Application of principle of Utmost Good Faith in Motor Insurance.

In insurance contracts, the legal doctrine of utmost good faith applies. This casts on the insured the duty to disclose all material facts that have a bearing on the insurance. A breach of this duty may make the contract void or voidable depending upon the nature of the breach.

The principle of utmost good faith is applicable to Motor Insurance in the same manner and with the same force as it is applicable to other classes of insurance.  The insured is under the duty to disclose all material facts that have a bearing on the insurance.

For this purpose proposal forms is used. In this form the insured submits various  material facts such as the type of vehicle, the geographical  area  of  use, the  physical  condition  of  the  driver, the driving  history  and traffic convictions of the driver, past loss experience etc.

There is a declaration clause in the form. The effect of declaration is that the answers given in the proposal become warranties. The answers are required to be literally true and correct.

Any wrong answer, irrespective of its materiality, will render the contract voidable by insurers. Thus it converts the common law duty into a contractual duty of utmost good faith.

However under compulsory third party insurance the doctrine is modified. Section 149 of the Motor Vehicles Act places the duty upon Insurers to satisfy judgments and awards against persons insured in respect of third party risks.

The principle of Utmost good faith plays an important role in motor insurance since it involves unlimited third party liability under the provisions of Motor Vehicle Act, 1988.

There is a condition precedent to declare all vehicle related particulars which affects premium and liability of the insurer. The use of the vehicle, Zone, age and capacity are the important factor to decide the cover in a motor insurance contract.

In case of non-observance of utmost good faith in the insurance contract between the insurer and the insured, it may permit the insurer to avoid his liability under various circumstances. However, if these circumstances do not fall within the purview of sub section (2) of Section 149 of M.V. Act 1988, the insurer cannot invoke them in aid and escape liability for the third party risk.

The terms of the contract between the insurer and the insured, which determines their rights and liability are different from statutory liability of the insurer for the third party risk. The remedy available to the insurer in such case is to proceed against the insured for the breach of the contract and to claim reimbursement of the amount paid to satisfy the award.

Extracts from “  Guide for Motor Insurance (IC-72)” by Dr. Rakesh Agarwal. Copyright of Sashi Publications,kolkata www.sashipublications.com and www.bimabazaar.com