Insurance Contract Law Issues Paper 2 Warranties - Law Commission

We recognise that a consequence of holding that the declaration
contains an express warranty of the truth of the answers to the
questions in the proposal is that if there was an error in, for example,
the postcode or telephone number of the proposer, the result would
be that the defenders would be entitled to avoid the policy. That
however is a consequence of the parties agreeing to an express
warranty with the result that the defenders would have a right to avoid
the policy if an answer was untrue whether or not the untrue item was
material. We are not persuaded that that would be a ludicrous result.
It is simply a consequence of what parties have agreed to by contract
and parties are free to agree what they like. 25
2.19 While it is true that parties are free to agree what they like, normally they must do
so in the contractual document itself. “Basis of the contract” clauses form an
exception to this normal rule. 26 Although in commercial policies the basis of the
contract clause may often be referred to in the policy itself, this is not necessary
under the current law. 27 Clarke comments that it is difficult to square basis of the
contract clauses “with the notion underlying the parole evidence rule”, namely
that a document such as a policy “which looks like the whole of the contract
should be treated as the whole of the contract”. 28
25 as above, at p 1202.
26
In Scotland, section 1 of the Contract (Scotland) Act 1997 now provides that where a
document appears to comprise all the express terms of a contract, then unless the contrary
is proved it shall be presumed that it does comprise all the express terms. Since this is
merely a presumption it does not appear to preclude an insurer from arguing that a basis of
the contract clause in a proposal constitutes an additional express term.
27 Different rules apply to marine insurance, where we are told that basis of the contract
clauses are rarely used. Under section 35(2) of the Marine Insurance Act 1906, “an
express warranty must be included in, or written upon, the policy, or must be contained in
some document incorporated by reference into the policy”. This means that the basis of the
contract clause used in the Unipac case would not have been recognised in a marine
insurance policy, as it was only printed on the proposal form and was not referred to in the
policy itself. It seems anomalous that protection available to marine insured since 1906
should not be available to other policyholders.
28 M Clarke, The Law of Insurance Contracts (4 th ed 2002), para 20 –2A1, p 630.
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