There are various principles of life insurance. These are also called essential elements of life insurance, such as:
- insurable interest,
- utmost good faith,
- proximate cause,
- nomination and assignment, and
- return of premium.
‘Utmost good faith’ means that both the parties, insured and the insurer, must be of the same mind at the time of contract because only then the risk may be correctly ascertained. They must make full and true disclosure of the facts material to the risk. Any breach of this duty shall render the contract voidable at the option of the aggrieved party that means the party who has suffered as a result of this breach. In life insurance, the material facts are age, income, occupation, health, habits, residence, family history and plan of insurance. Material facts are determined not on the basis of opinion. Therefore, the insured should disclose not only these matters which the insured may feel are material but all facts which are material. This doctrine also says that there should be full and true disclosure of all material facts. Full and true disclosure means that there should be no concealment, misrepresentation, half disclosure and fraud of the subject matter to be insured.
Since the decision is taken mostly on the basis of subject matter, the life to be insured in the life insurance and the material facts relating to the subject matter are known or is expected to be known by the insured; it is much more responsibility of the insured to disclose the material facts. The insured can not defend on the ground that he had omitted to disclose it by carelessness or by mistake of that he did not regard it material to the contract.
In the absence of utmost good faith, the contract will be voidable at the option of the person who suffered a loss due to non-disclosure. The intentional non-disclose counts fraud and is void and unintentional non-disclosure is void-able at the option of the party not at fault.
In the given situation, to save the $300 premium, Louis lied about his age which is a material fact for the life insurance because it renders a risk greater than normal. It is an intentional non-disclosure, and it is one kind of fraud, and that’s why the contract between Louis and Insurance Company will be void.
As a result, the claim will not be covered by the insurance company because it was a void contract.