Warranties and Other Policy Terms

“Basis of Contract” Clauses

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.

It is not possible for the parties to contract out of the abolition of basis of contract clauses, irrespective of whether the contract is for consumer or commercial insurance.

Effect of Breach of Warranty

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 (as was the case under the Marine Insurance Act 1906) and is also liable for losses occurring (or attributable to something happening) after the breach of warranty has been remedied (if it can be). A breach of warranty is remedied “when the insured ceases to be in breach of the warranty”. 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.

Terms not Relevant to Actual Loss

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.

As an example of a situation where the clause would apply, a lock warranty may require the hatch of a yacht to be secured by a particular type of padlock. The warranty is intended to reduce the risk of theft. Breach of the warranty would not discharge the insurer from liability for loss of a different kind, such as loss in a storm.

This provision 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. The Law Commissions gave, as an example of a term that defines the risk as a whole, a requirement that a property or vehicle should not be used for commercial purposes.