Insurance Contract Law Issues Paper 2 Warranties - Law Commission

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”.
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