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

7.36 In this case, the self-employed builder had caused a serious fire to his client’s
premises. The insurer argued that it was not liable because the builder had not
taken several of the precautions he should have taken in his use of a blow torch.
One of their arguments was that the warranty required the insured to have a
portable fire extinguisher with him “at each area of work”. The complainant had a
portable fire extinguisher at the premises, but it was not in the room where he
was working. However, one of the client’s fire extinguishers was nearby, and was
used. Unfortunately, however, the fire had started underneath the exterior
flashing and was already out of control by the time it was discovered. The
ombudsman eventually found for the builder, and gave short shrift to the insurer’s
argument concerning the fire extinguisher:
Given the fire extinguisher that was nearby… I am not persuaded that
the complainant failed to comply with this part of the warranty.
7.37 We think it would be rare for insurers to refuse claims solely for breaches of
warranty that have no connection with the claim. However, if the law permits
technical defences, some insurers will make use of them when they have other
reasons to refuse claims. The FOS may well use its discretion to reject such
technical defences, but they add to the cost and complexity of resolving disputes.
It can also damage the reputation of the industry if insurers are seen to be nitpicking
over irrelevancies.
Business insurance
7.38 With the exception of those small businesses (less than £1m turnover) to which
the FOS is prepared to apply the same rules as it applies to consumers, 22
business insureds are subject to the full rigour of the law of warranties. They are
not protected by the Unfair Contract Terms Act 1977, which exempts insurance
contracts from its provisions. This is unlike other types of contract, where those
who deal on the other party’s standard terms of business are granted protection
against unfair terms, which undermine reasonable expectations. 23
EVALUATION OF THE PRESENT POSITION
7.39 In 1980 the Law Commission described the law on breach of warranty as wrong
and unjust. 24 We agree. It is wrong because it does not accord with policyholders’
reasonable expectations. If a policyholder is slow in repairing a fire alarm, they
may well know that their fire cover will be suspended while the problem persists.
However, those unfamiliar with the niceties of insurance law are unlikely to
realise that they will continue without fire insurance after the alarm has been
fixed. Nor are they likely to realise that this may also invalidate their flood cover.
22 See para 1.34 above.
23 See para 8.4 below.
24
Insurance Law, Non-Disclosure and Breach of Warranty (1980) Law Com No 104, para
6.9.
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