Insurance Contract Law Issues Paper 2 Warranties - Law Commission

7.105 It has been put to us that a breach of warranty continues to undermine the
credibility of the insured, and hence the nature of the risk, even in the absence of
any specific causal connection between the two. In the Bamcell II, for example,
the policyholders had specifically promised to place a watchman on board each
night from 2200 hours to 0600 hours, but in fact had never hired a watchman at
all. It could be argued that such behaviour fundamentally altered the nature of the
risk. If the insured could not be trusted to do as they had promised, how many
other unacceptable risks were they taking? Even without a direct causal
connection between the lack of a watchman and the daytime loss, could there be
said to be a connection through the addition of a moral hazard?
7.106 We have two concerns about this argument. The first is that behaviour that
seems heinous to an insurer may seem innocuous to an outsider. There are
several examples in the law reports, where (for example) insurers have argued
that a minor conviction many years ago fundamentally alters the nature of the
risk, in ways that the court has been unable to accept. 29 The doctrine of
warranties allows the insurer to play judge and jury by denying a claim when they
think that the insured has committed a morally reprehensible breach, even for
matters that appear merely technical to others.
7.107 Secondly, we do not think that the present rules on warranties meet the needs
and expectations of an international market. We have not found any
commentators outside the common law sphere who consider it is fair for an
insurer to fail to pay a claim for a breach which is not connected to the loss.
Several criticise the rule in scathing terms. 30 Even within jurisdictions that share
the legacy of the Marine Insurance Act, it is rare for a court to accept insurers’
arguments that a claim unrelated to a breach should not be paid. It was rejected
by the US Supreme Court in Wilburn Boat, and by the Supreme Court of Canada
in Bamcell II. 31 The Australia Law Reform Commission reviewed marine
insurance law in 2001, following complaints from the fishing industry and
recommended that a breach of warranty should only justify avoiding a claim if it
proximately caused the loss.
7.108 Given the international nature of the marine market, it is particularly important
that its legal rules should correspond to internationally accepted notions of
fairness. For this reason, we tentatively propose that the causal connection
test outlined above should also apply to marine insurance.
29
See Roselodge Ltd v Castle [1966] 2 Lloyd’s Rep 113 and Reynolds v Phoenix Assurance
Co [1987] 2 Lloyd’s Rep 440.
30 For example, Professor Trine-Lise Wilhelmsen comments that the English concept of a
warranty is “hard to understand and even harder to explain” (Duty of Disclosure, Duty of
Good Faith, Alternation of Risk and Warranties: An Analysis of the Replies to the CMI
Questionnaire”, CMI Yearbook 2000 p 392). Professor Hare calls the Anglo-American
marine insurance warranty “a prodigal aberration from the European ius communis of
marine insurance” which should “be brought back into the fold in the interests of very
fairness, justice and equity to which English law so properly aspires” (The Omnipotent
Warranty: England v The World, paper to the International Marine Insurance Conference,
November 1999).
31 See paras 6.51 and 6.52, above.
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