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RISK CONTROL CLAUSES IN INSURANCE LAW: LAW REFORM AND THE FUTURE
Published online by Cambridge University Press: 11 January 2016
Abstract
Risk control clauses are often used in insurance contracts with a view to preventing the assured from altering the risk during the currency of the policy. An insurance warranty is the most commonly used risk prevention clause in practice. Having been subjected to severe criticisms for years, the legal regime concerning insurance warranties and other risk control clauses has recently been revamped by the Insurance Act 2015, which will apply to all contracts of insurance concluded after 12 August 2016. This article intends to elaborate on the appropriateness of the reforms introduced by the 2015 Act from risk assessment and management perspectives. It is also intended to offer a critical analysis on the potential impact of the changes on insurance law and practice.
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References
1 Chief Baron Pollock in Baxendale v Harvey (1849) 4 H & N 445, 449, 452, famously said: “If a person who insures his life goes up in a balloon, that does not vitiate his policy … . A person who insures may light as many candles as he please[s] in his house, although each additional candle increases the danger of setting the house on fire.” Conversely, in German law by virtue of Article 23–25 of Versicherungsvertragsgesetz (VVG), if the policyholder increases the risk in any way without the consent of the insurer, the cover ends at once in respect of any loss “influenced” by the increase, as well as any subsequent loss if the insurer so elects. A similar outcome follows in French Law by virtue of Article L 113–2–3 of Code d'assurance.
2 Other risk control mechanisms often used are: (1) condition precedents to liability of the insurer (breach of such clauses either entitle the insurer to elect to discharge from the contract or prevent the assured from claiming for a particular loss); (2) suspensory provisions (also known as clauses delimiting the risk) which set out the circumstances in which the insurer is to be on risk and (3) exclusion clauses.
3 This is not the only function that an insurance warranty serves. Some warranties (i.e. affirmative warranties) intend to circumscribe the risk to which the insurer subscribes.
4 Section 33(1) of the Marine Insurance Act (MIA) 1906.
5 Such warranties relate to facts after the attachment of the policy and are often known as future (or continuing) warranties.
6 A warranty of this nature is known as an affirmative warranty or a warranty that relates to a period before the attachment of the risk.
7 See ss. 33(3) and 34(2) of the MIA 1906.
8 De Hanh v Hartley (1786) 1 T.R. 343. The contractual status of warranties and the role they play in insurance law have been described in a categorical fashion by Lord Goff in Bank of Nova Scotia v Hellenic Mutual War Risks Association (Bermuda) Ltd. (The Good Luck) [1992] 1 A.C. 233, 262–63: “… if a promissory warranty is not complied with, the insurer is discharged from liability as from the date of the breach of warranty, for the simple reason that fulfilment of warranty is a condition precedent to the liability of the insurer. This moreover reflects the fact that the insurer only accepts the risk provided that the warranty is fulfilled.”
9 Lord Griffiths in Forsikringsaktielselskapet Vesta v Butcher [1989] A.C. 852, 893–94, famously said: “It is one of the less attractive features of English insurance law that breach of a warranty in an insurance policy can be relied upon to defeat a claim under the policy even if there is no causal connection between the breach and the loss.”
10 Birds, J., “The Effect of Breach of Warranty” (1991) 107 L.Q.R. 540Google Scholar; Schoenbaum, T.J., “Warranties in the Law of Marine Insurance: Some Suggestions for Reform of English and American Law” (1999) Tulane M.L.J. 267Google Scholar; J. Hare, “The Omnipotent Warranty: England v. The World” in M. Huybrechts, E.V. Hooydonk and C. Dieryck (eds.), Marine Insurance at the Turn of the Millennium, vol. 2 (Antwerp 1999), 37; and B. Soyer, “Marine Warranties: Old Rules for the New Millennium?” in D.R. Thomas (ed.), Modern Law of Marine Insurance, vol. 2 (London 2002), ch. 5.
