Uberrimae Fidei

Ethics is a process of systematically applying, using, defending and recommending concepts of right and wrong behavior.

Ethical behavior is required of both parties to a contract of insurance for the system to work. If any party to the insurance contract acts unethically the ability of insurance to work effectively and profitably will fail.

Ethics is the essence of insurance. Since insurance was first created it has been a business of utmost good faith. As a result, the insured and the insurer are expected to treat each other ethically.

Insurance was created to spread risk from individuals to multitudes. Spreading the risk in a fair, ethical and honorable manner from one person to many is the basis upon which a system of insurance was founded. The insurance contract since modern insurance was first created was founded on the concept of Uberrimae Fidei. The phrase Uberrimae Fidei is used to express the principle that a contract of insurance must be made in perfect good faith, with neither the insurer nor the insured concealing nothing from the other. In the case of insurance both the insured and the insurer must observe the most perfect good faith towards each other so that the insurer understands the risk it is asked to take and the insured understands the risks accepted by the insurer.

Insurers and reinsurers are dependent on “utmost good faith [which] may be viewed as a legal rule but also as a tradition honored by ceding insurers and reinsurers in their ongoing commercial relationships.”[1]

Uberrimae fidei has its roots in British jurisprudence. The doctrine has historically been applied to all insurance contracts issued in or to be performed in the United States. The doctrine of utmost good faith was stated by the U.S. Supreme Court dating back to 1828.[2] The doctrine imposes the highest duty on parties to an insurance contract to disclose facts that materially affect the insurer’s risk.[3]

Several federal cases have applied the duty of uberrimae fidei in the marine insurance setting applying the doctrine more strictly than in property, casualty, life, health or disability insurance.

Under marine insurance’s interpretation of uberrimae fidei, any failure to disclose a material fact not known by the underwriter that is, or should be, within the knowledge of the insured party, is grounds for rescission of the policy, even if the omission or misstatement is the result of the insured’s mistake, accident, or forgetfulness. In the marine setting the insured is required to disclose everything that is material to the insurer even if the insurer does not ask.

Not all federal circuit courts apply the uberrimae fidei doctrine to marine insurance policies but most do.

“Insurance policies are traditionally contracts uberrimae fidei and a failure by the insured to disclose conditions affecting the risk, of which he is aware, makes the contract voidable at the insurer’s option.”[4] Similarly, misrepresentation or concealment of material fact by the insurer allows the insured to declare the contract void at the insured’s option. The duty is mutual.

The majority of courts faced with the application of uberrimae fidei to a marine insurance policy, have found that utmost good faith applies.[5] Insurance cannot operate without the ethical doctrine of uberrimae fidei.

Under the doctrine of uberrimae fidei, or utmost good faith, the insured in a maritime insurance contract is required to disclose to the insurer all known circumstances that materially affect the insurer’s risk, the default of which renders the insurance contract voidable by the insurer. Under the doctrine of uberrimae fidei, “the parties to a marine insurance policy must accord each other the highest degree of good faith.”[6]This duty of good faith requires the insured to “disclose to the insurer all known circumstances that materially affect the risk being insured.”[7]

Because the insured is in the best position to know of any facts that may be material to the risk, the insured is obligated to disclose those facts to the insurer, regardless of whether the insurer makes a specific inquiry about the facts.

The age-old federal marine-insurance doctrine of uberrimae fidei governs the argument and provides “the controlling federal rule even in the face of contrary state authority.”[8]

Uberrimae fidei reflects “an enlightened moral policy” based upon the presumption that “the party procuring insurance, is not … in possession of any facts, material to the risk which he does not disclose.”[9] Indeed, “[i]t is the duty of the [insured] to place the underwriter in the same situation as himself.”[10] (quotation marks omitted).

Under the federal common law doctrine of utmost good faith or uberrimae fidei, a failure by the insured to disclose conditions affecting the risk, of which he is aware, makes the contract voidable at the insurer’s option.

