Airmic publishes guide to warranties in insurance policies

Airmic’s guide to warranties in insurance policies is its latest initiative to boost buyers’ confidence that big claims will be paid. The document, produced with the assistance of law firm Herbert Smith Freehills, provides an explanation of how warranties work and includes two sample clauses that may modify the effect of a breach of warranty.

Warranties in insurance terms impose obligations on policyholders. Cover can be voided if those conditions are not met even if the lapse in compliance has been remedied and is otherwise irrelevant to the claim. The Law Commission is recommending reform to the rules around warranties, but any change is unlikely to become law for some years.

The guide advises Airmic members to:

• consider whether their insurance policies contain any warranties;
• attempt to remove all such warranties from their insurance policies;
• consider whether the effect of a breach of any warranties which cannot be removed is mitigated by existing policy terms; and
• consider amending their insurance policies by endorsement.

This follows two other claims initiatives from Airmic.  In June the association published a guide into the related question of Basis clauses. These can have the effect of removing cover where the buyer has made an error when applying for insurance even where the inaccuracy is trivial and inadvertent and would have had no impact on the underwriting decision. A recent Appeal Court decision in Genesis Housing vs Liberty syndicates found in favour of the insurers who had turned down a claim.

Last year, meanwhile, Airmic produced a guide on another contentious aspect of the claims process, where insurers can void policies on grounds of non-disclosure of material information even where it was never requested by the underwriter.

As with warranties, the Law Commission is proposing legal changes on both these issues but the association feels that something needs to be done urgently in the meantime. This latest guide means that Airmic has covered three important areas where it feels claims may be turned down unfairly, providing sample clauses to negate their impact. Herbert Smith Freehills has been involved in all three projects.

“The UK has the most draconian commercial insurance laws of any major economy, and they are weighted against the buyer, reducing the confidence they would otherwise have in the market. Our job is to help our members achieve a maximum level of claims certainty and to support the Law Commission in their efforts to secure badly needed change,” said Airmic CEO John Hurrell.

Two sample clauses on warranties that appear in the guide are shown below.

ANNEX A – Sample endorsement removing all warranties

The Insurer agrees, with effect from inception, that no term in this contract shall take effect as a warranty such as to discharge automatically the Insurer from any liability upon its breach.

ANNEX B – Sample endorsement rendering warranties suspensory

The Insurer agrees that where there has been a breach of a term in the contract, which would result in the Insurer being automatically discharged from any liability, such a breach shall result in any liability of the Insurer under the policy being suspended only from the date and time at which the breach occurred, and up until the date and time at which the breach is remedied.

Please note that using these sample clauses is not recommended either by Airmic or Herbert Smith Freehills in the absence of proper consideration of the policy wording as a whole with a policyholders' broker and/or legal advisor.

“Our job is to help our members achieve a maximum level of claims certainty and to support the Law Commission in their efforts to secure badly needed change” – John Hurrell