Law of Insurance Warranties, The

Alastair Owen

Document

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CHAPTER 9 The Insurance Act 2015: An effective reform of the law on warranties and other provisions?

Insurance Act 2015: key provisions

9.1 For the purposes of this volume, the relevant clauses of the Insurance Act 2015 are the following:

Section 9 Warranties and representations
Section 10 Breach of warranty
Section 11 Terms not relevant to the actual loss
Section 16 Contracting out: non-consumer insurance contracts
Section 17 The transparency requirements

Section 9 Warranties and representations

9.2 Section 9 reads as follows:

(1) This section applies to representations made by the insured in connection with –
- (a) a proposed non-consumer insurance contract, or
- (b) a proposed variation to a non-consumer insurance contract.
(2) Such a representation is not capable of being converted into a warranty by means of any provision of the non-consumer insurance contract (or of the terms of the variation), or of any other contract (and whether by declaring the representation to form the basis of the contract or otherwise).1

9.3 Section 9 abolishes basis clauses. As discussed elsewhere, this author, like most other commentators, welcomes the abolition of basis clauses, regarding it as a reform that is long overdue. It may be thought that s9 will likely reduce the number of present fact warranties as the section outlaws the automatic ‘conversion’ of representations into warranties. However, this text doubts this will be the outcome: instead it is suggested additional, separate, warranties will simply be added to the policy by insurers, mirroring provisions that would

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otherwise have been ‘converted’ into warranties by basis of contract provisions. The Law Commission’s Report supports this assertion.2

Section 10 Breach of warranty

9.4 S10 of the Insurance Act 2015 reads as follows:

S10(1): Any rule of law that a breach of a warranty (express or implied) in a contract of insurance results in the discharge of the insurer’s liability under the contract is abolished.
S10(2): An insurer has no liability under a contract of insurance in respect of any loss occurring, or attributable to something happening, after a warranty (express or implied) in the contract has been breached but before the breach has been remedied.
S10(3): But subsection (2) does not apply if –
- (a) because of a change of circumstances, the warranty ceases to be applicable to the circumstances of the contract,
- (b) compliance with the warranty is rendered unlawful by any subsequent law, or
- (c) the insurer waives the breach of warranty.
S10(4): Subsection (2) does not affect the liability of the insurer in respect of losses occurring, or attributable to something happening –
- (a) before the breach of warranty, or
- (b) if the breach can be remedied, after it has been remedied.
S10(5): For the purposes of this section, a breach of warranty is to be taken as remedied –
- (a) in a case falling within subsection (6), if the risk to which the warranty relates later becomes essentially the same as that originally contemplated by the parties,
- (b) in any other case, if the insured ceases to be in breach of the warranty.
S10(6): A case falls within this subsection if –
- (a) the warranty in question requires that by an ascertainable time something is to be done (or not done), or a condition is to be fulfilled, or something is (or is not) to be the case, and
- (b) that requirement is not complied with.
S10(7): In the Marine Insurance Act 1906 –
- (a) in section 33 (nature of warranty), in subsection (3), the second sentence is omitted,
- (b) section 34 (when breach of warranty excused) is omitted.

9.5 In essence, the impact of s10 is that a breach of warranty cannot be relied upon by the insurer to escape liability, unless the assured was in breach at the time of the loss, or at least at the time of the happening of the event that gave rise to some future loss. The risk is simply suspended during any period of breach. It is submitted that it seems clear as a result of s10(2) (‘An insurer has no liability under a contract of insurance’) that the suspension applies

