Insurance Contract Law Issues Paper 2 Warranties - Law Commission

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THE STRUCTURE OF THIS PAPER 1.6 The paper is divided into seven further parts: (1) Part 2 provides a background to the discussion, by explaining the current nature of an insurance “warranty” and where warranties fit within a hierarchy of terms in insurance contracts. (2) Part 3 summarises the English Law Commission 1980 report, setting out both its analysis of the problems and its recommendations for reform. (3) Part 4 asks whether warranties are still the problem they were in 1980. It discusses four developments since the report was published: (a) the courts’ approach to construing warranties as other terms; (b) voluntary statements of practice and Financial Services Authority (FSA) rules; (c) the Unfair Terms in Consumer Contracts Regulations 1999; and (d) the Financial Ombudsman Service (FOS). It argues that each of these offers a partial solution to the problems, but difficulties remain. (4) Part 5 provides a brief evaluation of the current state of the law. (5) Part 6 looks at how other jurisdictions have dealt with warranties. (6) Part 7 sets out our provisional proposals, namely that basis of the contract clauses should be abolished, and that warranties should be set out in writing and made subject to a causal connection test. It asks whether these protections should apply to all insurance, including marine, aviation and transport insurance and reinsurance. Finally, it considers the consequences of our proposals for the Marine Insurance Act 1906. (7) Part 8 considers the arguments for and against making standard terms in commercial insurance contracts subject to a test of fairness, along the lines of sections 3 and 17 of the Unfair Contract Terms Act 1977. It asks whether in commercial polices on standard terms, warranties and terms having the same effect as warranties should be made subject to a fairness test. 1.7 Finally, Appendix A provides background to Part 7, with a brief summary of the implied warranties in marine insurance. Appendix B describes the approach taken by the Financial Ombudsman Services. It analyses 50 final ombudsman decisions concerning consumer disputes about policy terms. 2
PART 2: BACKGROUND WHAT IS A WARRANTY? 2.1 The word “warranty” causes considerable confusion, as it is used in many different senses. In general contract law, a warranty is normally a term of minor importance, and a breach of warranty gives rise only to damages. 1 Within the insurance industry, the word may be used to connote a variety of obligations placed on the insured. As a matter of insurance law, however, warranties are extremely important terms: the insured must comply with them strictly or face harsh consequences. Here we summarise the main characteristics of a warranty within insurance law, as set out in the Marine Insurance Act (MIA) 1906. Undertakings for the future and affirmations of fact 2.2 A wide variety of obligations on the insured can be given warranty status if the contract makes this sufficiently clear. Section 33(1) of the Marine Insurance Act (MIA) 1906 describes “promissory warranties” as terms by which the assured undertakes that some particular thing shall or shall not be done, or that some condition shall be fulfilled, or whereby he affirms or negatives the existence of a particular state of facts. In other words, warranties may apply to past or existing facts, or to future conduct. Strict compliance 2.3 The MIA states that a warranty “must be exactly complied with, whether it be material to the risk or not”. 2 So if an insured has “warranted” that certain facts are true, the warranty will be broken even if the answer made no difference, or if the insured was not at fault in any way. As we shall see, the insurer will be discharged from liability. Later remedy irrelevant 2.4 Furthermore, once a breach has occurred, the fact that it has been remedied does not prevent the contract from being discharged. As section 34(2) states: Where a warranty is broken, the assured cannot avail himself of the defence that the breach has been remedied, and the warranty complied with, before loss. 1 See e.g. Sale of Goods Act 1979, s 11(3) (“Whether a stipulation in a contract of sale is a condition, the breach of which gives rise to the right to treat the contract as repudiated, or a warranty, the breach of which may give rise to a claim for damages but not to a right to reject the goods….”) 2 Marine Insurance Act 1906, s 33(3). 3
Page 1 and 2: Insurance Contract Law Issues Paper
Page 3 and 4: SPECIFIC UNDERTAKINGS AS TO PAST OR
Page 5 and 6: Reinsurance 15. Are there any reaso
Page 7 and 8: Basis of the contract clauses 39 Sp
Page 9: PART 1: INTRODUCTION BACKGROUND 1.1
Page 13 and 14: Held covered in case of any breach
Page 15 and 16: For example, in Farr v Motor Trader
Page 17 and 18: We recognise that a consequence of
Page 19 and 20: THE RECOMMENDATIONS 3.3 The 1980 re
Page 21 and 22: The test in the final report 3.12 F
Page 23 and 24: 3.21 A more recent example is Seddo
Page 25 and 26: PART 4: ARE WARRANTIES STILL A PROB
Page 27 and 28: (4) The wording of the warranty doe
Page 29 and 30: 4.12 The “innominate term” clas
Page 31 and 32: 4.23 The 1977 Statement of Long-Ter
Page 33 and 34: 4.34 The Long-Term Statement, howev
Page 35 and 36: 4.42 In Director General of Fair Tr
Page 37 and 38: Does an exception have to be in pla
Page 39 and 40: 4.60 It is not necessarily sufficie
Page 41 and 42: 4.69 It might be argued that most w
Page 43 and 44: 4.78 However, issues of causal conn
Page 45 and 46: 4.86 Case 14 concerned a critical i
Page 47 and 48: 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
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6.33 An added twist to these diffic
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6.44 The problems appear where the
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6.53 Soyer argues that on the facts
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6.64 An example will illustrate the
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PART 7: PROVISIONAL PROPOSALS 7.1 T
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All insurance 7.12 For both consume
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7.20 In the seminar we were asked w
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7.28 The last option is the most ra
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7.37 It would be consistent with th
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7.46 There are two reasons why an i
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Other types of clause dealing with
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7.68 We tentatively conclude that t
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Our provisional view 7.75 In our vi
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7.85 We think it would be unduly fo
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7.97 Should the causal connection t
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7.105 It has been put to us that a
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Legality 7.116 The warranty of lega
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7.127 In 1980 the Law Commission re
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Continued liability for premiums FU
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7.148 The question is whether this
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7.157 Often both forms of waiver in
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PART 8: AN UNFAIR TERMS APPROACH TO
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8.10 These provisions require the c
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(3) In examining whether a term was
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APPENDIX A: THE IMPLIED WARRANTIES
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A.11 There are some reasons to trea
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To nullify a bargain in such circum
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Table 1: Type of policy Travel 14 2
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B.16 Here a breach of the term does
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(4) In Case 20, the policy excluded
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significant definitions, terms and
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B.46 Although ombudsmen are unsympa
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