Insurance Contract Law Issues Paper 2 Warranties - Law Commission

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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). 58
6.64 An example will illustrate the main differences. Under German law, the insurer is not normally liable if the insured put a vessel to sea in an unseaworthy condition. But this is subject to two important limitations. First, the exemption only applies to loss caused by the conduct. If, for example, the loss was unrelated to the unseaworthiness, the insurance policy continues. Secondly, it is open to the insured to show that they were not “responsible” for the unseaworthiness - ie that it was not a deliberate or negligent act. 36 Norwegian law is similar. 37 By contrast, under the Marine Insurance Act 1906, voyage polices contain an implied warranty “that at the commencement of the voyage the ship shall be seaworthy for the purposes of the particular adventure insured”. 38 This means that if the ship is not seaworthy at the beginning of the voyage, all liability is avoided even if the insured is not at fault; or the defect is remedied; or the loss is totally unconnected with the defect. 6.65 Trine-Lise Wilhelmsen, a Professor at the Scandinavian Institute of Maritime Law, comments that for most people in the Civil Law world, the UK concept of a warranty is “hard to understand and even harder to explain”. Although the words may seem “deceptively simple”, the consequences lack “logical reason” and cannot be explained in terms of either legal fairness or economic efficiency. 39 6.66 John Hare, Professor of Shipping Law at the University of Cape Town is even more outspoken. He describes the Anglo-American marine insurance warranty as “a prodigal aberration from the European ius communis of marine insurance”. He suggests that “the prodigal, in whatever systems it has raised its unwelcome head, ought to be brought back into the fold in the interests of the very fairness, justice and equity to which English law so properly aspires”. 40 6.67 UK warranty law is inconsistent with the mandatory, but milder, provisions concerning alteration of risk in several Civil Law countries. Wilhelmsen comments that if there are to be attempts towards harmonisation, it is unlikely that many other European States will move towards the British model: 36 Above, pp 186-7. See also Comite Europeen des Assurances, Insurance Contract Law In Europe (2004). This explains that German law requires an insured to notify details of an increased risk, but if they fail to do so, the insurer “may only refuse to pay compensation if there is a causal link between the occurrence of the risk insured against and the failure to notify details or the increased risk” (p 81): see article 23 and following of the "Versicherungsvertragsgesetz" or Insurance Contract Law of 30 May 1908, as amended 26 November 2001. 37 Under section 3-33 of the Norwegian Marine Insurance Plans 1996, the insurer is not liable for “loss that is a consequence of the ship not being in a seaworthy condition, provided that the assured knew or ought to have known of the ship’s defects at such a time as it would have been impossible for him to intervene”. 38 Section 39(1). 39 “Duty of Disclosure, Duty of Good Faith, Alternation of Risk and Warranties: An Analysis of the Replies to the CMI Questionnaire”, CMI Yearbook 2000 pp 392 and 409. 40 John Hare, The Omnipotent Warranty: England v The World, paper presented at International Marine Insurance Conference, November 1999, http://web.uct.ac.za/depts/shiplaw/imic99.htm (accessed 23 May 2006). 59
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Insurance Contract Law Issues Paper
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SPECIFIC UNDERTAKINGS AS TO PAST OR
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Reinsurance 15. Are there any reaso
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Basis of the contract clauses 39 Sp
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PART 1: INTRODUCTION BACKGROUND 1.1
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PART 2: BACKGROUND WHAT IS A WARRAN
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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 and 40: 4.60 It is not necessarily sufficie
Page 41 and 42: 4.69 It might be argued that most w
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: 6.53 Soyer argues that on the facts
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
Page 95 and 96: 7.127 In 1980 the Law Commission re
Page 97 and 98: Continued liability for premiums FU
Page 99 and 100: 7.148 The question is whether this
Page 101 and 102: 7.157 Often both forms of waiver in
Page 103 and 104: PART 8: AN UNFAIR TERMS APPROACH TO
Page 105 and 106: 8.10 These provisions require the c
Page 107 and 108: (3) In examining whether a term was
Page 109 and 110: APPENDIX A: THE IMPLIED WARRANTIES
Page 111 and 112: A.11 There are some reasons to trea
Page 113 and 114: To nullify a bargain in such circum
Page 115 and 116: 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
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significant definitions, terms and
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B.46 Although ombudsmen are unsympa
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