#4926 - Insurance Warranties - Insurance Law

Insurance Warranties

In insurance law contractual provisions are defined by their functional effect. Insurance warranties have the most significant effect on the cover afforded to the policy holder.

What? An ‘insurance warranty’ is an obligation entered into by the insured which must be complied with exactly, whether or not it is material to the risk. It is effectively a condition precedent to insurers having a liability to provide an indemnity at all in future under the insurance contract.

I.e. It is a promise by the insured as to the past, current or future existence of a particular state of affairs so that the insurer’s obligation to indemnify the insured is ‘conditional’ on the fulfilment of that promise.

An insurance warranty is an obligation entered into by the insured which must be complied with exactly as it is. Very draconian.

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Effect of Breach

• S.33(3) MIA: Expressly states that the insurer is discharged from liability if the insured breaches the insurance warranty. HH Casualty makes clear that this applies to both marine and non-marine insurance.

• The Goodluck; Effects: The insurance contract continues and the insured must continue to pay premiums but insurers have no further liability to indemnity under the policy. UWs are discharged from liability from the moment of the insured’s breach, but are still liable for earlier pre-breach claims.

There does not need to be any causative link between breach of warranty and the loss the insured suffers. This is considered harsh.

No election must be made by the insurers. They are automatically discharged from liability and the insured breaches the insurance warranty.

• S.34(2) MIA: Once the insurance warranty has been broken the insured cannot rely on the defence that the breach was remedied and the warranty actually complied with before the loss.

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When might a breach of warranty have no such effect?

1) Change of circumstances so the warranty becomes obsolete (s.34(1) MIA).

E.g. The insured owns several properties and warrants to ensure adequate safety precautions for them all, but sells one off so he no longer has an insurable interest in it. Then the warranty is inapplicable.

2) Waiver of the breach by the insured (s.34(3) MIA). UWs could waive by:

• Carrying on as before and accepting some extra performance / premium from the insured. This would be done by agreement.

• Estopped from relying on breach of warranty if the insurer conducts themselves in a way the insured is objectively entitled to treat as a representation that, despite the breach, UWs will still pay an indemnity and the insured relies on that to their detriment. The insurer must have knowledge.

E.g. If the insured sends an email to the insurer telling them they sailed their ship into a prohibited area and asking them if their insurance cover has been stopped. If the insurer does not send a response then that representation implies that insurance cover continues.

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Types of Warranties

Warranties are usually given as to:

1. Prior or existing state of affairs;

2. Future state of affairs;

3. Opinion as to truth of fact / belief as to the truth of fact.

These can be express or implied.

1) Express:

• S.35(1) MIA: An express warranty may be in any form of words from which the intention to warranty is to be inferred.

= Matter of interpretation. No particular form of words of words required, but nevertheless there must be an unequivocal expression of agreement that there is to be an insurance warranty.

Test: It must be clear to a reasonable person against the matrix of fact that the obligation must be strictly complied with and that the effect of non-compliance is that UWs will be relieved of any liability to provide an indemnity under the contract. It must be sufficiently certain what the nature of the obligation is.

• Phoenix; Simply calling something a ‘warranty’ does not make it so.

• Re Bradley; Each obligation has to be considered on its own merits, regardless of clauses saying it is a warranty.

• S.39-48 MIA: Contains various implied warranties; i.e. seaworthiness and legality.

2) Implied:

Common law test: Requirements for implication of terms...

• AG Belize v. Belize Telecom Ltd; Lord Hoffman: ‘Determined by what a reasonable reader of a contract considered the contract ought to say when read against the relevant matrix of fact’ = Officious bystander asks, ‘what happens if you don’t comply?’

There is a general prejudice against the implication of warranties:

• Provincial Insurance v. Morgan; Facts – A coal merchant completed an insurance proposal form. The UWs tried to turn the insured’s representation that he would ‘carry coal’ into a warranty that he would ‘only carry coal and nothing else’. H of L held that the term...