Insurance Contracts CP - Law Reform Commission

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―It is easy to sympathise with the consumer assured who has made an innocent error in making a statement about an existing or past fact in a proposal, who then forgets about it all and thinks he is insured and then suffers a loss which is not paid because the fact was not true and it is treated as a ―warranty‖. But I must admit to having less sympathy for the business assured, who, in his own business, may well demand exact compliance with contract terms with its counterparty, whether it be as to description of goods, date of shipment or the documents to be produced to entitle payment on a letter of credit. If business people wish to insure the wherewithal of their businesses, can it not be said that they ought to make themselves as aware of the consequences of their actions (or inactions) as they would do for their own speciality? That was how the rule as to breach of warranties was defended when it was first introduced and one asks whether businesses are, generally speaking, less robust now than they were in 1980.‖ 131 5.79 The Commission provisionally recommends that where the insured establishes that there is no causal link between the failure to observe a promissory warranty and the loss the insured should be able to recover on the claim; and the Commission invites submissions as to whether the failure to observe a promissory warranty will only lead to the contract being invalidated where the insured has acted fraudulently (intentionally or recklessly). This provisional recommendation should apply to all insurance contracts within the terms of the Financial Services Ombudsman jurisdiction, even if the dispute comes before the courts. In relation to other insurance contracts the Commission invites submissions on whether a provision of this kind should serve as a default rule in commercial insurance contracts generally. (2) Precautionary Measures under the PEICL and Promissory Warranties 5.80 The decision in Bennett v Axa Insurance Plc 132 suggests that individual insurers may be prepared to allow a policy to require that promissory conditions should be linked to the events that occasioned the loss. The case also shows that promissory warranties can remain draconian in their consequences. A pizza restaurant covered by an all risks policy was destroyed by fire after closing one evening. The insurer sought to avoid the claim by relying on a ―waste clause‖ whereby the insured warranted that ―trade waste‖ would be removed from the premises at the end of each days trading. Some materials, including cigarette butts and paper napkins, were, the court found, likely to have been left in metal bins and thus created the source of the fire. The insurer did not rely upon a clause requiring the insured to take reasonable precautions to prevent the loss (apparently conceding any defence centring on negligence would fail), and even though the policy behind the waste clause: ―could perhaps be more clearly advertised or enunciated, the waste clause was effective. In a plea ad misericordiam in his final reply [the claimant‘s counsel], suggested that the Claimant had complied with the spirit of the policy, although he was in fact unaware of the existence of the warranty, that the Defendant underwriters were relying upon a technicality and that it was unjust that someone who was as the Claimant was running a tight ship should in such circumstances be denied an indemnity by his underwriters. The plea serves only to demonstrate how uncertain a guide is sentiment in determining a claim of the sort which is before me. Naturally I have great sympathy for the Claimant, an honest businessman who finds himself without insurance cover notwithstanding his evidence as to the measures he took to put into place a proper system designed to ensure the tidiness and cleanliness of the premises was unchallenged. That is no doubt why the insurers did not suggest that the insured had failed to take reasonable precautions to prevent the loss and damage which in fact occurred. Sympathy for a large corporate insurer is less obviously felt, but by inclusion of the waste clause in their policy these insurers made clear that payment of a claim in circumstances such as I have been compelled to find here existed was not the bargain which they made. Warranties in an insurance policy are draconian in their effect … It is not altogether surprising 131 132 Ibid p.118. [2003] EWHC 86 (Comm). 130
that non-compliance with a warranty as to the existence and content of which both the insured and this staff were in ignorance should lead to failure of a claim.‖ 133 5.81 In contrast, the precautionary measures provisions in the PEICL, Article 4:102, if applied to this case, would produce a different result. The precautionary measures provisions in the PEICL are heavily influenced by the shape of general European insurance law and practice. The strict and inflexible nature of the promissory warranty is reflected in the Marine Insurance Act 1906, section 34 of which defines a promissory warranty as promises by which ―the insured undertakes that some particular thing will or will not be done or that some condition will be fulfilled.‖ The Act also provides that a breach of warranty results in the automatic discharge of the insurer from liability of the insurer 134 unless the insurer waives the breach of a promissory warranty, thus creating an estoppel to the extent that the insurer cannot rely upon the breach as having discharged the insurer form liability. 135 5.82 In contrast, Article 4:102 PEICL provides: (1) A clause which provides that in the event of non-compliance with a precautionary measure the insurer shall be entitled to terminate the contract, shall be without effect unless the policyholder or the insured has breached its obligation with intent to cause the loss or recklessly and with knowledge that the loss would probably result. (2) The right to terminate shall be exercised by written notice to the policyholder within one month of the time when the non-compliance with a precautionary measure becomes known or apparent to the insurer. Cover shall come to an end at the time of termination. 136 Article 4:102 is intended to limit the insurers right to decline to pay out on a claim when the obligation breached is a condition precedent to liability, that is, breach of a promissory warranty, 137 unless the breach occurred ―with intent to cause the loss or recklessly and with knowledge that the loss would probably result.‖ Irish law already allows recovery even if the insured acts with carelessness, negligence and improper conduct. 