Warranties in Insurance

Warranties in the law of insurance in the UK

The uncertainties in insurance law have often puzzled a student of the law in questioning the system in place and the dearth of uniformity in case laws regarding the laws of insurance. This discussion is one such compendium of incessant questions that remain intertwined in the rigid system in place and the reform suggested with amends to the Marine Insurance Act, 1906 ("MIA")

A 'Warranty' is defined by the MIA as "a promissory warranty, that is to say, a warranty by which the assured undertakes that some particular thing shall or shall not be done, or that some condition shall be fulfilled, or whereby he affirms or negatives the existence of a particular state of facts". The effect of a warranty is that the assured guarantees the truth of his statement, whether or not it is material to the risk involved. The existence of such a warranty therefore, makes it relatively simple for the insurer to establish a proof for breach in the event a question of admissibility of the representation made by the assured comes before the court.

The current regime on warranties have evolved over a large period of time by means of a surfeit of decisions in the courts which has often been viewed to be long drawn and unsatisfactory by noted practitioners in this area of insurance law. This unparalleled metamorphosis has however, contributed to the fact that the term 'warranty' in insurance law was used, and has continued to be used, in the sense of being a term in the contract which has the force of a condition.

Onceit is decided that a term of an insurance contract is a warranty, strict compliance is required by the law and it is irrelevant that the breach may have been put right before the loss. Furthermore, it is of utmost relevance that the breach of warranty (however slight or serious it may be) is not causative of loss to the insured. In DeHahn v. Hartley there was a statement, in the margin of a policy insuring the ship Juno for a voyage from Africa to the West Indies, that she had "sailed from Liverpool with fifty hands or upwards". For the first six hours of sailing, while she was under pilot, she picked up six more crew members, making 52 in all, and sailed unaltered in her course. She was captured while lying at her African port. Lord Mansfield held that:

1. "the statement in the margin of the policy was a warranty and not a mere representation of the state of the ship when she began the voyage from Liverpool; and
   
2. (and here I quote) "There is a material distinction between a warranty and a representation. A representation may be equitably and substantively answered; but a warranty must be strictly complied with"
   

In the aforementioned case, the insurer won, even though the broken warranty related to a time before the vessel had come on risk at all. Conversely, in Hyde v. Bruce, the warranty was that the ship should have 20 guns. In fact she had 22 guns but only 25 crew, whereas to manage 20 guns properly she should have had a crew of 60 men. The vessel was captured because there were not enough men to handle the guns but the warranty was held to be fulfilled.

There is nevertheless, a different situation to have come up for consideration in the courts, which is that any breach of warranty discharges the insurers from the date of breach because compliance with the warranty is a condition precedent to the liability of the insurer. The position taken by the court in The Good Luck serves authoritative settlement in such a situation. Thereby, if there are two separate losses during the period of the policy the first of which is caused by the breach of warranty and the second of which is not, but the insurers only discovers the breach of warranty after the second loss, he is under no liability for either loss.

According to their structure, warranties could be express or implied. In fact, this is the classification on which the warranties regime in the MIA is based. Express warranties appear in the policy, or are incorporated therein by reference to them. Under the principle of freedom of contract, the number and extent of express warranties depend on the consensus of the assured and the insurer. Implied warranties, on the other hand, are incorporated into certain marine policies by the MIA and accordingly, their number and scope is determined by the Act.

Section 35 (1) of the MIA clearly provides that no formal or technical wording is required for the creation of an express warranty. An express warranty can be created with any kind of wording, provided that the parties' intention is to give warranty status to the clause in question. The word 'warranty' or 'warranted' are, therefore, not essential in order to create an express warranty. However, it must not be thought that the use of these words is of no importance. They may be good evidence of the parties' intention to create an express warranty as was stated in Ellinger & Co v. Mutual Life Insurance Co of New York, the use of the word 'warranted' shows prima facie that the parties understood that a breach of it should be a permanent or temporary bar to the insurer's liability.

Accordingly, in Aktielskabet Greenland v. Janson, a clause worded 'No mining timber carried' was held to be an express warranty. Similarly, in Sea Insurance Co v. Blogg, the court did not hesitate to afford warranty status to a clause that, without using the waord 'warranted', required the insured vessel to sail on or a after a specific date.
The Parties have liberty in giving a warranty staus to any variety of terms of contract. In Overseas Commodities Ltd v. Style, for example, where a cargo of canned pork was insured, the assured warranted that all tins were marked by the manufacturer with a code for verification of date of manufacture.

