Insurance Contract Law Issues Paper 2 Warranties - Law Commission

For example, in Farr v Motor Traders Mutual Insurance the
policyholder insured two taxi-cabs, stating that they were only
driven for one shift every 24 hours. 14 For a short time, one of
the cabs was driven for two shifts while the other was being
repaired. The cab was then used for one shift a day in the
normal way and a couple of months later was damaged in an
accident. The Court of Appeal rejected the insurer’s argument
that the assured had breached a warranty. Instead the words
were merely “descriptive of the risk”. This meant that if the
cab was driven for more than one shift per day, the risk would
no longer be covered, but as soon as the owner resumed
one-shift working, the insurer again became liable.
(4) Innominate terms, where the remedy for a breach depends on its
seriousness. Where the breach is serious, the insurer may repudiate the
policy (that is, treat the contract as terminated). Where it is minor, the
remedy would be in damages only. In Alfred McAlpine Plc v BAI (Run-
Off), 15 it was suggested that a serious breach of a notification clause may
lead to a rejection of the claim while a minor one may not. However, this
has now been doubted, 16 and we discuss the issue further in Part 4.
(5) Mere terms, breach of which gives rise to a claim for damages, but which
do not affect the insurer’s liability to pay claims.
2.14 The category a term falls into is a matter of construction for the courts. There are
many statements within the cases that any ambiguity should be resolved in
favour of the insured. 17 If the insurer wishes to treat a condition as a warranty or
condition precedent, they must use clear words. 18 They should not escape liability
unless terms are put before policyholders “in words admitting of no possible
doubt”. 19
BASIS OF THE CONTRACT CLAUSES
2.15 The problems with warranties are exacerbated by the use of “basis of the
contract” clauses. This is a device whereby potential policyholders are asked to
sign a clause at the bottom of the proposal form, declaring that they warrant the
accuracy of all the answers they have given. The clause usually states that the
answers “form the basis” of the contract. It is well established that such a clause
may elevate the answers to contractual terms, even if the terms are not to be
found in the policy itself.
14
15
[1920] 3 KB 669. The case was approved in Provincial Insurance v Morgan [1933] AC 240.
For further examples of cases where courts have rejected insurers’ arguments that a term
is a warranty and have instead declared it to be descriptive of the risk: see Part 4.
[2000] 1 Lloyd’s Rep 437.
16
Friends Provident Life and Pensions v Sirius International Insurance [2005] 2 Lloyd’s Rep
517; [2005] EWCA Civ 601.
17 See the discussion in Part 4.
18 Provincial Insurance Company v Morgan [1933] AC 240, per Lord Wright at p 255.
19 As above, per Lord Russell, at p 250.
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