Insurance Contracts CP - Law Reform Commission

(3) the basis of contract clause renders issues of materiality and inducement irrelevant whereas
these factors remain relevant to non-disclosure and misrepresentation; and
(4) issues of fraudulent intent, negligence and innocence will be irrelevant in the majority of basis of
contract situations. For example, if a clause expressly provides that breach will render the contract void
do initio and no premiums will be returned, the clause will be effective regardless of the degree of
culpability shown against the proposer.
5.26 In Dawsons Ltd v Bonnin, 64 a motor insurance policy was subject to a basis of contract clause
in which the proposer mistakenly warranted that the vehicle was usually parked on business premises
when it was not; the claim was brought in respect of loss by fire, something that was immaterial to the
question posed. This is also the law in Ireland: Farrell v South East Lancashire Insurance Co. 65
5.27 There are Irish cases where the ―basis of contract‖ clause itself does not appear to operate
harshly because of context: the matters misstated were clearly either done fraudulently or related to
material factors, or both. Misstatements in health insurance that family members had not died through
pulmonary disorders 66 nor that other policies had not been obtained 67 or proposals declined 68 were clearly
material matters. Failure to accurately detail a previous household fire claim was arguably material to a
domestic all risks application. 69 But the real hardship that warranties cause in the context of incorporation
is that most proposers with no specialist knowledge of insurance practice would not understand the
draconian effects that such clauses will trigger because ―basis of contract‖ clauses are terms of art. The
Law Commission‘s 2007 Consultation Paper at paragraph 2.112 clearly condemns the fact that
―An obscure legal device can convert a statement on the proposal form into a warranty. If a
policyholder signs the proposal form stating that they warrant the accuracy of all their answers
or one stating that their answers ―form the basis of the contract‖ then the answers in the
proposal form will be elevated to warranties. This means that the law according to warranties
applies and the insurer is entitled to be discharged from liability if any statement is inaccurate.‖
5.28 That a basis of contract clause can ―trump‖ compliance with the duty of disclosure will
exacerbate the position of the proposer is illustrated by several decisions. In Mackay v London General
Insurance Co 70 the failure by a motorcyclist to reveal that he had been fined in respect of a minor road
traffic offence was held not to be a material non disclosure, but because he had signed a basis of contract
clause warranting that he had never been convicted the policy was held never to have come into effect.
Swift J held the contract was void ab initio but said the insured had been very badly treated. The insurers
had taken the premium and had not been in the least bit misled by the replies the insured had made to
questions posed in the proposal form. In contrast, McCarthy J, in Keating v New Ireland Assurance
Company 71 approached the basis of contract clause from a different direction, indicating that these
clauses hid or obscured the legal consequences for which the insurer contended, the learned judge
taking the view that there would be no takers for insurance cover if clauses and their effects in law were
clearly set out. Lord Wrenbury observed that reliance on a basis of contract clause or warranty
constituted ―a mean and contemptible policy [and a]… contemptible defence‖ 72 . Irish judges in particular
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[1922] 2 AC 413.
[1933] IR 297.
Anderson v Fitzgerald (1853) 3 ICLR 475 at p.492.
See Scanlan v Sceals (1843) 6 Ir LR 367 and Rose v Star Insurance Co (1850) 2 Ir Jur 206 for cases involving
procedural requirements frustrating these clauses.
See Insurance Ombudsman, Digest Case Study 51 (1992-1998).
Keenan v Shield Insurance [1987] IR113.
(1935) 51LI.L.R 201.
[1990] 2 I.R. 383. See also Kelleher v Irish Life Assurance Co [1993] ILRM 643 where the Supreme Court held
that questions in a proposal form could abridge both the duty of disclosure and a declaration that questions
had been truthfully answered following Hair v Prudential Assurance Co Ltd [1983] 2 LI.L.R 667.
Glicksman v Lancashire & General Assurance Co [1927] AC 139 at 144-5.
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