11 For example, if the assured under a motor policy warrants that he will maintain the insured vehicle in an “efficient” or “roadworthy” condition, the insurer who proves that the vehicle was not in that state at the time of the loss will have a defence to a claim arising out of an accident involving the insured vehicle, without going so far as to prove that the poor condition of the vehicle caused or contributed to the accident. See Conn v Westminster Insurance Co [1966] 1 Lloyd's Rep. 407.
12 In De Hahn v Hartley (1786) 1 T.R. 343, when the insured vessel commenced the intended voyage without having the warranted number of crew on board, the insurer was held not to be liable although the warranted number of crew had been recruited before the vessel sailed on the leg of the voyage during which the casualty occurred.
13 In 1980, the Law Commission prepared a report advocating a reform of the warranty regime: Law Commission Report No. 104, Insurance Law – Non-Disclosure and Breach of Warranty, Cmnd. 8064 (1980). The striking feature of this report is the fact that marine, aviation, and transport insurance has been excluded from the scope of a possible reform. Although a draft Bill was introduced to Parliament for reform of the regime regulating non-marine warranties, the draft Bill was withdrawn after the Government reached agreement with the Association of British Insurers (ABI) that ABI would take up the Law Commission's recommendations on a self-regulatory basis. Extending the debate to marine and commercial insurance, the Australian Law Reform Commission (ALRC) in 2001 proposed substantial amendments to the Australian Marine Insurance Act 1909 (which is the equivalent of the MIA 1906), including the regime regulating marine insurance warranties; see Australian Law Reform Commission, Review of the Marine Insurance Act 1909 (Report 91, 2001). As of today, no action has been taken with regard to the proposals made in this Report.
14 The process commenced in 2006 with a scoping paper. In the course of nine years, a series of Issues and Consultation Papers have been published by the Law Commissions. The exercise has also led to the enactment of the Consumer Insurance (Disclosure and Representations) Act 2012, which has fundamentally overhauled the pre-contractual duty of utmost good faith as it had previously applied to consumer insurance contracts. This Act came into force on 6 April 2013 (SI 405/2013).
15 Section 22 of the Insurance Act 2015.
16 The Act also introduces changes with regard to pre-contractual good faith duties of the assured in non-consumer insurance contracts and also stipulates the remedies available to an insurer in case of submission of a fraudulent claim in consumer and non-consumer insurance contracts. These aspects of the 2015 Act will not be deliberated on in this article.
17 Section 15 of the Insurance Act 2015.
18 Section 6(2) of the Consumer Insurance (Disclosure and Representation) Act 2012 abolishes the use of such clauses in consumer insurance contracts.
19 This was put forward as one of the potential solutions to the problem in B. Soyer, Warranties in Marine Insurance, 2nd ed. (London 2006), 213.
20 Fireman's Fund Insurance Co. v Cox 742 F Supp. 609 (M.D. Fla. 1989) (Florida law); Lineas Aereas Colombians Expresas v Travelers Fire Insurance Co. 257 F. 2d 150 (5th Cir. 1958) (Louisiana law) and Commercial Union Insurance Co. of N.Y. v Daniels 343 F. Supp. 674 (S.D. Tex. 1972) (Texas law).
21 Technically speaking, breach will result in the insurer never coming on risk, as compliance with this kind of warranty will be viewed as a condition contingent to the attachment of the risk. See comments made by Lord Mansfield in De Hahn (1786) 1 T.R. 343, 345–46, to that effect. It is submitted that the contractual analysis will remain the same despite the change in the proposed remedy.
22 On the other hand, one should be mindful of the authorities suggesting that there is no causation as a matter of law in such arbitrary instances; see e.g. The Estrella [1977] 1 Lloyd's Rep. 525; NV Koninklijke Rotterdamsche Lloyd v Western Steamship Co Ltd. (The Empire Jamaica) [1957] A.C. 386.
23 See ss. 10 (5)(a) and 10(6) of the Insurance Act 2015.
24 As discussed above, a similar situation might arise with regard to other warranties – the breach might change the course of events and lead to loss even though it is remedied. However, by virtue of s. 10(5)(b), the risk will be reinstated and the loss will be recoverable in such cases. It has been assumed by the draftsmen that remedying the breach is capable of bringing the risk to the original level, perhaps for the sake of avoiding uncertainty.
