Insurance Contracts CP - Law Reform Commission

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CHAPTER 5
WARRANTIES
A
Introduction
5.01 The use of warranties in insurance contracts has been a controversial subject for over 200
years. 1 Insurers defend the practice of securing contractual promises from proposers on the basis that
the principle of freedom of contract legitimises the practice, arguing that warranties provide an insurer
with effective protection from fraudulent proposers and assist the insurer in fixing or circumscribing the
risk. Warranties have been attacked as being traps for proposers (and concealed traps at that) 2 and
mechanisms whereby an insurer may extract binding promises from proposers on a wide range of
undiscoverable and irrelevant facts which can serve to allow the insurer to avoid paying out on the policy.
While insurers acknowledge that warranties are capable of operating harshly where the proposer has
acted bona fide (in such cases insurers indicate that industry practice is not to invoke a warranty which
has no causal link to the loss occasioned) 3 all major common law jurisdictions have either legislated to
restrict the operation of contractual warranties or are in the process of doing so. 4
5.02 In Part B, the Commission examines the law relating to warranties in general and suggests a
number of reform proposals. The Commission then examines in Part C the specific issues of causation,
the response of the PEICL to promissory warranty provisions and the relationship between promissory
warranties and exclusions.
B
Warranties in General
5.03 Warranties clearly have draconian effects when the proposer is being required to warrant the
truth of all facts provided to the insurer. In such a context the Supreme Court, in Farrell v South East
Lancashire Insurance Co 5 held that materiality is irrelevant in such a case; Kennedy CJ remarked that this
is ―undoubtedly a very hard case‖ but the Supreme Court was unable to lessen the impact of the law on
the proposer. However, not all warranties are objectionable or have such oppressive consequences.
5.04 In the 19 th Century the Irish judge Palles CB expressed the view that temporal restrictions
which can be viewed as promissory warranties are the subject of rules of interpretation that require such
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Eg. Hasson, ―The Basis of the Contract Clause in Insurance Law” (1971) 34 MLR 29 traces the shift in
bargaining power over the centuries; Clarke, ―Insurance Warranties: the absolute end?‖ [2007] LMCLQ 474;
Soyer, ―Reforming Insurance Warranties – Are we finally moving Forward?” In Soyer, Reforming Marine and
Commercial Insurance Law (Informa Law 2008).
In the 2007 Consultation Paper the Law Commissions observed that ―insurers use warranties for a number of
purposes: to provide an additional remedy if information given by the proposer was incorrect; as an alternative
method of defining the risk; to require the insured to take specified precautions; and to allow the insurer to
escape from the contract should there be a change in the risk. This is possible because the wide variety of
obligations on the insured can be given warranty status if the contract makes this sufficiently clear.‖
Eg Hasson, ―The Basis of the Contract Clause in Insurance Law” (1971) 34 MLR 29; see also the IIF Code of
Practice on Non Life Insurance which provides: ―Neither the proposal form nor the policy shall contain any
general provision converting the statements as to past or present fact in the proposal form into warranties.
But insurers may require specific warranties about matters which are material to the risk.‖ But see Buckley;
―Self Regultation does not work” [2005] CLP 10.
Eg New Zealand, Insurance Reform Act 1977; Australia, Insurance Act 1984. Canadian law does not have a
uniform approach. Warranties are virtually unknown to continental insurance contracts.
[1933] IR 297.
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