The Terms of the Insurance Contract
1. The perspective of the general law of contract
The law governing insurance contracts is rooted in the common law. As such, the approach adopted by the courts towards the classification of terms in contracts of insurance owes its origins to the jurisprudence which developed rapidly during the late eighteenth century and throughout the nineteenth century in response to the increasing sophistication of the commercial contract.
The common law of contract proceeds on the basis that not all obligations created by an agreement are of equal significance or importance to the parties. The orthodox classification of contractual terms categorises such obligations as either ‘conditions’ on the one hand, or ‘warranties’ on the other. A condition is an essential term of the contract and is fundamental in nature,1 the effect of its breach is to entitle the innocent party to terminate the contract and sue for damages. A warranty, however, is a subsidiary promise, the breach of which entitles the innocent party to damages only and not to terminate the contract.2
The word condition may also carry a different meaning insofar as such a term may be either a condition precedent or a condition subsequent. A condition precedent is a term ‘which must be fulfilled before any contract is concluded at all’.3 In this sense it has been described as a pre-condition, ‘something which must happen or be done before the agreement can take effect’.4 Although the contract crystallises as soon as the parties conclude their agreement, if the contingent event does not occur, the contract does not become operative.5 It should be noted that a condition precedent is not restricted to the situation where the contract provides for a third party to perform some specified act, but may also arise where one of the contracting parties themselves is required to carry out some act.6
A condition subsequent operates to bring an existing contract to an end upon the occurrence of a stipulated event.7 However, whether a particular term can be accurately designated a condition subsequent as opposed to a condition precedent is often nothing more than an etymological exercise. Nevertheless, the significance of the condition subsequent is more readily seen in the context of insurance contracts where it has become subsumed in the more appropriate terminology of the promissory warranty and clauses descriptive of risks.8
As is evident from much of the case law on the place of conditions and warranties in the general scheme of contract law,9 there has been considerable judicial debate over whether the dichotomy amounts to nothing more than an over simplistic approach to determining the importance of contractual terms.10 This has seen the recent emergence of a third category of terms, namely innominate or intermediate terms. Whether a party may terminate the contract in the event of breach of an innominate term lies within the discretion of the court. In this way, such terms operate as a flexible device whereby termination is made to depend upon the court’s view of the seriousness of the consequences flowing from the breach.11 Nevertheless, the classification of contractual terms as major (conditions) or minor (warranties) obligations has withstood the rigours of judicial challenge and continues to represent the orthodoxy.
We have already encountered the Consumer Insurance (Disclosure and Representations) Act 2011 in Chapters 3 and 4, above. It will be seen below that the statute abolishes ‘basis of contract’ clauses in consumer policies. It is expected that the Law Commissions will return to the issue of reforming warranties towards the end of 2011 when their business insurance law consultation paper is published.
2. The nature and effect of insurance warranties
The parallels between the general law of contract and the law applicable to insurance contracts encompasses the approach adopted towards the relative importance of contractual terms. The terms of a contract of insurance are not necessarily of equal importance in the minds of the parties, nor indeed in the eyes of the judges, and so the consequences arising from the breach of a term will depend (as with the general law) upon the nature of the term in question.
