Contractual Terms


Contractual Terms

8.1     Introduction

As with non-insurance contracts, for example contracts for the sale of goods, not all terms in a policy of insurance will be of equal importance to the parties. The basic classification of terms into ‘conditions’ or ‘warranties’ that has long been adopted in the general law of contract is also followed in insurance. In general contract law conditions are viewed as fundamental terms which are promissory in nature (‘the breach of which may give rise to a right to treat the contract as repudiated’: Sale of Goods Act 1979, section 11(3)); and warranties are viewed as subsidiary promises which are collateral to the contract, the breach of which gives rise to a claim in damages only. However, in insurance contracts the classification is reversed so that warranties are treated as fundamental terms (‘[a] warranty…is a condition which must be exactly complied with, whether it is material to the risk or not. If it be not so complied with…the insurer is discharged from liability’: Marine Insurance Act 1906, section 33(3)). As is apparent from the language of the 1979 and 1906 statutes, the distinction between the general law of contract and insurance goes beyond mere terminology but also relates to the consequences that flow from a breach of a fundamental term (see below).

8.2     Defining and Creating an Insurance Warranty

In De Hahn v Hartley (1786) 1 TR 343, Ashurst J stated that ‘the very meaning of a warranty is to preclude all questions whether it has been substantially complied with; it must be literally so.’ Similarly, Lord Eldon LC remarked in Newcastle Fire Insurance Co v Macmorran & Co (1815) 3 Dow at 262, that: ‘it is a first principle in the law of insurance, on all occasions, that where a representation is material it must be complied with — if immaterial, that immateriality may be enquired into and shown; but if there is a warranty it is part of the contract that the matter is such as it is represented to be. Therefore the materiality or immateriality signifies nothing. The only question is as to the mere fact.’

The Law Commission Report No 104 (1980), Non-Disclosure and Breach of Warranty, defines a warranty as ‘a term of the [insurance] contract which must be strictly complied with…The meaning of warranty in insurance law is thus similar to the meaning of ‘condition’ in the law of sale of goods. The promise which forms the subject-matter of a warranty consists of an undertaking by the insured that some particular thing shall or shall not be done or whereby he affirms or negatives the existence of a particular state of facts.’

The New York Insurance Law Code § 3106 defines a warranty as ‘any provision of an insurance contract which has the effect of requiring, as a condition of the taking effect of such contract or as a condition precedent of the insurer’s liability thereunder, the existence of a fact which tends to diminish, or the non-existence of a fact which tends to increase, the risk of the occurrence of any loss, damage or injury within the coverage of the contract.’ A warranty is thus defined by reference to whether it relates to ‘potential causes’ as opposed to ‘actual causes’ (as is the case with terms descriptive of risk (below)): see Edwin W Patterson, Essentials of Insurance Law (New York, McGraw Hill, 1957) at 275; (the distinction is illustrated by Kler Knitwear Ltd v Lombard General Insurance Co Ltd [2000] Lloyd’s Rep IR 47 (below, [819])).

No particular form of words is required to create a warranty and simply labelling a term as a warranty is not conclusive of the issue. The critical factor is that the language must unequivocally point to the intention of the parties to create a fundamental term, the breach of which will terminate the contract: ‘any statement of fact bearing upon the risk…[is] to be construed as a warranty, and prima facie, at least that the compliance with that warranty is a condition precedent to the attaching of the risk.’ It is evident from this passage taken from Lord Blackburn’s speech delivered in Thomson v Weems (1884) 9 App Cas 671, that the judges adopt the term ‘condition precedent’ to describe a warranty that relates to the risk and which is precedent to the insurer’s liability. In this respect, section 33(3) of the Marine Insurance Act 1906, which codified the common law, is so framed as to reflect ‘the inveterate practice…of using the term “warranty” as signifying a condition precedent’: per Lord Goff, The Good Luck [1992] 1 AC 233 (below, [820]).

[801]   The Law Commission Report No 104 (1980), Non-Disclosure and Breach of Warranty, para 6.3:

Creation of warranties

A warranty may be created in one of the following ways:

(a)   by the use of the word “warranty”; for example, “the insured warrants…”;

(b)   by an express provision for strict compliance and the right to repudiate for breach;

(c)   by the use of a phrase such as “condition precedent” from which the court can infer that the parties intended strict compliance and the right to repudiate for breach;

(d)   by the use of any other words such that the court concludes that, on the true construction of the whole document containing the term, the parties intended the term to possess the attributes of a warranty;

(e)   by the use of a “basis of the contract” clause.


1.     As will be seen (below, [819]), it is now settled that a breach of warranty automatically discharges the insurer from liability (Bank of Nova Scotia v Hellenic Mutual War Risks Association (Bermuda) Ltd, The Good Luck [1992] 1 AC 233 (HL)). (Prior to the decision in The Good Luck the prevailing view was that an insured’s breach of warranty entitled the insurers to repudiate the contract).

