Warranties in Insurance Policies

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“The Law Commission has made a number of recommendations to reform the law in relation to warranties, including that warranties should become ‘suspensive conditions’”

A breach of warranty within an insurance contract, no matter how immaterial to the insured risk, operates automatically to discharge the insurer from all liability under that contract as from the date of breach. The effect of this is expanded by the existence of ‘basis clauses’ which operate so as to turn certain pre-contractual representations made by the insured into warranties.

The Law Commission has made a number of recommendations to reform the law in relation to warranties, including that warranties should become ‘suspensive conditions’ so that the breach of a warranty, once it has been remedied, does not discharge the insurer of liability.

Airmic unequivocally supports all of the Law Commission’s recommendations on warranties. However, Airmic believes that one of the proposals – amending warranties to be suspensive conditions – is something that members should seek to address immediately. It is fundamentally unfair that a breach of warranty which is remedied prior to any loss (and is in no way causative of that loss) should, on the current law, allow an insurer to escape liability.

Given that any changes to the law may still be years away (as at December 2013), this guide assists members in mitigating the implications of a breach of warranty by way of draft endorsements to (i) disapply all warranties or (ii) convert warranties to suspensive conditions.

This guide builds on work undertaken by Airmic earlier in 2013 preparing guidance to assist members in understanding the effect of ‘basis clauses’ and taking steps to remove them from their contracts. This guide has been produced with the assistance of Herbert Smith Freehills LLP as a preferred service provider to Airmic. The content of this guide relates to the position under English law and does not constitute legal advice. Members are advised to consult their lawyers should they require advice on any matter relating to the subject of this guide.