Insurance Contract Law Issues Paper 2 Warranties - Law Commission

“Basis of the contract” clauses in business insurance
7.32 Here we consider whether, if warranties as to facts are to remain effective, they
should have to be created by the policy itself, rather than through a basis of the
contract clause on a proposal form. Later we discuss whether to take a more
radical approach, to say that all statements of existing fact made by the insured
should be regarded as representations rather than warranties.
7.33 In the Issues Paper on Misrepresentation and Non-disclosure we tentatively
proposed that basis of the contract clauses should no longer be effective in
business insurance. There would need at least to be a provision that incorrect
answers would not give rise to a remedy for breach of warranty unless there was
a term to that effect in the contract itself, rather than merely a “basis of the
contract” clause in the proposal form. In effect, if a statement made by the
insured were to amount to a warranty it would have to be stated in the policy or in
a document incorporated by reference. This is a rule that would have to be
mandatory, otherwise the mere insertion of a “basis of the contract” clause might
be taken as a ‘contracting out’ from all the rules proposed in this section. 7
7.34 Again at the working seminar there seemed to be wide support for this, which is
already the position in marine insurance. The only query raised was whether it
was consistent to make this a mandatory rule while we had suggested that in
business insurance it should be possible to contract out of the proposed
restrictions on avoidance for misrepresentation. We discussed this question
above. In any event, the thrust of the argument seemed to be that both sets of
rules should be mandatory, so it does not affect the present discussion.
7.35 As will be seen below, we would consider going further than denying effect to
basis of the contract clauses in business insurance; we ask whether all
statements of existing fact made by the insured should be regarded as
representations rather than warranties, as in the next section we will propose for
consumer insurance. However, as a minimum, we tentatively propose that in
business insurance, a “basis of the contract” clause in the proposal form
should no longer be effective to turn the statements made by the proposer
into warranties. Each statement of fact warranted should be set out either
in the policy, or in some document incorporated by reference to the policy.
This rule would be mandatory.
Specific warranties as to past or existing fact
Consumer insurance
7.36 In our first Issues Paper on the law of misrepresentation and non-disclosure, we
suggested that the remedies proposed for misrepresentation should be
mandatory in consumer insurance contracts, but default rules in business
insurance contracts. In other words, for consumer insurance, an insurer’s
remedies for a mis-statement of fact should be those set out in the new
legislation: an insurer would not be entitled to add to those remedies by a term in
the contract. 8
7 Issues Paper 1, Para 7.82.
8 The insurer would be free to agree that the insured should have greater rights.
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