What principle requires both parties to act honestly in an insurance contract?

The principle that requires both parties to act honestly in an insurance contract is known as utmost good faith. This principle is fundamental in insurance because it emphasizes that the insurer and the insured must both deal with each other fairly and disclose all relevant information.

In the context of an insurance policy, the insurer must provide clear information regarding the terms, coverage, and limitations of the policy, while the insured must truthfully disclose any pertinent details that could affect the risk assessment, such as previous claims or relevant health information. This mutual honesty fosters trust in the contractual relationship and is essential for the effective functioning of insurance agreements.

By adhering to the principle of utmost good faith, both parties help ensure that the insurance contract operates as intended – providing protection and peace of mind to the insured, while allowing the insurer to underwrite risks accurately based on complete information.