In browsing through Investopedia.com recently, I came on a term that was certainly new to me: An Uberrimae Fidei contract. Here’s what I found: It’s 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 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.
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is later found to not have acted in utmost good faith at the time of application, his policy and benefits can be rescinded.”