Insurance Contract Law Issues Paper 2 Warranties - Law Commission

More documents

Recommendations

Info

7.61 We think the same protections should apply in a court of law. Like the FOS, a court should only enforce a specific obligation on the consumer if the insurer took sufficient steps to bring it to the consumer’s attention. The insurer should spell out both what the consumer must do (as in “you must fit a five-lever mortice lock”) and the consequences of not doing so (as in “if you do not, we may refuse any claim connected with your failure”). 7.62 There are different approaches to implementing this principle. One would be to impose detailed rules about how policyholders’ obligations should be spelled out. For example, rules could state that the obligation should be in the product summary (required by ICOB Rule 5.3.1); or on the cover note; or in a separate letter; on in one of the three. The statement could be required to be in plain language, legible and clearly presented; or one could go further and specify a minimum point size and prescribed warning. The FSA already has powers to make rules of this sort. 7.63 The alternative would be to set out the general principle that unusual terms should be brought to the consumers’ attention. It would then be left to the courts to decide whether the obligation has been complied with, bearing in mind any relevant FSA rules or guidance. 7.64 The first approach is more certain; the second is more flexible. It is more adaptable to new methods of sales and product information. Given the FSA’s current emphasis towards a more principles-based approach, with fewer detailed rules, we are inclined to favour the second approach. This would mean that a court would be left to decide whether the insurer had met its obligation to bring the warranty or similar obligation to the policyholder’s attention, having regard to any rules or guidance specified by the FSA. 7.65 In consumer insurance, we tentatively propose that an insurer may only refuse a claim on the grounds that the insured has failed to carry out a specific task (or refrained from a normal activity) if it has taken sufficient steps to bring the requirement to the insured’s attention. In deciding whether the insurer has taken sufficient steps, the court should have regard to FSA rules or guidance. REQUIRING A CONNECTION BETWEEN THE BREACH AND THE LOSS 7.66 The greatest and most obvious problem with the law on warranties is that it permits the insurer to escape liability for technical breaches that have nothing to do with the loss in question. 7.67 We think there is a need to introduce some form of causal connection test to protect policyholders from unfair treatment. An insured may readily agree to a warranty that their sprinkler system will be inspected, believing that if the failure of the sprinkler system causes a loss they will not be indemnified. However, policyholders would not understand this to mean that the insurers would refuse to pay if the breach were later remedied, or if the loss were totally unconnected with the sprinklers. This result defies logic and normal expectations, is inconsistent with good practice as recognised by the SGIP and risks bringing the UK insurance industry into disrepute. Whether we are discussing consumer or business insurance, the current law can properly be described as unjust. 74
7.68 We tentatively conclude that the law should afford policyholders some protection against claims being denied for reasons unconnected with the loss. 7.69 Although our general policy is clear, difficult questions arise about how this policy should be implemented. There are several possible models to follow. Both New Zealand and Australia have enacted statutes requiring some form of connection. Similarly, in 1980 the Law Commission proposed that an insured should be able to challenge the insurer’s decision not to pay a claim if there were shown to be no links between the breach and the loss. Their recommendations were explained earlier. 