2.     In terms of a particular claim, therefore, the effect of a breach of warranty carries dire consequences for the insured. The courts have thus adopted a strict approach when called upon to determine whether a particular term is fundamental to the contract by enlisting the contra proferentem canon of construction. The practical effect is that the courts lean in favour of policyholders. Note the strident criticism of the insurers voiced by MacKinnon J in Roberts:

[802]   Roberts v Anglo-Saxon Insurance Association Ltd (1926) 26 Ll L Rep 154

[While the insured’s car was carrying passengers on a pleasure trip it caught fire and was destroyed. The insurers repudiated the claim on the basis that the insured had warranted that the vehicle would be used only for commercial traveling. The arbitrator, finding in favour of the insured, held that the carrying of passengers in no way caused the fire, and that the ‘warranty’ in question did not go to the root of the transaction between the parties].

MacKinnon J:

‘…The contention on behalf of the insurance company is that there is contained in this contract a stipulation which, if written out in perfectly plain language, would be to this effect: “It is a condition of this policy that this car shall at every moment be used for commercial travelling, and if on any similar occasion it is used for any other purpose, the validity of the policy shall instantly cease.”

Now it has been long settled that an insurance company which desires for its own protection to insert a provision of that nature or indeed any provision or limitation of its liability must do so in plain terms, and an ambiguous provision affords them no protection. When I turn to the policy I see that the operative part of it is this:

“It is hereby agreed as follows: That the Association will indemnify the insured in respect of any motor vehicle, the property of the insured, and described in the Schedule thereto.”

— leaving out some immaterial words —

“subject to the provisions, conditions and definitions herein contained and to any memorandum endorsed hereon.”

The promise there is to insure a certain described schedule subject to certain provisions and definitions “on any memorandum endorsed.” There is no memorandum endorsed, so that that may be left out. The “conditions” are clearly put under a headline on the back of the policy. The “definitions” are contained under a headline at line 52 of the policy. There is no headline to any provisions, but one may reasonably conclude that provisions are referred to between lines 27 to 51, which has a heading “General exclusions.” Now, those are the provisions, conditions and definitions subject to which the promise to pay is contained. There is a further reference in this operative part of the policy to the car, “described in the schedule hereto,” and it is in that schedule that the words occur which are relied upon as constituting this warranty or condition. Quite clearly the schedule which is referred to as described in the policy is the thing headed: “Schedule — Particulars of motor vehicles insured,” and which is the headline over certain printed matter enclosed in lines forming a square. The other part of it is with regard to the description of the car which includes, among other things, the fact that it has five seats. No one could for a moment suppose that if during the course of the policy the man altered the body and turned it into a two-seater car, the validity of the policy would then cease. There then follows as part of that schedule of description: “Warranted used only for the following purposes — Commercial travelling.” Now, nothing turns upon the word “warranted”; the word “warranted” is always used with the greatest possible ambiguity in a policy. Because a phrase begins with the word “warranted” in a policy it does not by any means mean that that is a condition. In a marine policy of insurance it is the usual thing to warrant for particular average. It simply means: “We shall not pay for partial loss.” In my judgment the words there appearing in part of that schedule specified as the description of the policy are by no means sufficiently clear to entitle the insurance company to say that they amount to a condition to the effect that I have indicated, namely, that if ever the car is used, for instance, to carry a wounded person to hospital, the validity of the whole policy shall at once cease. Presumably the Anglo-Saxon Insurance Company, if it is to live up to its name, can express its meaning in English, in perfectly clear terms, and if they desire to put in a condition to the effect suggested, I think they must do so in perfectly clear Anglo-Saxon, the result of which I should suppose would be that an increasingly small number of people would desire to insure with them.

I agree that the motion should be dismissed with costs.’

See also, CTN Cash and Carry v General Accident [1989] 1 Lloyd’s Rep 299 (below, [817]).

[803]   Provincial Insurance Company Ltd v Morgan [1933] AC 240 (HL)

[The facts appear from Lord Buckmaster’s speech].

Lord Buckmaster:

‘My Lords, the question on this appeal depends upon the true construction of a policy of insurance issued by the appellants in favour of the respondents insuring them against liability to the public for damage caused by the use of a motor vehicle. The insurance was consequent upon a proposal form which was signed by the respondents in March of 1931. In that form there was a statement in the following words: “State (a) the purposes in full for which the vehicle will be used; and (b) the nature of the goods to be carried.” The answer was (a) “delivery of coal”; (b) “coal.” At the foot of the proposal form and above the respondents’ signature was a statement in the following words: —

“I hereby declare and warrant that the above questions are fully and truthfully answered, that I have not withheld or concealed any circumstance affecting in any way the proposed insurance, and that the vehicles described are in good condition. I agree that this declaration and the answers above given shall be the basis of the contract between me and the Provincial Insurance Co., Ltd., and I agree to accept a policy subject to the conditions prescribed by the Company and expressed in the policy.”

The policy which was subsequently issued referred to the proposal and declaration which it was agreed should be deemed to be of a promissory nature and effect and should be the basis of the contract for the insurance thereby intended. The policy itself provided that the indemnity should be subject to the exclusions and conditions therein set out, and one of those conditions was condition 6: —

“It is a condition precedent to any liability on the part of the Company under this policy: (i) that the terms, provisions, conditions and endorsements hereof, so far as they relate to anything to be done or complied with by the insured, are duly and faithfully observed; and (ii) that the statements made and the answers given in the proposal hereinbefore referred to are true, correct and complete.”

