Insurance Contract Law Issues Paper 2 Warranties - Law Commission

PART 8: AN UNFAIR TERMS APPROACH TO
COMMERCIAL INSURANCE?
8.1 In this paper we have discussed ways in which warranties and unexpected
definitions of the risk hidden within contractual small print may be used to
produce results that are unfair to policyholders. As we have seen, consumer
insurance is subject to the Unfair Terms in Commercial Contracts Regulations
1999, which require terms that go beyond the main definition of the subject
matter to be fair. We have suggested that unexpectedly narrow definitions of the
risk and unexpectedly wide exclusions can be challenged under the Regulations. 1
However, there is no similar protection for commercial insurance.
8.2 In other areas of commercial life, businesses are given protection against unfair
terms by the Unfair Contract Terms Act 1977 (UCTA). When a business is
dealing on its written standard terms of business, it cannot rely on a clause as
entitling it to render a contractual performance substantially different from that
which was reasonably expected, or to render no performance at all, unless the
clause is fair and reasonable. However UCTA does not apply to insurance
contracts.
8.3 For the purposes of this paper, we are primarily interested in whether an unfair
terms approach could be substituted for the causal connection test outlined in
Part 7, or added to it to deal with clauses that define the risk or provide
exceptions to the cover.
8.4 As we have seen, we do not think that the causal connection test should apply
only to warranties, but should extend to all clauses that define the risk. This,
however, may be over-inclusive. We suggest that it should be subject to a proviso
to allow the insurer to escape liability where the activity is so far outside the terms
of the cover that a reasonable insured could not have expected the loss to be
covered. A more direct approach may be to look at the fairness of the term. Thus
the causal connection test might be confined to warranties, and other exclusions
could be subject to a fairness test. Alternatively, the warranty itself might be
subjected to the test of fairness if the insurer attempted to rely on it to render a
performance that was substantially different from what the insured reasonably
expected. The fairness test might apply to all standard term business insurance
contracts, or might be confined to those entered into by small businesses.
8.5 It is possible that unfair terms protection could also be applied to other
problematic terms in insurance contracts. In the first issues paper we raised the
question of whether insurers should only be permitted to exclude our proposed
reforms on misrepresentation and non-disclosure in small business contracts in
so far as this was fair. In subsequent papers we intend to return to the question of
notification clauses: one answer to the problems they cause might be to subject
them to a test of fairness. In this paper, however, we raise general questions
about an unfair terms approach only in relation to warranties, definitions of the
risk and exclusions.
1 Above, Part 4.
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