Insurance Contract Law Issues Paper 2 Warranties - Law Commission

7.52 In our first Issues Paper we had proposed that, in business insurance, the insurer
should be able to give itself the right to avoid for negligent or even wholly
innocent misrepresentations, as in business insurance the new rules on
misrepresentation would not be mandatory. As we explained earlier, we now
think this was the wrong approach. If the insurer should be allowed to give itself
remedies for “non-negligent” misstatements, the permitted way of doing this
should be by the insured giving warranties of specific facts.
7.53 Were the law to be changed so as to prevent the insurer being able to rely on
warranties as to specific facts (as in Australian law), that rule itself should be
mandatory. To make it merely a default rule that could be altered by agreement
would render it ineffective. Insurers could simply insert into their contracts a
clause disapplying the relevant section of the new legislation and then continue to
use specific warranties. Indeed the court might find that the parties had implicitly
excluded the new rule simply because there is a warranty of fact in the contract.
In either case, the insured who is not an expert will still not be aware of the
potential consequences. In other words, any new “no warranties of fact” rule
would have to be mandatory to have any effect at all.
7.54 So a choice has to be made. The alternatives are:
(1) To continue to allow breach of warranties of specific facts to act as a
defence to a claim provided the claim was causally connected with the
breach. We think that specific warranties should be permitted only
subject to formal safeguards, such as that the warranty is in a separate
written schedule to the policy. We also think that an insurer should only
be entitled to reject a claim on the ground of breach of warranty if there
was a causal connection between the breach and the claim. We discuss
these points in more detail in relation to warranties as to the future; or
(2) To provide both that the insurer’s remedy for a misstatement of fact
should only be through the remedies for misrepresentation, and that the
rules governing these should be mandatory. This is the position in
Australian law.
This choice is difficult and we would welcome views.
7.55 In business insurance, we invite views on whether:
(1) incorrect statements of past or existing fact should only amount to
misrepresentations and not warranties (which would be a
mandatory rule); or
(2) breach of warranty of specific facts should continue to act as a
defence to a claim provided the claim was causally connected with
the breach, and that certain formal safeguards as to warranties
generally had been satisfied when the contract was made.
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