Because of the intangible nature of insurance contracts, The Doctrine Of Utmost Good Faith is very much vital in insurance contracts. The insurers will not be able to underwrite a risk properly, or cannot even give a proper judgment on question of underwriting, unless all facts material to the risk are voluntarily disclosed. This is important because the insurers are in the position of trustees and therefore must see that fair & equitable treatments are given to all of their clients.
Indiscriminate underwriting or underwriting without due regards to the importance of disclosing material facts would certainly impair the rating and consequently the amount available from premium would definitely fall short of claims emanating from the policies This will also create a condition where by good clients would go out of the insurance scheme because of increased cost of insurance thereby making insurance business impossible.
Therefore, it is necessary that the proposer, throughout the negotiation period, must disclose all facts material to the risk voluntarily to the insurers. It is no defence that certain facts have not been asked by the insurers. Whether asked or not, if a fact is thought to be material it must be disclosed. Sometimes lot many questions are asked through the proposal forms. Even if all the questions are answered truthfully, nevertheless if something is not asked and the proposer thinks it to be material, he must disclose it.
He must allow the underwriters to apply their judgment in deciding the question of acceptability or otherwise of the risk. It is quite natural and equitable that bad risks should pay more than good risks and, therefore, unless facts are disclosed f properly how this philosophy can be maintained?
Nevertheless, a breach of this becomes imperative to examine the legal status of the insurance contract vis-a-vis the legal position of a claim arising out of such a contract.