Why is an insurance contract considered a contract of utmost good faith?

An insurance contract is considered a contract of utmost good faith because it relies heavily on mutual trust and transparency between the insurer and the insured. This principle, known as "uberrima fides," mandates that both parties disclose all relevant information truthfully, as the insurer's ability to assess risk and set appropriate premiums is based on the information provided by the insured. If either party fails to disclose pertinent information or is misleading, it undermines the integrity of the contract and can lead to disputes or claims being denied.

The nature of insurance involves potential future events that are uncertain, so both parties need to operate on good faith to ensure that the contract remains fair and effective in covering the insured's needs. This trust is foundational because if an insured party withholds information or misrepresents facts, it can significantly affect the insurer's risk assessment and the effectiveness of the coverage. Therefore, the focus on mutual trust and transparency is paramount in establishing and maintaining the contract's validity.