138 5.83 While this provision would reverse the decision in Bennett v Axa Insurance Plc, a hard case, the scope of Article 4:102 to a common lawyer appears at first to be overreaching. Article 4:102 qualifies the bargain and requires an underwriter to meet a claim the underwriter did not undertake to meet; Article 4:102 sets a standard of performance for the policyholder insured that falls short of strict liability; the claim will be successful even if the policyholder/insured was negligent. But codes of practice in Ireland and the United Kingdom direct that claims should not be rejected unreasonably, save where there is evidence of fraud. In cases of breach of warranty or condition, rejection of a claim per se is not good insurance practice. Unless the circumstances of the claim are connected to the breach, reliance on breach of a promissory warranty is not industry practice, at least not amongst responsible insurers. The adoption of Article 4:102 would not necessarily deny an insurer the promissory warranty where fraud was suspected, but even in such a case the provisions in Article 4:102(1) seem to accord with the various Ombudsman‘s 133 134 135 136 137 138 Ibid para 22. Marine Insurance Act 1906, s.33(3) effective from the date of the breach. This is representative of the entire law of insurance: The Good Luck [1992] 1 AC 233; Global Press Systems Inc v Berhad [2011] UKSC 5, per Lord Mance at para. 56. Section 34(3): see Lord Goff in The Good Luck [1992] 1 AC 233 at 262-3; see also J Kirkaldy and Sons v Walker [1999] Lloyds Rep IR 410 and Kosmar Villa Holidays Plc v Trustees of Syndicate 1243 [2008] Bus L.R. 931. Defined in Article 4:101 as ―clause in the insurance contract, whether or not described as a condition precedent to the liability of the insurer, requiring the policyholder or the insured, before the insured event occurs, to perform or not perform certain acts. See Lord Goff in The Good Luck[1992] 1 AC 233 at 263. Jameson v Royal Insurance Company (1873) IR 7 CL 126. 131
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CONSULTATION PAPER INSURANCE CONTRA
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MEMBERSHIP The Law Reform Commissio
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ADMINISTRATION STAFF Head of Admini
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ACKNOWLEDGEMENTS The Commission wou
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TABLE OF CONTENTS Table of Key Legi
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CHAPTER 4 (3) Factors covered by an
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(10)Enforcement 149 CHAPTER 7 FORMA
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TABLE OF KEY LEGISLATION Assurance
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Pg No. Economides v Commercial Unio
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Ireland Ltd Pg No. Roselodge Ltd v
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D Regulation and Supervision of Ins
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has been the Consumer Protection Co
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this definition would apply both to
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Commission provisionally recommends
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2005 Final Report and Recommendatio
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in Coleman accords with data protec
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functions may in the future be merg
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estrictions on the ability of the O
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(2) Adverse comments on the propose
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harmonisation of insurance contract
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1.49 Before leaving the general iss
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(2) Decisions of the Financial Serv
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uberrima fidei, regulatory requirem
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1.68 The Commission provisionally r
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2.03 In contrast, a non-indemnity
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CJ expressed the view that it made
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2.18 In the House of Lords, Lord El
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Lord Eldon formulation, 45 overrule
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interest in respect of the property
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drawings themselves, Auld LJ and Si
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the judges to complicate the law by
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Insurance in the UK, Ireland and EU
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any existing doubt, or prevailing m
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(2) A potential financial loss reco
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to the extent of monies actually ex
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took out a life insurance policy on
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2.86 The Commission invites submiss
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and social provision be integrated
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and deny enforceability. The leadin
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(6) Defining Insurance Contracts in
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3 CHAPTER 3 DUTY OF DISCLOSURE A In
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the Ohio case of Hartford Protectio
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the basis that the insurance contra
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that which the signatory could reas
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―(i) In order to be entitled to a
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withholding information on the basi
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public interest in running blockade
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In Manor Park, McMahon J. took a si
Page 99 and 100: at the precontractual stage. The de
Page 101 and 102: decisions in which the Ombudsman ha
Page 103 and 104: (8) The English Law Commission’s
Page 105 and 106: (10) Australia 3.88 In ALRC Report
Page 107 and 108: Article 3:103 Exceptions The sancti
Page 109: it is desirable to retain the duty;
Page 112 and 113: B Judicial approaches to limiting a
Page 114 and 115: will no doubt arise in the future.