…The respondents in fact did use their cart for hauling timber of the Forestry Commission in pursuance of a verbal contract to that effect and had so used it on the day when an accident occurred. But the finding of fact is clear that the claimants were engaged in the business of delivering coal when the accident arose, and it is not suggested that this was not in general terms the use to which the vehicle was put. The appellants have repudiated liability under the contract upon the ground that the use of the lorry for a purpose other than that of carrying coal was a breach of the statement as to the purpose for which the vehicle was to be used, and as this was made the basis of the contract the risk has never attached. Now it is old and well known law that parties to an insurance contract are at liberty to contract upon the footing that any statement can be made the basis of the contract, and if the statement be inaccurate its materiality does not arise…

Turning, therefore, back to the words in the present case, the question that arises is, were these words intended to mean that the use of the vehicle was to be exclusively confined to that of carrying coal, so that any temporary, trivial, and incidental use would completely defeat the policy, or was it not? I wish again to repeat that it is perfectly open to people to make such a bargain, and when made it is useless to complain that the bargain is harsh. But it is at least essential that the bargain should be plain in order that it may be clear that a man has contracted on the faith of something which may rob the insurance of the greater part of its value. It is said here that the insurance was at a lower rate because it was a coal cart; and that may be so, but that does not help the question on the one side or the other. To state in full the purposes for which the vehicle is to be used is not the same thing as to state in full the purposes for which the vehicle will be exclusively used, and as a general description of the use of the vehicle it is not suggested that the answer was inaccurate.

I am therefore of opinion that there was no bargain here so to confine the use of the vehicle to the cartage of coals as to make any occasional use that did not destroy the general purpose of its user a breach of the condition upon which the policy was based…’

Lord Russell:

‘My Lords, it appears to me that the result of this appeal depends solely upon the true construction of the documents…

The foundation of [the insurers] contention is as follows: The proposal form requires the proposer (amongst other things) to state (a) the purposes (in full) for which the vehicle will be used, and (b) the nature of the goods to be carried. The proposers stated: (a) Delivery of coal; (b) coal: and they signed a declaration that the questions were fully and truthfully answered. The policy refers to the proposal and declaration which (it provides) shall be deemed to be of a promissory nature and effect and shall be the basis of the contract as if incorporated in the policy. [His Lordship read Condition 6, see Lord Buckmaster’s speech, above]…

It is contended by the appellants that the statement above referred to constituted a statement: (a) that during the currency of the policy the vehicle would never be used for any purpose other than the delivery of coal; and (b) that during the currency of the policy coals, and coals only, would be carried in the vehicle. They then say that these statements are incorporated into the policy as contractual provisions relating to something to be done or complied with by the insured, the due and faithful observance of which is under condition 6 a condition precedent to any liability on the part of the insurance company; and that the vehicle having in fact been used during the currency of the policy for the purpose of carrying timber, no liability can attach to the insurance company. Alternatively it was said that the answer given in the statement was not true, correct, or complete because the vehicle had in fact subsequently carried timber, with the result of freeing the insurance company from liability under the second part of condition 6.

This argument in my opinion breaks down at the outset. I cannot read the above statements in the proposal form as being more than statements by the proposers of their intentions as to the user of the vehicle and the goods to be carried in it, and so as descriptive of the risk. If it had really been the intention of the insurance company that the carrying of goods other than coal at any time should free them from liability in respect of an accident happening subsequently, it was incumbent on them to make that abundantly clear to the proposers. On the construction which I give to the statement there is no scope for the operation of condition 6 in favour of the insurance company. It is not shown that there has been any failure of the insured to observe any provision relating to anything to be done or complied with by them, or that their answers were not true, correct, and complete…’

[804]   Wood v The Hartford Fire Insurance Co 13 Conn 533, 35 Am Dec 92 (1840)

Sherman J:

‘The general rule in regard to what constitutes a warranty, in a contract of insurance, is well settled. Any statement or description, or any undertaking on the part of the insured, on the face of the policy, which relates to the risk, is a warranty. Whether this is declared to be a warranty totidem verbis or is ascertained to be such, by construction, is immaterial. In either case, it is an express warranty, and a condition precedent. If a house be insured against fire, and is described in the policy as being “cooper roofed,” it is as express a warranty, as if the language had been, “warranted to be copper roofed”; and its truth is as essential to the obligation of the policy, in one case as in the other. In either case, it must be strictly observed. There may often be much difficulty in ascertaining from the construction of the policy, whether a fact, quality or circumstance specified, relates to the risk, or is inserted for some other purpose — as to shew the identity of the article insured…This must be settled, before the rule can be applied. But when it is once ascertained, that it relates to the risk, and was inserted in reference to that, it must be strictly observed and kept…

In the policy, this establishment is described as “the one undivided half of the paper-mill, which they [the insured] own at Westville, together with the half of the machinery wheels, gearing, etc; the other half being owned by William Buddington.” If this relates to the risk, it is a warranty. That it does, is evident from the memorandum in the conditions of the policy, where “paper-mills” are enumerated among those articles which “will be insured at special rates of premium”; that is, a paper-mill is the subject of peculiar risks, and is to be insured upon special stipulations. Therefore, the description of this, in the policy, as a “paper-mill,” relates to the risk, and is, consequently, a warranty. It is the only subject of insurance; and, if it was not a paper-mill, at the time of the loss, the warranty was not kept, and the plaintiffs cannot recover, although the change may have diminished the hazard, and been effected without their knowledge or against their will.

