Insurance Contract Law Issues Paper 2 Warranties - Law Commission

5.5 In 1980 the Law Commission described these results as wrong and unjust. 7 We
agree. They are wrong because they do not accord with policyholders’
reasonable expectations. If a proposer has given incorrect information but the
true position does not alter the risk or reduces it, the policyholder may well not
realise that the policy is ineffective. If a policyholder is slow in repairing a fire
alarm, they may well think that their fire cover is suspended while the problem
persists. However, those unfamiliar with the niceties of insurance law are unlikely
to think that this also invalidates their flood cover. Nor are they likely to realise
that they will continue without fire insurance after the alarm has been fixed.
5.6 Insurers have told us that they would rarely apply the strict letter of the law. They
would not, for example, refuse to pay a claim because of a breach that had
already been remedied before the loss. It is difficult to know how many claims are
turned down each year for breaches of terms that are not causally connected to
the loss. Our own small survey of complaints brought to the FOS does not
suggest that the practice is widespread, though we note that the FSA reports
cases where it has occurred. 8 The case for reform does not depend on evidence
of widespread abuse. If insurers no longer think that the Marine Insurance Act
1906 embodies fair principles, this is itself strong evidence that the law should be
brought into line with acceptable practice.
5.7 In the rest of this part we deal first with basis of the contract clauses, which cause
the same problem in all types of insurance. We then consider specific warranties
of fact or future conduct.
BASIS OF THE CONTRACT CLAUSES
5.8 In our first Issues Paper on Misrepresentation and Non-disclosure we said that
basis of the contract clauses should no longer be effective to convert a statement
of fact into a warranty in any kind of insurance.
5.9 Although judges have severely criticised the use of basis of contract clauses for
the last 150 years, their use has been consistently upheld. In 1996 the Court of
Session justified them on the grounds that the parties are free to agree what they
like. 9 We find this unconvincing. In most cases the insured’s signature at the
bottom of the proposal form containing a clause stating that “this proposal shall
be the basis of the contract between us and the insurers” would not represent a
true agreement because the proposer will have no idea of the implications of the
statement. An insurer may have good reasons for making cover dependent on
particular facts but, if so, it must make this clear to the insured.
7
para 6.9.
8
FSA, General Insurance and Pure Protection Products: Treating Customers Fairly, July
2006, p 18.
9 Unipac (Scotland) Ltd v Aegon Insurance 1996 SLT 1197.
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