The terminology adopted in insurance law to categorise terms is curious and confusing to those schooled in general contract law. For insurance contracts, fundamental terms are classified as warranties, not as conditions. To compound the confusion, in insurance contracts the two terms are sometimes used interchangeably. Nevertheless, the strict nature of the warranty in insurance law can be seen from the statutory definition of the term contained in the Marine Insurance Act, 1906, section 33(3) which provides: ‘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.’12 The general applicability of this definition to non-marine insurance contracts is now beyond dispute, so that in this respect at least, marine insurance contracts can be treated as sui generis. This is manifest from the formulation of Viscount Finlay in Dawsons Ltd v Bonnin,13 who said:
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.14
Accordingly, even a minor or trivial breach of warranty is enough to terminate the risk under the insurance contract. For example, in Overseas Commodities Ltd v Style,15 the insured warranted that each can of pork in a consignment had been date- stamped by the manufacturer. In fact, a number of cans had the date-stamp missing. The insured claimed due to a quantity of the cargo being swept overboard in a storm. It was held that the insurers could rely on the breach of warranty in denying the claim. The fact that the insured was blameless is, therefore, irrelevant, for liability is strict.16 The court will not ask whether the breach was material or otherwise to the risk or to the loss sustained. The inexorable rule is that a warranty must be strictly complied with so that substantial performance is insufficient.17 An interesting illustration is afforded by the decision in Argo Systems FZE v Liberty Insurance PTE Ltd, London Special Risks Ltd,18 where, in effect, a breach of a warranty occurred before the inception of the insurance policy. The policy was incepted to cover the insured’s floating casino to be towed from the US Gulf to India. The tow contract was in standard form and included a term which stated that the tug owner would not be liable for any loss sustained during the tow. The policy, which was governed by English law, contained a warranty stating ‘no release, waivers or “hold harmesless” given to Tug’.. The vessel sank during the voyage and the insurers, having obtained a copy of the Towcon, declined cover on the grounds that the insured had breached the insurance contract. The insured argued that it was contrary to the orthodox rules of construction to construe the warranty so that the policy was worthless as soon as it was entered into as it would produce ‘commercially absurd’ results.19 They argued that a there was an implied condition that the ‘hold-harmless’ warranty would not apply where they entered a contract on standard terms, that it was standard practice to limit liability in this context and, further, if the warranty was valid, it only applied to different terms not the one included in the agreement. In construing the warranty, HHJ Mackie QC agreed with the insurers. The insurers argued that construing the term in the way they contended was not commercially absurd, that there was no room for implying any terms as this was unnecessary and standard term contracts can be amended.20 The judge said:
[A]s I see it in construing the policy of insurance I cannot impress upon Liberty [the insurer] both knowledge of the standard form and also a willingness to accept that the wording of the explicit warranty it has required should be read subject to that form. It was for Argo, or its advisers, to ensure that the policy of insurance it took out was consistent with the towing contract it had entered into.21
The insurers would have been able to rely on the warranty had they not waived by estoppel their right to rely on the breach.22
3. Creating an insurance warranty
It is not necessary for any form of words to be used in order to create a warranty, the use or absence of the word ‘warranty’ is therefore not important. It was observed by Lord Blackburn in Thomas v Weems,23 that:
In policies of marine insurance I think it is settled by authority that any statement of fact bearing upon the risk introduced into the written policy 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. I think that on the balance of the authority the general principles of insurance law apply to all insurances, whether marine, life or fire.24
While there is no particular formula, nevertheless the language creating a warranty must be unequivocal, showing clearly that it is the intention of the parties that the term in question is viewed by them as fundamental to the contract.25 In HIH Casualty and General Insurance Ltd v New Hampshire Insurance Co,26 the issue was whether a term in the policy which stated that six films would be made was a warranty. Rix LJ laid down three tests for deciding the nature of a term:
In my judgment, once the six film term is established as a term of the insurance or reinsurance contract, the grounds for holding it to be a warranty are very strong. It is a question of construction, and the presence or absence of the word ‘warranty’ or ‘warranted’ is not conclusive. One test is whether it is a term which goes to the root of the transaction; a second, whether it is descriptive of or bears materially on the risk of loss; a third, whether damages would be an unsatisfactory or inadequate remedy. As Lord Justice Bowen said in Barnard v Faber,  1 QB 340 at p 344: ‘A term as regards the risk must be a condition.’ Otherwise the insurer is merely left to a cross-claim in a matter which goes to the risk itself, which is unbusinesslike. … In the present case, the six film term would seem to answer all three tests. It is a fundamental term, for even if only one film were omitted, the revenues are likely to be immediately reduced.27
This approach was applied by the Court of Appeal in Toomey (of Syndicate 2021) v Banco Vitalicio de Espana SA de Seguros y Reasseguros.28 The defendants, Spanish insurers, insured a Spanish first-division football club, Atletico de Madrid, against loss of income should the club be relegated. The club had been required to effect such insurance by Audivisual, (AV) which had exclusive rights to televise the club’s home matches. AV had paid the club advances, a percentage of which, subject to certain conditions, was returnable in the event of relegation. The insurance policy provided security to AV for its exposure under promissory notes in the sum of Pts 2.9 billion. The insurers reinsured the risk with a number of reinsurers in London. At the end of the 1999-2000 season the club was relegated to the second division. The defendants paid the loss but the London based reinsurers, Toomey, refused to pay on the reinsurance on the basis that there was a material misrepresentation in the draft slip relating to the nature of the direct policy. At first instance, it was held to be a valued policy and not, as represented, an indemnity policy. The reinsurers exposure was therefore greater than appeared. Toulson J also held that the description in the slip of the policy was a warranty and that there was breach. The Court of Appeal agreed on both issues. With respect to the warranty issue, the Court held, applying the tests formulated by Rix LJ in HIH, that a term may be a warranty even though it is not expressed as such provided it goes to the root of the transaction and bears materially on the risk of loss and if damages would not be an adequate remedy. On the facts, these conditions were satisfied.