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to the whole contract of insurance. As we have seen in the Commission’s draft legislation clause 10(2) was stated to be subject to s11. This wording was however dropped from the legislation adopted by Parliament as s10(2). Although s11 can apply in addition to s10 (s11(4) refers), s10(2) is no longer subject to s11. Under the Commission’s original proposals, where a warranty was shown to relate to a particular risk it was clear that the policy would only be suspended in relation to that risk. The reasons for the change in the final version of the Act are not clear and are considered further later in this chapter. 9.6 The Act makes no change to the existing law in relation to the standard of compliance required: it is still the case that a warranty ‘must be exactly complied with, whether material to the risk or not.’3 The effect of s10(2) is that a breach of a warranty by an insured suspends the insurer’s liability under the insurance contract from the time of the breach, until such time as the breach is remedied.4 The insurer will have no liability for anything which occurs, or which is ‘attributable to something occurring,’ during the period of suspension.5 The ‘attributable … occurring’ wording in s10(2) is intended to cater for the situation in which the loss arises as a result of an event which occurred during the period of suspension, but is not actually suffered until after the breach has been ‘remedied.’ For example where a vessel enters a prohibited zone and incurs damage there, but the damage does not become apparent until after the vessel has left the prohibited zone (and the breach has therefore prima facie been ‘remedied’). While the concept may appear clear, it is argued that the implementation of this section may not be straightforward. As Soyer has indicated, it is likely that to avail himself of the benefit of this provision, an insurer will need to establish a causal linkage between an event occurring during the period of suspension and a loss that arises after cover has been re-instated.6 Despite the Commission’s stated opposition to the concept, causal linkage again appears relevant in the context of s10(4) where the Act confirms that the insurer remains liable in respect of losses occurring, ‘or attributable to something happening’ before the breach of warranty or after it has been remedied. Soyer asserts that causal linkage is again relevant: if the insurer is to avoid liability after a breach has been remedied he must demonstrate that the risk has acquired new characteristics as a result of the breach and that the loss that results after the breach is remedied is attributable to these new characteristics.7 Soyer offers the example of a motor insurance policy which contains a warranty indicating that the insured vehicle will not be used in racing competitions. If the insured breaches this condition and, in the following week, an engine breakdown arises then, in order to deny liability, the insurer would be required to prove that ‘something happened’ during the race which led to the mechanical breakdown after the cover was reinstated. The fact that the insured vehicle took part in a race on its own will not be enough to afford a defence to the insurer under s10(2);8 a causal link between the events will need to be established. This analysis seems sound. It seems odd that a causal linkage approach should be

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judged acceptable to establish liability or otherwise of the insurer in s10(2) and 10(4), but is seemingly rejected as an appropriate mechanism elsewhere in the Act.9 The result is an inconsistent application of causal linkage in the Insurance Act. 9.7 Section 10(4)(b) provides that the insurer will be liable for losses occurring after a breach has been remedied, but acknowledges that some breaches of warranty cannot be remedied.10 Section 10(5)(b) provides that a warranty will normally be remedied when the assured is no longer in breach.11 As we have seen, in its report the Law Commission indicated that where the risk, post ‘remedy,’ is essentially the same as that prior to the breach, the insurer will be liable, even if the loss may not have occurred, save for the breach.12 For example the insurer will remain liable where a vessel takes a short cut through a prohibited zone but, having exited the latter, is hit by a storm (which it would otherwise not have met) and is lost. This seems reasonable: the risk of this occurring is normally the same post remedy as it was pre-breach. It is also consistent with the common law, which suggests there is no causation as a matter of law in such arbitrary instances.13 9.8 Where a warranty requires something to be done by a specific time or date, but that deadline is missed, sections 10(5)(a) and 10(6)(a) and (b) provide that the breach of warranty will be treated as being remedied if the requirement of the warranty is met, albeit late,14 and provided the risk is essentially the same as that originally contemplated by the parties.15 This approach, which addresses remedies for breaches that are usually in practice trivial but, as they are time based, in theory could not be remedied, is welcomed. Soyer argues that s10(5) and (6) will require the courts to consider the purpose for which the warranty was inserted into the policy and analyse whether that purpose has been frustrated as a result of the breach which was later remedied.16 If so, he argues that the insurer’s liability for any loss which arises will be avoided. Soyer uses the example of a fishing policy that contains a warranty that the vessel should not be left unoccupied for more than 60 days a year. Suppose the vessel is in fact unoccupied for 75 days, but the assured then ‘remedies’ the breach by ensuring the vessel is occupied for the remainder of the policy period. As the extended period of non-occupancy has potential risk consequences (it could for example increase the risk of vandalism or theft), and because the commercial purpose of the warranty has arguably been frustrated, Soyer suggests that the breach is not capable of remedy. This seems reasonable; but what if the vessel was unoccupied for 61 days? This volume argues that the courts will need to assess each instance on its facts and reach a conclusion regarding the risk consequences of any breach.

