Insurance Contracts CP - Law Reform Commission

nature and potentially draconian nature of such clauses, there was no general recommendation to follow
the logic of the Australian Act and relegate such clauses to representations, even in business insurance.
Rather, the Law Commissions adopted the procedural solution mapped out in 1980, provisionally
proposing that a warranty of present or existing fact will only be effective if set out as a specific term of
the policy or in an accompanying document. Attempts to convert answers into warranties en bloc,
whether in the proposal form or elsewhere, are to be ineffective, the Law Commissions proposed.
Because the Law Commissions took the view 84 that in business insurance their proposed rules would only
be default rules, the parties in business insurance were to be free to agree either that:
(1) the insurer was to have a stipulated remedy or remedies for misrepresentation, even if
the proposer was neither dishonest nor careless in making the representation; or
(2) the insurer could obtain a warranty that statements are correct, affording the insurer a
right to refuse claims even if the insured had acted honestly and carefully. Liability for breach
of warranty of fact should remain strict unless the warranty is not material to the contract and
the warranty cannot be relied upon in relation to a claim for a loss that was in no way
connected to the breach of a warranty.
5.41 The Law Commissions however suggested that contracting out of these restrictions is to be
possible, that is, the insurer should be free to stipulate that claims in respect of breaches of a nonmaterial
warranty will not be entertained and that the insurer is to be entitled to defend a claim for a loss
even if it is in no way connected with the breach of warranty. 85
(15) The 2009 Report and Draft Bill – Basis of Contract Clauses
5.42 On December 15, 2009, the Law Commissions published a joint report, Consumer Insurance
Law: Pre-Contract Disclosure and Misrepresentation. 86 The core recommendation in the report was that
basis of contract clauses should be abolished in consumer insurance contracts, or, more specifically, it
should be impossible to use a basis of contract clause so as to convert a misrepresentation into a
contractual right to terminate a consumer insurance contract, by stipulating that such a statement is to be
a warranty.
(16) Warranties in General – United Kingdom Developments
5.43 The Law Reform Committee, in the 1957 Report, Conditions and Exceptions in Insurance
Policies 87 was critical of the impact that basis of contract clauses had in elevating all statements, even
statements of fact concerning matters that the proposer may have no knowledge of (such as a preexisting
condition), into a binding promise. The Law Reform Committee recommended that:
―notwithstanding anything contained in or incorporated in a contract of insurance, no defence to
a claim should be maintainable by reason of any mis-statement of fact by the insured, where
the insured can prove that the statement was true to the best of his knowledge and belief.‖ 88
5.44 The same hostility was not evident in relation to conditions precedent and subsequent. 89
5.45 The examination undertaken in 1979 and 1980 by the Law Commission squarely addressed
the use of warranties and basis of contract clauses. In relation to warranties the Report drew attention to
the important distinction between warranties of past or present fact and promissory or continuing
warranties, and warranties of opinion. The Law Commission identified three defects in the existing law on
warranties:
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Para. 5.131.
Para. 5.132.
Law Com No.319 / Scot Law Com No.219 (hereafter, 2009 Report).
Cmnd. 62.
Cmnd. 62, para. 14.
Cmnd. 62, para. 9.
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