What is 'Uberrimae Fidei Contract'

An uberrimae fidei contract is a legal agreement requiring the highest standard good faith. "Uberrimae fidei" or "uberrima fides" is Latin for "utmost good faith." Insurance contracts are the most common type of a uberrimae fidei contract. Because the insurance company agrees to share the risk of loss with the policyholder, it is imperative that the policyholder act in good faith by fully disclosing all information that affects the insurance company's level of risk. Full disclosure allows the insurer to protect itself by charging the policyholder a premium that accurately reflects the level of risk it is undertaking or even refusing to issue a policy if the risk is too high.

BREAKING DOWN 'Uberrimae Fidei Contract'

Because the insurance applicant often has more information about the risk that is being insured against than the insurer does, the principle of uberrimae fidei is used in an attempt to eliminate moral hazard. For example, someone applying for health insurance knows more about their eating habits, exercise patterns, family medical history and personal medical history than the potential insurer does. In order to determine how risky the applicant is, the insurer requires him or her to honestly answer a medical questionnaire and submit to a review of medical records before being approved for a policy. If the policyholder is later found to not have acted in utmost good faith at the time of application, his policy and benefits can be rescinded.

History and Role of Uberrimae Fidei

The principles of Uberrimae Fidei were first expressed by Britain's Lord Mansfield in the case of Carter v Boehm (1766). He said, "Insurance is a contract of speculation... The special facts, upon which the contingent chance is to be computed, lie most commonly in the knowledge of the insured only. The underwriter trusts to his representation, and proceeds upon confidence that he does not keep back any circumstances in his knowledge, to mislead the underwriter into a belief that the circumstance does not exist... Good faith forbids either party by concealing what he privately knows, to draw the other into a bargain from his ignorance of that fact, and his believing the contrary."

Uberrimae fidei is seen as the foundation of a reinsurance contract. In order to make reinsurance affordable, a reinsurer cannot duplicate costly processes, such as insurer underwriting and claim handling costs. They must rely on the primary insurer’s ability to complete these tasks adequately. In return, a reinsurer must appropriately investigate and reimburse an insurer’s good faith claim payments.

RELATED TERMS
  1. Bad Faith Insurance

    Bad faith insurance refers to a number of ways insurance company ...
  2. Cooperation Clause

    An insurance contract clause that requires the policyholder to ...
  3. Underwriting Risk

    Underwriting risk is the risk of loss borne by an underwriter ...
  4. Experience Refund

    Experience refund is the portion of an insurance company’s premiums ...
  5. Insurance Premium

    An insurance premium is the amount of money that an individual ...
  6. Reinsurance Recoverables to Policyholder ...

    The amount of incurred losses covered by reinsurers compared ...
Related Articles
  1. Insurance

    Understanding your insurance contract

    Learn how to read one of the most important documents you own: your insurance contract.
  2. Financial Advisor

    Mutual Vs. Publically Traded Insurance Companies

    Should you buy your insurance policy from a mutual or publically traded insurance company?
  3. Insurance

    The History of Insurance in America

    Insurance was a latecomer to the American landscape, largely due to the country's unknown risks.
  4. Insurance

    When Things Go Awry, Insurers Get Reinsured

    Guru Warren Buffett is making this sector popular. Learn more here.
  5. Insurance

    Understanding Taxes on Life Insurance Premiums

    Learn about the tax implications of life insurance premiums, including when they might be taxable and whether they are tax deductible.
  6. Insurance

    Examples of Adverse Selection in the Insurance Industry

    Find out what the term "adverse selection" refers to in the insurance industry, and learn how insurance companies protect themselves from adverse selection.
  7. Investing

    Elements of Insurable Risks: A Quick Guide

    Explore the elements of insurable risk: due to chance, measurable and definite, predictability, noncatastrophic, random selection and large loss exposure.
  8. Insurance

    Can I Get Life Insurance?

    Find out what you can do to get the coverage you need for the right price.
  9. Insurance

    Is Loan Protection Insurance Right For You?

    Loan protection insurance can keep you from defaulting on your loans when you're in financial trouble, but it's not for everyone. Learn more on how it can help you.
RELATED FAQS
  1. Can your insurance company cancel your policy without notice?

    Learn about your rights as an insured when it comes to your insurance policy being canceled, including how to access your ... Read Answer >>
  2. Why do insurance policies have deductibles?

    Learn the basic concept of an insurance deductible and why they mitigate moral hazards and provide financial viability to ... Read Answer >>
  3. What are some examples of when insurance bundling is a bad idea?

    Learn about situations where insurance bundling may not be a favorable option. Bundling insurance is often a good idea, but ... Read Answer >>
Hot Definitions
  1. Financial Risk

    Financial risk is the possibility that shareholders will lose money when investing in a company if its cash flow fails to ...
  2. Enterprise Value (EV)

    Enterprise Value (EV) is a measure of a company's total value, often used as a more comprehensive alternative to equity market ...
  3. Relative Strength Index - RSI

    Relative Strength Indicator (RSI) is a technical momentum indicator that compares the magnitude of recent gains to recent ...
  4. Dividend

    A dividend is a distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders.
  5. Inventory Turnover

    Inventory turnover is a ratio showing how many times a company has sold and replaces inventory over a period.
  6. Watchlist

    A watchlist is list of securities being monitored for potential trading or investing opportunities.
Trading Center