Given the harsh results which flow from the insured’s breach of warranty, the courts have endeavoured to mitigate the effects by adopting the contra proferentem rule of construction towards such terms. Under this rule any ambiguity in the wording of such clauses will be strictly construed against the party, usually the insurer, seeking to rely on them. In a line of cases it has been stressed that insurers should express themselves in plain terms so that where the language used is ambiguous, it will be interpreted in the sense that the insured might reasonably have understood it:For example, in Provincial Insurance Co Ltd v Morgan,29 the proposer stated in the proposal form that the purpose for which the insured lorry was to be used was to carry coal. The proposal form was made the basis of the contract. The House of Lords held that it was not the intention of either party that the lorry should never be used for any purpose other than the carriage of coal so that the warranty was not broken by the occasional carriage of timber. Lord Wright stated:
A policy ought to be so framed, that he who runs can read. It ought to be framed with such deliberate care, that no form of expression by which, on the one hand, the party assured can be caught, or by which, on the other, the company can be cheated, shall be found upon the face of it.30
The point has been made judicially that questions ‘framed in a slovenly way’ are ‘mere traps’ and will be strictly construed against the insurers who seek to rely on them.31 In Re Bradley and Essex and Suffolk Accident Indemnity Society,32 Farwell LJ surveyed the relevant authorities and stressed that:
It is especially incumbent on insurance companies to make clear, both in their proposal forms and in their policies, the conditions which are precedent to their liability to pay, for such conditions have the same effect as forfeiture clauses, and may inflict loss and injury to the assured and those claiming under him out of all proportion to any damage that could possibly accrue to the company from non-observance or non-performance of the conditions. Accordingly, it has been established that the doctrine that policies are to be construed ‘contra proferentes’ applies strongly against the company.33
However, an insured cannot avail himself of an apparent ambiguity where to a reasonable person its meaning would be clear. In this situation the court will follow the basic rule of interpreting the words reasonably. Thus, where an insured warrants that he has not suffered any illnesses of consequence when in fact he had attempted suicide by way of an overdose and was, as a result, critically ill, the court will construe the word ‘illness’ in a fair business manner so that the effects of the overdose would be covered by the term.34 Provided due care has been taken in describing the nature of a term, that is likely to be decisive. In Virk v Gan Life Holdings plc,35 Potter LJ explained that:
In relation to the exercise of construction to be undertaken by the court, the question of ‘labelling’ is influential rather than decisive, particularly if the label … has been applied to a number of terms of differing type and practical importance. On the other hand, if care and logic appear to have been applied in the attachment of the label to one term but not to another, the label (or absence of it) is likely to be decisive.36
The courts therefore construe insurance warranties using the general principles of contract law, and in so doing they are acutely aware of the harsh consequences which flow from a breach of warranty so that any ambiguity, however small, will be construed strictly against the insurer. For example, in AC Ward & Son Ltd v Caitlin (Five) Ltd,37 the insured’s theft policy contained two clauses described as warranties, which were related to security. The first stated that:
It is warranted that … the whole of the protections provided for the safety of the insured property shall be maintained in good order throughout the currency of this insurance and that they shall be in full and effective operation at all times… All defects occurring in any protections must be promptly remedied.
The second clause stated that:
It is warranted that – … the burglar alarm system shall have been put into full and effective operation at all times when the Insured’s premises are closed for business, and at all other appropriate times, including when the said premises are left unattended.
