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Joint Consultation Paper: The Business Insured’s Duty of Disclosure and the Law of Warranties

The third and final Consultation Paper in the Commissions’ joint review of insurance contract law was published in June 2012. It covers the following issues:

The business insured’s duty of disclosure

Under current law, a business policyholder has a duty to disclose every material circumstance it knows about the risk it wants to insure. Failure to do so entitles the insurer to avoid the contract, which means the insurer may treat it as if it did not exist and refuse all claims.

The duty is unclear and sometimes poorly understood, while the consequence of breach is too harsh. There is evidence that the duty does not work well in practice. Our proposals aim to clarify how policyholders are expected to comply with the duty when presenting a risk to insurers and to encourage insurers to assist them in that task. We also propose fairer remedies for breach where the policyholder has not been dishonest.

The law of warranties

An insurance warranty is an important term which, unless exactly complied with by the policyholder, results in the automatic discharge of the insurer’s liability for loss. It makes no difference if the breach is trivial, not material to the risk or if the policyholder remedies the breach prior to loss being incurred.

We propose that breach of a warranty should suspend the insurer’s liability for the duration of the breach; remedy of the breach restores liability. Where a term is designed to reduce a particular type of risk, we propose that liability is suspended only in relation to that risk. This would be mandatory for consumer insurance but subject to freedom of contract for business insurance.

A Summary of the Consultation Paper, a News Release, an Impact Assessment and a Memorandum on relevant New York law prepared for the Law Commissions by David W Kenna are also available. The consultation period has now closed.  We are most grateful to all who responded and are now analysing their comments.

Next steps

In spring 2014, a final report will be published which will cover the topics dealt with in this paper as well as some of the topics covered in the previous (second) joint Consultation Paper.