Insurance Contract Law Issues Paper 2 Warranties - Law Commission

7.28 The last option is the most radical, since it would mean that even specific
warranties of existing fact would have no special status; they would merely be
representations. This would be so whether they were warranties of specific facts
or became warranties by virtue of a general “basis of the contract” clause. We
consider this radical third option after discussing whether basis of the contract
clauses should continue to be effective, without prejudice to the question of
specific warranties. We consider consumer insurance first and then business
insurance.
Basis of the contract clauses in consumer insurance
7.29 Even if warranties as to specific facts are still to be effective in business
insurance, we are convinced that in consumer insurance, basis of the contract
clauses should not be effective. We raised this question in our first Issues Paper
on Misrepresentation and Non-disclosure, noting there has been widespread
criticism of their use. 2 In 1997, for example, the National Consumer Council
described them as “completely unfair”. 3 Although the ICOB Rules do not refer to
basis of the contract clauses, their use was barred by the 1986 SGIP. The ABI
has told us that the use of such clauses contravenes insurers’ duty to treat
customers fairly. 4 They have been outlawed in Australia and New Zealand. At the
first working seminar there seemed to be widespread agreement with the
suggestion in our Issues Paper that basis of the contract clauses should always
be ineffective in consumer insurance. 5
7.30 In consumer insurance it would not be adequate to reform the law merely by
requiring that the warranty must either be in the policy, or “contained in some
document incorporated by reference to the policy”. If all that is required were that
there should be a clause in the policy that the insured warrants the truth of every
statement made in another document, such as the proposal form, consumers
would be no more likely to understand the effect than if the “basis of the contract”
clause were in the proposal form. At the very least (and as will be seen in the
next section, we would go further) we think that in consumer insurance warranties
of existing fact should be effective only if each fact warranted is specifically set
out in the policy or in a schedule to it.
7.31 We tentatively propose that “basis of the contract” and similar clauses that
have the effect of turning statements of fact in general into warranties
should be of no effect in consumer contracts. 6
2 See, for example, the 1980 report para 7.2 and Joel v Law Union and Crown Insurance Co
[1908] 2 KB 863, 885; Glicksman v Lancashire and General Assurance Co [1927] AC 139,
144 to 145; Mackay v London General Insurance Co [1935] Lloyd’s Law Reports 201 and
Lord Russell’s comments in Provincial Insurance v Morgan [1933] AC 240, 250.
3 NCC, Insurance Law Reform, May 1997, p 28.
4 See the discussion in Part 4.
5 See Draft Issues Paper No 1, para 6.104.
6 If this were followed but specific warranties of fact were to be permitted (as to which see
the next section), it might be necessary to draft the legislation by reference to what is
permitted, since it is not easy to define a ‘basis of the contract’ clause. See 1980 report,
Draft Bill cll 8 and 9.
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