It is contended, that the paper-mill had become converted into a grist mill. The policy is dated in February 1837. In the August, following, the use of the paper-mill was discontinued, and a pair of mill-stones were added, for grinding grain. They were located in the place previously occupied by the rag-cutter and duster; and were moved by the same gearing, and by the power of the same water-wheel. No other machinery was used for the grindstones. All remained as it was, except the rag-cutter and duster — which were dismounted and all the other machinery might, at any time, have been employed in making paper. It was, to all intents and purposes a paper-mill, ready for use. The character of the establishment was no more altered, than if a grindstone had been attached, by a band, to the water-wheel and all the other machinery left at rest. The warranty was duly kept.’

Judgment for plaintiffs.


1.     The terms in a typical insurance contract are, of course, found in the policy document. But this will commonly incorporate the answers given by the insured to the questions contained in the proposal form together with any provisions in renewal notices or other instruments sent out by the insurer. Constructing insurance contracts by means of incorporating terms from different documents has not escaped judicial criticism. For example, in Provincial Insurance Company Ltd v Morgan (above, [803]), Lord Wright stridently condemned this practice on the basis that ‘it must be very confusing to the assured’ who may find himself deprived of cover ‘because he has done something quite innocently but in breach of a condition, ascertainable only by the dovetailing of scattered portions.’

2.     As noted by the Law Commission (see para 6.3, above [801]) insurers commonly sought to convert the insured’s answers in the proposal form into warranties by the so-called ‘basis of the contract clause’. Notwithstanding the criticism of this practice by the Law Commission (see below, [831]), Parliament has so far failed to intervene. (For judicial criticism, see Lord Wrenbury’s speech in Glicksman v Lancashire and General Assurance Co Ltd (see chapter 4, [419]). From the insured’s perspective basis of contract clauses can give rise to particularly harsh results.

3.     Contrast the approach of the Supreme Court of Connecticut in Wood (above, [804]) with that of the House of Lords in Dawsons Ltd v Bonnin:

[805]   Dawsons Ltd v Bonnin [1922] 2 AC 413 (HL)

[The appellants, a firm of removal contractors carrying on business at 46 Cadogan Street, Glasgow, insured a lorry against damage by fire and third party risks. The policy stated that the proposal should be the basis of the contract and incorporated into the policy. It also stated that the policy was subject to the conditions set out on its reverse. The fourth condition provided that a “material misstatement or concealment of any circumstance by the insured material to assessing the premium herein, or in connection with any claim, shall render the policy void.” In response to a question in the proposal form, “State full address at which the vehicle will usually be garaged,” the insured inadvertently answered: “Above Address,” ie. the insured’s ordinary place of business in Glasgow. This was not true because the lorry was usually garaged at a farm (Dovehill) on the outskirts of Glasgow but within the city itself. The lorry was destroyed by fire at Dovehill and the insured claimed payment under the policy].

Viscount Haldane:

‘The question in the appeal is whether the respondents were freed from liability under the policy by reason of inaccuracy in a statement made by the appellants in the proposal submitted when the policy was issued, to the effect that the motor would usually be garaged at a certain address, whereas it was garaged elsewhere…

My Lords, the reply of the appellants, the insured, on this point was that the question whether the motor vehicle was to be stored at Dovehill or at Cadogan Street was not a material one. The chief risks covered by the policy were in the main wholly unconnected with fire at the garage, and the percentage of the premium to be allocated to that risk was very small. The respondents called evidence to prove that they did consider that the question was one of importance, and the learned judges in the Court below appear to have given credence to that evidence and to have attached weight to it. This is an important fact, and I am reluctant to differ from them. But I think that, notwithstanding some differences in the way in which they cross-examined the witnesses called for the respondents, the appellants have sufficiently proved by testimony which commends itself that in all probability no importance would have been attached to any answer to the fourth question in the proposal form to the effect that Dovehill was to be the place of garage.

But that does not dispose of the case. For if the respondents can show that they contracted to get an accurate answer to this question, and to make the validity of the policy conditional on that answer being accurate, whether the answer was of material importance or not, the fulfilment of this contract is a condition of the appellants being able to recover.

My Lords, for this reason it appears to me that the question which really lies at the root of the matter in dispute is one of construction simply…If there are statements in the answers to the questions in the proposal form which are in this way constituted by special stipulation conditions, they are therefore unaffected by the subsequent and independent condition dependent on materiality.

