Insurance Contract Law Issues Paper 2 Warranties - Law Commission

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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. 32
4.69 It might be argued that most warranties are fair on their face. The unfairness arises only because of the way they are applied. However, before assessing the fairness of a term the court must interpret it. Suppose, for example, that an insurer seeks to rely on the lock warranty to reject a claim for flood damage. The court would first have to decide whether the term was a true warranty, and was intended to exclude flood claims in this way. If the court accepts the insurer’s case that the term has a wide meaning, then it is likely to hold that the term is unfair. The court may be influenced by the fact that this use of the term specifically breaches ICOB Rule 7.3.6. As a result, the term would not be binding on the consumer, and the insurer could not rely on it to avoid paying the claim. If the court gives the term a narrow meaning, to merely except burglary claims while the lock is not fitted, then the term is more likely to be considered fair – but it would not assist the insurer to resist liability for flood damage. Preventive powers 4.70 A major innovation in the 1994 Regulations was that enforcement was not left to the parties alone. Instead, the Director General of Fair Trading was empowered to bring proceedings for an injunction (or interdict) against suppliers using unfair terms in their contracts with consumers. In 1999, the list of enforcement organisations was extended, and in 2001 the Financial Services Authority was added. The FSA is now the organisation primarily responsible for preventing insurers from including unfair terms within their contracts. 55 4.71 The FSA has reached agreements with insurance companies to alter terms: for example, the FSA complained about a cash-back scheme underwritten by insurers, which only met claims if consumers submitted numerous forms within strict time limits. The insurers agreed that they would accept claims within 6 months of the specified dates and would issue replacement documents on request. 56 55 See the Concordat between the OFT and FSA, set out in OFT, Unfair Contract Terms Bulletin 16, December 2001. An account of how the FSA uses its powers is given in FSA Handbook Enforcement Manual (Chapter 20). See also, FSA, Fairness of Term in Consumer Contracts: Statement of Good Practice, May 2005. 56 See: FSA website at: http://www.fsa.gov.uk/consumer/updates/updates/unfair_contracts/cases(last checked 8 August 2006). The FSA has also taken action to prevent an insurer from varying long-term insurance premiums without giving reasons for the changes. It also took action against an insurance policy guaranteeing the return of deposits paid to home improvement suppliers. The cover ceased on the original installation date – which meant that if installation was delayed, the deposit could not be returned. 33
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: 4.60 It is not necessarily sufficie
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
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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
Page 121 and 122:
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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