What the blessed heck is Utmost Good Faith?

It's an insurance principle that could see your policy treated as if it never existed. And you might have triggered it without knowing. Yikes.

When you’ve filled in the exhaustive forms and answered the tedious questions (and paid your premium), then you’re covered.

But are you really?

What does Utmost Good Faith actually mean?

Every commercial insurance contract in the UK is built on a legal principle called uberrimae fidei. Utmost good faith, for those who didn’t go to Eton. It means that before your insurer agrees to cover you, you have a duty to tell them everything they'd consider relevant to assessing your risk. Not just the things they asked about.

That's a bigger ask than it might sound.

A bit of history

The principle goes back to 1766 and a case called Carter v Boehm, in which Lord Mansfield established that insurers rely almost entirely on what the insured tells them. They can't inspect your business, audit your processes or verify your claims before agreeing to cover you. So the law places the burden on you to be completely straight with them.

For nearly 250 years, the consequence of getting this wrong was pretty brutal: your insurer could void the entire policy and walk away, even if the thing you failed to disclose had absolutely naff-all to do with the claim you were making.

It took until 2016 for that to change.

The Insurance Act 2015: marginally better, still tricky

The Insurance Act 2015 swooped in and replaced the old all-or-nothing approach with something called a "duty of fair presentation." Proportionate remedies. Progress, allegedly.

But do not read that as good news and move on. Here is what proportionate actually means in practice:

If your non-disclosure was deliberate or reckless, your insurer can still void the policy entirely, keep your premium and refuse the claim.

If it was innocent, the insurer can still reduce your payout proportionately based on what they would have charged or done had they known the full picture. They can also apply different terms to your policy retrospectively.

And here is the bit that can catch you out. You are expected to disclose not just what you know, but what you ought to know. That doesn’t mean you have to be some sort of insurance Nostradamus, though.

Disclosure should include information held elsewhere in your organisation that a reasonable search would have turned up. So "I didn't know about that" is not a get-out-of-jail card. Just be thorough.

A practical example

A director at a growing tech company is facing criminal charges. Unrelated to the business. Eventually dropped, never resulted in a conviction. The company takes out a D&O policy. Nobody thinks to mention the charges. A claim comes in (oh no). The insurer avoids the policy entirely (oh no, again).

This is not a hypothetical, by the way. A UK court confirmed this outcome under the 2015 Act. The fact that the charges were unrelated to the claim, and eventually dropped, was irrelevant. The insurer would not have issued the policy had they known. That was enough to chuck a spanner in the works.

What counts as a material fact?

Anything a prudent insurer would consider relevant. Yeah, that doesn’t narrow things down. So here’s some common ones that businesses miss:

• Previous claims or incidents, even if no formal claim was never made
• Directors with prior county court judgements (CCJ)
• Regulatory investigations, past or ongoing
• Changes to your business activities since the last renewal
• Significant headcount growth or new service lines
• Operating in new territories

Renewal is where this bites people most often. Customers often tick the "nothing has changed" box. Do you know who doesn’t do that? Customers of REALLY HONEST. We take the time to check first.

Can you protect yourself?

To a reasonable degree, yes.

Work with a broker who asks the right questions at renewal, not just the ones on the form. A good broker will prompt you to think about what has changed, flag anything that might be considered material, and document the disclosure process properly.

If something has happened during the policy year that might be relevant, tell your broker. Mid-term. Do not wait for renewal and hope for the best.

The REALLY HONEST takeaway

The principle exists for a fair reason. Insurers can only price risk based on what they are told, and we cant expect an insurer to go digging around your business themselves.

But the responsibility sits with you more heavily than most founders realise, and the consequences of getting it wrong go well beyond a rejected claim.

Know what you have disclosed. Know what has changed. And if you are not sure whether something is relevant, tell your insurance broker and let them decide.

That is quite literally what we are here for.