Insurance Contract Law Issues Paper 2 Warranties - Law Commission

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.
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