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. Uberrimae Fidei Contract

    A legal agreement requiring the highest standard good faith. ...
  3. Bad Faith Insurance

    An insurance company’s appalling or malicious refusal to pay ...
  4. Privity

    A legal interpretation in contract law where contracts are only ...
  5. Shingle Theory

    A suitability doctrine first introduced by the Securities and ...
  6. Borrowed Servant Rule

    A legal doctrine indicating that an employer may be held liable ...
Related Articles
  1. Insurance

    Exploring Advanced Insurance Contract Fundamentals

    Understanding your contract can help you protect our family's financial security.
  2. Insurance

    Understanding Your Insurance Contract

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

    Real Estate Flipping: 8 Disclosures You Must Make

    If you don't tell potential buyers about these situations and possible hazards, you could find yourself in court. Here's how to profit – and stay out of trouble.
  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. Insurance

    10 Hurdles To Closing On A New Home

    It's the biggest purchase of your life - find out what can go wrong before you even close the deal.
  7. 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.
  8. 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.
  9. 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. How are arm's-length transactions determined by law?

    Determine if transactions are conducted at arm's length by checking if the parties to a contract are independent and transact ... Read Answer >>
  3. 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 >>
  4. 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 >>
  5. Is a private company required to disclose financial information to the public?

    Understand whether a private company is required to disclose financial information to the public. Learn what is required ... Read Answer >>
Hot Definitions
  1. Debt Security

    Any debt instrument that can be bought or sold between two parties and has basic terms defined, such as notional amount (amount ...
  2. Taxable Income

    Taxable income is described as gross income or adjusted gross income minus any deductions, exemptions or other adjustments ...
  3. Chartered Financial Analyst - CFA

    A professional designation given by the CFA Institute (formerly AIMR) that measures the competence and integrity of financial ...
  4. Initial Coin Offering (ICO)

    An Initial Coin Offering (ICO) is an unregulated means by which funds are raised for a new cryptocurrency venture.
  5. The Bernie Madoff Story

    Bernie Madoff ran a multibillion-dollar Ponzi scheme that is considered the largest financial fraud of all time.
  6. Pyramid Scheme

    An illegal investment scam based on a hierarchical setup. New recruits make up the base of the pyramid and provide the funding, ...
Trading Center