What does the principle of utmost good faith in insurance contracts require?

The principle of utmost good faith, known as "uberrima fides," mandates that both parties involved in an insurance contract act with honesty and transparency. This principle is foundational in insurance as it seeks to ensure that all material facts relevant to the risk being insured are disclosed. By requiring truthfulness and full disclosure from both the insurer and the insured, the principle aims to foster trust and prevent one party from misleading the other, thus ensuring that the terms and conditions of the insurance coverage are based on accurate and complete information.

In practice, this means that the insured must provide all relevant information about the risks associated with the policy, while the insurer must clearly communicate the terms, coverage, and limitations of the policy to the insured. This mutual obligation of disclosure helps to avoid disputes later on when a claim is made, as both parties have acted in good faith throughout the contractual relationship.

Other options, such as disclosing risks only by the insurer or limiting disclosures to financial data, do not encapsulate the bidirectional aspect of the principle. Additionally, only relying on verbal agreements does not uphold the formalities and clarity required in insurance contracts, which are typically documented in written form. Thus, the correct response reflects the essence of the principle of utmost good faith as