Despite the fact that no specific form is necessary to create an express warranty, s 35(2) requires a warranty to be included in, or written upon, the policy or contained in some document incorporated by reference into the policy. Necessity for inclusion of an express warranty in the policy is unique to marine insurance and has no application in non-marine insurance where the answers in the proposal form can be included in the contract as express warranties by a 'basis of the contract clause'.

The Basis of the Contract clause

Owing to the purpose, of this discussion, being the emphasis on consumer insurance, it is thereby necessary for us to consider the basis of the contract clause in greater detail. These clauses are often found in consumer insurance contracts for creating warranties. The method in practise to extract a basis clause is by way of a questionnaire and a declaration by the assured that he has chosen to abide by the factual statements in the questionnaire. Little does the assured realize that the basis clause dangles over him like a democles' sword, as inter alia with the warranted statements in the basis clause, he has also entrusted the insurer with an indivisible right to repudiate the contract upon manifestation of any misstatement or proof thereto. The occurrence of any misstatement can be used against the assured by the insurer, regardless of whether such misstatement is material to the risk or not.

Although the basis clause was developed in the early nineteenth century for the purposes of life insurance, it has gradually infiltrated into various other forms of insurance as well. The use of the basis clause has often been viewed with contempt by the courts as it disrupts the balance of convenience more often than not, in favour of the insurers. Nevertheless, there have been instances wherein a strict pattern in the questionnaire has not been followed, as evident in the case of Anderson v. Fitzgerald, wherein only some of the assured's answers in the proposal were made the subject of warranty in the policy. A basis clause therefore may be qualified in its operation by its own terms.

Dawsons Ltd v. Bonnin is a landmark judgment in this point of discussion, as the House of Lords had to determine the bearing of the basis clause upon the materiality. The case in Dawsons was one involving a misstatement that overstated the risk. The House of Lords reaffirmed the earlier decisions on this point, holding that materiality had no importance wherein a basis clause was included, irrelevant of whether the facts were clearly material or the courts have endeavoured to extract some materiality out of the case when in reality none existed. The decision in Dawsons, however has been criticised by legal practitioners in their works to have been the least satisfactory case on the subject.

The Basis clause and the way the courts have dealt with materiality is rather complex considering the plethora of decisions wherein the relationship between the two have often been interpreted in the light of varying circumstances in each case. By contrast, if it is clear that the basis clause and the materiality provision are identical in scope, the doctrine of contra proferentem almost demands that the basis clause be overridden by the requirement of materiality. In most cases, uniformity can only be accorded to the general presumption in favour of construing the assured's promise as directed towards present facts only and such presumption is only justified and strengthened by the doctrine of contra proferentem. The cases decided in the latter half of the twentieth century and the early twenty first century has dwelt around this presumption in great deal. In Hussain v. Brown, the claimant insured his premises under a Lloyd's policy, having answered in the affirmative to a proposal form question which asked whether the premises were fitted with a security alarm: the assured was held not to have been in breach of warranty due to the fact that the alarm had ceased to waork after the inception of the risk and was not working when a fire occurred, damaging the premises, as the question had been framed in the present tense and had not sought to elicit information as to the assured's practises but merely as to the situation at the time.

Suggested amendments to the MIA on the basis clause

Since the first use of the basis clause in the early nineteenth century, as it was more of a sine qua non then to have a basis clause when the business of insurance was still in its infancy, the law of insurance has developed a great deal and the educated masses have learnt how to work their ways around the perils and niceties of the basis clause. The basis clause however, has been misused more often to enhance the already stronger position of the assured, as a consumer or the insured in the case of a consumer contract would be an individual and not a corporation.

The insurers usually have a standard form contract which would include inter alia the basis clause and the unprecedented right of repudiating the contract for misstatements. The assured can be deceived more often than once by having consented to converting his representations into warranties as he would have no other option in this regard to make amends to a standard form contract. This practise has been criticised by the courts in the past, nevertheless legislation ought to have been progressively initiated much earlier to check the vice involved and this draft can therefore set things in the right direction. An earlier instance of reform had come in the year 1986 in the form of barring the usage of the basis clause by the Statement of General Insurance Practise. The empowerment of the Financial Ombudsman Service has also negated the overreliance on such basis clauses by the insurers.

Legal practitioners have often welcomed reforms in the MIA, as it would involve an enhancement in the position of the assured when compared to that of the insured in a consumer contract. The very common factor suggested in the welcoming of reform would be in the operation of Section 33 (3) of the MIA, as most legal clerics have considered the remedies available under the section to be inconsiderate and archaic. The arguments advanced for reform have often quoted that the MIA is not suited in many respects for the contemporaneous practices involved in insurance law. The MIA has often borne the brunt to have been made to suit the circumstances as foreseeable at the start of the twentieth century and therefore, is an old horse in the race for a technologically superior world today.

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