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

…subject to any express provision in the policy, the insurer is
discharged from liability as from the date of the breach of warranty,
but without prejudice to any liability incurred by him before that date.
If an insurer is automatically discharged from liability from the date of the breach,
it cannot logically be liable to pay a subsequent loss unconnected with the
breach. Thus under our proposals, section 33(3) of the 1906 Act would have to
be replaced. The question is what to put in its place, and how this would affect an
insurer’s right to bring a policy to an end following a breach of warranty.
Separating past claims from future cover
8.82 In 1980 the Law Commission said that the issue of past claims and future
repudiation should be treated separately. An insurer should be able to pay past
claims and repudiate the policy for the future; it should also be entitled to reject
claims, without repudiating in the future. We agree. Under the proposals already
outlined, a breach of warranty would allow the insurer to refuse a claim
connected with the breach, though (unless the contract provided otherwise) it
would remain liable to pay unconnected claims. This is a separate question from
the insurer’s right to terminate the policy for the future.
A right to repudiate
8.83 We think the consequences for a breach of warranty should be brought closer to
normal contract principles. Normally, one party is only able to repudiate a
contract for another’s breach if the breach has serious consequences, 32 or this
has been agreed in advance. Furthermore, a breach does not automatically bring
a contract to an end. Instead, it gives the other party the choice. When an injured
party becomes aware of the breach, it may either decide to repudiate the contract
or to affirm it and continue with the relationship.
8.84 We think this brings the law closer to reasonable expectations. The insured would
not reasonably expect the insurer to have the right to terminate the contract for a
breach of the policy terms unless the breach had serious consequences or the
contract expressly provided for cancellation.
Notice
8.85 In Issues Paper 2 we asked whether the insurer should have to give notice before
it terminated a policy for breach of warranty. There was some support for this,
because otherwise an insured may be left unexpectedly without cover.
8.86 In Australia, the insurer cannot bring a contract to an end as a result of the
breach, but it is entitled to terminate the contract using a cancellation clause.
Under section 59 of the Insurance Contracts Act 1984, the insurer must give at
least three days notice in writing. In Norway, circumstances covered by a
warranty would normally be considered as an alteration in the risk. This would
permit the insurer to terminate the contract, but only after 14 days notice. 33
32
As under the approach in Hong Kong Fir Shipping Co v Kawasaki Kisen Kaisha [1962] 2
QB 26.
33 Norwegian Marine Insurance Plan 1996, ss 3-10.
203