Information Asymmetry in Insurance Contracts and “the Weaker Party”

Duty of Good Faith Disclosures in India

Abstract

Adverse selection for insurers which arises due to asymmetric information in the insurance market is unquestionably a barrier for efficient insurance contracts. The insurance economics literature postulates that the insurance company suffers from a lack of information which can be harmful to its financial health. In Carter v. Boehm (1766) 97 E.R. 1162 which formulated the concept of good faith, the C.J. Lord Mansfield, observed that “in insurance contracts good faith forbids either party by concealing what he privately knows, to draw the other into a bargain from his ignorance of that fact, and his believing the contrary”. This article examines the contractual duty of good faith disclosures in life and health insurance during contract negotiations in the law of India. The findings underline significant problems in regard to insurability resulting from information asymmetry between the parties and inaccurate risk assessment. It is asserted that the focus should be on establishing a balanced regime which protects the interests of both the insured and insurer. In conclusion this would lead to some concrete suggestions for more deliberation.