Law Commission unveils plans to tackle Warranty and Basis Clause penalties in insurance contracts

Airmic has responded enthusiastically to the latest Law Commission plans to reform insurance law announced in March. They would make it much more difficult for insurers to use breach of warranty as a reason to refuse a claim, whilst basis clauses would be prohibited altogether.

Basis Clauses have been described as ‘silent killers’. They act as a warranty that all information given by the insurance buyer is correct so that any factual error will negate the entire policy - even if the discrepancy is clearly innocent and otherwise not material to the risk. Even a slightly misspelt name could result in a claim being refused.  

The Commission’s paper is highly critical of their use. “These clauses convert even minor representations by an insured during placement into warranties, and absolve the insurer from liability if they are or become untrue. Unlike a failure to disclose information or a misrepresentation, the insurer is not required to show that warranted matters are material or induced it to enter into the contract,” it says.

On warranties, the Commission found that “the vast majority of consultees from all sides of the market agreed that there is a need to reform the law of warranties.”

In response, it proposes that warranties should become “suspensive conditions”, meaning that an insurer would not be liable for losses under the policy while the insured is in breach of a warranty, but that liability could be restored once the breach of warranty is remedied. Furthermore, the insurer’s ability to refuse claims would be restricted to circumstances where any breach was relevant to the particular risk.

“We warmly welcome the Law Commission’s proposals on Warranties and Basis Clauses,” said Airmic chief executive John Hurrell. “They deal effectively with one of our biggest concerns - the fact that even trivial and innocent inaccuracies can invalidate entire insurance policies.”

In January, the commission published part of draft legislation to reduce the burden of disclosure on commercial insurance buyers – a move also supported by Airmic. Legislation will take effect next year at the very earliest and will possibly be delayed until after the election in May 2015.

Airmic has produced a series of member guides and model clauses, in partnership with law firm Herbert Smith Freehills, on disclosure, warranties and basis clauses. These are intended to help risk managers overcome shortcomings in the legal framework pending any changes to insurance law.

John Hurrell – “warm welcome”