Uberrima fides (noun, from Latin)

Both insurance and reinsurance contracts are bound under the principle of uberrima fides. For those who slept through those tedious hours of grade-school Latin instruction, the phrase means 'utmost good faith'. It sets out a fundamental principle of the risk transfer industry: really, really fair dealing. For uberrima fides is a step above bog-standard, unqualified fairness, the kind which most business people find sufficient when concluding their contracts.

It is the gold-plated, exceptionally fair kind.

There is a reason for the insurance industry's additional need to trade with all its cards clearly displayed upon the table. In the rest of the commercial world, information is exchanged on a need-to-know basis. In the insurance arena, one needs to know everything about the risk and the cover before a sensible decision can be made. It is a question of defining fortuity: the known unknowns must be specified in detail, and only the unknown unknowns can remain outside the uberrima fides relationship. Consequently, in insurance the whole deal is off if any pertinent information has been withheld. In practical terms, both buyer and seller are bound to disclose everything of any importance to the contract. The duty also applies to reinsurance arrangements - a matter of no small interest when disputes arise. For even when a discussion takes place before the courts, uberrima fides applies.

Insurance law

Uberrima fides is much more than a noble idea; it is part of the law of insurance contracts in many countries, from the UK to Australia. For one thing, it requires insurers to act in the insured's interest, even if that interest conflicts with its own (which is rather often the case).

On the other side of the coin, the policyholder must be honest with the insurer, a duty which extends to brokers, in their role as agents of the buyers. This duty is critical during the negotiation of cover, but extends throughout the life of the policy, and includes claims. For example, if someone nicks your car, worth £10,000, and you add £1,500 onto your claim for a non-existent top-of-the-line Blaupunkt hi-fi, your whole claim is void, even if your car was really stolen. A case of uberrima fides or bust.

The application of uberrima fides is very old, and like most of the weird stuff in insurance, it comes from the marine market. In the years before wireless application protocols and real-time white-boarding, underwriters had to rely entirely on the data which their clients transmitted to them conventionally. For obvious reasons, when a 17th-century risk trader in Edward Lloyd's coffee house said the East India company had captured two new ships in the Dutch East Indies with such-and-such specifications, and wanted them covered on a risks-attaching basis, the insurer had little choice but to take his word for it, since the opportunity to survey was minimal. Likewise, if Nathaniel said he lost his nutmeg, the underwriters had little opportunity for verification (beyond the possibly scurrilous reports published in Mr Lloyd's 'list').

In law, Lord Justice Mansfield was the first of the UK benchers known to have cited uberrima fides, when he referred to the principle in Carter v Boehm back in 1766. It first came up in a reinsurance dispute 39 years later, in Hastie v DePeyster, which was heard exactly two centuries ago.

For cedants, uberrima fides imposes a need to be forthright and forthcoming about both the exposures to be reinsured, and the claims to be recovered.

For reinsurers, it is a critical principle behind their typical requirement to follow the fortunes, coughing up recoveries regardless of the circumstances, without delving too far into their clients' claims practice.

Real life application

While the idea is nice in theory, it is a bit different in practice.

Lawyers and judges have spent thousands of hours arguing and deliberating (respectively) over its proper application in real life. Sometimes their decisions have been surprising. For example, Manifest Shipping v Uni-Polaris (the infamous 'Star Sea' case) revolved around claims for a ship that caught fire. The insurers used the uberrima fides defence (as codified in Section 17 of the Marine Insurance Act 1906), complaining that the principle imparted a duty on the insured to give the underwriter copies of some papers explaining why the Star Sea's sister vessels had also gone up (or, rather, down) in flames, something which the good owners of the fair vessels failed to do.

In its wisdom, the House of Lords concluded that the insureds were guilty only of gross negligence, and not a breach of the duty of utmost good faith. Today, culpable non-disclosure is not sufficient grounds to avoid an insurance contract, which some would argue has watered-down the concept.

Many people now bemoan this deterioration, but uberrima fides is still a very critical component of the reinsurance relationship. Certainly lawyers are unlikely to abandon it: they can argue for hours over a principle that has been crystal-clear to everyone else for centuries.