At the time of the loss neither of these provisions was being complied with. At first instance HHJ Mackie QC held that the insurers were not entitled to summary judgment based on breach of these terms. He found that the terms were warranties and not, as the insurers had argued, merely suspensory conditions. That meant that the terms were to be given the narrow construction appropriate to draconian clauses such as warranties. Further, the terms were not to be construed as unconditional statements that there was no recovery if security protection or burglar alarms were not working. Instead they were to be construed as meaning that the insured was under a duty to remedy defects promptly, so that there was no recovery only if the defects were or ought to have been known to the insured and had not been remedied. The Court of Appeal dismissed the appeal, holding that the insurers’ interpretation of the warranties were draconian and that the more unreasonable or draconian the effects of insurance terms were, the more clear and specific they had to be.
It is common practice for insurers to subdivide the policy document into separate schedules, each of which will relate to different types of risk put on cover and each containing warranties. Where this is the case, the question arises whether each schedule will be construed in isolation from the rest of the policy document of which it forms an integral part. If the policy is construed as a whole, without its schedules being treated as distinct, then a breach of warranty contained in one schedule will enable the insurers to repudiate the contract even though the particular risk in question is covered by another schedule in the policy altogether. Typically, insurers argue, of course, that where there is a single policy any breach of warrantly discharges them from liability notwithstanding the fact that the policy is multi-sectioned. However, the Court of Appeal has recently held that this is not necessarily the case. In Printpak v AGF Insurance Ltd,38 the insured had effected a commercial inclusive policy which covered various types of risk for loss and damage in the event of a fire at the insured’s print factory. When the insured claimed for fire loss, the insurer repudiated liability alleging arson and also arguing that it was discharged from liability because the fire had started while the burglar alarm had been switched off during building work in breach of a warranty requiring the alarm to be fully operational whenever the building was closed. It was held by the Court of Appeal that while the policy should be viewed as a single contract, nevertheless it was not a seamless document. The particular policy comprised separate schedules, each dealing with a different type of risk and having different section endorsements. The section dealing with cover against theft contained the alarm warranty as an endorsement. Given that the schedules described the endorsements as ‘section endorsements’ and that they were ‘operative only as stated in the policy schedule’, the court took the view that these words limited the warranties to the individual sections. It therefore concluded that a breach of warranty in one section did not operate to invalidate cover under the other self-standing sections. The insurers were therefore held liable in respect of the fire claim. Hirst LJ explained that:
[I]t does not follow from the fact that the policy is a single contract that it is to be treated as a seamless contractual instrument. On the contrary, in the present case, its whole structure is based on its division into sections. … The commercial inclusive endorsements are all stated in terms to be ‘operative only as stated in the policy schedules.’ In my judgment those words explicitly write the warranty into the relevant section in which it appears and not into the others.39
3.1 The basis of the contract clause
As with contracts under the general law, the terms of an insurance contract may be incorporated from a number of sources. For insurance contracts these will include the completed proposal form, the policy document and any renewal notices. As commented in chapter 4, a common method of creating warranties is by the inclusion of the so-called ‘basis of the contract clause’ at the foot of the proposal form whereby the questions and answers contained in the form, together with the insured’s declarations, are stated to be the basis of the contract. Often the policy document will also contain such a clause.40 The effect is to make truth and accuracy condition precedents to the validity of the contract and the issue of materiality is irrelevant.41 If ananswer is false, the insurer is discharged from liability.42 Thus, in Dawsons Ltd v Bonnin,43 the House of Lords held that the insured’s inaccurate statement, albeit made inadvertently, as to where the insured lorry was garaged entitled the insurer to repudiate liability even though the statement was immaterial to the risk. The proposal form had stated that the insured’s answers to questions contained therein constituted the basis of the contract.44 Viscount Haldane observed that in this situation if the insurers 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 [insured] being able to recover.45
Criticism of the practice of cross-incorporation of terms from different sources into the insurance contract was voiced by the House of Lords in Provincial Insurance Co Ltd v Morgan.46 The insured’s answers to questions contained in the proposal form for motor insurance were declared to be the basis of the contract and therefore warranties, and the subsequent policy stated that the contents of the proposal form should be deemed to be promissory in nature and effect. Lord Wright observed that:
