Warranties Flashcards
What is a warranty?
A warranty is a fundamental term of the insurance contract. It is effectively a promise made by the insured, and must be strictly observed. Breach of a warranty allows the insurer to escape liability[ It does not allow the insurer to rescind the contract.] and avoid the contract even if the breach is unconnected with the occurrence of any loss that occurs or the warranty is immaterial to the risk.
Where is warranty defined?
It is defined in section 33 of the Marine Insurance Act 1906:
“A warranty…means 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”.
- It “must be exactly complied with, whether it be material to the risk or not”.
- In effect, this states that the effect of a breach of a warranty will differ, depending upon whether it is classed as relating to past/present facts or future ones. If the former, then breach is considered to have occurred when the insurance contract was entered into, and contract will be avoided ab initio. If latter, then breach discharges the insurer from liability from the date of breach, but he will remain liable for claims arising prior to the breach.
Seavision Investments v Evennett and Clarkson Puckle (the “Tiburon”) [1992]
A warranty was granted by the insured to the effect that the ship would either have a German flag, German ownership or German management. In fact the ship had none of these things. In the Iran-Iraq war the ship was hit by a missile and it was held that the insurer didn’t have to make any payment to the insured because the insured was in breach of this warranty even though the breach of warranty had nothing to do with the loss.
What form can a warranty take?
⁃ 1) a statement of fact by the insured as to the past or present, or
Is there a special form the warranty must take?
There is no special form of words required in order to create a warranty. But the language must clearly indicate that a warranty was intended [Dawsons Ltd v Bonnin per Viscount Findlay at 165-67].
No particular form of wording is required to create a warranty but it must be clear that the parties intend the term to be a warranty. The Courts will try to mitigate the severity of the law in relation to breach of warranty by interpreting any ambiguity in the warranty contra proferentem[ This means against the party who is putting forward the clause (check this) - generally this will mean against the insurer who is seeking a broader interpretation.].
Statements in a proposal form can be rendered warranties by a “basis of the contract” clause (despite the fact that these clauses can be very draconian).
What is the effect of a breach of warranty?
The effect of a breach of warranty depends on whether it is classed as relating to past / present or future facts. However it is possible to warrant that a state of affairs will prevail throughout the duration of the insurance contract. This is known as promissory warranty.
- The normal rules of contractual interpretation apply to determine this. [The following two cases show how this contractual interpretation has been treated, and differing approaches have been taken depending on the wording.]
The effect of a breach of warranty depends on whether it is classed as relating to past / present facts or future facts. If breach of past / present fact warranty the insurer avoids liability ab initio. If breach of a continuing warranty the insurer is discharged from liability from the date of the breach of warranty - Bank of Nova Scotia v Hellenic Mutual War Risks Association (Bermuda) Ltd, (The Good Luck). Breach of a warranty allows the insurer to escape liability even if the breach is unconnected with the occurrence of any loss that occurs or the warranty is immaterial to the risk. See section 33 of the Marine Insurance Act 1906 and Seavision Investments v Evennett and Clarkson Puckle (the “Tiburon”) [1992] 2 Lloyds Rep 26.
Hussain v Brown [1996]
This case related to a fire policy in respect of commercial property. There was a question in the proposal form that the insured had to complete: “are the premises fitted with any system of intruder alarm, and if yes the name of the company who had installed the alarm and a copy of the specification of the alarm was to be provided if available.” The insured answered yes.
⁃ A fire occurred and at the time of the fire the alarm was inoperative. The insurer argued the answer to the question was a continuing warranty that the alarm was operational and would be habitually set when the premises were unattended.
⁃ The court disagreed, since the question was written in the present tense there was no justification to imply anything further into the clear words of the policy, and as such the claim by the insured was successful (primarily since there was no requirement that the intruder alarm always be on).
Woolfall & Rimmer v Moyle [1942]
“Are your machinery, plant and ways properly fenced and guarded and otherwise in good order and condition?” - “yes”.
- Held: the insured had not made a continuing warrant; he had not bound himself to ensure that the obligations contained in the question were fulfilled throughout the period of insurance.
- Rule: where the warranty is drafted using the present tense, it is unlikely that it will be interpreted as a continuing one.
Ansari v New India Assurance [2009]
Insured who took out insurance over commercial premises. Question on the proposal form as to whether the premises were protected by an automatic sprinkler system. The insured answered yes. A fire broke out and the sprinkler system hadn’t been in operation. The insured then made a claim.
⁃ The insurer denied liability. This case was distinguished from Hussain on the grounds that the statement that the property was ‘protected’ by an automatic sprinkler system was in fact a continuing warranty; since this had been breached the insurers weren’t liable. Unlike an intruder alarm, the automatic sprinkler system is intended to function permanently without the need for human intervention.
- You can contrast this with a burglar alarm which has to be set. Hussain was distinguished in this case (?).
Kennedy v Smith 1976
This case concerned a ‘lifetime abstainer from alcohol’ who was involved in a bad car accident following a pint of lager. The statement in the proposal form for the insurance stated that the individual did not drink alcohol. This was held to be merely a statement of existing fact rather than a continuing or promissory warranty.
- The defenders provided insurance cover to abstainers at reduced premium.
- While driving his car home from a bowls competition with two of his friends, the party had stopped at a local pub and the insured had had one pint of lager. When they continued the journey home, the insured’s car had careered on to the wrong side of the dual carriageway, and both the passengers were killed.
- The defenders refused to pay out under the claim, arguing that the abstinence declaration was thus false.
- Held: the declaration did not cover the insured’s future behaviour.
⁃ As it had been true at the time the warranty had been taken out, there wasn’t any misrepresentation and thus the insurers were liable.
- Similar approach to Hussain.
- So because a continuing warranty may place an onerous obligation on the insured, such warranties must be very clearly expressed. An ambiguity will lead to the term being interpreted contra proferentem, against the interests of the party who is proposing it.
Unipac (S) v Aegon Insurance [1999]
Court held that if there is an error in something as minor as the postcode or phone number this would be sufficient to constitute breach of warranty and allow the insurers to avoid the policy.
However, in terms of section 6(2) of the 2012 Act, ‘basis of the contract’ clauses will be of no effect in consumer insurance contracts.
Dawsons Ltd. v Bonnin 1922
Example of a case in which a ‘basis of the contract’ clause was used:
⁃ A furniture removal company in Glasgow took out insurance for one of their removal lorries. The proposal form included a ‘basis of the contract’ clause. One question concerned where the lorry would normally be parked - the company inadvertently wrote their business address rather than the real place of parking. The lorry was destroyed in a fire and the insured made a claim.
⁃ The insurers argued that the insured’s mistake as to the address allowed them to avoid the policy. The court agreed and thus the ‘basis of the contract’ clause was effective.
Forfar Weavers Ltd. v MSF Pritchard Syndicate 2006 SLT (Sh. Ct.) 19
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Provential Insurance v Morgan ??
An accident happened and lorry had previously been carrying timber in the day. It was only warrantied for coal. When it crashed there was coal in the lorry. Held: this was not a warranty it was simply describing what we are insuring against. So the insurance company had to pay out.
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