Insurance Contracts CP - Law Reform Commission

attempt was made to bring this to the proposer‘s attention. The exclusion of off-piste skiing
would not be a core term. However, if the policy were sold explicitly as ―suitable for skiing on
piste‖, the same term might be exempt from review, provided it was presented in a plain
intelligible way‖ 31 .
6.23 On the more controversial issue of how warranties are treated, if at all, under the Unfair
Contract Terms Directive, the Law Commissions conclude that warranties may be core terms that
describe the subject matter of a contract, whether the warranty be one of existing fact or future
obligation 32 . The Commission agrees with this view. To give an example, there is no substantive
difference between a warranty that a burglar alarm meeting an ISO standard is in place to a warranty that
such an alarm will be fitted within 1 month of cover commencing. If both provisions make it clear that non
compliance renders the policy ineffective then the purpose behind the Community legislation will have
been largely achieved. The problem that must frequently arises in relation to warranties is that neither of
the procedural requirements required under the Directive – intelligible drafting of the term itself, and the
need to satisfy a reasonable expectations test – are always readily met. The Law Commissions argued
that the second of these two factors is a powerful counterweight to the formal rules governing warranties
in insurance law:
Consider the legal effect of a breach of the warranty. It will discharge the insurer from liability
under the policy automatically, so that there is no liability for any loss even if the matter
warranted was immaterial, or the loss was completely unrelated to the breach (for example,
flood damage). The insurer is discharged from liability even if the breach of warranty has been
cured before the claim arose. As we argued earlier, it is most unlikely that these results accord
with the reasonable expectations of any insured, least of all a consumer – unless he or she
happens to be an insurance lawyer. Thus for the warranty to be exempt as a ―core term‖, the
consequences of a breach of warranty would have to be spelled out in full, in clear and
intelligible language and in a way that left the consumer in no doubt about what to expect. 33
6.24 Substantive unfairness is often relegated to a subsidiary role. However, if the insurer does not
overcome these procedural requirements, or if the term is itself incidental or non core, the Directive
requires the courts to consider the substantive unfairness of the provision, judged at the time when the
contract was made. The Law Commissions argue that this question has two dimensions. Substantive
unfairness may undermine warranties that, in isolation, seek to do too much for the insurer:
The court is required to assess the fairness of the term at the time the contract was made. It
is not asked to assess whether the term has been applied fairly in the particular circumstances
of the loss. Thus if the term gives the insurer the right to avoid even when the breach of
warranty was immaterial, it will be no answer that in the particular facts the loss that has been
incurred was caused directly by the breach of warranty. If the warranty as a whole was unfair,
the insurer simply cannot reply on it at all. 34
6.25 The second dimension addresses warranties from the perspective of judicial interpretation of
the clause, the Law Commissions arguing that the principle of meeting reasonable consumer
expectations will influence this process:
It might be argued that most warranties are fair on the face. The unfairness arises only
because of the way they are applied. However, before assessing the fairness of a term the
court must interpret it. Suppose, for example, that an insurer seeks to rely on the lock warranty
to reject a claim for flood damage. The court would first have to decide whether the term was a
true warranty, and was intended to exclude flood claims in this way. If the court accepts the
insurer‘s case that the term has a wide meaning, then it is likely to hold that the term is unfair.
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Para 2.90.
The contrary argument, that a warranty does not describe the subject matter of the contract (and is thus noncore)
is rejected at para.2.98.
Para 2.100.
Para 2.101.
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