Doctrine Of Utmost Good Faith
Categories: Regulations
The Doctrine of Utmost Good Faith is one of those general "societal contracts" that we need in order to keep our society functioning. The Doctrine of Utmost Good Faith asks everyone, "when y'all are making deals with one another, please, please act honestly and provide each other will the information you have...no misleading or withholding key information. K thxxx."
You might have heard of adverse selection, which, in short, is when two parties are cutting a deal and have asymmetric information. Adverse selection means someone's not telling something; either the buyer is hiding something about themselves or the seller is hiding something about the product quality.
A classic case of adverse selection is insurance, which requires buyers to accurately explain how risky a lifestyle they lead. Eccentric livers, living Bon Jovi-style, on the edge...are incentivized to downplay their lifestyle for cheaper insurance premiums. Likewise, insurance companies are incentivized to provide the least amount of coverage they can for the most money, and all that fine print isn't really accessible to your average Joe. Or John.
You can see how the Doctrine of Utmost Good Faith is really key for insurance markets, making it one of the most important tenets of insurance law. The Doctrine of Utmost Good Faith is also important for the financial industry, where borrowers and sellers of debt and other financial instruments should be telling the truth so that neither side gets screwed over by the other.