Insurance Contracts CP - Law Reform Commission

(13) United Kingdom Developments on Basis of Contract Clauses
5.36 Basis of the contract clauses were examined separately from warranty issues by the Law
Commission in the 1980 Report and the views and proposals expressed therein have been revisited by
the Law Commissions in 2007 and 2009. In relation to warranties of past or present fact, the Law
Commission proposed, in 1980, 76 that where these are created by way of a proposal form, any statement
of fact (e.g. a housebuilder warrants that his/her house is constructed of brick and slate) or a declaration
that an answer given is true (e.g. proposer is 30 years of age) will be ineffective in creating a warranty. 77
In the event that the insurer wishes to extract specific undertakings, the insurer should only be able to do
so by way of terms contained in the policy itself, subject of course to the requirement that written notice of
the warranties so incorporated are provided to the proposer as soon as practicable. 78
5.37 In contrast, the use of basis of the contract clauses in relation to warranties as to the future, or
promissory warranties, was not the subject of any specific recommendation because the mischiefs
caused by basis of contract clauses relating to warranties of past or present fact were considered to be
obvious whereas:
―the safeguards and precautions which can be created by promissory warranties are clearly
necessary for insurers and unobjectionable, and there appears to be no reason to prevent their
creation by means of ―basis of the contract‖ clauses as a matter of convenience.‖ 79
5.38 Insofar as a warranty created via a basis of contract clause related to existing and future
conditions (eg the car is roadworthy and will be maintained in a roadworthy condition) the basis of
contract clause would only be effective vis a vis the statement as to the future. Clearly the Law
Commission in 1980 saw the proposed formalities requirements as central to any effective method of
dealing with abuse of contractual principles. 80
5.39 This proposed restriction – basis of contract clauses will not be effective when used in a
proposal form in order to create contractual warranties in relation to matters of past or present fact – was
accompanied by two proposed substantive law adjustments. The Law Commission recommended that
no matter of past or existing fact should be capable of constituting a warranty unless it related to a matter
which is material to the risk. 81 The second recommendation was directed at counteracting basis of
contract clauses that required the proposer to warrant the absolute accuracy of all or any of the answers
given. The Law Commission referred back to the 1957 Law Reform Committee recommendation that,
notwithstanding anything containing in a policy, no defence to a claim can arise from a misstatement
where the insured can prove the statement was true to the best of his knowledge and belief. 82
(14) Basis of Contract Clauses – The British 2007 Consultation Paper
5.40 The Law Commissions, in the 2007 Consultation Paper were similarly critical of basis of
contract clauses, describing them as ―an obscure legal device‖ allowing insurers to treat themselves as
discharged from the contract ―if any statement is inaccurate‖. 83 Basis of Contract clauses were believed
to be no longer in use as a result of the Industry Code, The Statement of General Insurance Practice, the
Statement directing that such clauses should not be used in consumer insurance. The Law Commissions
recommended that basis of contract clauses should have no effect in consumer insurance law. In relation
to business insurance however, the Law Commissions were more equivocal. While remarking that, save
in cases where a business proposer is professionally advised, most proposers will not appreciate the
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Law Com No.104.
Law Com No.104, para. 7.8.
Law Com No.104, para. 10.39.
Law Com No.104, paras. 7.11 and 10.40.
See para. 7.8.
See paras. 6.2 and 7.7.
See paras. 4.61 and 7.7.
See para. 2.112 of the 2007 Consultation Paper.
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