What is meant by "utmost good faith" in insurance contracts?

The concept of "utmost good faith" in insurance contracts refers to the obligation that both parties to the contract—namely the insurer and the insured—must act with complete honesty and transparency. This principle is fundamental to the insurance industry to ensure that both parties fully disclose all material facts relevant to the risk being insured.

For insurers, it is crucial to receive accurate information in order to assess the risk appropriately and set premiums accordingly. For insured parties, this means providing truthful information regarding their circumstances, which may influence the coverage provided. Failure to adhere to this principle can lead to disputes, claims being denied, or contracts being voided.

The other options do not accurately reflect the essence of utmost good faith. Keeping financial information secret does not encompass the mutual relationship of honesty expected in the contract. The ability of insurers to change terms after contracts are signed runs counter to the expectations of good faith and fairness in contractual obligations. Lastly, requiring insured parties to seek approval for all claims does not directly relate to the mutual obligations of honesty and transparency which are at the heart of utmost good faith.