Insurance Contract Law Issues Paper 2 Warranties - Law Commission

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Waiver and Affirmation 7.154 The changes we have proposed to section 33 of the MIA 1906 would have consequences for the law on waiver. The 1906 Act specifically states that “a breach of warranty may be waived by the insurer”. 51 However, since the House of Lords decision in The Good Luck, 52 there has been a considerable academic debate over how breaches of warranty may be waived. 53 7.155 In English contract law, there are two ways in which a party may be taken to have waived their rights when faced with the other party’s repudiatory breach. 54 The first way is by making a choice between two inconsistent courses of action. The wronged party has a choice: either to treat the breach as discharging the contract (ie to “repudiate” or “terminate” the contract), or to affirm the contract. If they affirm, it seems the right to repudiate will be lost provided that the wronged party knew of the facts giving rise to the right to repudiate and, it would appear, that they possessed the right in question. 55 The wronged party must then evince a decision to relinquish that right by words or conduct. Once the party has made the choice to affirm the contract, it is bound by that decision. This type of waiver is sometimes called “waiver by election”. 7.156 The second way is through “waiver by estoppel”. 56 This requires the wronged party to make an unequivocal representation by words or conduct that it will not rely on its legal rights. The other party must show that it relied on the representation by doing something or refraining from doing something, in circumstances where it would be inequitable for the wronged party to rely on its legal rights. Normally, the other party would have to show that it has altered its position to its own detriment. 57 51 See s 34(3). 52 Bank of Nova Scotia v Hellenic Mutual War Risks Association (Bermuda) Ltd [1992] 1 AC 233. 53 nd See Baris Soyer, Warranties in Marine Insurance (2 ed, 2006), ch 6; Clarke para 20-7A; and MacGillivray, para 10-104. 54 For a full discussion of the authorities on this point see Peyman v Lanjani [1985] I Ch 457. In Habib Bank Ltd v Tufail [2006] EWCA Civ 374; [2006] All ER (D) 92 (Apr) Lloyd LJ drew a distinction between affirmation, “where knowledge of the right to rescind is essential” (at [20]) and “acquiescence”, which requires the other party to show that it relied on the representation. 55 See Chitty on Contracts (29 th ed, 2004), para 24-003. 56 See Chitty on Contracts (29 th ed, 2004), paras 24-007 – 24-008. 57 See Tool Metal Manufacturing Co Ltd v Tungsten Electric Co Ltd [1955] 1 WLR 761; and Emery v UCB Corporate Services Ltd [2001] EWCA Civ 675. 92
7.157 Often both forms of waiver involve similar types of inconsistent acts. For example, after learning of a breach an insurer may accept premiums, 58 or issue a policy document, 59 or handle a claim. For affirmation, the issue would be whether the insurer had the requisite knowledge and whether the act shows that it intended to continue with the policy. For “waiver by estoppel” the focus shifts to the policyholder’s perceptions and conduct. Did the act appear to show that the insurer did not intend to rely on its legal rights? If so, did the policyholder in fact rely on this representation by, for example, failing to take out another insurance policy? It is usually more difficult for the policyholder to show waiver by estoppel because it has to prove that it relied on the representation, usually to its detriment. The policyholder would not need to prove that the insurer knew that it had the right to deny liability, but the policyholder would need to show that a reasonable policyholder in their position would think that the insurer was aware of the right. 60 7.158 It is now thought, following The Good Luck, that affirmation, or waiver by election, is not applicable to a breach of an insurance warranty of assurance. In HIH Casualty & General Insurance Ltd v AXA Corporate Solutions, Lord Justice Tuckey explained with apparent approval the reasoning of the trial judge: 61 where there is a breach of warranty there is no scope for traditional waiver by election because the insurer is automatically discharged from liability upon breach and therefore has no choice to make. This is why only waiver by estoppel availed HIH, if it did… 62 7.159 This puts a heavier burden on the policyholder as they not only have to show that the insurer made an unequivocal representation, but also that they relied on it. 58 As MacGillivray says "the acceptance of premium after receipt of knowledge of a breach of warranty or condition is an act so inconsistent with an intention to repudiate liability that it is frequently a ground of waiver": para 10-109. See for example, Yorkshire Insurance Co v Craine [1922] 2 AC 541 and Cia Tirrena Assiccurazioni v Grand Union Insurance Co [1991] 2 Lloyd's Rep 143 59 See, for example, Sulphate Pulp Co v Faber (1895) 1 Comm Cas 146. 