25 This was affirmed by the Court of Appeal in Kosmar Villa Holidays Plc v Trustees of Syndicate 1243 [2008] EWCA Civ 147; [2008] Lloyd's Rep. I.R. 489, at [38].
26 The elements of waiver by estoppel in this context have been summarised by deputy judge Sheer Q.C. in HIH Casualty & General Insurance Ltd. v Axa Corporate Solutions [2002] Lloyd's Rep. I.R. 325, at [24], in the following fashion: “Waiver by estoppel or promissory estoppel, as it is more commonly described, involves a clear and unequivocal representation that the reinsurer (or insurer) will not stand on its right to treat the cover as having been discharged on which the insurer (or insured) has relied in circumstances in which it would be inequitable to allow the reinsurer (or insurer) to resile from its representation.”
27 See s. 84(2) of the MIA 1906.
28 Bank of Nova Scotia [1992] 1 A.C. 233, 263.
29 It is worth noting that this provision was omitted from the Bill as first presented to Parliament even though it formed part of the Final Report published in July 2014 (Insurance Contract Law: Business Disclosure; Warranties; Insurer's Remedies for Fraudulent Claims; and Late Payment, Cm 8898, SG/2014/131). A slightly amended version of the clause was put to the Committee in December 2014 shortly before the hearings commenced and it was strongly embraced by the Committee.
30 However, it is not beyond the bounds of possibility that, in such a case, the insurer could successfully argue that compliance with the burglar alarm warranty could have increased the risk of loss at the insured premises (or at least extent of loss) in the circumstances in which it occurred on the basis that, had the burglar alarm been working, it might have been activated by the movement of the fire, meaning the emergency services might have arrived sooner. This example is an illustration of the difficulties that might emerge in applying s. 11 in practice.
31 The introduction of a causal link requirement in this context between breach and loss is deemed to be problematic. M. Clarke, “Insurance Warranties: The Absolute End?” [2007] L.M.C.L.Q. 474, 487, said: “… may it be observed in passing that the history of English law on questions of causation is not encouraging.”
32 The Law Commissions are fully aware of the difficulties that this change might introduce and admit that there might be borderline cases that turn on their particular facts (Law Commission and Scottish Law Commission, Insurance Contract Law; the Business Insured's Duty of Disclosure and the Law of Warranties (LCCP No 204; ScLCDP No 155: 2012), 186). With respect, it is submitted that they have considerably downplayed the difficulties that can arise with respect to several types of promissory warranties.
33 However, it is, at least, arguable that the function of an exclusion clause in an insurance contract is to define the boundaries of the cover so s. 11 should not be relevant. It is possible that this point can be taken by insurers given that no attempt has been made in the Act to clarify the meaning of “a term defining the risk as a whole”.
34 This point will be further deliberated below in section IV.
35 For a case concerning a premium warranty, see JA Chapman & Co Ltd. v Kadirga Denizcilik ve Ticaret [1998] Lloyd's Rep. I.R. 377. Such warranties are occasionally used in commercial insurance policies in order to ensure that premium payments are made in a timely manner.
36 A similar outcome will follow in a case like Overseas Commodities Ltd. v Style [1958] 1 Lloyd's Rep. 546, where it was warranted that the insured cargo (tins of canned pork) was marked by the manufacturer with a code for verification of date of manufacture.
37 Insurance Contract Law: Business Disclosure; Warranties; Insurer's Remedies for Fraudulent Claims; and Late Payment, Cm 8898, SG/2014/131, para. 18–35.
38 Especially in light of the statement of Lord Hoffmann in Investor Compensation Scheme Ltd. v West Bromwich Building Society [1998] 1 W.L.R. 896, 912–13.
39 In Rainy Sky SA v Kookmin Bank [2011] UKSC 50; [2012] 1 Lloyd's Rep. 34, at [21], Lord Clarke, speaking for the entire court, commented: “The language used by the parties will often have more than one potential meaning … . If there are two possible constructions, the court is entitled to prefer the construction which is consistent with business common sense and to reject the other.”
