Insurance Contract Law Issues Paper 2 Warranties - Law Commission

7.37 It would be consistent with this still to permit the insurer to rely on specific
warranties of fact that were set out in a written document (or some similar formal
requirement). This appears to have been the view of the Law Commission in
1980. The report recommended that basis of the contract clauses should be of no
effect but specific warranties as to past or existing fact would be effective, subject
to two provisos:
(1) The warranty must be material (there would be a presumption that it was
material); and
(2) Once a claim had occurred, the insurer would not be entitled to refuse to
pay the claim if the insured showed that the warranty was not intended to
safeguard against the kind of event that materialised or that the breach of
warranty did not increase the risk of the event occurring in the way it did. 9
7.38 The requirements of materiality and of some connection between the warranty
and the claim would limit the possibility for the insurer to use specific warranties
as a way to avoid any restrictions on the current remedies for misrepresentation.
Suppose, for example, that an insurance policy contained the following term:
The insured hereby warrants that the house in question is made of
brick and slate.
7.39 If the house was in fact timber-framed under a brick skin, the insurer would be
able to serve notice on the insured repudiating the contract from the date of the
notice if no claim had yet arisen; but if an event giving rise to a claim had
occurred, whether the insurer would have to meet the claim would depend on the
facts. If the event were a flood, the insurer would have to pay. If the event were a
fire, it would depend on whether the construction of the house had increased the
risk of the event that occurred. So a claim for smoke damage caused by a chippan
fire might have to be met whereas a fire that affected the main structure
might be different.
7.40 We now think this “specific warranty” approach would offer insufficient protection
to consumers. First, it would still provide the insurer with the right to refuse a
claim even though the consumer had not been fraudulent or even negligent.
Secondly, we doubt that consumers would derive much protection from the
formal requirements. Merely requiring that the warranty is put into a written
document which is given to the consumer within a reasonable time will only
protect the consumer who reads the document. Even if the statements have to be
in a separate document from the body of the policy, we doubt that many
consumers will read them. Normally they will only receive the document after they
have, in their view, completed arranging their insurance.
9 Cl 10 of the draft Bill. See further below.
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