Now as to the character of such conditions, and as to what is implied in their constitution, there is a good deal of authority which is instructive. It is worthwhile to consider how the distinction between a condition and a representation came to be drawn in this connection. The distinction had its origin in the historical development of the law of England, but, as Lord Watson observed of the existing state of the law, the doctrine of warranty as applied to such stipulations in a contract of assurance is the same in the law of Scotland as in that of England: Thomson v Weems (1884) 9 App Cas 671…“Warranty” is a somewhat unfortunate expression to have been used in this connection. The proper significance of the word in the law of England is an agreement which refers to the subject matter of a contract, but, not being an essential part of the contract either intrinsically or by agreement, is collateral to the main purpose of such a contract. Yet irrespective of this the word came to be employed in England when what was really meant was something of wider operation, a pure condition. If goods tendered in performance of a contract do not satisfy the conditions stipulated for, the buyer may reject them; but he may alternatively accept the goods and claim damages for breach of the stipulated condition, thus treating his claim as one for damages for a breach of warranty, sufficiently so constituted. The condition is thus wider than the warranty strictly so called, but may sometimes be founded on as giving rise to a contract of warranty.

In this way the restricted limits of the English common law encouraged the development of the notion of warranty in a fashion which would not have been required in Scotland, where law and equity were never severed. In England it was always possible to set aside a contract for misrepresentation, but the representation, although sufficient for the jurisdiction even though perfectly innocent, had to be material. Moreover, at common law it was no defence to an action on a contract that there had been misrepresentation, unless the misrepresentation were fraudulent or of a recklessness analogous to fraud: see the judgment of Jessel MR in Redgrave v Hurd (1881) 20 Ch D 1, 13. Possibly in order to provide for the difficulty occasioned by the limits of their jurisdiction, the Courts of common law showed great readiness to construe a representation sufficiently expressed to be the foundation for the acceptance of a proposal made by a would-be insured to an insurer as a condition which, if accepted, had to be observed independently of any question of materiality. As Lord Blackburn observed in Thomson v Weems…:

“It is competent to the contracting parties, if both agree to it and sufficiently express their intention so to agree, to make the actual existence of anything a condition precedent to the inception of any contract; and if they do so the non-existence of that thing is a good defence. And it is not of any importance whether the existence of that thing was or was not material; the parties would not have made it a part of the contract if they had not thought it material, and they have a right to determine for themselves what they shall deem material.”

He goes on to point out that in policies of marine insurance it is settled that any statement of a fact bearing on the risk is, “by whatever words and in whatever place, to be construed as a warranty, and, prima facie, at least, that the compliance with that warranty is a condition precedent to the attaching of the risk.” Without going so far as to hold that this rule is also applicable to the construction of life policies generally, he thought that it applied to the life policy before him, and “when we look at the terms of this contract, and see that it is expressly said in the policy, as well as in the declaration itself, that the declaration shall be the basis of the policy, that it is hardly possible to avoid the conclusion that the truth of the particulars (which, I think, include his statement that he was of temperate habits) is warranted”…

As to the fourth of the appended conditions, this, as I have already observed, extends to matters which go beyond in some respects, and are outside in other respects, those dealt with specifically in the proposal form. Moreover, the fourth condition is limited to what is “material to assessing the premium,” and I will assume for present purposes that nothing material in this sense was misstated or concealed. If so, that fourth condition does not apply. But on the other hand I do not find in the language used in it anything which cuts down or interferes with the effect of the fourth of the answers in the proposal form, if this in itself imports a condition. If it does import by itself a condition, then I think that, as Lord Blackburn laid down in the passage quoted, it imports a condition which must be shown to have been complied with, whether material from an ordinary business standpoint or not. It is clear that the answer was textually inaccurate. I think that the words employed in the body of the policy can only be properly construed as having made its accuracy a condition. The result may be technical and harsh, but if the parties have so stipulated we have no alternative, sitting as a Court of justice, but to give effect to the words agreed on. Hard cases must not be allowed to make bad law. Now the proposal, in other words the answers to the questions specifically put in it, are made basic to the contract. It may well be that a mere slip, in a Christian name, for instance, would not be held to vitiate the answer given if the answer were really in substance true and unambiguous. “Falsa demonstratio non nocet.” But that is because the truth has been stated in effect within the intention shown by the language used. The misstatement as to the address at which the vehicle would usually be garaged can hardly be brought within this principle of interpretation in construing contracts. It was a specific insurance, based on a statement which is made foundational if the parties have chosen, however carelessly, to stipulate that it should be so. Both on principle and in the light of authorities such as those I have already cited, it appears to me that when answers, including that in question, are declared to be the basis of the contract this can only mean that their truth is made a condition exact fulfilment of which is rendered by stipulation foundational to its enforceability…’

Viscount Finlay (dissenting):

‘…There remains for consideration only the defence raised in the second answer and in the first and fourth pleas in law for the defenders. The second answer contained the following averment: “In the proposal which is the basis of the policy, the following question and answer occur ‘State full address at which the vehicles will usually be garaged.’ (A.) ‘Above address’ (which was 46 Cadogan Street, Glasgow). The said answer is untrue and misleading. The information requested and given was of material importance to the defenders in considering the said proposal, and they contracted on the faith that the answer was true. In consequence of its falsehood, the policy is void.”

