Insurance Contract Law Issues Paper 2 Warranties - Law Commission

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the Judge [at first instance] was wrong to hold that the effect of the payment of premium clause [which allowed payment by quarterly instalments]…was to apportion the premium payable under the policy to discreet periods of the term of the policy; that is to say, to convert what was (but for the payment of premiums clause) a premium payable in respect of the entire risk into a series of premiums payable in respect of risks during successive periods…The fact that the successive instalments are due and payable on dates which occur at three monthly intervals during the term of the policy does not, in my view, lead to the conclusion that the premium, which comprises the aggregate of those instalments, is itself divisible between successive three month intervals. 47 7.144 If it were accepted that the premium became due immediately (with payment postponed into instalments) then the insured would remain liable to pay the whole premium even after the repudiation was accepted. We do not think that this result would be fair. It would allow the insurer to make a windfall profit from the insured’s breach of warranty, by keeping the premiums and not incurring any liability. In our view, the normal default rule should be that the insured would no longer be liable to pay premium instalments that fell due after the contract has been terminated. 7.145 Is it agreed that if the insurer accepts the insured’s breach of warranty, so as to terminate future liability, the insured should cease to be liable for future premiums? PREMIUMS PAID IN ADVANCE 7.146 A more difficult question is what should happen if the insured has paid the premium in advance. Under normal contract principles, the insured would only be entitled to the return of the premium if there had been a total failure of consideration. 48 For this, the breach, and the acceptance of the breach, must have occurred before the cover started. 7.147 However, for many types of contract, the courts are prepared to divide the bargain into constituent parts. Where some of the advance payment can be attributed to a particular part of the contract, and the consideration for that part has wholly failed, the guilty party may recover that portion of money. This would apply in a yearly insurance contract where it was possible to divide the total cover into 12 separate monthly parts. It would mean that if a breach of warranty were accepted in Month 2, the insured would be entitled to be repaid 10/12ths of the advance premium, less any damages due to the insurer for administrative expenses and loss of profit. 47 See above. 48 See Rover International Ltd v Cannon Film Sales (No. 3) [1989] 1 WLR 912. In Stocznia Gdanska SA v Latvian SS Co [1998] 1 WLR 574 at p 588, Lord Goff stated that “the test is not whether the promisee has received a specific benefit, but rather whether the promisor has performed any part of the contractual duties in respect of which the payment is due”. 90
7.148 The question is whether this is a desirable result. We are keen to improve communication and trust between insurers and insured, and we are concerned that allowing the insurer to retain the whole premium may operate to undermine such trust. Suppose, for example, a shop owner has warranted that the shop will be protected by a working burglar alarm at all times, and the burglar alarm breaks down. Ideally, the shop owner would contact the insurer to tell them about the problem as soon as possible. However, if this would permit the insurer to cancel the policy and retain ten months’ premium, the owner would be better off keeping quiet. They might calculate that the alarm would be fixed soon, before any loss happens. Furthermore, under our reforms, the insurer would remain liable for losses unconnected with the problem, giving the insured a clear incentive not to alert the insurer. 7.149 We would be interested to hear views on whether an insurer who terminates a policy following the insured’s breach of warranty should normally provide a pro-rata refund of the outstanding premium, less any damages or administrative costs. Notice 7.150 Under our proposals, once an insurer had communicated its acceptance of the breach to the insured, it would no longer be liable for future claims. This would not make any difference to claims for losses connected to the breach (for which the insurer would not be liable in any event) but it would terminate all the insurer’s other liability for claims arising after the effective date. 49 This leads to the question whether the insurer should give reasonable notice of such a termination. Should the termination take place when it is received, or only after sufficient time for the insured to make other arrangements? 7.151 In Australia, the insurer cannot bring a contract to an end as a result of the breach, but it is entitled to terminate the contract using a cancellation clause. Under section 59 of the Insurance Contracts Act 1984, the insurer must give at least three days notice in writing. In Norway, circumstances covered by a warranty would normally be considered as an alteration in the risk. This would permit the insurer to terminate the contract, but only after 14 days notice. 50 7.152 We think that a requirement for a period of reasonable notice would encourage insureds to report breaches of warranty. If a notice period is to be specified, it should reflect a reasonable period for the insured to make other arrangements. We would welcome views about whether this is more likely to be a few days or a couple of weeks, or somewhere in between. 7.153 We welcome views as to whether the act should include any requirement for notice. If so, what would constitute a reasonable time for an insured to make other arrangements? 49 Claims arising before the effective date would not be affected. 50 Norwegian Marine Insurance Plan, section 3-10. 91
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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
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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 and 96: 7.127 In 1980 the Law Commission re
Page 97: Continued liability for premiums FU
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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