What is the core principle behind the need for 'good faith' in insurance contracts?

• A. To minimize claim processing time
• B. To establish trust between parties
• C. To ensure maximum compensation
• D. To enforce strict penalties for fraud

Answer: (B)

The core principle behind the need for 'good faith' in insurance contracts is to establish trust between parties. Good faith ensures that both the insurer and the insured act honestly and fairly towards each other. This mutual honesty is essential because insurance contracts are often based on a premise of reliance. The insured relies on the insurer to provide coverage as promised, and the insurer relies on the insured to provide accurate information and comply with the terms of the policy.

In the context of good faith, the insurer is expected to handle claims efficiently and fairly, while the insured must disclose all relevant information honestly and refrain from fraudulent activities. This principle is fundamental in maintaining the integrity of the insurance relationship, fostering cooperation, and ultimately ensuring that the insurance system functions effectively. When trust is established and maintained, it benefits both parties, leading to smoother claims processing and a more stable insurance market.