Which principle holds that the insurer relies on the truthfulness of the applicant and in return promises and has the ability to pay claims?

The principle that best captures the insurer's reliance on the truthfulness of the applicant and the subsequent promise to pay claims is "utmost good faith." This principle, also known by its Latin term "uberrima fides," requires that both parties in an insurance contract operate with a high level of honesty and integrity.

In the context of insurance, the applicant must provide accurate and complete information during the application process, as this information directly affects the insurer's decision to provide coverage and the terms of that coverage. The insurer, in return, commits to honoring the policy and paying legitimate claims. This relationship underscores the importance of disclosure and transparency between the insurer and insured.

By practicing utmost good faith, the insurance company can assess risk accurately, and the insured can feel confident that claims will be paid promptly if all terms of the policy are adhered to. Therefore, this principle ensures that both parties uphold their obligations, fostering trust and reliability in their contractual relationship.