Insurance Contract Law Issues Paper 2 Warranties - Law Commission

7.20 In the seminar we were asked whether it was consistent to permit business
parties to alter the rules on misrepresentation by agreement while at the same
time forbidding them to use basis of the contract clauses. To some extent they
are just different ways of reaching the same result; why forbid one but allow the
other? The same question will arise in relation to warranties as to specific facts:
why should the parties not be able to create specific warranties, so that they have
remedies even for non-negligent misstatements, if they can achieve much the
same result by altering the rules on misrepresentation? Shouldn’t both sets of
rules be mandatory?
7.21 We had thought not. We had thought that there is a difference between remedies
for misrepresentation and remedies for breach of warranty that justified a
difference in treatment. In the context of insurance contract law, the parties’
freedom of contract should not be interfered with unless strictly necessary.
However we need to ensure, so far as reasonably possible, that the parties
understand the effect of what they are agreeing to. This is the problem with
warranties of fact: as we pointed out earlier, the effects are most unlikely to
accord with the reasonable expectations of the insured. We thought that an
insured was much less likely to be taken by surprise by a clause dis-applying the
normal rules governing misrepresentation in favour of the insurer.
7.22 We were thinking of a provision such as that “the insurer should have the right to
avoid the contract even if the proposer’s misstatement were made without
negligence”. That kind of provision should put the insured on warning. It makes it
reasonably clear to the insured what its position will be if it makes an inaccurate
or incomplete statement. Therefore we had in mind to allow the parties to alter
the rules on misrepresentation but not to give effect to specific warranties of fact,
even in business insurance.
7.23 However we have to admit that our argument is only a good one so far as
insureds will in practice become aware of the clause. Moreover, it was rightly
pointed out that the rules on misrepresentation could be excluded by a clause
stating simply “section 000 of the Insurance Contract Act 2xxx shall not apply to
this contract”. Even if they read this clause, few non-expert insureds would be
much the wiser.
7.24 We now think our approach was incorrect. We suspect that a contractual clause
that alters the rules on avoidance for misrepresentation is less likely to put the
insured on notice of the risk being placed on it than is a statement that it warrants
the truth of specified facts. In other words, we think we were wrong to suggest
that the rules on misrepresentation could be varied by agreement. If it is desired
to allow insurers to reserve the right to refuse a claim because of a wholly
innocent misstatement of existing fact, it is probably better to allow it to do so via
a warranty of the truth of the facts than by a clause altering the remedies for
misrepresentation.
7.25 We return to the question of warranties as to specific facts below. Meanwhile, we
tentatively propose that, contrary to what we said in our first Issues Paper, the
proposed rules on materiality and non-fraudulent misrepresentation should be
mandatory in business and consumer insurance.
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