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

7.45 It is our conclusion that although the UTCCR, the FSA Rules and the FOS offer
valuable protection to consumer insureds in relation to breaches of warranty,
there is a clear need for reform of the underlying law in consumer insurance
cases.
Business insurance
7.46 The problems with the law on breach of warranty also apply to business insureds.
In fact, the practical problems faced by businesses are often more serious, as
they do not receive protection from UTCCR or from FSA rules.
7.47 We do not think it accords with the expectation of any class of insured that the
insurer should be discharged by an immaterial breach of warranty, or one that
has been cured before any claim arose. Nor would policyholders reasonably
expect a claim to be rejected on the ground of a breach of warranty that had no
connection to the loss. We propose below that the parties should be able to
agree expressly that a breach of warranty should have such consequences.
However, we do not think that this should be the “default” rule for breach of
warranty.
7.48 The only protection for insured businesses lies in inviting the court to construe a
term to give it a fair meaning. The courts are often prepared to do this,
sometimes finding ambiguities in the words used, or that the parties cannot have
intended them to have the effect of a warranty, even when the words appear firm
and clear. 28 However, we do not think that this is an adequate substitute for law
reform. The process of re-interpreting the effect of contractual terms can cause
considerable complexity and difficulty. 29 And in some cases the courts are
prepared or feel constrained to give terms their traditional (harsh) meaning. 30
7.49 The problems caused by the harshness of the law can affect any business, but
they appear most severe for small and medium businesses. They may not
understand the importance of words such as “warranty” and, even if they do, they
lack the bargaining position to change the insurer’s standard wording.
Furthermore, they may lack resources to argue cases before the courts. Insurers
may therefore be able to use the harshness of the law as set out in the 1906 Act
as a negotiating tool.
28
The clearest example of this is Kler Knitwear v Lombard General Insurance Co [2000]
Lloyd’s Rep IR 47.
29 The problems are illustrated by the case law relating to a notification clause, where
different views have been reached about when a notification clause may be considered an
innominate term: see Alfred McAlpine Plc v BAI (Run-Off) [2000] I Lloyd’s Rep 437 and
Friends Provident Life and Pensions v Sirius International Insurance [2005] 2 Lloyd’s Rep
517, [2005] EWCA Civ 601.
30 See Unipac (Scotland) Ltd v Aegon Insurance 1996 SLT 1197.
182