Disclosure

Basis Clauses: The Hidden Risk

Airmic members will be aware of the dangers of unintentional non-disclosure when purchasing insurance. One of the biggest risks, specifically addressed in the Airmic model disclosure wording, relates to basis clauses. Alexander Oddy and Paul Lewis of Herbert Smith Freehills LLP explain its significance.

Members will no doubt be giving careful consideration to their disclosure obligations at forthcoming renewals following Airmic's recent guidance.  It is equally important that members identify whether their policies include a basis clause – a provision that converts the truth of all statements made in the proposal form and placing information into warranties.  The recent decision in Genesis Housing Association Limited v Liberty Syndicate Management Limited serves as a stark reminder of the draconian effects of basis clauses. 

Case Summary

A construction company Time and Tide (Bedford) Ltd (“TT Bedford”) contracted with a property owner to redevelop and renovate a block of flats.  Under the contract, TT Bedford was to procure an insurance policy for the benefit of the property owner.  The policy was to cover, amongst other things, circumstances where TT Bedford was unable to complete the proposed renovation due to insolvency.

A director of TT Bedford signed a proposal form, for and on behalf of the property owner and TT Bedford.  However, the proposal form mistakenly named "Time and Tide Construction Limited" as the builder, rather than TT Bedford.

The proposal form contained a basis clause.  Basis clauses state that the insured warrants that the representations provided are correct, and agrees that those representations shall form the basis of the contract between the parties.   Since the representations take effect as a warranty, the consequence of providing untrue statements in a proposal form containing a basis clause is that the contract of insurance will be void and unenforceable.

Following severe delays on the build, TT Bedford was dissolved.  The property owner sought to enforce the insolvency provision in the policy without success, and consequently issued proceedings against the Underwriters.

The Underwriters claimed that the representation relating to the name of the builder was automatically converted into a contractual warranty by virtue of the basis clause contained in the proposal form.  Since the warranty was incorrect, the policy was void at the outset.

The Judge found in favour of the Underwriters confirming that the basis clause was effective.  However, the Judge stated that there was no reason why the effects of a basis clause could not be negated by other provisions contained in the policy itself. 

Mitigating Your Risk

The Genesis Housing case serves as a stark reminder to Airmic members of the draconian effects of basis clauses.The case does not change the current law; it is simply an illustration of the Court upholding a basis clause and giving it effect. 

Whilst basis clauses are to be abolished for consumer insurance contracts when the Consumer Insurance (Disclosure and Representations) Act comes into force (in April this year), they remain effective in business insurance contracts.  The Law Commission has proposed that basis clauses should be abolished in business insurance as well but, as members will know, any change in the law is still some way off. 

The facts of Genesis Housing illustrate why Airmic members should take active steps not only to check the accuracy of information disclosed to insurers but also to have basis clauses removed from their policies.  AIRMIC will be publishing a practical guide in the coming months to help members identify basis clauses that appear in proposal forms or their policy wordings and prepare them for conversations with their brokers and insurers.

Those members that have sought to include in their policies the Airmic Non-Disclosure Clause, which expressly excludes the effect of any basis clause, can take comfort from the Judge’s comments as to the efficacy of provisions in insurance policies that amend, or render a basis clause of no effect.

Alexander Oddy and Paul Lewis are partners at Herbert Smith Freehills LLP.