The Law Commission has recently published a paper which discusses potential changes to the law relating to warranties in insurance contracts . The views put forth in the paper are tentative and have not been formally scrutinised by the Commissioners but if they are adopted there will be major implications for the insurance industry.

Warranties of Fact and Basis of Contract Clauses (BOC)

As the law currently stands a breach of warranty allows the insurer to terminate the contract and deny cover. A BOC clause effectively turns all statements of fact made on the application for cover into warranties. The current law has been considered too harsh, as many insureds are unaware of the effect the BOC clauses have. As such, the following changes are being considered.

Consumer insurance:

  •  The Law Commission recommends complete abolition of BOC clauses in consumer contracts. 
  • All statements of fact are representations and subject to the rules of misrepresentation.

Business insurance:

  • Not as strict as in consumer insurance but still recommends rendering the BOC clauses unable to turn statements made by the proposer into warranties.
  • In relation to warranties of fact the Law Commission is undecided as to whether consumer and business policies should work uniformly. An insurer would only be able to rely upon a breach of warranty as a defence to a claim if the warranty is brought to the attention of the insured and there is a causal connection between the breach and the loss. Proposed remedies in relation to misrepresentation:
  • Insurers should be allowed to avoid policies where the insured has acted fraudulently at the pre-contractual stage. 
  • In the case of innocent misrepresentation insurers will not be allowed to avoid the policy. 
  • If a consumer has made a negligent misrepresentation the court should apply a proportional remedy

Warranties of Future Conduct

The Commission does not propose to completely do away with future warranties but institute two safeguards: 

  • A warranty of future conduct should be set out in writing either at or before the contract is made or as soon as possible thereafter. 
  • Insurers should only be entitled to avoid liability to pay a claim because of a breach of warranty if the breach bears some connection with the loss

This will be interpreted more strictly for consumer insurance.

Impact

The courts have been dealing with the harshness of the current law for many years and have tried to create equitable remedies where possible. The Law Commission has recognised the need for change and started this consultation process. It is only a matter of time before the law changes and insurers seeking to deny cover may find the chances of doing so more limited.