Edwin Coe Insurance Blog – Taming the harsh consequences of warranties in insurance contracts

The final stage in the Law Commission’s consultation on changing the law relating to insurance contracts ended on 21 March 2014, with a draft Bill expected in the summer of this year.

The aim is to consider changes to the law to address potential unfairness on the insured in the following areas:

1. Disclosure and misrepresentation in non-consumer insurance contracts;
2. Warranties;
3. Damages for late payment of claims;
4. Remedies for fraudulent claims; and
5. Contracting out.

This Edwin Coe Insurance Litigation blog discusses the proposed changes to the law on warranties. Whilst we await the results of the latest consultation, it is clear that the Law Commission is looking to extend the fairness brought to consumers under the Consumer Insurance (Disclosure and Representations) Act 2012 to non-consumers and also to make further changes to insurance contracts in general. Whilst this will be welcome for the insured, insurers are likely to take advantage of any contracting out provisions which are likely to become more extensive in non-consumer cases.

The law relating to warranties has been viewed as unfair since it was decided in the late eighteenth century, and is clear: warranties have to be complied with “literally”. This, of course, is the case whether or not the breach was material and connected to the cause of the loss.

The Law Commission has recommended that:

1. Basis clauses, which, whether material or not, warrant as true all information presented to insurers, should be prohibited;
2. Warranties should operate as “suspensive conditions”, resulting in the insured not being covered under the policy only while any breach is not remedied; and
3. If a term is designed to reduce the risk of a particular type of loss, or the risk of loss at a particular time or in a particular place, then, if the insured is in breach, insurers will only be able to refuse claims for losses falling into those categories.

If the proposals become law they may provide protection to the insured in circumstances where even large claims can currently be avoided based on trivial breaches. It is important to note, however, that the Law Commission has not sought to depart too far, in non-consumer cases, from their proposals to allow insurers to contract out or to expand their policy terms to combat some of the restrictions any new act will place on them.

Either way, it is hoped that the changes, when enacted, will provide some comfort for the insured, although, in some cases, the position may become more difficult as policy wordings become ever more detailed as insurers attempt to circumvent the new restrictions.

If you would like further information please contact the Edwin Coe Insurance Litigation team.

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