Though this general scheme of policy has been, as it were, sanctified by long usage, it has often been pointed out by judges that it must be very puzzling to the assured, who may find it difficult to fit the disjointed parts together in such a way as to get a true and complete conspectus of what their rights and duties are and what acts on their part may involve a forfeiture of the insurance. An assured may easily find himself deprived of the benefits of the policy because he has done something quite innocently but in breach of a condition, ascertainable only by the dovetailing of scattered portions.47
Despite the weight of criticism levelled against this practice it seems likely to continue unabated. More particularly, the basis of the contract clause has itself attracted ardent criticism as a trap for the unwary. For example, in Glicksman v Lancashire & General Insurance Co Ltd,48 Lord Wrenbury observed that:
I think it a mean and contemptible policy on the part of an insurance company that it should take the premiums and then refuse to pay upon a ground which no one says was really material. Here, upon purely technical grounds, they, having in point of fact not been deceived in any material particular, avail themselves of what seems to me the contemptible defence that although they have taken the premiums, they are protected from paying.49
The draconian effects consequent upon breach of a basis of the contract clause was also considered in Zurich General Accident and Liability Insurance Co Ltd v Morrison.50 The facts are curious when viewed from a contemporary standpoint. The Court of Appeal held that the proposer’s failure to disclose to the insurers the fact that he had failed his driving test was not a material fact for a policy designed specifically for inexperienced drivers. For present purposes, the interest of the case lies in the view expressed most vehemently by Lord Greene MR who described the practice of using basis clauses as ‘vicious’.51
In their second Issues Paper, Warranties, the English and Scottish Law Commissions highlighted three main problems with basis of contract clauses:52
(i) The insurer is not required to distinguish between material and immaterial issues: instead, it can grant warranty status en bloc to all the answers in proposal form, whether they are material or not.
(ii) Such clauses allow insurers to apply a remedy appropriate to warranties to statements that are really representations. If the law of misrepresentation were to be reformed to reduce the remedies available to insurers for non-fraudulent misrepresentations, insurers could use basis of contract clauses to evade the reforms.
(iii) The warranty does not need to appear in the policy itself. Policy Holders will rarely understand the import of what may seem to be obscure words at the bottom of a proposal form.
As noted in Chapter 4, the Law Commissions’ proposals distinguish between consumer and business insurance. For consumer insurance, their recommendation to abolish ‘basis of contract’ and similar clauses that ‘have the effect of turning statements of fact into warranties’53 is included in the Consumer Insurance (Disclosure and Representations) Act 2011. Section 6(2) of the Act,54 states that in relation to representations made by the insured in respect of proposed consumer insurance or proposed variations for consumer insurance:
Such a representation is not capable of being converted into a warranty by means of any provision of the consumer insurance contract (or of the terms of the variation), or of any other contract (and whether by declaring the representation to form the basis of the contract or otherwise).
With respect to business insurance, the Commissions propose that ‘a basis of contract’ clause in the proposal form should no longer be effective to turn the statements made by the proposer into warranties. Each statement of fact warranted should be set out either in the policy, or in some document incorporated by reference to the policy. The recommendation is that the latter proposal should be mandatory.55 The topic of warranties and small businesses is expected to be included in the Law Commissions’ business insurance law reform consultation paper to be published towards the end of 2011.
The statutory aboliton of basis of contract clauses in consumer contracts is to be welcomed and will reflect industry practice. The insurance industry in 1986 revised the Statements of Insurance Practice,. In essence the revisions reflected the 1980 Law Commission’s proposals.56 Paragraph 1(a) of the Statement of Insurance Practice 1986 provided that: ‘The declaration at the foot of the proposal form should be restricted to completion according to the proposer’s knowledge and belief.’ Paragraph 1(b) went on to provide that: ‘Neither the proposal form nor the policy shall contain any provision converting the statements as to past or present fact in the proposal form into warranties.’ Paragraph 2(b)(iii) stated that an insurer will not repudiate a policy on grounds of a breach of warranty or condition where the circumstances of the loss are unconnected with the breach ‘unless fraud is involved’. Taken together, these provisions mitigated the effect of the basis clause in insurance policies so that, so far as individuals are concerned (ie consumers or non-business insureds), the harshness exemplified by the decision in Dawsons v Bonnin, for example, was largely addressed. However, these provisions have been replaced by the FSA rules, which do not cover these clauses but, as the Law Commissions note,those who fall within the Financial Services Ombudsman’s (FOS) jurisdiction are able to benefit from its approach of not generally allowing repudiation in cases where the loss is unconnected with the breach of warranty or where the breach is minor. The new Act now places the FOS approach on a statutory footing.