The first plea in law for the defenders was this: “1. The policy is void because of the untrue answer given to the question in the proposal referred to in Answer 2 hereof, and because the information contained in said answer was material to the formation of the contract, and misled the defenders on a material matter.”

The fourth plea in law was the following: “4. The proposal of the pursuers being false and misleading with reference to the place where the motor car insured would be garaged, the defenders are entitled to absolvitor”…

The proposal form contained a description of the vehicle to be insured and the answers to which I have already referred. The policy itself recites the proposal and says that it is to “be the basis of the contract and be held as incorporated herein.” The underwriters bound themselves to indemnify the assured subject to the conditions on the back as against certain perils, including loss by fire. The fourth of the conditions on the back is this: “4. Material mis-statement or concealment of any circumstances by the insured material to assessing the premium herein, or in connection with any claim, shall render the policy void.”

It was urged on behalf of the respondents that the statement of the usual place of garage was a warranty in the sense in which that term is used with reference to contracts of insurance, and that if it was not correct the action must fail, whether the statement was material or not in itself. The Lord Ordinary held that this statement was such a warranty, and, in his interlocutor of 15 July 1920, found that the policy “is void because of the untrue answer given to the question in the proposal.” On appeal the Second Division also decided in favour of the underwriters, the respondents in the present appeal, but on grounds entirely different from that on which the Lord Ordinary had proceeded. They held that the fourth condition indorsed on the policy applied, and that the policy was void, because the answer in the proposal form contained a material misstatement by the assured of circumstances material to assessing the premium on the policy.

I agree with the Second Division that the case is governed by the fourth of the indorsed conditions. I am unable to agree with them in the view that the statement as to the garage was material to assessing the premium on the policy, and if I am right in this view it will follow that the appeal should be allowed and judgment entered for the appellants.

I am wholly unable to adopt the view on which the Lord Ordinary proceeded that the clause amounted to a warranty.

The expression “warranty” imports that a particular state of facts in the present or in the future is a term of the contract, and, further, that if the warranty is not made good the contract of insurance is void. It is not necessary that the term “warranty” should be used, as any form of words expressing the existence of a particular state of facts as a condition of the contract is enough to constitute a warranty. If there is such a warranty the materiality of the facts in themselves is irrelevant; by contract their existence is made a condition of the contract. But if the language used is not clear the materiality or immateriality of the facts said to be warranted may be an element in arriving at a conclusion on the question whether the language used should be construed as constituting a warranty.

In the present case it appears to me that the evidence establishes that the statement as to the garage was not material to the present insurance. In the case of an ordinary policy covering a motor against fire risk the question of the garage might be very material. Its structure and locality might affect the chances of fire or the chance of fire being extinguished if it should break out, but as to the present policy, the evidence of the pursuers’ witnesses, Olden, Stewart and Ballantyne, is quite distinct that the risk of fire in the garage is so insignificant in comparison with the other risks insured, which are those of the road, including fire on the road, which might result from self-ignition, that it is ignored in fixing the premium. It is true that the evidence of the defenders, upon whom lay the onus probandi, had been taken before the evidence for the pursuers, and it is said, and I think with justice, that the cross-examination of the defenders’ witnesses on this point was insufficient. The defenders, however, did not object on this ground to the reception of the pursuers’ evidence on the point, and, further, the defenders, if they had been in a position to controvert the pursuers’ evidence, might have applied to be allowed to adduce evidence on the point which had been so clearly developed in the evidence of the pursuers’ witnesses. They made no such application, and for this there can be only one reason — namely, that they were not in a position to controvert the truth of the evidence given by the pursuers’ experts. We must therefore take the evidence as it stands, with the result that there is no contradiction of the pursuers’ evidence on this point.

If the risk of fire in the garage did not affect the premium it could not be material. It would require clear language in the policy to establish that a statement of an immaterial point of this nature had been made a condition of the policy by warranty. The very usual clause making the truth of the answers in the proposal a condition of the policy, so that it is void if they are in any respect untrue, does not occur in the present policy, and the fact that such a clause is usual cannot be ignored in determining whether a policy in which it is absent amounts to a warranty.

The respondents are therefore driven to rely solely upon the clause in the policy that the proposal should be the basis of the contract and be held as incorporated therein. This clause appears to me to be inadequate to support the conclusion which the respondents desire to draw from it. The proposal is no doubt the basis of the contract of insurance in the sense that it initiated the transaction and that in response to it the insurance was granted. But this does not in the least involve the proposition that any inaccuracy on any point in any of the answers, however immaterial, would be fatal to the policy. If the statement were material to the risk it might be another matter altogether. The policy is put forward by the underwriters and it must be construed contra proferentes. If its effect is ambiguous it must be read in favour of the assured.

The existence of the fourth condition indorsed on the policy tends strongly to show that the answer as to the garage should not be read as a warranty. The fourth condition is one subject to which the contract of insurance came into existence, and it is an integral part of the contract. On the fair reading of the contract as a whole, including the fourth condition, the inference seems to me irresistible that it was only material misstatements, whether in the proposal or elsewhere, that were to render the policy void…

The case really falls to be determined on the fourth of the indorsed conditions, and as the misstatement was not material to the question of premium, the appeal, in my opinion, should be allowed.’