16 7.70 There are similarities in these three models. For example, all three put the burden of proof firmly on the insured to show a lack of connection. However, the provisions differ in the words they use to define the type of causal connection required. There are also differences in scope: the 1980 report applied just to warranties, while the New Zealand legislation, for example, applied to any term which limited liability for events or circumstances likely to increase the risk of a loss. Here we look first at how to define the causal connection required, and then at the scope of any reform. Defining the causal connection 7.71 The three provisions use different words to describe the connection required between the breach and the loss. The Bill in the Law Commission’s 1980 Report required the insured to prove that the breach did not “increase the risk” that the event giving rise to the claim would occur in the way it did. Under the New Zealand Act, the insured must prove that the event did not “cause or contribute to” the loss. 17 In Australia the insured need only prove that it did not “cause” the loss. 18 16 The 1980 report is summarised in Part 3, and the New Zealand and Australian approaches are discussed in Part 6. 17 In New Zealand, the Insurance Law Reform Act 1977 s 11 states the insured has a right to be indemnified if he can prove, on the balance of probabilities, that the loss was not “caused or contributed to by the happening of such events or the existence of such circumstances”. 18 For example, the Australian Insurance Contracts Act 1984, s 54(3) states that “Where the insured proves that no part of the loss that gave rise to the claim was caused by the act, the insurer may not refuse to pay the claim by reason only of the act”. 75
Page 1 and 2:
Insurance Contract Law Issues Paper
Page 3 and 4:
SPECIFIC UNDERTAKINGS AS TO PAST OR
Page 5 and 6:
Reinsurance 15. Are there any reaso
Page 7 and 8:
Basis of the contract clauses 39 Sp
Page 9 and 10:
PART 1: INTRODUCTION BACKGROUND 1.1
Page 11 and 12:
PART 2: BACKGROUND WHAT IS A WARRAN
Page 13 and 14:
Held covered in case of any breach
Page 15 and 16:
For example, in Farr v Motor Trader
Page 17 and 18:
We recognise that a consequence of
Page 19 and 20:
THE RECOMMENDATIONS 3.3 The 1980 re
Page 21 and 22:
The test in the final report 3.12 F
Page 23 and 24:
3.21 A more recent example is Seddo
Page 25 and 26:
PART 4: ARE WARRANTIES STILL A PROB
Page 27 and 28:
(4) The wording of the warranty doe
Page 29 and 30:
4.12 The “innominate term” clas
Page 31 and 32: 4.23 The 1977 Statement of Long-Ter
Page 33 and 34: 4.34 The Long-Term Statement, howev
Page 35 and 36: 4.42 In Director General of Fair Tr
Page 37 and 38: Does an exception have to be in pla
Page 39 and 40: 4.60 It is not necessarily sufficie
Page 41 and 42: 4.69 It might be argued that most w
Page 43 and 44: 4.78 However, issues of causal conn
Page 45 and 46: 4.86 Case 14 concerned a critical i
Page 47 and 48: 5.5 In 1980 the Law Commission desc
Page 49 and 50: 5.15 The effect of the Regulations
Page 51 and 52: Business insurance 5.25 The problem
Page 53 and 54: PART 6: WARRANTIES IN OTHER JURISDI
Page 55 and 56: 6.10 In a 1982 case, the judge expl
Page 57 and 58: (b) In the view of the court or arb
Page 59 and 60: (4) Where the insured proves that s
Page 61 and 62: 6.33 An added twist to these diffic
Page 63 and 64: 6.44 The problems appear where the
Page 65 and 66: 6.53 Soyer argues that on the facts
Page 67 and 68: 6.64 An example will illustrate the
Page 69 and 70: PART 7: PROVISIONAL PROPOSALS 7.1 T
Page 71 and 72: All insurance 7.12 For both consume
Page 73 and 74: 7.20 In the seminar we were asked w
Page 75 and 76: 7.28 The last option is the most ra
Page 77 and 78: 7.37 It would be consistent with th
Page 79 and 80: 7.46 There are two reasons why an i
Page 81: Other types of clause dealing with
Page 85 and 86: Our provisional view 7.75 In our vi
Page 87 and 88: 7.85 We think it would be unduly fo
Page 89 and 90: 7.97 Should the causal connection t
Page 91 and 92: 7.105 It has been put to us that a
Page 93 and 94: Legality 7.116 The warranty of lega
Page 95 and 96: 7.127 In 1980 the Law Commission re
Page 97 and 98: Continued liability for premiums FU
Page 99 and 100: 7.148 The question is whether this
Page 101 and 102: 7.157 Often both forms of waiver in
Page 103 and 104: PART 8: AN UNFAIR TERMS APPROACH TO
Page 105 and 106: 8.10 These provisions require the c
Page 107 and 108: (3) In examining whether a term was
Page 109 and 110: APPENDIX A: THE IMPLIED WARRANTIES
Page 111 and 112: A.11 There are some reasons to trea
Page 113 and 114: To nullify a bargain in such circum
Page 115 and 116: Table 1: Type of policy Travel 14 2
Page 117 and 118: B.16 Here a breach of the term does
Page 119 and 120: (4) In Case 20, the policy excluded
Page 121 and 122: significant definitions, terms and
Page 123 and 124: B.46 Although ombudsmen are unsympa
show all

Insurance Contract Law Issues Paper 2 Warranties - Law Commission

Create successful ePaper yourself

Delete template?

Save as template?