4. The classification of warranties in insurance contracts
Insurance warranties can be classified into three types depending upon whether the insured’s promise or undertaking relates to: (i) some past or existing state of affairs; (ii) some future state of affairs (iii) a warranty of opinion by the insured as to the truth of a fact.
Generally, a warranty as to some past or existing facts will arise from the information contained in the proposal form after due completion by the insured. It is a question of construction whether it is a warranty as to present facts, or whether it also extends to the future, in which case it is termed a ‘promissory warranty’ or ‘continuing warranty’. The distinction is critical, for if a false warranty relates to a state of affairs existing at the time of the proposal, there is an effective breach which will entitle the insurer to terminate the contract from the moment of its conclusion. The appropriate analogy here is rescission for misrepresentation. Conversely, if the insured’s statement was true when made, no action will lie for breach if there is a subsequent change in the state of affairs. In practice, however, the insured is often placed under a continuing duty to notify the insurer of any subsequent changes.
In determining whether, as a question of construction, a warranty is promissory in nature the courts have regard not only to the purpose of the warranty, but the purpose of the policy itself. Thus, in Hair v Prudential Assurance Co Ltd,57 Woolf J held that a warranty in a fire policy that the insured premises were occupied could not be construed as amounting to a continuing obligation but rather as ‘an indication of the state of affairs which existed at the time that the answers were given [and as such] they did not amount to a warranty that no change would occur’.58 However, where a warranty is construed as being promissory in its effect, any breach will operate to terminate the insurer’s liability as from the date of the breach only.59 In Beauchamp v National Mutual Indemnity Insurance Co,60 the proposal form asked ‘Are any explosives used in your business?’ The insured answered that there were none. This was correct at the time it was made but the insured, a builder, did subsequently use explosives when, for the first time in his business, he was contracted to demolish a building. It was held, as a matter of construction, that the question and its answer related to the future. Similarly, in Hales v Reliance Fire and Accident Insurance Co,61 a question in the proposal form asked: ‘Are any inflammable oils or goods used or kept on the premises?’ The insured answered: ‘Lighter fuel’. It was held that the question and answer were a warranty as to the existence of the fact at the time of the proposal and also during the currency of the risk. Accordingly, there was a breach when the insured took delivery of a quantity of fireworks 17 days prior to 5 November. McNair J accepted that warranties in fire and burglary policies as to the condition of the premises and precautions taken to prevent loss will prima facie be construed as continuing otherwise such warranties will be of little value to the insurers.62 But this view is now open to question in the light of Saville LJ’s interpretation of Hales in the recent decision in Hussain v Brown.63 His Lordship took the view (based on decided cases,64 and doubting the approach of McNair J in Hales) that questions contained in proposal forms which are constructed in the present tense cannot be taken to import warranties as to the future. Saville LJ stated that:
[T]here is no special principle of insurance law requiring answers in proposal forms to be read, prima facie or otherwise, as importing promises to the future. Whether or not they do depends upon ordinary rules of construction, namely consideration of the words the parties have used in the light of the context in which they have used them and (where the words admit of more than one meaning) selection of that meaning which seems most closely to correspond with the presumed intentions of the parties.65
The futurity of a warranty must therefore be manifestly apparent from the words used, and the tense in which the question is framed will be the material factor. In Kennedy v Smith and Ansvar Ins Co Ltd,66 the insured warranted in a proposal for motor insurance that: ‘I am a total abstainer from alcoholic drinks’ which was true at the time it was made. However, after a cricket match the insured drank a small quantity of beer on an empty stomach. He then drove himself and two friends home. His vehicle was involved in an accident and his two passengers were killed. He sought an indemnity from his insurers for the delictual damages he was liable to pay, but the insurers refused the claim on the basis that a continuing warranty had been broken. It was held that the warranty related to the past and was not promissory as to the future. Construing the term contra proferentem, the Lord President said that:
