurer is also responsible for offering information in relation to:

• Length of the contract
• Scope and type of coverage
• Specific terms affecting cover

Failure to disclose material facts is a breach of Utmost Good Faith and can have some severe consequences.

Breaches of Utmost Good Faith

Breaches of Utmost Good Faith can occur in a number of different ways.

• Fraudulent Misrepresentation: When either party intentionally, or fraudulently supplies false material facts to the other party.
• Non-Fraudulent Misrepresentation: When either party supplies false material facts to the other party negligently, or innocently.
• Fraudulent Non-Disclosure: When either party fraudulently omits to supply material facts.
• Non-Fraudulent Non-Disclosure: When either party omits to supply material facts negligently, or innocently.

If Utmost Good Faith is breached in any of these ways, the hurt party (which is normally the insurance company) has access to different remedies, including:

• Void – voiding the entire contract of insurance from inception. Premiums paid in a fraudulent breach are kept by the insurer.
• Legal Action – in addition to voiding the contract, it is possible for the aggrieved party to sue for damages in a court of law in the case of fraudulent or negligent misrepresentation.
• Waive – the hurt party agrees to waive the breach and the contract becomes valid on a retrospective basis.

Why Does Utmost Good Faith Matter?

Using Health Insurance as an example, pre-existing medical conditions are a great way to understand the impact on Utmost Good Faith and your coverage.

Because pre-existing medical conditions are so complicated, and because many insurers will simply exclude pre-existing conditions from coverage under their plans, many applicants may attempt to hide, or not disclose a pre-existing medical condition to the insurance company.

However, a pre-existing condition is a material fact, and as we have seen above, under Hong Kong law and the principle of Utmost Good Faith both parties (and especially the applicant) have a duty to disclose these facts. Attempting to conceal a pre-existing medical condition in order to have it covered by a health insurance policy may be considered fraudulent misrepresentation – you would likely forfeit any and all premiums paid, and could see yourself become the subject of legal action.

Pre-existing medical conditions are normally defined as any condition for which the policyholder has received a diagnosis, treatment, or medication, or any condition for which they have displayed symptoms, or were aware of prior to the commencement of the insurance.

Failing to provide details about any medical conditions you may be suffering from, even if they have never been formally diagnosed, and if you have never received medical treatment, is a breach of Utmost Good Faith under Hong Kong Law. This is primarily due to the fact that you have not provided the insurance company with all of the information it requires to fully underwrite your policy, and consequently the coverage in question would not be equitable.

Free Hong Kong Insurance Advice

If you would like to learn more about the principle of Utmost Good Faith, or any of the other concepts commonly encountered in Hong Kong Insurance, please Contact Us to arrange a discussion with an Expert Hong Kong Insurance Broker.

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