60 As the judge of first instance said in HIH Casualty & General Insurance Ltd v AXA Corporate Solutions [2002] Lloyd’s Rep IR 325: the point is not so much the awareness of [reinsurer] as to its rights to treat the cover as discharged but whether it appeared to a reasonable person in the position of [the reinsured] that the reinsurer was so aware and was prepared to forego its rights. That is a gloss that is important and can easily be overlooked in this analysis. 61 [2003] 1 Lloyd’s Rep IR 1. 62 Para 7. Note also Longmore J’s view in Kirkaldy & Sons Ltd v Walker [1999] Lloyd’s Rep IR 410 at p 422 that “since the breach of warranty does not give rise to any election by the insurer, eg, to choose to keep the contract on foot, the doctrine of waiver by election has no application”. We have some doubts whether these decisions are consistent with the wording of the Act, which refers simply to waiver without mentioning reliance, but the cases are clear. See Baris Soyer, Warranties in Marine Insurance (2 nd ed, 2006), ch 6. 93
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Insurance Contract Law Issues Paper
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SPECIFIC UNDERTAKINGS AS TO PAST OR
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Reinsurance 15. Are there any reaso
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Basis of the contract clauses 39 Sp
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PART 1: INTRODUCTION BACKGROUND 1.1
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PART 2: BACKGROUND WHAT IS A WARRAN
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Held covered in case of any breach
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For example, in Farr v Motor Trader
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We recognise that a consequence of
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THE RECOMMENDATIONS 3.3 The 1980 re
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The test in the final report 3.12 F
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3.21 A more recent example is Seddo
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PART 4: ARE WARRANTIES STILL A PROB
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(4) The wording of the warranty doe
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4.12 The “innominate term” clas
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4.23 The 1977 Statement of Long-Ter
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4.34 The Long-Term Statement, howev
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4.42 In Director General of Fair Tr
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Does an exception have to be in pla
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4.60 It is not necessarily sufficie
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4.69 It might be argued that most w
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4.78 However, issues of causal conn
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4.86 Case 14 concerned a critical i
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5.5 In 1980 the Law Commission desc
Page 49 and 50: 5.15 The effect of the Regulations
Page 51 and 52: Business insurance 5.25 The problem
Page 53 and 54: PART 6: WARRANTIES IN OTHER JURISDI
Page 55 and 56: 6.10 In a 1982 case, the judge expl
Page 57 and 58: (b) In the view of the court or arb
Page 59 and 60: (4) Where the insured proves that s
Page 61 and 62: 6.33 An added twist to these diffic
Page 63 and 64: 6.44 The problems appear where the
Page 65 and 66: 6.53 Soyer argues that on the facts
Page 67 and 68: 6.64 An example will illustrate the
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Page 71 and 72: All insurance 7.12 For both consume
Page 73 and 74: 7.20 In the seminar we were asked w
Page 75 and 76: 7.28 The last option is the most ra
Page 77 and 78: 7.37 It would be consistent with th
Page 79 and 80: 7.46 There are two reasons why an i
Page 81 and 82: Other types of clause dealing with
Page 83 and 84: 7.68 We tentatively conclude that t
Page 85 and 86: Our provisional view 7.75 In our vi
Page 87 and 88: 7.85 We think it would be unduly fo
Page 89 and 90: 7.97 Should the causal connection t
Page 91 and 92: 7.105 It has been put to us that a
Page 93 and 94: Legality 7.116 The warranty of lega
Page 95 and 96: 7.127 In 1980 the Law Commission re
Page 97 and 98: Continued liability for premiums FU
Page 99: 7.148 The question is whether this
Page 103 and 104: PART 8: AN UNFAIR TERMS APPROACH TO
Page 105 and 106: 8.10 These provisions require the c
Page 107 and 108: (3) In examining whether a term was
Page 109 and 110: APPENDIX A: THE IMPLIED WARRANTIES
Page 111 and 112: A.11 There are some reasons to trea
Page 113 and 114: To nullify a bargain in such circum
Page 115 and 116: Table 1: Type of policy Travel 14 2
Page 117 and 118: B.16 Here a breach of the term does
Page 119 and 120: (4) In Case 20, the policy excluded
Page 121 and 122: significant definitions, terms and
Page 123 and 124: B.46 Although ombudsmen are unsympa
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Insurance Contract Law Issues Paper 2 Warranties - Law Commission

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