What is the Doctrine of Utmost Good Faith?
The doctrine of good faith means that all parties involved in a contract are expected to behave honestly and fairly when dealing with each other. The doctrine of utmost good faith is a legal principle that applies to most insurance dealings. We will discuss below the aspects of the principle and how it applies to insurance contracts.
The Doctrine of Utmost Good Faith
The doctrine of utmost good faith, sometimes referred to as the implied covenant of good faith and fair dealing is a legal principle that governs legal contracts. It is an unwritten law, but one that is expected to be applied to all legal contracts. All parties included in the contract are expected to behave in good faith and to deal with each other fairly.
Two primary components are defined by the doctrine of utmost good faith. They are as follows:
Duty of Performance
Duty of performance simply means that each party to the contract is required to perform their duties and obligations under the contract of good faith. Each party is expected to behave honestly and fairly and to observe the terms of the contract.
Duty of Cooperation
This second aspect, the duty of cooperation, ensures that each party to the contract will offer complete cooperation to the other party to achieve the joint goals of the contract. This means transparent, honest communication. It also requires that neither party should participate in conduct that could cause the other party not to be able to fulfill their obligations under the contract.
The Importance of the Doctrine of Utmost Good Faith
The doctrine of utmost good faith is necessary for a variety of reasons. These are as follows:
- To ensure fairness: The doctrine of utmost good faith ensures that all individuals or entities in a contract are fairly treated and are honest with one another. This way, one party does not unfairly benefit at the cost of the other party.
- To encourage trust: The doctrine of utmost good faith stands to encourage trust between the parties to a contract. This promotion of trust helps to prevent disputes or misunderstandings.
- To provide a basis for legal action: To ensure that each party is held accountable for their conduct under a contract, the doctrine of utmost good faith stands. If a party breaches the unwritten doctrine, the other party can pursue damages.
Application of the Doctrine of Utmost Good Faith to Insurance Contracts
The insured must rely on the insurer to behave in good faith when it comes time to file an insurance claim. The insurance company drafts the contract, and the insurer must trust that it is fair since they are not given the ability to negotiate such contracts. The doctrine of utmost good faith forces the insurance company to behave in good faith.
The insurance company, when acting under the doctrine of utmost good faith, meets the following requirements:
- They have a duty to investigate claims
- Duty to promptly pay off claims
- They have a duty to provide accurate and complete information
- The insurance company has a duty to defend the insured party
An Important Legal Principle
The doctrine of utmost good faith is a very important legal principle that applies to all contracts. It requires honesty, openness, and fairness when dealing with each other. If you question whether your insurance contract is being supported by good faith conduct, reach out to Dawson & Rosenthal, P.C., for guidance.