Insurance Contract Law Issues Paper 2 Warranties - Law Commission

WARRANTIES OF PAST OR EXISTING FACT
Abolishing basis of the contract clauses
7.26 There are three main problems with basis of the contract clauses:
(1) The insurer is not required to distinguish between material and
immaterial issues: instead, it can grant warranty status en bloc to all the
answers in a proposal form, whether they are material or not.
(2) Such clauses allow insurers to apply a remedy appropriate to warranties
to statements that are really representations. If the law of
misrepresentation were to be reformed to reduce the remedies available
to insurers for non-fraudulent misrepresentations, insurers could use
basis of the contract clauses to evade the reforms. They could, for
example, avoid liability for misrepresentations that are innocent and nonnegligent;
for negligent misrepresentations, they could avoid all liability
rather than applying a proportionate remedy.
(3) The warranty does not need to appear in the policy itself. Policyholders
will rarely understand the import of what may seem to be obscure words
at the bottom of a proposal form.
7.27 There are several approaches to removing these problems.
(1) The law could allow statements to be incorporated en bloc, but only if the
incorporation clause were in the policy itself. This is the current law for
marine insurance. Section 35(2) of the Marine Insurance Act 1906 states
that the warranty must either be in the policy, or “contained in some
document incorporated by reference to the policy”. This means that a
policy may contain a clause that has the effect of converting all the
statements in the proposal form into warranties. However, the
incorporation clause must be in the policy itself. By contrast, in other
types of insurance, the incorporation clause may be on the proposal form
only.
(2) The legislation could permit an insurer to convert a statement of existing
fact into a warranty, but only if it did so as a specific term of the policy.
This was the approach taken by the Law Commission’s 1980 report. It
would allow a statement of existing fact to be treated as a warranty, but
only if the statement itself were in the policy. It would prevent all
statements on a proposal form from being incorporated as warranties en
bloc.
(3) The legislation could state that all statements of existing fact made by the
insured should be regarded as representations rather than warranties.
Thus if the statement were inaccurate, the insurer’s remedies would be
those available for misrepresentation, not for breach of warranty. This
means, for example, that an insurer could not avoid liability for an
innocent misstatement, even if it was written into the contract. This is the
approach taken by the Australian Insurance Contracts Act 1984, section
24. It provides that a statement by the insured about the existence of a
current state of affairs should take effect only as a representation, not as
a warranty.
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