The statement does not require to be given a future promissory content to make it intelligible. It is quite intelligible if it is read literally for no doubt the risk during the period of insurance is reduced if at the outset the proposer is a total abstainer since it may reasonably be hoped that he is unlikely to abandon his principles. It would have been simple to include in the statement if this had been intended, that the insured shall continue to be a total abstainer for the period of the insurance. No such statement was, however, included and in my opinion is not, without undue straining of the language used, to be implied.67
In Ansari v New India Assurance Ltd,68 the court had to decide whether an affirmative answer to the question ‘Are the premises protected by an automatic sprinkler installation?’ was tantamount to importing a continuing warranty to the contract. The insured held commercial property owners’ insurance with New India. A fire broke out on the property and the insured claimed. New India denied liability relying on General Condition 2 of the contract which stated, ‘This insurance shall cease to be in force if there is any material alteration to the Premises or Business or any material change in the facts stated in the Proposal Form or other facts supplied to the Insurer unless the Insurer agrees in writing to continue the insurance., It was argued there had been a material alteration when the sprinkler system was not operative. The insured contended that the answer in the proposal form did not state that the sprinkler system was working nor would continue to be working. The Court of Appeal, affirming the judgment of Pattern J, stated that the proposal form contained a statement that the premises were protected by an automatic sprinkler system. Moore-Bick LJ explained that:
Where an automatic sprinkler system has been installed in a building it forms an integral part of the building and moreover is one which (unlike an intruder alarm) is intended to function permanently, in the sense of being constantly ready to operate in the event of a fire without the need for human intervention.69
The court distinguished Hussain v Brown:
[I]in that case it would have been difficult to read the warranty that the premises were fitted with an intruder alarm as containing by implication a continuing warranty that it would be maintained and put into operation whenever the premises were left unattended. Apart from anything else, such an interpretation could lead to a complete loss of cover as a result of a simple act of negligence on the part of the insured or his employees in failing to set the alarm.70
Moore-Bick LJ rejected the insured’s appeal and construction of the policy because
[T]o construe the completed form as meaning no more than that they were fitted with an automatic sprinkler system which might or might not be functioning would be contrary to common sense. Apart from anything else, it would give little or no effect to the word ‘protected’.71
Where the insured is an individual (ie a consumer) as opposed to a business entity, warranties of opinion or belief are commonly encountered in proposal forms. The effect of this type of term is that the insured warrants that the answers given in the proposal form are true to the best of his belief and knowledge. The insured must exercise due care when completing the proposal form.72 In contrast with warranties of fact, a warranty of opinion will only be broken if the insured is dishonest or reckless. For example, in Confederation Life Assn v Miller,73 the insured warranted in a life policy that to the best of his knowledge and belief he had suffered no serious injury. Gwynne J held that this would be untrue only if the answer given was wilfully false.
Further, householders who insure possessions against theft or other loss are frequently required to estimate and warrant the value of specific items. Where this is the case, it has been held that the value of a possession, a stamp collection, is a matter of opinion so that provided the insured gave a bona fide estimate, the warranty would not be broken where a subsequent expert valuation showed the original estimate to be too low.74 As has been noted above, so far as non-business insureds (consumers) are concerned, the Statement of Insurance Practice 1986 requires the basis of the contract clause found at the foot of proposal forms to be framed as warranties of opinion only.
