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Utmost Good Faith

"Utmost Good Faith” is a term of art used in the insurance industry. It encompasses a duty imposed by law on all parties to an insurance contract. They must treat each other with complete honesty and fairness at all times. This means means you must consider the other parties’ interests as well as yours. Not ahead of yours, but simply as well as yours.


March 20, 2009
By Neil J. Macdonald

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"Utmost Good Faith” is a term of art used in the insurance industry. It encompasses a duty imposed by law on all parties to an insurance contract. They must treat each other with complete honesty and fairness at all times. This means means you must consider the other parties’ interests as well as yours. Not ahead of yours, but simply as well as yours.

Insurance contracts are complicated documents, but the rationale behind the principle of Utmost Good Faith is straightforward. As an owner/operator of a helicopter, you need to have insurance before you enter the marketplace. You obtain insurance by contacting an insurance broker to come out and meet with you at your facility. 

The broker is generally quite experienced in aviation matters, and knows what to look for, but the person who has the most knowledge is the owner/operator. You know more about your own business than anyone else.  As owner/operator you know the experience level of the pilots and engineers you hire, whether they have had any accidents or whether they have ever been denied insurance coverage; all of these factors are relevant to an insurer’s risk assessment and help determine the value of the insurance premium. 

A broker will certainly ask questions but as owner/operator, if you have information that you are not disclosing, withholding that information could be seen as failing to uphold the duty of Utmost Good Faith, and may result in a claim denial. 

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Much of the aviation insurance business in Canada is underwritten or passes through London in one form or another. Lloyds of London is an insurance market, originally established in 1688 at Edward Lloyd’s coffeehouse, to provide merchants with an opportunity to “share the risk” of loss of their sea vessels. 

Many changes have taken place over the past 300 years, but the general concept of underwriting insurance policies remains remarkably the same. A broker will gather the information from a prospective insured and present the file to an underwriter who will assess the overall risk and determine what will be covered and what premiums will be required. 

This arms-length handling of underwriting risk is another reason for Utmost Good Faith. The underwriter must rely on the information provided by the broker to determine the level of risk on which to base base the insurance premiums. The market relies on trust. 

Once we have an insurance policy in place, we never think about it again – unless a claim arises. Then, as an insured, you have a duty to provide your insurer (through the broker) with a Notice of Loss. The insurer may assign an adjuster to investigate your claim, and may hire a lawyer to assist in the preparation or defence of any litigation that might arise from the loss. This is stated in the insurance contract.

Less certain, however, are those occurrences that, in the first instance, do not seem important enough to prompt us to notify our insurer. These potential claims are equally important to report, as the duty of Utmost Good Faith applies here as well. This grey area is where we, as operators, can find ourselves in the most trouble. Failing to notify an insurer of a possible claim can trigger the same denial of coverage as withholding information would. Imagine passengers involved in a loss who initially say they are fine, but later claim to have developed whiplash or post-traumatic stress disorder. An insurer needs to be able to investigate a claim immediately, when the evidence can still be obtained, and set appropriate reserves for defending and indemnifying the claim. Late notice of a claim may prejudice the insurer’s ability to fully defend on the insurer’s behalf. 

You may be reluctant to alert your insurer for fear that your premiums may increase. However, I would argue that a premium increase pales in comparison to a situation where you are denied coverage and face a huge lawsuit and need to pay the claim if you lose (and the lawyer, win or lose!). 
The key to ensuring that your insurance policy will respond when you need it to is simple: Always act with Utmost Good Faith!


 Neil MacDonald is a lawyer with Harper Grey LLP, practising in Aviation Law. He holds an ATPL-H, and flies part-time as an Air Ambulance pilot. nmacdonald@harpergrey.com.

This is not a legal opinion. Readers should not act on the basis of this article without first consulting a lawyer for analysis and advice on a specific matter.Your feedback on this or any other topic is always welcome. Please contact the editor at dmccarthy@annexweb.com or go to www.helicoptersmagazine.com to post a comment on our blog.


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