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

8.18 The first approach is more certain; the second is more flexible. It is more
adaptable to new methods of sales and product information. Given the FSA’s
current emphasis towards a more principles-based approach, with fewer detailed
rules, we are inclined to favour the second approach. This would mean that a
court would be left to decide whether the insurer had met its obligation to bring
the warranty or similar obligation to the policyholder’s attention, having regard to
any rules or guidance specified by the FSA.
8.19 In consumer insurance, we provisionally propose that an insurer may only
refuse a claim on the grounds that the insured has broken a warranty if it
has taken sufficient steps to bring the requirement to the insured’s
attention. In deciding whether the insurer has taken sufficient steps, the
court should have regard to FSA rules or guidance.
8.20 It is equally important for business insurance that the insured is made clearly
aware of their obligations. We have wondered whether the way in which the
written statement has to be presented should be regulated even for business
insurance. For example, a warranty could be required to be set out in a schedule
to the policy, along with the summary of the cover. However, we think it is better
to apply a more flexible approach. This would be to provide that where the written
statement of the warranty is merely one of the standard terms of the policy, it
should be subject to a general control. The insurer would not be able to rely on it
if it had the effect of making the cover substantially different to what the insured
reasonably expected. We explore this proposal below. 7
REQUIRING A CONNECTION BETWEEN THE BREACH AND THE LOSS
8.21 The greatest and most obvious problem with the law on warranties is that it
permits the insurer to escape liability for technical breaches that have nothing to
do with the loss in question.
8.22 We think there is a need to introduce some form of causal connection test to
protect policyholders from unfair treatment. An insured may readily agree to a
warranty that their sprinkler system will be inspected, believing that if the failure
of the sprinkler system causes a loss they will not be indemnified. However,
policyholders would not understand this to mean that the insurers would refuse to
pay if the breach were later remedied, or if the loss were totally unconnected with
the sprinklers. This result defies logic and normal expectations, is inconsistent
with good practice as recognised by the industry’s own Statements of Practice
and risks bringing the UK insurance industry into disrepute. Whether we are
discussing consumer or business insurance, the current law can properly be
described as unjust.
8.23 We provisionally conclude that the law for both consumer and business insurance
should afford policyholders some protection against claims being denied for a
breach of warranty unconnected with the loss.
7 See para 8.54 to 8.80 below.
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