5. Terms descriptive of the risk
It is important to distinguish promissory warranties from terms which describe or limit the risk, sometimes called ‘exceptions’. It is common practice for insurers to reduce the scope of the risk insured by listing excepted perils. The effect of such terms is merely to suspend the insurance cover during the period in which the insured engages in an excepted risk. Further, if the insured’s loss is not proximately caused by an excepted peril, the insured may still be able to recover under the policy. It will be recalled that in Provincial Insurance v Morgan,75 the proposer for a motor policy stated in the proposal form that the lorry to be insured was to be used for delivering coal. The insured warranted the truth of his answers and the proposal form was made the basis of the contract. At the time of the accident, the lorry was carrying coal although earlier that day, it had been used to carry timber. The insured’s claim was repudiated by the insurers who argued that there had been a breach of warranty. It was held by the House of Lords that the statement in the proposal form did not amount to a warranty but was merely descriptive of the risk insured. Lord Russell stated that the insured’s statements could be read as nothing more than mere statements of ‘intentions as to the use of the vehicle and the goods to be carried in it’.76
Farr v Motor Traders’ Mutual Insurance Society,77 provides a clear illustration of the point. The claimant, answering a question in the proposal form which contained a basis of contract clause, stated that the insured taxi-cabs were only driven in one shift per twenty four hours. This was true at the time the statement was made. However, when one of the two cabs was off the road for repairs, the other was driven in two shifts during the day. Subsequently, when the repairs were completed and the two cabs were being driven in only one shift, one of them was involved in an accident and the insured claimed. The insurers argued that that the policy was void for breach of warranty. It was held that the claimant’s answer was merely descriptive of risk and was not a promissory warranty. Although cover was suspended during the time when the vehicle was driven in two shifts, cover had resumed at the time of the accident so that the insurers were liable.
In motor insurance effected for non-business use, the policy typically restricts cover to when the vehicle is being used for ‘social, domestic and pleasure’ purposes only, the effect of such a clause is to suspend cover should the insured use the vehicle for some other purpose which has a business element.78 When considering whether the insured’s use of a vehicle at the time of the loss was for ‘social, domestic and pleasure purposes’, the court will examine the true purpose of the journey to determine whether cover was suspended. Thus, in Seddon v Binions,79 Roskill LJ observed that the court should look at the ‘essential or predominant character’ of the insured’s use at the time of the loss.80 In a similar vein, Megaw LJ looked to ‘the primary purpose’ of the relevant journey to see whether it could ‘properly or fairly be described as use for social, domestic and pleasure purposes’.81 If, therefore, the essential character of the journey was of a business nature, the loss will not be covered. Where insurance cover for a motor vehicle is restricted, for example, to when it is being used for ‘social, domestic and pleasure purposes and for the business of the insured’ and at the time of the loss the vehicle is being used by the insured’s work colleague on employers business, the insured will not be covered. The words ‘for the business of the insured’ restricts cover to the insured’s business use only, not that of her colleague.82 But where the insured, as a courtesy, gives a lift to someone who was carrying on some business, the insured’s use of the vehicle would nevertheless continue to be social even though the passenger was assisted in carrying on hisbusiness by receiving that lift.83
It seems that as with the law of contract generally, the nature of a particular term is always a question of law based on the court’s construction of the wording used and no doubt taking account of the consequences of the breach.84 In De Maurier (Jewels) Ltd v Bastion Insurance Co,85 an all risks policy contained a ‘warranty’ that the insured’s vehicles would be fitted with approved locks and alarm systems. The insured suffered two losses. When the first loss occurred, the locks were not of the required type but by the time of the second loss there was compliance with the term. The insurers denied liability on the basis, inter alia, that the policy was voidable ab initio for breach of a promissory warranty, and was avoided by them two days after the second loss. However, during the course of the trial the insurers admitted liability in respect of the second loss. It was held by Donaldson J that as a matter of construction of the so-called ‘warranty’, it was merely a term describing the risk, so that the insurers were not liable for the first loss, the policy being suspended by the breach, but were right to admit liability for the second loss. In CTN Cash & Carry v General Accident,86 the court took the opportunity to again lay down explicit guidelines to the construction of contractual terms. A burglary insurance policy effected by the insureds on their cash and carry depots contained the term that: ‘It is warranted that the secure cash kiosk shall be attended and locked at all times during business hours.’ It was held that the clause was not a warranty but a term descriptive of risk. Macpherson J, having reviewed the authorities,87 defined a warranty as a term which goes to the root of the contract, the breach of which therefore entitles the insurers to avoid liability under the policy. The fact that the insurers used the word ‘warranty’ was not sufficient to convert the term into one which is so fundamental to the contract, that it goes to its root.88
In Kler Knitwear Ltd v Lombard General Insurance Co Ltd,89