In our last post on the Insurance Bill, we discussed how legal reforms proposed by the Law Commission and Scottish Law Commission could be set to revolutionise the way commercial insurance is provided and administered in the UK.
We talked in detail about how the Insurance Bill will affect duty of disclosure, a grey area of commercial insurance that has been recognised as being poorly understood.
The Insurance Bill will also have an effect on insurance warranties, another area of concern and confusion for businesses, and it is these we will discuss in this latest post.
Current Law on Insurance Warranties
An insurance warranty is a promise you make as a policyholder to the insurer to do or not do something. It could be something like installing a certain type of door or window lock, an intruder alarm or sprinkler system or employing security personnel.
Breach a warranty and you will face serious consequences. If the warranty is not exactly complied with then, under current law, the insurer is discharged from liability from the date the warranty is breached. Once a breach has occurred, so the law states, the insured “cannot avail himself of the defence that the breach has been remedied, and the warranty complied with, before loss”. So basically even if you make amends and remedy the breach before a loss has occurred, as it has already occurred, the insurer is still discharged from liability.
The Law Commissions have identified numerous problems with the way the law on warranties currently stands. One is this issue concerning the insurer still being discharged from liability in the event of a breach, even though it was remedied before a loss occurred. Another is that it enables an insurer to refuse a claim because of a trivial mistake by the policyholder that really doesn’t have a bearing on the risk.
One other issue considered unfair is that when a breach occurs, the insurer is discharged from all liability, not just the liability relating to the loss being claimed for. So for example if you make a claim for fire damage, and it transpires that you failed to install a certain type of door lock as required by one of the warranties in your policy, the insurer is within its rights to refuse your fire damage claim even though it had nothing to do with the type of door lock you had installed.
And finally, when you are arranging an insurance policy and you sign the declaration in the proposal to confirm that the information you have provided is true and complete, you may not realise that this declaration will actually form the ‘basis of the contract’, which incorporates the declaration into the insurance contract as a warranty. So if you make a mistake and provide inaccurate information at this stage, even a trivial mistake, it will be considered breach of warranty.
To deal with these problems, which clearly have very serious connotations for businesses, the Law Commissions have made a series of recommendations.
One is to abolish the ‘basis of contract’ clause in all business insurance. Another is to suspend rather than discharge an insurer’s liability where a breach of warranty has occurred. And where a breach has been remedied before the loss occurred, the insurer’s liability should be reinstated.
Finally, where there is a particular type of loss, or a loss occurs in a specific location or at a particular time, insurer liability should only be suspended according to the type, location or time of the loss. So for example, if as a policyholder you breached a warranty requiring you to install a sprinkler system and made a claim for fire damage, then the insurer’s liability to pay out would be suspended. However, if a loss occurred that was due to a break-in, then the insurer would still be liable as the loss would not be connected to the installation of the sprinkler system.
These remedies, and those we talked about in our last post on duty of disclosure, can only spell good news for businesses. We continue to monitor developments on the Insurance Bill which is currently subject to a Special Public Bill Committee. As soon as there is any news on the recommendations becoming law, we will report it on this blog.