Insurance Contract Law Issues Paper 2 Warranties - Law Commission

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The construction approach: conclusion 4.18 Courts’ willingness to construe warranties against the interests of insurers provides a partial solution to the unfairness inherent in the existing law. It does so at the cost of adding complexity and uncertainty to the law. We anticipate repeated litigation over both warranties and notification clauses. 4.19 Furthermore, there are still harsh decisions that cause injustice to policyholders. In Unipac (Scotland) Ltd v Aegon Insurance, for example, the Court of Session upheld a basis of the contract clause which converted all the statements in the proposal form into warranties. 22 We do not think that courts’ willingness to construe clauses against the interests of insurers removes the need for reform. THE ABI STATEMENTS OF PRACTICE AND FSA RULES 4.20 Insurance companies have long argued that the defects in the present law can be remedied through voluntary action. In 1977 the Association of British Insurers agreed to two statements of practice: one for general insurance and one for life. The 1980 report explained that the statements were the result of concern about the decision to exclude insurance from the Unfair Contract Terms Act 1977, and were designed to reassure consumers that they would not be dealt with unfairly. 23 The statements covered both warranties and “basis of the contract” clauses. Below we look at each issue in turn. We then consider the FSA’s more general initiative to encourage insurers to treat their customers fairly. Provisions on warranties Statements of Practice 4.21 The 1977 Statement of General Insurance Practice (SGIP) dealt with the perceived problems with warranties by stating that: Except where fraud, deception or negligence is involved, an insurer will not unreasonably repudiate liability to indemnify a policyholder… on grounds of a breach of warranty or condition, where the circumstances of the loss are unconnected with the breach. 24 4.22 The references to deception or negligence were later removed, so as to confine the right to repudiate only where fraud is involved. The 1986 version of SGIP read: An insurer will not repudiate liability to indemnify a policyholder 22 1996 SLT 1197. 23 para 3.23 24 Clause 2(b)(ii). 25 Clause 2(b)(iii). on the grounds of a breach of warranty or condition where the circumstances of the loss are unconnected with the breach unless fraud is involved. 25 22
4.23 The 1977 Statement of Long-Term Insurance Practice (SLIP) did not specifically refer to warranties at all, and merely said that “an insurer would not unreasonably reject a claim”. However, in 1986 SLIP was revised, to be similar to SGIP. 26 4.24 In 1980 we made three criticisms of the 1977 Statements: (1) The statements only covered private (that is, consumer) insurance, while the problems covered both consumers and businesses. 27 (2) The provision in effect conferred “a discretion on insurers to repudiate a policy on technical grounds if they suspect fraud but are unable to prove it”. 28 (3) The statements lacked the force of law “so that an insured would have no legal remedy if an insurer fails to act in accordance with them”. 4.25 We concluded that far from being an argument against reform, the statements were “evidence that the law is unsatisfactory and needs to be changed”. FSA rules 4.26 The Statement of General Insurance Practice has now been abolished and replaced by ICOB 7.3.6. For long-term insurance, SLIP has been supplemented by COB 8A.2.6. ICOB Rule 7.3.6 states that insurers may not: except where there is evidence of fraud, refuse to meet a claim made by a retail customer on the grounds: (c) in the case of a general insurance contract, of breach of warranty or condition, unless the circumstances of the claim are connected with the breach. 4.27 COB 8A.2.6 is in similar terms, except that it only applies to breaches of warranty and not conditions. It goes on to state that the warranty must be “material to the risk” and must be “drawn to the attention of the policyholder before the conclusion of the contract”. 4.28 These provisions replicate the difficulties identified with the 1977 Statement. First they only cover retail (that is, consumer) insurance. Secondly, they continue to permit insurers to repudiate claims where they suspect but cannot prove fraud: although the insurer must show some evidence of fraud it does not have to be conclusive evidence. 26 Clause 3(b) states that Except where fraud is involved, an insurer will not reject a claim or invalidate a policy on grounds of breach of a warranty unless the circumstances of the claim are connected with the breach … It then goes on to deal with basis of the contract clauses by stating that these are permitted for “life of another” policies (provided they are material and within the knowledge of the proposer). Warranties for own life policies must relate to specific matters material to the risk and must be drawn to the proposer’s attention at or before the making of the contract. 27 para 3.29. 28 para 6.10. 23
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: 4.12 The “innominate term” clas
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
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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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Insurance Contract Law Issues Paper 2 Warranties - Law Commission

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