Insurance Contract Law Issues Paper 2 Warranties - Law Commission

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…subject to any express provision in the policy, the insured is discharged from liability as from the date of the breach of warranty, but without prejudice to any liability incurred by him before that date. If an insurer is automatically discharged from liability from the date of the breach, it cannot logically be liable to pay a subsequent loss unconnected with the breach. 41 7.133 If one were to repeal section 33(3) it would be necessary to put something in its place. If not, the repeal would only lead to confusion about how far the provision merely reflected the pre-existing common law position, which continued unchanged. The question is how far any statutory restatement should go in altering the current law. 7.134 If warranties are not to be given any special or pre-eminent status, then it would be more in keeping with general contractual principles to provide that a breach by one party merely gave the other party the choice. When an injured party becomes aware of the breach, it may either decide to repudiate the contract or to affirm it and continue with the relationship. 7.135 Should the reforms provide that a breach of warranty gives the insurer the right to repudiate the contract, rather than automatically discharging it from liability? 7.136 In 1980 the Law Commission argued that the issue of past claims and future repudiation should be treated separately. An insurer should be able to pay past claims and repudiate the policy for the future; it should also be entitled to reject claims, without repudiating in the future. 7.137 Under the tentative proposals in this paper, a breach of warranty would mean that an insurer was not liable for a loss causally connected to the breach (though, as we discuss below, it would be possible for the insurer to waive this breach). The breach would not affect any past unconnected losses. However, the question is whether the breach should also entitle an insurer to choose to bring the policy to an end. This means that the insurer would no longer be liable to meet any claims (whether causally connected to the breach or not) from the time the decision was communicated to the insured, 7.138 Should the reforms provide an insurer with a choice between repudiating the claim only, or the policy for the future, or both? The implications of termination: liability for premiums, notice and waiver 7.139 If the reforms were to provide that a breach of warranty gives an insurer the right to bring a contract to an end, this raises three further questions. First, should the insured continue to be liable to pay premiums after the contract is terminated? Secondly, should the insurer’s right to repudiate for the future be subject to a requirement to give reasonable notice? Finally, what effect would this have on the law of waiver? We explore these issues below. 41 Furthermore, if we were to extend the Unfair Contract Terms Act 1977 to insurance policies, as discussed in Part 8, it would be incompatible with s 29, which provides that a party may rely on provisions that are specifically authorised by statute. 88
Continued liability for premiums FUTURE PREMIUMS 7.140 Under general contract law, where one party accepts the other’s wrongful repudiation, the effect is to bring to an end both parties’ primary obligations under the contract. As Lord Diplock put it: (a) there is substituted by implication of law for the primary obligations of the party in default which remain unperformed a secondary obligation to pay money compensation to the other party for the loss sustained by him in consequence of their non-performance in the future and (b) the unperformed primary obligations of that other party are discharged. 42 7.141 This means that neither the innocent nor the guilty party are required to perform any further primary obligations under the contract (though ancillary clauses, dealing with matters such as arbitration, may survive). 43 If the guilty party has been paying by instalments, the normal rule is that the insured remains liable for any payments that fall due before the repudiation is accepted, 44 but not for payments due after that date. The primary obligation to pay the instalments is replaced with a secondary obligation to pay damages for loss of profits. This contrasts with the rule for breach of warranty under section 33(3), under which only the insurer is discharged from liability: the insured remains liable to pay future instalments of the premium. As we have seen, under the current law if the insured breaches a payment of premium warranty, the insurer is automatically discharged from further liability, but the insured must continue to make payments. 45 7.142 The question is what would happen if we were to repeal section 33(3) and replace it with an insurer’s right to accept repudiation? It is unclear whether the normal rule would apply, so that the insured would cease to be liable for the premium). The insurer might be able to argue that the separate instalments did not constitute different payments for divisible periods of cover (with, for example, each monthly instalment paying for each month’s cover). Instead, it could be said that the premium was one single indivisible payment for one single period of cover: it was just that the contract permitted the single premium to be paid over the course of time. 7.143 This latter argument was accepted in Chapman v Kardirga. 46 Chadwick LJ commented: 42 Photo Production Ltd v Securicor Transport Ltd [1980] AC 827 at p 849. 43 See Yasuda Fire & Marine Insurance Co of Europe v Orion Marine Insurance Underwriting Agency Ltd [1995] 1 Lloyd’s Rep 525. 44 Hundai Heavy Industries Co Ltd v Papadopoulos [1980] 1 WLR 1129, where the party in default was entitled to claim an instalment which fell due on 15 July despite the fact that they had cancelled the contract on 6 September. 45 In JA Chapman v Kadirga and others [1998] CLC 860. 46 Above. 89
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Insurance Contract Law Issues Paper
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SPECIFIC UNDERTAKINGS AS TO PAST OR
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Reinsurance 15. Are there any reaso
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Basis of the contract clauses 39 Sp
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PART 1: INTRODUCTION BACKGROUND 1.1
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PART 2: BACKGROUND WHAT IS A WARRAN
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Held covered in case of any breach
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For example, in Farr v Motor Trader
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We recognise that a consequence of
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THE RECOMMENDATIONS 3.3 The 1980 re
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The test in the final report 3.12 F
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3.21 A more recent example is Seddo
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PART 4: ARE WARRANTIES STILL A PROB
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(4) The wording of the warranty doe
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4.12 The “innominate term” clas
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4.23 The 1977 Statement of Long-Ter
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4.34 The Long-Term Statement, howev
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4.42 In Director General of Fair Tr
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Does an exception have to be in pla
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4.60 It is not necessarily sufficie
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4.69 It might be argued that most w
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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 and 82: Other types of clause dealing with
Page 83 and 84: 7.68 We tentatively conclude that t
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: 7.127 In 1980 the Law Commission re
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
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Insurance Contract Law Issues Paper 2 Warranties - Law Commission

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