Insurance Contract Law Issues Paper 2 Warranties - Law Commission

7.41 This suggests that we should take the wide approach of the Australian Insurance
Contracts Act 1984, namely that a statement of existing fact cannot be a
warranty. The insurer’s remedies should be those available for misrepresentation
(which would not permit avoidance for an innocent, non-negligent
misrepresentation, and would apply a proportionate remedy to a negligent one). If
the clause were treated as a warranty it would allow an insurer to evade the
reforms by applying a different (more insurer-friendly) set of remedies to any
breach.
7.42 It might be objected that this restriction would be easy to evade. It would be open
to the insurer to define the cover by stating that the insurance only applied to
houses constructed of brick and slate. In consumer cases, we think current law
provides adequate safeguards through the Unfair Terms in Consumer Contract
Regulations 1999. The effect of these was explained in detail in Part 4. In the
example above, if the restriction to brick houses was explained upfront and in a
clear and transparent way, the term would be classified as a core term and would
not be open to review. If the exclusion was only mentioned in the small print, it
would be subject to a fairness test. We think that is a just result. A consumer who
is told that the insurance offered applies only to certain types of risk and not
others, or who is given documents that make this quite clear without the
consumer having to read the small print, does not have legitimate grounds for
complaint. With warranties of fact the situation is different. The reason for limiting
the use of warranties as to existing facts is precisely because consumers are
very unlikely to understand the effect of the warranty.
7.43 We tentatively propose that in consumer insurance, all statements of
existing fact should be treated as representations rather than warranties.
Business insurance
SHOULD SPECIFIC WARRANTIES OF FACT BE EFFECTIVE?
7.44 We have already proposed, as we did in our first Issues Paper, that in business
insurance basis of the contract clauses should not be effective to make every
statement in the proposal form into a warranty and thus give the insurer the right
to repudiate. The reason for this is that to allow basis of the contract clauses
would permit the insurer in effect to exclude the regime we proposed for
misrepresentation by means of a single clause, 10 which most business insureds
would not understand. This rule should be mandatory. 11
7.45 As we said in the case of consumer insurance, it would be consistent with
rendering basis of the contract clauses ineffective 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). The question is whether this should also be
prevented, as we have tentatively proposed for consumer insurance, 12 or whether
it should be permitted, either as at present or subject to restrictions.
10
Not necessarily even in the policy itself; except for marine insurance, the clause need only
be in the proposal form.
11 See above, para 7.33.
12 See para 7.43 above.
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