Registered Insurance Brokers of Ontario (RIBO) Practice Exam

What principle requires insurance contracts to be based on complete honesty?

1. Principle of Indemnity

2. Principle of Insurable Interest

3. Utmost Good Faith

4. Principle of Subrogation

The correct answer is: Utmost Good Faith

The principle that requires insurance contracts to be based on complete honesty is known as "Utmost Good Faith." This principle mandates that both parties involved in an insurance contract—the insurer and the insured—must act in good faith and disclose all material facts relevant to the insurance coverage. This means that the insured must provide truthful and comprehensive information about their risk, and the insurer must clearly communicate the terms of the policy. Utmost Good Faith is fundamental because it ensures transparency and builds trust in the insurance process. When one party withholds information or misrepresents facts, it can lead to disputes later on, often resulting in claims being denied or the contract being voided. In contrast, the principles of indemnity, insurable interest, and subrogation have different focuses in the context of insurance. Indemnity refers to the principle that insurance should restore the insured to the financial position they were in prior to a loss. Insurable interest requires that the insured have a legitimate interest in the safety of the item being insured to prevent gambling on losses. Subrogation allows insurers to step into the shoes of the insured to recover costs from a third party responsible for the loss. Each of these principles plays a crucial role in the functioning of insurance contracts, but it