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.

RELATED TERMS
  1. Continuity Of Interest Doctrine ...

    A doctrine which stipulates that a corporate acquisition can ...
  2. Real Bills Doctrine

    An economic theory that surmises that when central banks loan ...
  3. Uberrimae Fidei Contract

    A legal agreement requiring the highest standard good faith. ...
  4. Borrowed Servant Rule

    A legal doctrine indicating that an employer may be held liable ...
  5. Equitable Subrogation

    A legal doctrine that allows a party that has made payments on ...
  6. Transaction Costs

    Expenses incurred when buying or selling securities. Transaction ...
Related Articles
  1. Financial Advisor

    How Utmost Good Faith is Applied in Practice

    The principle of utmost good faith is an articulation of the need for both parties to act in a completely open and honest manner with each other to facilitate access to services at a fair market ...
  2. Insurance

    Understanding Your Insurance Contract

    Learn how to read one of the most important documents you own.
  3. Personal Finance

    Legality Of Selling Used Items

    An upcoming U.S. Supreme Court ruling could make it illegal for consumers to resell items due to copyright infringement.
  4. Financial Advisor

    Asset Manager Ethics: Rules Governing Capital Markets

    The integrity of the capital markets needs to be kept at utmost importance for all investors. This article shows how to maintain the integrity while investing.
  5. Personal Finance

    How to Pick the Right Lender When Refinancing a Mortgage

    Refinancing your mortgage has never been easier with the range of lenders and access to information that are available to you.
  6. Investing

    Arm's Length Transaction

    An arm’s length transaction describes business deals in which the buyer and seller act independently and with no interest in the other’s benefit.
  7. Investing

    Understanding Related-Party Transactions

    In business, a related-party transaction refers to a transaction where parties on both sides have a common interest or relationship.
  8. Financial Advisor

    How Brokers Are Compensated for Selling Bonds

    Find out how brokers are paid for selling bonds and how the transaction costs are passed on to the investor through a markup or commission.
RELATED FAQS
  1. Are good faith estimates (GFEs) accurate?

    Learn how federal guidelines regarding good faith estimates protect consumers under the revised 2010 version of the Real ... Read Answer >>
  2. What are the different ways I can file my income tax return?

    Learn about the potential consequences of violating the terms of a letter of intent, such as breakup fees, damages and agreement ... Read Answer >>
  3. What is the difference between a capital good and a consumer good?

    Learn to differentiate between capital goods and consumer goods, and see why capital goods require savings and investment ... Read Answer >>
  4. How are industrial goods different from consumer goods?

    Understand the difference between industrial goods and consumer goods, and learn the different types of industrial goods ... Read Answer >>
  5. Do any markets not exhibit asymmetric information?

    Find out why every market possesses information asymmetry, and why this isn't necessarily a huge or insurmountable problem ... Read Answer >>
  6. Are arm's length transactions always better than transactions not at arm's length?

    Transactions not at arm's length have real tax and other consequences for individuals and businesses, but they are not necessarily ... Read Answer >>
Hot Definitions
  1. Return on Market Value of Equity - ROME

    Return on market value of equity (ROME) is a comparative measure typically used by analysts to identify companies that generate ...
  2. Majority Shareholder

    A person or entity that owns more than 50% of a company's outstanding shares. The majority shareholder is often the founder ...
  3. Competitive Advantage

    An advantage that a firm has over its competitors, allowing it to generate greater sales or margins and/or retain more customers ...
  4. Mutual Fund

    An investment vehicle that is made up of a pool of funds collected from many investors for the purpose of investing in securities ...
  5. Wash-Sale Rule

    An Internal Revenue Service (IRS) rule that prohibits a taxpayer from claiming a loss on the sale or trade of a security ...
  6. Porter Diamond

    A model that attempts to explain the competitive advantage some nations or groups have due to certain factors available to ...
Trading Center