Insurance Contract Law Issues Paper 2 Warranties - Law Commission

6.58 The case concerned a small houseboat, kept on a lake between Texas and
Oklahoma. The policy contained various stipulations that the policyholders had
breached. Contrary to the terms of the policy, the insured had pledged the boat,
carried passengers on several occasions and had at times leased the vessel. A
fire destroyed the boat while it was moored, in circumstances that had nothing to
do with the breaches of warranty. The insurers argued that, under Federal law,
there was no need for a causal link between the breaches and the loss. The
policyholders, however, argued that the matter should be dealt with under Texan
law, where breaches of the policy would not defeat the claim unless they
contributed to the loss. Eventually the case found its way to the Supreme Court,
which held that insurance law was a matter for each state.
6.59 The case has generated considerable debate within the US: some see it as a
necessary part of the state/federal balance; others as a source of uncertainty and
complexity. 32 One element behind the decision, however, may have been the
Supreme Court’s unhappiness with the harshness and rigidity of the English
approach. 33
6.60 The result is that the way warranties are to be interpreted and applied is largely a
matter for state law. As we have seen, some states, such as Texas, require a
causal connection between the breach and the loss before permitting the insurer
to avoid paying a claim.
6.61 By contrast, in New York, the requirement is that a breach of warranty will avoid
an insurance contract, provided that it “materially increases the risk of loss,
damage or injury within the coverage of the contract”. 34 If the contract specifies
two or more kinds of loss (such as fire and theft) the breach will only avoid the
particular kind of loss to which the warranty relates. This does not mean that the
breach must cause or contribute to the specific loss, but it must be such that
would materially increase the risk of a loss of the same sort. In other words, a
breach of a burglar alarm condition would not affect a fire claim, but it would
avoid a theft policy, so as to permit the insurer to refuse a claim for theft, however
the thieves had entered the building.
CIVIL LAW JURISDICTIONS
6.62 UK law on breach of warranty diverges from that of most other European States,
which require that a breach be causally connected to the loss in some way before
it can absolve the insurer from payment.
6.63 Baris Soyer provides a detailed analysis of the English, German and Norwegian
approach to breach of warranty in marine insurance. 35 He shows that in both
Germany and Norway provisions exist to exempt the insurer from liability if the
nature of the risk changes during the life of the policy. However, unlike the
English law, these require some degree of culpability and causation.
32 For a discussion, see B. Soyer, Warranties in Marine Insurance (2 nd ed, 2006), p 182.
33 T Schoenbaum, “Warranties in the Law of Marine Insurance: Some Suggestions for
Reform of English and American Law”, 23 Tul Mar LJ 267 (1998-1999), 314.
34 New York Insurance Code, Article 31, section 3106(b).
35 Warranties in Marine Insurance (2 nd ed, 2006).
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