What is the 'Doctrine Of Utmost Good Faith'

The doctrine of utmost good faith is a minimum standard that requires both the buyer and seller in a transaction act honestly toward each other and not mislead or withhold critical information from one another. The doctrine of utmost good faith applies to many common financial transactions. It is also known in its Latin form as "uberrimae fidei."

BREAKING DOWN 'Doctrine Of Utmost Good Faith'

In the insurance market, the doctrine of utmost good faith requires the party seeking insurance discloses all relevant personal information. For example, if you are applying for life insurance, you are required to disclose any previous health problems you may have had. Likewise, the insurance agent selling you the coverage must disclose the critical information you need to know about your contract and its terms.

The doctrine of utmost good faith provides general assurance that the parties involved in a transaction are being truthful and acting in an ethical way. This can include ensuring all relevant information is available to both parties while negotiations are taking place or amounts are being determined.

Uses of the Doctrine of Utmost Good Faith

Aside from the aforementioned use in the insurance market, good faith may also be exercised while completing various financial transactions. This can include when a business or individual seeks financing from banking institutions, or when a financial institution provides a fee estimate as a real estate loan is in process.

Often, estimates provided by certain service providers are made in good faith. In this context, it refers to the fact the service provider, such as a plumber or electrician, is confident in the cost estimate based on the known factors surrounding the transaction, in this case a repair. It is considered good faith only, and not legally bonding, as it acknowledges that not all variables are known. Certain issues may not be discoverable, by the service provider or the person requesting service, until certain work has begun.

Repercussions for Violations of Good Faith

Depending on the nature of the transaction, violations of the doctrine of good faith can result in a variety of consequences. Most commonly, whatever contract was drawn based on inaccurate information, caused by intentional misinformation or failure to disclose, may cause the contract to become null and void.

Further, if certain goods or services were provided prior to the information being discovered or disclosed, certain legal actions may be within the right of the misinformed party, including the right to recoup any costs associated with the fulfillment of the contract that could be deemed fraudulent in nature.

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