40 It is not permitted to use the basis of contract clauses even in non-consumer insurance policies (s. 16(1)).
41 Section 16(2) of the Insurance Act 2015.
42 The Act refers to a term of this nature as a disadvantageous term.
43 Section 17(2) of the Insurance Act 2015.
44 Section 17(3) of the Insurance Act 2015.
45 This is endorsed by s. 17(5) of the Act, which stipulates that the insured will not be able to rely on any failure by the insurer to draw a disadvantageous term to its attention if the assured (or its agent) had actual knowledge of the disadvantageous term at the time the contract was entered into.
46 Insurance Contract Law: Business Disclosure; Warranties; Insurer's Remedies for Fraudulent Claims; and Late Payment, Cm 8898, SG/2014/131, para. 29.50.
47 Section 17(4) of the Insurance Act 2015.
48 It is possible that even insurers operating in more sophisticated markets, such as marine and energy, might prefer to err on the side of caution and provide expressly that s. 33 of the MIA 1906 remains in place in its un-amended form or, even better, stipulate the consequence of breach of a term which is traditionally regarded as a warranty.
49 This is done typically by the policyholder signing a statement on the proposal form stating that his answers form the basis of the contract.
50 Dawsons v Bonnin [1922] 2 A.C. 413, 425, per Viscount Haldane.
51 Zurich General Accident & Liability Ins Co. Ltd. v Morrison [1942] 2 K.B. 53, 58, per Lord Greene, MR.
52 Law Commission, Insurance Law – Non-Disclosure and Breach of Warranty: Law Com No. 104 (Cmnd 8064, 1980), para. 7.5.
53 See s. 6(2) of the 2012 Act.
54 A different regime in relation to warranties has been in application for a considerable amount of time in the context of consumer insurance. For instance, the Financial Conduct Authority Handbook: Conduct of Business Sourcebook (ICOBS) provides a regulatory safeguard in relation to warranties for consumers. ICOBS 8.1.2 states: “A rejection of a consumer policyholders’ claim is unreasonable, except where there is evidence of fraud, if it is … (3) for breach of warranty or condition unless the circumstances of the claim are connected to the breach.” This provision is designed to offer a different and more assured friendly regime for consumers; and, even though it cannot be applied in court, it is possible for a consumer to bring action for an insurer that acts contrary to this rule for breach of statutory duty under s. 138 of the Financial Services and Markets Act 2000 (as amended). In a similar fashion, the Financial Ombudsman Service (FSO), which has jurisdiction to hear complaints from consumers and micro-businesses, has often overruled an insurer's decision to reject a claim where the breach the insurer relied on did not cause the loss in question. The Insurance Act 2015 will afford a similar protection to consumers which can be enforced not only by the FSO, but also by courts.
55 See e.g. Kler Knitwear Ltd. v Lombard General Insurance Co Ltd. [2000] Lloyd's Rep. I.R. 47.
56 In many cases, the courts have used interpretative principles to relieve the harsh effects of the warranty regime. See Hide v Bruce (1779) 3 Doug K.B. 213. Saville, L.J., in Hussain v Brown [1996] 1 Lloyd's Rep. 627, 630, said: “… it must be remembered that a continuing warranty is a draconian term. As I have noted, the breach of such a warranty produces an automatic cancellation of cover, and the fact that a loss may have no connection at all with the breach is simply irrelevant. In my view, if the underwriters want such a protection, then it is up to them to stipulate for it in clear terms.” More recently, see Pratt v Aigaion Insurance Co SA [2008] EWCA Civ 1314; [2009] 1 Lloyd's Rep. 225 and Sugar Hut Group Ltd. and Others v Great Lakes Reinsurance (UK) plc [2010] EWHC 2636 (Comm); [2011] Lloyd's Rep. I.R. 198.
57 See Insurance Contract Law: Business Disclosure; Warranties; Insurer's Remedies for Fraudulent Claims; and Late Payment, Cm 8898, SG/2014/131, paras. 14.11–14.22.