“Basis” clauses and warranties will always raise questions and helpfully Mr Justice Akenhead clarified the law in a case late last year, namely Genesis Housing Association Limited v Liberty Syndicate Management Limited for and on behalf of Syndicate 4472 at Lloyd’s. This case provides a useful insight and a timely reminder into why the details specified within the proposal form must be correct and mirror the building contract, if not, the insured may become unstuck when a claim is made.
The judge adopted the following propositions based upon a review of the relevant case law:
- In principle “basis of contract” clauses and warranties in relation to insurance are enforceable in law and not contrary to law or public policy.
- Enforceability will be generated by such clauses or warranties being incorporated within the contract of insurance or as a stand-alone warranty by the insured given to the insurer through the proposal form or other document in which the “basis of contract” expression or declaration is given.
- If the insured has innocently or otherwise signed a document, usually the proposal form, as the basis of the insurance contract entered or to be entered into, which confirms (either to the best of the insured’s knowledge or belief or absolutely) as true the contents of that document, the insurance contract will be void or unenforceable if the contents are untrue.
- The contract of insurance, whether contained in the policy itself or any other documents such as the quotation or a certificate of insurance, may as a matter of construction modify, amend or even render of no limited effect the “basis of contract” declaration or warranty.
Declarations are said to be true or correct to the best knowledge or belief of the declarer will often be in the case of an individual person reviewable by reference to the honesty of that person in making the declaration. Thus Mr Zeller and Mr Economides in their respective cases honestly believed that what they were declaring was true in the sense it was to their best knowledge and belief. In determining particularly whether a corporate organisation making a declaration as to various statements being true to the best of its knowledge and belief is wrongful, the Court must determine what it corporately is likely to have known when it made the declaration. There does not have to be dishonesty as such on the part of the organisation but, if that organisation actually knows that something said to be true on the declaration is in fact wrong, then it is making a statement which is not true to the best of its knowledge or belief.
Diligence is Key
It is incredibly obvious but the insured really must be diligent when checking and signing proposal forms… It is often the obvious points that are missed. Even if the error is innocently made, it could give rise to a breach of warranty.
One usually needs clear words even in a contract of insurance to remove or cancel the basis of contract warranty that was made by the insured.
“Basis” clauses have attracted criticism in the past on the basis (forgive the pun!) of how the declaration can become an effective term of the “contract of insurance even if not expressly mentioned in the policy .” One explanation “is that the policy evidences the main contract between the parties but the promises in the proposal form are collateral warranties given prior to the conclusion of the contract.” Interestingly on a tangential point, the Consumer Insurance (Disclosure and Representations) Act 2012 (not yet in force) shall outlaw “basis” clauses in consumer contracts. The Law Commission has also adopted the position that insurers should not be provided with an opportunity of utilising contract clauses in the form of warranties.