[806]   Unipac (Scotland) Ltd v Aegon Insurance Co (UK) Ltd (1999) Lloyd’s Rep IR 502

[A proposal form for fire insurance contained two incorrect answers. The first concerned the length of time the insured had carried on business at the premises. The second concerned whether the insured was the sole occupier. The insured had signed the following declaration:

“We declare that to the best of our knowledge and belief all statements and particulars contained in this proposal are true and complete and that no material fact has been withheld or suppressed. We agree that this proposal shall be the basis of the contract between us and the insurers.”

A fire damaged the premises and the insurers repudiated liability. The insured argued the first sentence of the declaration was no more than a declaration that no material fact had to the best of their knowledge and belief been concealed in respect of matters to which the questions in the proposal form had been directed].

Opinion of the court:

‘[W]e are not persuaded that there is any ambiguity in the declaration. On the contrary, we are satisfied that the meaning of the declaration is clear. The statement in the first part of the second sentence, to the effect that the proposal is to be the basis of the contract, makes it perfectly plain that the answers contained in the proposal are warranted as being true and complete…We see no reason why the second clause of the first sentence should be treated as qualifying the words contained in the first clause. We accept that there may be cases where the context requires that subsequent provisions should be construed as qualifying or explanatory of what has gone before…

In our opinion, the first sentence in the declaration is dealing with two separate matters. The first clause, when read along with the provision in the second sentence to the effect that the proposal is to be the basis of the contract, clearly contains a warranty of the truth of the answers given to the questions in the proposal form. The second part of the first sentence is dealing with a different matter, namely the obligation not to withhold or suppress material facts. No doubt that is a repetition of what would be implied at common law, but there is nothing to prevent parties from choosing in a contract to repeat a provision which would be implied by the common law…

We see no reason in law or principle for concluding that these two contractual provisions should not co-exist, and we see no justification for favouring a construction which would mean that one of these pro visions qualifies the other. In our opinion, upon a proper construction the two clauses in the first sentence of the declaration are separate and substantive.

It was not disputed that if the second clause had not appeared in the first sentence of the declaration, the first clause read along with the provisions in the first part of the second sentence would amount to a warranty of the truth of the answers given to the questions in the proposal. We see no reason why the inclusion of the second clause should modify or qualify the clear warranty contained in the first clause. In the circumstances, we are satisfied on a proper construction of the declaration, that the two clauses of the first sentence are dealing with separate matters, and that there is no justification for regarding the second clause as modifying the first.

We recognise that a consequence of holding that the declaration contains an express warranty of the truth of the answers to the questions in the proposal is that if there was an error in, for example, the postcode or telephone number of the proposer, the result would be that the defenders would be entitled to avoid the policy. That however is a consequence of the parties agreeing to an express warranty with the result that the defenders would have a right to avoid the policy if an answer was untrue whether or not the untrue item was material. We are not persuaded that that would be a ludicrous result. It is simply a consequence of what parties have agreed to by contract and parties are free to agree what they like. We express no view upon the question of whether an error of this kind could be covered by the principle de minimis non curat praetor.’

[807]   R A Hasson, “The ‘basis of the contract clause’ in insurance law” [1971] MLR 29

‘No meaningful reform of insurance law can be achieved without a complete overhaul of the law which has developed around the “basis of the contract” clause in insurance litigation…

The Genesis of the Clause

The nineteenth century decisions are troublesome not so much for the results reached in them but rather for some overbroad statements of principle and unnecessary dicta which produced unfortunate results in later cases.

Thus, in Newcastle Fire Insurance Co v Macmorran (1815) 3 Dow 255, Lord Eldon went out of his way to state, although these remarks were clearly unnecessary to the decision before him:

“If the Court of Session was of opinion that the danger and risk was not greater in mills of the second class than in those of the first class though that were sworn to by five hundred witnesses, it would signify nothing. The only question is, what is the building de facto that I have insured.”

The basis of the contract clause made its first appearance in a reported case in Duckett v Williams (1834) 2 C & M 348. In that case, the trustees of the Provident Life Assurance Company had represented to the Hope Insurance Company that the “herein named John Stephenson is now in good health, and has not laboured under gout, dropsy, fits, palsy, insanity, affection of the lungs or other viscera or any other disease which tends to shorten life.” In the event of the trustees making any “untrue averment,” the Hope Insurance Company would be entitled both to avoid the policy and to retain the premiums that the Provident Insurance Company had paid. The jury found that the insured was in fact uninsurable. On these facts, Lord Lyndhurst CB rejected Provident’s argument that their duty to answer “truly” meant only that they made this statement to the best of their knowledge. In his Lordship’s view, “two consequences are to follow if the statement be untrue: one, that the premiums are to be forfeited; the other that the assurance is to be void.” This result is both defensible and rational given the fact that Duckett v Williams dealt with a reinsurance situation rather than with an original application for insurance. But the court did not make this distinction and unfortunately Lord Blackburn in Thompson v Weems (1884) 9 App Cas 671 also failed to make the distinction, treating Duckett v Williams as an authority in a case of ordinary insurance…

