Insurance Contract Law Issues Paper 2 Warranties - Law Commission

5.15 The effect of the Regulations is not as clear as it should be. The two Law
Commissions have already made recommendations to rewrite the Regulations in
a clearer and more accessible way, so that the implications behind the Directive
are made explicit. 11 The recommendations have been accepted in principle,
subject to a regulatory impact assessment. We believe that if our draft bill were
implemented, what is required of insurers would be made significantly clearer.
5.16 A consumer may be aware of the existence of a warranty but unaware of its
implications. A consumer may realise that the insurer requires certain locks, but
not realise that a failure to install these locks discharges the insurer from liability
for flooding. We have argued that the Regulations are very likely to apply to a
clause making a term into a warranty if it does not set out the insurer’s rights
should the warranty be broken, because its effects will almost always be
substantially different from what the consumer reasonably expects. Then it is
open to the court to hold the term unfair because it would give the insurer the
right to treat itself as discharged for a breach that was immaterial, or where there
was no causal link between the breach and the loss for which the claim was
made.
5.17 However, we do not think that in practice the problem for consumers has been
solved by the Regulations. We think that it is important that consumers are
protected by a firm rule, that a breach of warranty should not absolve the insurer
from liability if the breach was immaterial or there was no causal connection
between it and the claim. The consumer should not be required to make the
complex and difficult argument that the term permitting this first is not a core term
and secondly is unfair.
The FSA rules
5.18 Is reform of the law along these lines needed? ICOB Rule 7.3.6 currently states
that “except where there is evidence of fraud” the insurer may not refuse to meet
a claim for a breach of warranty or condition “unless the circumstances of the
claim are connected with the breach”. However, the FSA rule suffers from two
problems.
5.19 First, the FSA rule permits an insurer to refuse to pay a claim where there is
inconclusive evidence of fraud. This effectively allows insurers to substitute their
own opinion for that of the court. While inconclusive evidence of fraud may be a
reason for excusing the insurer from a regulatory sanction, it is not a ground on
which the insurer should be entitled to reject an individual claim where the breach
of warranty and the claim had no causal connection.
11 Unfair Terms In Contracts (2005), Law Com No 292; Scot Law Com No 199.
41