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

8.51 For business insurance it is arguable that it should be possible to alter the rule by
agreement. We find it hard to envisage a case in which the insurer would have a
legitimate reason for turning down a claim that had arisen after the insured had
failed to take some precaution such as maintaining an alarm, if there was
absolutely no connection to the loss. However in Part 5 we noted that insurers
occasionally use warranties of existing fact as a way of defining the risk that they
are prepared to undertake. Thus a ship may be warranted as having a particular
classification because the insurer is unwilling to underwrite any other class of
ship, whether for losses connected to the class or not. The same approach may
sometimes be used in relation to future changes of circumstances: the ship must
continue to have its classification. It would be open to the parties to include a
term by which the insured “warranted” that a ship would retain a classification,
and which then spelled out in clear terms that as soon as the ship lost its
classification, the insurer’s liability would cease.
8.52 The first safeguard is that clear words should be required to alter the rule. That
seems self-evident. However, a number of those who have given us views on the
reform of warranties have urged a stronger approach. This is that when the
relevant term is merely one of the insurer’s standard policy terms, it does not
make the cover substantially different from what the insured reasonably
expected. We return to this issue below.
8.53 We provisionally propose that in business insurance the parties should be
free to vary the rules on the effect of a breach of warranty by agreement.
However, where the insured contracts on the insurer’s standard terms,
there should be safeguards to ensure that the term does not make the
cover substantially different from what the insured reasonably expected.
A “REASONABLE EXPECTATIONS” APPROACH
8.54 In Issues Paper 2 we considered an alternative to a wide causal connections test.
We had called it an “unfair terms” approach, because it was based on UCTA.
Initially, we rejected this approach as too uncertain but, as we have indicated,
consultees urged us to look at it again.
8.55 The test we are now provisionally proposing asks whether the effect of the term is
that the cover is substantially different from what it was reasonable for the
insured to expect to be covered in the circumstances. It would apply only where a
business insured contracted on the insurer’s written standard terms of business.
8.56 We have seen that a similar rule already applies in consumer insurance, where
the UTCCR requires terms other than the main definition of the subject matter to
be fair. We have suggested that unexpectedly narrow definitions of the risk and
unexpectedly wide exclusions can be challenged under the Regulations. 19
However, there is no similar protection for commercial insurance.
19 See Part 3 above.
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