The Insurance Act 2015 heralds the long-awaited reform of insurance contract law. It represents a number of significant changes to the rights and remedies of insurers and policyholders and impact on the role and duties of commercial brokers. In this article we consider changes to warranties and other conditions of the insurance contract.
Warranties, in the context of insurance contracts, are representations of truth which, if untrue, entitle the insurer to treat the contract as at an end from the date of breach. It is in many respects the ultimate weapon from an insurer's perspective. The breach can be minimal, there is no concept of materiality and the warranty can be entirely unrelated to the presented claim.
The law has now changed in a number of material respects. Firstly ‘basis clauses’ have been abolished. Basis clauses in practical terms are a mechanism for converting all statements in a proposal form into warranties. Insurers can nevertheless seek warranties on particular matters but will now need to be more selective in doing so.
Warranties are now converted into suspensory conditions. What this means is that an insurer will not be liable during any period that the insured is in breach of warranty but that, if the breach can be remedied, the insured will be liable for claims arising after that takes place so long the claim is not attributable to something happening during the period of breach. An example is where an insured warrants that it checks its fire systems annually, say on 1st January. It fails to do so. If a fire takes place before the annual check takes place, an insurer may well have grounds to avoid cover. If its subsequently gets the system checked later than usual but before any fire takes place, the warranty is satisfied and the policy resumes in full force.
A further fundamental change is to prevent an insurer from avoiding claims in circumstances where the breach was unrelated to loss. When dealing with warranties relating to particular types of loss or in particular locations or time, the claim can only be avoided if it can be shown that the breach increased the risk of the loss that did actually occur. This provision does not apply to conditions or warranties that ‘define the risk as a whole’. This is a new concept and thus uncertain as to its scope.
The changes concerning warranties radically reduce, though certainly does not remove, the insurer’s rights to avoid claims for breach of warranty. There are a number of new concepts that will be open to dispute as to scope and meaning and opportunities for both insurers and insureds to strengthen their hand in claims and negotiations.