The doctrine of utmost good faith in insurance means that:
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Answer & full 3-part explanation (select an option above, or peek)
Why C is correct
Insurance contracts are contracts of utmost good faith. Because the insurer relies on the applicant's statements to assess the risk, the applicant must disclose material facts and refrain from concealment or misrepresentation; and because the applicant relies on the insurer's promise of coverage, the insurer must deal fairly and in good faith as well. The duty is therefore mutual. Under CIC Sections 331 and 359, concealment or false representation of material facts can allow the insurer to rescind, which underscores that the applicant's candor is a foundation of the contract. Paying the premium does not cure a material nondisclosure made during the application process.
Why the other options are wrong
- B) The duty of good faith runs both ways. Insurers also must act honestly and fairly with applicants and insureds, so the duty is not limited to the applicant. This choice misstates what the statute actually requires, so it must be eliminated from consideration.
- D) The application is part of the contract, but the doctrine of utmost good faith governs conduct and disclosure beyond the four corners of the application document. This option reflects a different rule and does not match the law that governs the transaction.
- A) Paying the premium does not cure a material nondisclosure or concealment made during the application process. The duty of candor survives premium payment. Accordingly, this plausible-sounding answer is one that examiners expect candidates to eliminate.
Memory hook
Utmost good faith is a two-way street. Both sides tell the truth; the premium does not launder a secret.