Page 116 and 117: questions that are incapable of a y
Page 118 and 119: (1) Marine Insurance Act 1906 and m
Page 120 and 121: (3) Should the right to rescind be
Page 122 and 123: y English judges to any extent, and
Page 124 and 125: non-disclosure or misrepresentation
Page 126 and 127: Factually incorrect answers to a qu
Page 128 and 129: 4.68 While the English and Scottish
Page 130 and 131: terms to be construed by reference
Page 132 and 133: conclusion, ―with considerable re
Page 134 and 135: the present was held not to be prom
Page 136 and 137: (10) Limiting the scope of the warr
Page 138 and 139: have been forthright in suggesting
Page 140 and 141: nature and potentially draconian na
Page 142 and 143: (b) that even though the loss was o
Page 144 and 145: whichever is the earlier event. 103
Page 146 and 147: 5.67 Nevertheless, the law reports
Page 148 and 149: may properly consider to be relevan
Page 152 and 153: decisions, and case-law, that preve
Page 154 and 155: the terms of the insurance contract
Page 156 and 157: householder each assuming the other
Page 158 and 159: whether in all the circumstances it
Page 160 and 161: may be regarded as technical or unm
Page 162 and 163: ―Basis of contract clauses would
Page 164 and 165: The court may be influenced by the
Page 166 and 167: ―consumer‘s reasonable expectat
Page 168 and 169: of the term, particularly in the co
Page 170 and 171: National Consumer Agency would be t
Page 172 and 173: premium, thus taking the contract o
Page 174 and 175: the Provider could not provide the
Page 176 and 177: exceptions to these requirements in
Page 178 and 179: (l) the existence of guarantee fund
Page 180 and 181: policy should be issued within fift
Page 182 and 183: contains interesting and helpful ad
Page 184 and 185: in the Aro Road case who wrote that
Page 186 and 187: 8.11 The most visible demonstration
Page 188 and 189: common law position relating to sep
Page 190 and 191: F Effects of fraud 8.27 Once the fr
Page 192 and 193: 8.36 In the case of composite insur
Page 194 and 195: (i) consented to the act or omissio
Page 196 and 197: Insurance Corporation of the Channe
Page 198 and 199: not only an economic purpose, but a
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Article 6:104 Time of Performance (
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B The Problem in Context 9.04 The d
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D Exceptions to the Privity Rule (1
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9.20 Because Ireland has not adopte
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cover but the defendants failed to
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(1) ―Where a person who is not pa
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9.46 The privity doctrine confines
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CHAPTER 10 REMEDIES A Introduction
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(4) Where the risk would have been
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isks‖ policy provided by Royal an
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elation to negligent misrepresentat
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insurer is seeking to avoid the con
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10.38 The decision of Hirst J in Th
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10.48 The Ontario Court of Appeal,
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(a) An insurer cancelled a motor in
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G Subrogation - Public Policy Excep
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(ii) Subrogation - Employee Liabili
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Employee‟s Liability (Indemnifica
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―an employer should be liable to
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Street Dublin against the embezzlem
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11.09 The Commission invites submis
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of a promissory warranty, it should
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