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

8.24 Although our general policy is clear, difficult questions arise about how this policy
should be implemented. There are two issues: deciding which types of clause the
causal connection test should apply to, and defining the nature of the causal
requirement.
8.25 There are several possible models to follow. In 1980 the Law Commission
recommended reforms that would apply only to warranties. It thought that an
insured should be able to challenge the insurer’s decision not to pay a claim if
there were shown to be no links between the breach and the loss.
8.26 Similarly both New Zealand and Australia have enacted statutes requiring a
causal connection. However, unlike the 1980 report, they are not confined to
warranties but apply to any term which limits liability for events or circumstances
likely to increase the risk of a loss. Here we look first at the scope of any reform
and then at how to define the causal connection.
The scope of the reform: distinguishing between warranties and other
types of term
8.27 The 1980 Report applied only to warranties, that is to terms phrased in a way
which placed an obligation on the insured. For example, if the insured “warranted
to maintain the car in a roadworthy condition”, then a causal connection would be
required. Take the case where the car was not roadworthy because a headlight
was defective, but the accident occurred in broad daylight. It would be open to
the insured to argue that a fault with the headlights could not have increased the
risk of a loss. However, if the same provision were expressed as an exception or
description of the risk (that the insurance only applied “while the car was
roadworthy”) then the insured could not take advantage of the defence. The
insurer could refuse the claim. Birds and Hird argued that this was a major flaw
with the 1980 recommendations. The reform would merely encourage insurers to
find other means of achieving the same ends. 8
8.28 Under current law, the effect of a breach of warranty is usually more serious than
the effect of breach of another term. A “condition precedent to liability” under the
policy has the same effect as a warranty; if the condition is not complied with, the
insurer is discharged from liability as from the date the non-compliance started,
and so there need be no connection between the non-compliance and any
subsequent loss claimed. 9 In contrast, “conditions precedent to a claim” and
“exceptions” do not result in the discharge of the insurer. The insured is simply
not covered for the particular claim or for claims that arise while the exception
applies. They are temporal exceptions: if for example, cover is dependent on a
car being roadworthy, when the car is repaired, liability resumes. Nonetheless,
these types of term may operate in a way that the insured reasonably does not
expect, because again there may be no connection between the condition or
exception and the loss. For example, we do not think that an insured would
reasonably expect to lose all motoring cover, even for daylight driving, simply
because the car has a defective headlight.
8
J Birds and NJ Hird, Birds Modern Insurance Law (6 th ed 2004) p 166, note 36.
9 Conn v Westminster Motor Insurance [1966] 1 Lloyd’s Rep 407.
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