Policy Terms

The Insurance Act prohibits “basis of contract” clauses for commercial insurance contracts. A “basis of contract” clause is one that converts a pre-contractual representation by the insured into a warranty. This could, for example, be a clause in a proposal form stating that the insured warrants the accuracy of all of the answers given. It may also cover a warranty that a particular representation made by the insured before the contract is entered into is true.

This brings commercial insurance in line with the position for consumer insurance under the Consumer Insurance (Disclosure and Representations) Act 2012.

Parties cannot contract out of the abolition of basis of contract clauses, irrespective of whether the contract is for consumer or commercial insurance.

For both commercial and consumer insurance, a breach of warranty suspends rather than discharges the insurer’s liability. The insurer has no liability for losses occurring, or which are attributable to something occurring, during the period of the suspension.

The insurer is liable for losses before the breach occurs and for losses occurring (or attributable to something happening) after the breach of warranty has been remedied (if it can be). The insurer is not, however, liable for losses attributable to something happening before the breach is remedied even if the loss itself occurs after the breach has been remedied.

A warranty that requires something to be done by an ascertainable time may be remedied even if the deadline is missed, if the risk to which the warranty relates later becomes essentially the same as that originally contemplated. For example, a warranty in a policy covering theft may require the insured to install a burglar alarm by a particular date. If the insured does not fit the burglar alarm until after that date the insured is in breach of the warranty (which stipulated a date for compliance). The insured may nevertheless be treated as having remedied the warranty because the risk (of theft) has been reduced to that originally contemplated.

If a policy (whether commercial or consumer) contains a term designed to reduce the risk of loss of a particular kind, or at a particular location or at a particular time, an insurer cannot rely on breach of the term if the insured can show that failing to comply could not have increased the risk of the loss which actually occurred. The test is not whether the non-compliance actually causes or contributes to the loss but whether it could not have increased the risk of the loss.

This applies to any term in a policy with which the insured has to comply and that relates to a particular type of loss, or the risk of loss at a particular time or place. It is not limited to warranties and can, for example, apply to conditions precedent.

The provision does not apply to a term “defining the risk as a whole”. Whether a particular term defines the risk as a whole is likely to depend on the scope of cover provided under the policy. A requirement that a property or vehicle should not be used for commercial purposes, for example, would be a term defining the risk as a whole.

With the exception of the abolition of “basis of contract” clauses (which is mandatory), parties to commercial insurance contracts (but not consumer contracts) can contract out of the Insurance Act and substitute their own agreed terms. If a term would put the insured in a worse position, the insurer must meet the transparency requirements contained in the Insurance Act.

To be effective, a term that would put an insured in a worse position than they would be in under the Act must be:

• sufficiently drawn to the insured’s attention before the contract is entered into; and
• clear and unambiguous as to its effect.