The first instance decision of Akenhead J in Genesis Housing v Liberty Syndicate Management illustrates the operation of a “basis” clause in a proposal form or insurance policy.
These clauses state that the proposer’s answers to the questions in the proposal form are to be the “basis” of any policy subsequently issued by the insurer. The proposer warrants the truth of those answers. If the answers are incorrect, the proposer is in breach of warranty and “the insurer is discharged from liability as from the date of breach of the warranty” (s.33, Marine Insurance Act 1906). It is irrelevant that the answer is not “material” to the risk.
The only recent mitigation of this potentially harsh rule is where an individual insured answers a question in the proposal form “to the best of his knowledge and belief”. Here the proposer’s answer has to be one in which he honestly believes even if his belief was objectively unreasonable. To avoid liability, the insurer has to prove that the proposer was dishonest.
Akenhead J followed these well established principles in Genesis holding that an erroneous answer to a question in a proposal form enabled the insurer to refuse indemnity under the policy. In this case, the insured was not an individual but a limited company so even the limited mitigation of the basis clause referred to above would have had no effect (even if that formula had been adopted). In the case of a company proposer, the knowledge of the person signing the proposal on its behalf is irrelevant: “the court must determine what [the company] corporately is likely to have known when it made the declaration”. That opens up a much wider enquiry about what was known to other individuals within the corporation and whether their knowledge can be attributed to the corporation.
The Law Commission proposes the abolition of “basis” clauses in business insurance. They will be abolished for consumer insurance when the Consumer Insurance (Disclosure and Misrepresentation Act 2012 comes into effect in March 2013. Consequently, “if the insurer wishes to include specific warranties they would need to be spelled out in the [policy]” (in the words of the most recent consultation paper). That could simply lead to the answers in proposal forms being repeated in longhand as warranties in the policy – which is scarcely a significant change from the current position.
The Law Commission has abandoned its earlier proposals to introduce a causal connection between the breach of warranty and the claim so that, for instance, the insurer could not rely on a breach of warranty in relation to a sprinkler system to reject a theft claim. It is proposing that warranties should be treated as suspensive conditions so that, for example, breach of a warranty to inspect a sprinkler system will enable the insurer to reject claims only whilst the insured fails to comply – but the insured will be able to obtain indemnity once it had remedied its breach.
That will affect proposal forms where, for instance, the insured states that it will maintain a sprinkler system in the future. At present, the insured’s failure to do so is a breach of warranty and the insurer is discharged from liability from the date of breach. Under these proposals, the basis clause will be of no effect so the answer would not become a warranty unless it was repeated as a warranty in the policy. If it is, the insurer will remain liable from the date when the insured remedied its breach.
A draft bill including these proposals should emerge in late 2013. Insurers will need to consider whether and how they are going to change their underwriting processes – and in particular whether they want to incorporate the insured’s answers to questions in the proposal form as warranties in the policy.