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. Continuity Of Business Enterprise ...

    A taxation principle applicable to corporate mergers and acquisitions. ...
  3. Real Bills Doctrine

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

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

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

    A legal interpretation in contract law where contracts are only ...
Related Articles
  1. Insurance

    Exploring Advanced Insurance Contract Fundamentals

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

    Top 10 Common Mortgage Scams To Avoid

    How do you know which companies to avoid? Look for these telltale signs.
  8. 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.
  9. 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.
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. 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 >>
Hot Definitions
  1. Dividend Yield

    A financial ratio that shows how much a company pays out in dividends each year relative to its share price.
  2. Fixed-Income Security

    An investment that provides a return in the form of fixed periodic payments and the eventual return of principal at maturity. ...
  3. Free Cash Flow - FCF

    A measure of financial performance calculated as operating cash flow minus capital expenditures. Free cash flow (FCF) represents ...
  4. Leverage Ratio

    Any ratio used to calculate the financial leverage of a company to get an idea of the company's methods of financing or to ...
  5. Two And Twenty

    A type of compensation structure that hedge fund managers typically employ in which part of compensation is performance based. ...
  6. Market Capitalization

    The total dollar market value of all of a company's outstanding shares. Market capitalization is calculated by multiplying ...
Trading Center