An insured who conceals or misrepresents a material fact commits fraud which avoids the policy and is a clear breach of the ethical obligation of the insured. Fraud is an obvious breach of the contract and the implied covenant of good faith and fair dealing. It is the ethical obligation of the insured to truthfully and fully advise the insurer of the risks the insured is asking the insurer to take. Failure to do so, even if there was no intent to deceive, is sufficient to allow the insurer to rescind the policy, if the insurer was actually deceived.

In some instances, the law chokes on the issue of ethics and good faith. It is sometimes difficult for a court to determine which of the two considerations influences the classification of insurance contracts. At least the insurance considerations have been referred to as uberrimae fidei in England and in the United States. The two countries, however, are not in accord in their interpretation of the uberrimae.

In the leading English case of Carter v. Boehm, S.C. 1 Bl. Burr 1906, 11th May 1766. 593, 3, Lord Mansfield in 1766 declared that even an innocent concealment of a material fact made the contract voidable saying that the question, therefore, must always be, whether there was, under all the circumstances at the time the policy was underwritten, a fair representation, or a concealment, fraudulent if designed, or, though not designed, varying materially the object of the policy, and changing the risk understood to be run.

[1] Unigard Security Insurance Co. v. North River Insurance Co., 4 F.3d 1049 (2nd Cir. 09/09/1993)

[2] M’Lanahan v. Universal Ins. Co., 26 S. 170, 185, 7 L. Ed. 98, 105 (1828).

[3] 7 Jeffrey E. Thomas, New Appleman on Insurance Law Library Edition 76.01 (LexisNexis 2014)

[4]  Stipcich v. Metropolitan Life Ins. Co., 277 U.S. 311, 316, 48 S.Ct. 512, 513, 72 L.Ed. 895 citing Carter v. Boehm, 3 Burrows, 1905; Livingston v. Maryland Insurance Co., 6 Cranch, 274, 3 L.Ed. 222; McLanahan v. Universal Insurance Co., 1 Pet. 170, 7 L.Ed. 98; Phoenix Life Ins. Co. v. Raddin, 120 U.S. 183, 189, 7 S.Ct. 500, 30 L.Ed. 644 (1887); Hardman v. Firemen’s Insurance Co., 20 F. 594 (C.C.).

[5]  Steelmet, Inc. v. Caribe Towing Corp., 747 F.2d 689, 695 (llth Cir. 1984); Knight v. United States Fire Insurance, 804 F.2d 9, 13 (2d Cir. 1986)

[6] Knight v. U.S. Fire Ins. Co., 804 F.2d 9, 13 (2d Cir.1986).

[7] ; see also Kilpatrick Marine Piling v. Fireman’s Fund Ins. Co., 795 F.2d 940, 942 (11th Cir.1986).

[8] Steelmet, Inc. v. Caribe Towing Corp., 747 F.2d 689, 695 (11th Cir.1984); see also HIH Marine Servs., Inc. v. Fraser, 211 F.3d 1359, 1362 (11th Cir.2000)

[9] McLanahan v. Universal Ins. Co., 26 U.S. 170, 185, 1 Pet. 170, 7 L.Ed. 98 (1828).

[10] Sun Mut. Ins. Co. v. Ocean Ins. Co., 107 U.S. 485, 510–11, 1 S.Ct. 582, 600, 27 L.Ed. 337 (1883)

Ethics is a process of systematically applying, using, defending and recommending concepts of right and wrong behavior. Ethical behavior is required of both parties to a contract of insurance for the system to work. Ethics is the essence of insurance. Ethical behavior is required of both parties to a contract of insurance for the system to work. If any party to the insurance contract acts unethically the ability of insurance to work effectively and profitably will fail. Ethics is the essence of insurance. Since insurance was first created it has been a business of  utmost good faith. As a result, the insured and the insurer are expected to treat each other ethically.

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