Utmost good faith puts a duty on both sides: each party must communicate in good faith the material facts it knows that the other has no means of finding out (Ins. Code §332). Neglecting to communicate what you know and ought to communicate is concealment (§330). Concealment, whether intentional or unintentional, entitles the injured party to rescind the contract (§331). An honest motive does not save the policy, and no related claim is needed.
Not every fact has to be volunteered. Unless the other party asks, neither side has to communicate (§333):
- facts the other party already knows;
- facts the other party, using ordinary care, ought to know, such as the ordinary hazards of an occupation the applicant listed;
- facts the other party waives, for example when the application says not to list treatment older than a stated number of years;
- facts that prove or tend to prove a risk excluded by a warranty, if not otherwise material;
- facts about a risk excepted from the insurance, if not otherwise material.
These may be left unsaid only until the other party asks about them.
One thing never has to be shared, even when asked: a party's own judgment on the matters in question (§339). An applicant must answer factual questions but need not offer an opinion about them.
Materiality (§334): whether a fact is material depends not on the event, but solely on the probable and reasonable influence it would have on the other party in judging the proposed contract or making its inquiries. A hidden heart condition is material even if the later disability came from a car accident. The same test applies to representations (§360).
When can a party rescind? The CDI outline groups the rescission sections together (§§331, 338, 359, 447): concealment (§331), a false representation on a material point (§359), and violation of a material warranty (§447); the next page covers the last two. Disability income examples are used on these pages on purpose: health insurance policies have their own rescission limits, taught later in the course.