Misrepresentation, Non-Disclosure and Breach ... - Law Commission

5.124 Is one approach better than the other, or should the parties be free to choose
either? We have not found this an easy question to answer, and our thinking on it
has changed over time. 26 Our conclusion is that the parties should be free to use
either method.
(1) They should be free to agree that the insurer will have one or more
specified remedies for misrepresentation even if the proposer was
neither dishonest nor careless in giving the information.
(2) They should also be free to obtain a warranty from the proposer that the
statements are correct. This would give the insurer the right to refuse
claims where a fact turned out to be untrue, even if the insured had
behaved honestly and carefully.
5.125 Both types of term should be subject to the controls on the use of standard terms
set out below.
The legal effect of warranties: materiality and causal connection
5.126 In 1980, the Law Commission recommended that specific warranties as to past or
existing fact would only be effective if the warranty was material (though there
would be a presumption that it was material). As we explain in Part 7, it also
recommended that an insured should have a right to be paid a claim if there was
no causal connection between the breach of warranty and the claim. Thus it
would be open to the insured to show that the warranty was intended to
safeguard against a different risk, or did not increase the risk that the loss would
occur in the way in which it did. 27
5.127 Returning to our example in which the insured warranted that its staff had no
criminal convictions: is it right that any conviction should allow the insurer to
refuse claims, even if:
(1) the conviction was so minor as to be immaterial (such as a speeding
conviction);
(2) the claim was for some other type of risk (such as storm damage); or
(3) the conviction had no connection with the claim (as where an employer
makes a claim under a theft policy following a theft by employee A who
has no previous convictions, but another employee, who acted entirely
honestly on this occasion, has a previous conviction for dishonesty)?
26 In the first Issues Paper, we suggested that the parties to a business insurance contract
should be free to modify the rules on misrepresentation. In the second Issues Paper we
suggested that the same rules should be made mandatory, because a clause in the
agreement along the lines of “section x of the Insurance Contract Act 20xx shall not apply
to this contract” would leave most insureds none the wiser. We now take the view
explained in the text.
27
Insurance Law, Non-Disclosure and Breach of Warranty (1980) Law Com No 104, para
10.36.
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