Contract of utmost good faith is one of those essential elements of insurance contract, which are legally mandatory for making an insurance contract. In case of insurance contract, both parties (insurer and policy taker) make a relation of trust, which is settled by terms. Thus, depending on terms and condition, both parties are obligated to maintain trusted behavior to each other.
Trusted behavior means becoming trustworthy to each other. More deeply, trusted behavior refers to the condition of delivering all information truthfully related to the insurance contract. All necessary information is real provided by both parties related to the insurance contract it is presumed in this contract of utmost good faith. Therefore, if a party provides wrong information regarding to the insurance contract and another party is free to deny obeying the contract.Thus, the policy holder must describe about his insurable interest on a insured material or life.
The following quote has been mentioned in Oxford Dictionary of Business “Utmost good faith is the fundamental principle of insurance practice, requiring that a person wishing to take out an insurance cover must provide all the information the insurer needs to calculate the correct premium for the risk involved. Nothing must be withheld from the insurers, even if they do not actually ask for the information on an application form.”
The policy taker is obligated for providing all essential information to the insurer. If the policy taker hides any information regarding to the insurance contract, the insurer can cancel the contract and deny bearing the risk and therefore that party is free to ignore the contact of indemnity.
Both parties of an insurance contract should be careful when they are providing information. Otherwise, the contract may be canceled and its objective may go to nullity. Therefore, that is why insurance contract is called as the contract of utmost good faith.