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Treatment of conditions precedent

9.9 How are warranties that are also conditions precedent affected by section 10 of the Insurance Act 2015? S10 applies to breaches of warranties and does not differentiate between different types of warranty (for example between ‘affirmative’ or ‘present’ warranties and ‘future’ warranties); as such, it is submitted that it must surely be taken to apply to all warranties. A condition precedent by definition requires something to be done (or not done) by an ascertainable time … often the date at which it is intended the contract will come into effect. Conditions precedent are often expressed as warranties. Merkin and Gurses assert that ss10 and 11 of the Insurance Act 2015 do not apply to conditions precedent.17 This author respectfully disagrees in relation to s1018 and submits that there are circumstances in which s10 can apply to conditions precedent. The combination of subsections 10(5)(a) and 10(6) have typically been regarded as applying to situations where, at the time the contract comes into effect, or after the contract has come into effect, there is a time dependent warranty that has not been met. As we have seen in accordance with these two subsections, any breach (e.g. failure to have the inspection carried out by the given date) will be treated as remedied once the condition has been met and provided the risk is essentially the same as that originally contemplated by the parties. As conditions precedent are by definition time dependent, this volume argues that a remedy of a breach of a condition precedent can fall to be considered under ss10(5)(a) and 10(6) and that accordingly for the remedy to take effect (and thus for example, for the contract to come on risk in relation to a given exposure), the risk must be as originally contemplated by the parties. Accordingly it is submitted that somewhat perversely, where a warranty that is a condition precedent is initially not met, a contract may nevertheless subsequently come into effect if the condition precedent is subsequently met and19 the risk to which the warranty/condition precedent relates becomes essentially the same as that originally contemplated by the parties.20 Were this interpretation not correct, it might be argued that any breach of a warranty that is also a condition precedent could prima facie be caught by s10(5)(b) which has no requirement for the risk to be essentially the same as originally contemplated, only that the insured ceases to be in breach of the warranty; such an outcome could be potentially commercially catastrophic for insurers. This author would however argue that given that any condition precedent by definition has a time dependent element, the insured would still be in breach and that accordingly s10(5)(b) could not apply: the insurer would remain not liable. Soyer does not directly address the question of whether s10(5) can have application to conditions precedent. By implication however he suggests it does not, arguing, for example, that in the case of a policy requiring that a specific type of security alarm be fitted, that, in circumstances where the specified alarm is not installed by the policy commencement date, the policy would be suspended from the outset, without the insured having any possibility of remedying the breach.21 But this surely cannot be right if, for example, the specified alarm is operational within just a few hours of the deadline. In such circumstances the facts surely fit directly within ss10(5)(a) and 10(6) and the risk to which the warranty relates is essentially ‘the same as originally contemplated by the

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parties.’22 If there was a substantial delay in fitting the alarm, this could well impact the risk, such that it is no longer the same as that originally contemplated by the parties. In such circumstances the breach would not be capable of remedy. 9.10 In a separate example, Soyer references the situation where a policy contains a warranty that the insured yacht is registered in Australia.23 Soyer argues that if at the commencement date, the yacht is not registered in Australia, cover will be suspended from the outset, again without the insured having any possibility of remedying the breach. To support this proposition Soyer argues that the breach would result in the insurer never coming on risk as compliance with a warranty of this kind would be viewed as a condition contingent to the attachment of risk; he references the comments of Lord Mansfield in De Hahn v Hartley. Lord Mansfield declared:

A warranty in a policy of insurance is a condition or contingency, and unless that can be performed there is no contract. It is perfectly immaterial for what purpose a warranty is introduced, but, being inserted, the contract does not exist unless it be literally complied with.24

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