Insurance Contract Law Issues Paper 2 Warranties - Law Commission

Partial loss
7.79 The Australian provisions protect policyholders when a breach of warranty
causes only part of the loss. Section 54(4) of the Australian Insurance Contracts
Act 1984 states that:
Where the insured proves that some part of the loss that gave rise to
the claim was not caused by the act, the insurer may not refuse to
pay the claim, so far as it concerns that part of the loss, by reason
only of the act.
For example, if a fire spreads from a well-maintained section of a building (A) to
one where the sprinklers are not working (B), the insured is entitled to the part of
their claim relating to the well-maintained section.
7.80 On balance, we think that such a provision is fair to policyholders, and a useful
clarification of the causal connection test. If the fire spreads from section A to
section B, the faults in section B cannot be said to have contributed to the loss in
section A. It would, of course be different if the fire spreads from the faulty
section. Here the breach would have contributed to the further loss. We welcome
views.
7.81 We tentatively propose that the law should provide that if a breach
contributes to only part of a loss, the insurer may not refuse to pay the part
not related to the breach.
A mandatory or default rule?
7.82 We have said that the current rule is unjust because it defeats the reasonable
expectations of the insured. We think this will almost always be the case in
consumer insurance, and we recommend that for consumers the rule should be
mandatory. For business insurance it is perhaps arguable that it should be
possible to alter the rule provided very clear words are used to do so.
7.83 We tentatively propose that the causal connection rule should be
mandatory in consumer insurance. We invite views on whether it should
also be mandatory in business insurance.
OTHER TYPES OF CLAUSE
7.84 The 1980 Report applied only to warranties. For example, if the insured
“warranted to maintain the car in a roadworthy condition”, then it would be open
to the insured to argue that a fault with the headlights could not have increased
the risk of a loss in broad daylight. However, if the same provision were
expressed as a description of the risk (that the insurance only applied while the
car was roadworthy) then the insured could not take advantage of the defence,
and the insurer would not be required to pay the claim.
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