Insurance Contract Law Issues Paper 2 Warranties - Law Commission

More documents

Recommendations

Info

B.39 Although this is described as a “warranty”, the word is clearly not used in the legal sense. First, it applies only to some sorts of loss, rather than all liability under the contract. Secondly, it seems absurd to think that a breach could not be remedied; if the policyholder had gone to bed, and then got up to lock the door, the insurer would be liable for any subsequent theft. B.40 In this particular case, the front door had a yale lock, a metal door limiter and a chubb lock. The policyholder had engaged all but the chubb. Thieves broke down the front door and the insurer argued this would not have happened if the chubb had been locked. Nevertheless, the ombudsman upheld the complaint and ordered the insurer to pay. B.41 The ombudsman argued that good insurance practice required insurers to stipulate precisely what types of lock they wanted. Here, the more locks that were fitted, the more chance that one would not be engaged and that the claim would be rejected. If the policyholder had not fitted a chubb lock, for example, the insurer would have paid. The ombudsman thought this was not a fair and reasonable outcome. CHANGES IN RISK CLAUSES B.42 Particular problems can be caused by clauses that require the policyholder to notify the insurer about changes in conditions. B.43 In Case 25, the complainant took out contents insurance through her local authority landlord in September. The policy included a term stating that “you must tell the Local Authority straight away” about a series of changes. These included “if someone lives in your home other than you or your household”, or “if any member of your household is convicted of an offence other than parking or speeding offences”. In October, the complainant’s partner moved in, who had a conviction for arson. When the complainant suffered an unconnected burglarly, the insurers rejected the claim on the grounds that if they had known about the arson conviction, they would not have continued to provide cover. B.44 The ombudsman said that the FOS was unlikely to uphold increases in risk clauses of this type: My fellow Ombudsman and I do not necessarily consider this type of clause to be fair and reasonable, particularly if it was not highlighted when the policy was sold. By issuing a policy, the firm has effectively promised to cover the policyholder against certain contingencies. In most cases, if the policyholder’s circumstances change during the term of the policy, that is generally just part of the risk the firm agreed to take on. B.45 The ombudsman found that expecting customers to recognise relevant facts and inform them of these facts was unfair. He quoted the Unfair Terms in Consumer <strong>Contract</strong>s Regulations 1999, arguing that the clause created a “significant imbalance in the parties rights and obligations”. There may be cases where a firm could rely on a change of risk clause, where the clause was clearly drawn to the policyholder’s attention and the change was so fundamental that it altered the very nature of the risk. However, this was not one of them. 114
B.46 Although ombudsmen are unsympathetic to changes in risk clauses, such clauses may be upheld in some cases. Case 47 is one such case. Here Mr D took out an annual travel policy which stated that “if you have a medical condition, you must tell us about any changes in your medical condition before you travel”. 3 When he took out the policy, Mr D declared that he had controlled hypertension. In January, however, Mr D’s hypertension became uncontrolled: he visited his Accident and Emergency Department and saw a cardiologist. A few days later he travelled to the USA, where he became unwell and underwent a triple by-pass operation. B.47 In this case the ombudsman found that the policy requirements were clear: it was repeated throughout the policy and “cannot be said to be anything other than unambiguous”. Although it was unusual for insurers to expect continuing disclosure throughout the policy, it was not unfair “where the change in circumstances was so significant that it could be said to create a new insured risk”. Here the change in circumstances was “so significant that it created a new insured event”. REFERRING TO THE UNFAIR TERMS IN CONSUMER CONTRACTS REGULATIONS B.48 It was relatively rare for ombudsmen to refer explicitly to the Unfair Terms in Consumer <strong>Contract</strong> Regulations in their decisions. Among the 50 cases we looked at, the regulations were mentioned in only two. B.49 The first case was Case 25 about the change in risk, discussed above. The second, Case 9 involved a motor policy. This provided that if the insurer cancelled the policy, the premium would be refunded on a pro-rata basis. However, if the policyholder cancelled, the refund would be limited, so that after four months of cover, the insurer would refund only 40% and after more than four months, would refund nothing. B.50 The policyholder decided to sell his car and cancel his cover, at which he was told that he would receive nothing. The ombudsman referred to term (d) of Schedule 2 of the regulations, which specifically states that a term may be unfair if it permits the supplier to retain significant sums if the consumer cancels a contract, while the consumer is not given similar compensation if the seller cancels. The ombudsman held that there was no good reason why the consumer could not be given a pro rata refund, less an administration charge. 3 In general, the FOS follows the law in refusing to give effect to a change in risk clause unless the effect is to create a significantly different or new insured risk. However, in periodic travel policies (such as this one) it has been suggested that this rule does not apply, as the cover is said to incept on a trip by trip basis. The FOS tell us that they will shortly be publishing an article in Ombudsman News to clarify the position in such cases. 115
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 and 10:
PART 1: INTRODUCTION BACKGROUND 1.1
Page 11 and 12:
PART 2: BACKGROUND WHAT IS A WARRAN
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
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
Page 69 and 70:
PART 7: PROVISIONAL PROPOSALS 7.1 T
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 and 100: 7.148 The question is whether this
Page 101 and 102: 7.157 Often both forms of waiver in
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: significant definitions, terms and
show all

Insurance Contract Law Issues Paper 2 Warranties - Law Commission

Create successful ePaper yourself

Delete template?

Save as template?