Basis clauses have long been the bane of insureds and brokers alike. They have been described as “traps” by some commentators because they allow the insurer to refuse claims on the basis of minor and irrelevant mistakes. In its June 2012 consultation paper on “The Business Insured’s Duty of Disclosure and The Law of Warranties”, the Law Commission recommended that insurers should be prevented from using basis of contract clauses to convert statements into warranties.
So what is the current law?
The position has been summarised by Mr Justice Aikenhead in the recent case of Genesis Housing Association Limited –v- Liberty Syndicate Management Limited for and on behalf of Syndicate 4472 at Lloyd’s. In that case the Judge considered the current legal position. He also considered the impact of a declaration in a proposal form which asserts the belief of the signatory as to the correctness of the information supplied.
The background to the case is not especially relevant; suffice to say the circumstances were all too familiar: a business insured had made a minor error in a proposal for insurance which contained a declaration that “I/We declare that to the best of my/our knowledge and belief, the information I/We have given is correct and complete in every detail and I/We have not withheld any material fact.”
It also contained a basis clause stating that “This proposal form and the statements made therein shall form the basis of the contract between me/us and the Insurers”.
In considering the current law, the judge drew five principles from the relevant authorities:
(1) It is well established that in principle “basis of contract” clauses and warranties in relation to insurance are enforceable in law and not contrary to law or public policy, at least yet. (That position has now changed in respect of consumer insureds following the introduction of the Consumer Insurance (Disclosure and Representations) Act 2012 – see our briefing note of April 2012).
(2) The enforceability will generally come about either by such clauses or warranties being incorporated within the contract of insurance or as a stand alone warranty by the insured given to the insurer through the proposal form or other document in which the “basis of contract” expression or declaration is given.
(3) If the insured has innocently or otherwise signed a document, usually the proposal, as the basis of the insurance contract entered into or to be entered into, which confirms (either to the best of the insured’s knowledge or belief or absolutely) as true the contents of that document, the insurance contract will be void or unenforceable if the contents are untrue.
(4) A “basis of contract” declaration or warranty may as a matter of construction modify, amend or even render of no or limited affect the basis of contract declaration or warranty. The ordinary principles of contractual interpretation apply to this exercise.
(5.1) In the case of an individual person, the declaration is said to be true or correct to the best knowledge or belief of the declarer and will often be reviewable by reference to the honesty of the person making the declaration. (The test here is that the belief is honestly held, not that it is objectively reasonable).
(5.2) In the case of a corporate organisation making a wrongful declaration as to various statements being true to the best of its knowledge and belief, the Court must look a what the company is likely to have known when it made the declaration, taking into account the knowledge of the insurance buyers and the company’s directing mind and enquiries that it would have been reasonable for them to have made. There does not have to be dishonesty as such on the part of the organisation, but if that organisation actually knows that something said to be true on the declaration is in fact wrong, then it is making a statement which is not true to the best of its knowledge or belief.
This case does not add to the substantive law relating to basis of contract clauses, but it does provide a useful summary of the principles involved. It also illustrates the need for brokers to advise individuals completing proposal forms on behalf of corporate insureds to consider not just what the individual signing the form knows, but what the organisation collectively believes to be the case.
In small companies that is unlikely to be an issue. The controlling mind of the company is often directed by no more than one or two individuals. For larger entities caution may be required. Unless the individual completing the form is reasonably senior in that organisation, and therefore conversant with the views and knowledge of the management, what the individual thinks and what the company thinks may not be the same.
In the Genesis case the relevant individual “was at worst confused or more likely simply did not properly read the form”, and even though the error was entirely innocent, it gave rise to a breach of warranty.
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