Insurance Contract Law Issues Paper 2 Warranties - Law Commission

Do warranties define the subject-matter of the contract?
4.65 First, we have wondered whether a warranty, however clearly worded and
prominently set out, can ever be a “core term”, simply because it does not
describe the subject-matter of the contract. In effect it circumscribes the insurer’s
liability if the right lock is not installed, and might be thought of as the kind of
“incidental” or “subsidiary” term that the House of Lords, in its decision in DGFT v
First National Bank plc, recognised as not being “core”. 53 On reflection, however,
we do not think this argument is correct. A warranty is correctly interpreted as an
obligation on the insured, and there is no reason why (if it is clear and
“reasonably expected”) it should not be as “core” as the obligation to pay the
premium.
The effect of warranties and reasonable expectations
4.66 A second restriction does seem to bite on warranties. We think that unless the
insurer expressly spells out in full the effect of a breach of the warranty, it will be
subject to review because it will almost inevitably fail the “reasonable
expectations” test.
4.67 Consider the legal effect of a breach of the warranty. It will discharge the insurer
from liability under policy automatically, so that there is no liability for any loss
even if the matter warranted was immaterial, or the loss was completely
unrelated to the breach (for example, flood damage). The insurer is discharged
from liability even if the breach of warranty has been cured before the claim
arose. As we argued earlier, it is most unlikely that these results accord with the
reasonable expectations of any insured, least of all a consumer - unless he or
she happens to be an insurance lawyer. Thus for the warranty to be exempt as a
“core term”, the consequences of a breach of a warranty would have to be
spelled out in full, in clear and intelligible language and in a way that left the
consumer in no doubt what to expect. 54
4.68 If the term were not sufficiently central to the way the bargain was presented to
be a core term, the court would need to consider whether it was fair. It should be
noted that under the UTCCR, the court is required to assess the fairness of the
term at the time the contract was made. It is not asked to assess whether the
term has been applied fairly in the particular circumstances of the loss. Thus if
the term gives the insurer the right to avoid even when the breach of warranty
was immaterial, it will be no answer that in the particular facts the loss that has
been incurred was caused directly by the breach of warranty. If the warranty as a
whole was unfair, the insurer simply cannot rely on it at all.
53 [2001] UKHL 52, [2001] 1 AC 481, esp at [12] and [34]. See further Unfair Terms in
Contracts (2002), Law Com Consultation Paper No 166, Scot Law Com Discussion Paper
No 119, para 3.25.
54 We do not think it matters that it is the general law of insurance, rather than the term of the
contract itself, that provides for these consequences. It is true that under the Regulations
terms that merely reflect what would be the law anyway are probably exempt from review.
see Reg 4(2) and recital 13 of the Directive, discussed in CP 166 para 3.37. However, the
insurer would not be discharged from the contract unless the warranty term had been
included, so this exemption does not apply.
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