Thompson v Weems is the last and most important of the nineteenth century decisions on the basis of the contract clause. While it is impossible to quarrel with the result, the way the result was reached seems to be open to attack. In an application for life insurance, the applicant answered the following questions as follows: “Question 7 (a) Are you temperate in your habits? (b) and have you always been strictly so? (a) ‘Temperate’ (b) ‘Yes.’” The Lord Ordinary, in a decision affirmed by a majority of the Second Division of the Court of Session found that the applicant had not made any untrue statements in his declaration. In arguing for the reversal of this decision before the House of Lords, the Solicitor General for Scotland based his argument for overruling the decision in favour of Weems on narrow (and legitimate) grounds: “The evidence showed that Mr Weems was not in the ordinary sense of the word ‘temperate’; and more than that, he had had warnings and expostulation on the subject, which made it impossible for him to consider himself a person of temperate habits.”

All would have been well if their lordships had based their decision in favour of the insurers on the ground that the applicant had acted in bad faith. Instead, Lord Blackburn went out of his way to state that “insurers have a right if they please to take a warranty against [the applicant’s]…disease, whether latent or not, and it has very long been the course of business to insert a warranty to that effect.” This practice might, no doubt, result in a “hard bargain” for the assured if he had innocently warranted what was not accurate, but if he had warranted it, “untruth” without any moral guilt, avoided the insurance.”

What is also disturbing about Thompson v Weems… is that [the]…judge [did not] appreciate the proper meaning of questions relating to the applicant’s health. It would seem obvious that questions such as “Are any of your immediate family at present in a delicate state of health?” [this was question 2(b) in the proposal form] or “(1) What is the present and general state of your health? and “(2) Do you consider yourself of a sound constitution?” [this was question 4] are questions requiring only the assured’s opinion on these matters. After all, this is how such questions would be regarded by experts, ie, medical men to whom these questions were addressed. How much more so must this be the case when the addressee of these questions is a layman should have been evident to their lordships. Once the “opinion-requiring” character of these questions is perceived, the only question that remains is: did the applicant state his honest opinion in response to the particular question? If the answer to this is in the affirmative, the insured should be entitled to recover.

Twentieth Century Developments

The reported cases in the present century are more unsatisfactory than those in the nineteenth century because in all too many of them, indefensible results have been reached…

Dawsons v Bonnin [for the facts, see above, [805]] is undoubtedly the most important case on the subject; it is also probably the least satisfactory decision on the subject…

On [the] facts, the lorry having been destroyed by a fire at the garage, the House of Lords (Viscount Finlay and Lord Wrenbury dissenting) held that the insured was not entitled to recover because of his (the insured’s) mis-statement as to where the car was to he garaged. The ways by which the majority reached this result in the teeth of the wording of provision 4 of the policy borders on the fantastic. Thus Viscount Haldane stated: “I do not look on the fourth condition appended to the policy as what is important for this purpose, for that condition extends to possible misstatements and concealments which go beyond those to which the proposal statements are confined.” This way of reading condition 4 is not supported by any further evidence or argument; it has the effect of rendering, the condition entirely redundant.

Lord Dunedin reached the same result by a different route. For him, the case raised “the pure question,” as yet I think undecided, when certain statements are said to be the “basis of the contract and incorporated therewith” is that equivalent to saying that these statements are held to be “contractually material”? “Unwillingly” and “contrary to [his] first impression, his lordship decided that “it is.” It was impossible to regard the word “basis” as being “merely pleonastic.” Thus, in order to give meaning to a single word, a whole provision, ie, condition 4, is sacrificed! It is not necessary that one be a strong supporter of the contra proferentem principle to regard this view as untenable.

But even if there had been no condition 4 of the policy, it is submitted that Dawsons v Bonnin is an unfortunate decision. The misrepresentation of fact in this case worked to the benefit of the insurers, since it is less dangerous to garage a car outside Glasgow than it is to garage it in central Glasgow. On these facts, the House of Lords should have held that the insurer was not entitled to avoid the policy…

The Case for Reform

It seems reasonably certain that the basis of the contract clause was originally introduced into insurance policies in the early part of the nineteenth century with the purpose of drawing the attention of applicants for insurance to the fact that the information required of them was very important. The basis of the contract clause has long since served to reform this “educative” function efficiently. Today, most insureds are already aware of the need to answer questions in the proposal form with great care, since they realise that the information sought is likely to be of the greatest importance to the insurers. To the extent that some insureds still need to be educated on this point, this can be done by means other than the basis of the contract clause. It is open to insurers, for example, to point out in clear and prominent language on the proposal form that great care must be taken by the insured in supplying information; since a misstatement with respect to a material fact is liable to render the policy void. As it is, the basis of the contract clause performs little or no “educative” function and, instead, as Lord Greene MR pointed out in Zurich Insurance Co v Morrison [1942] 1 All ER 529, it creates “traps” for the insured.

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