Few pieces of insurance law caused as much quiet damage as the pre-2015 warranty regime. A single technical breach — often unrelated to the eventual claim — could discharge the insurer from all liability. Sections 9 to 11 of the Insurance Act 2015 dismantled that framework and replaced it with something closer to what a reasonable insured would expect. This entry sets out what the sections do and how the reform reads across into professional indemnity practice.
The old common-law rule was set out in Bank of Nova Scotia v Hellenic Mutual War Risks Association (Bermuda) Ltd [1989] 1 Lloyd's Rep 514, known as "the Good Luck". Breach of a promissory warranty automatically discharged the insurer from liability from the date of breach. The discharge did not depend on the insurer electing to terminate, nor on the breach being causally connected to any loss. Once the warranty was broken, cover ended.
The problem was compounded by "basis of the contract" clauses in proposal forms. A single line at the foot of the form declared that every answer given by the proposer formed the basis of the contract, converting ordinary representations into warranties. Innocent inaccuracies about matters entirely unrelated to the risk could void the policy — a point examined in HIH Casualty and General Insurance Ltd v Chase Manhattan Bank [2003] UKHL 6.
Section 9 abolishes basis-of-contract clauses outright in both consumer and non-consumer insurance. Any provision that purports to convert a pre-contractual representation into a warranty is of no effect. The section cannot be contracted out of in a consumer contract, and contracting out in a non-consumer contract is subject to the transparency requirements in Part 5 of the Act.
The practical consequence for professional indemnity is that proposal-form answers are representations, governed by the duty of fair presentation under section 3, and no longer become warranties by virtue of proposal-form wording. Insurers must draft any warranty they want as a warranty in the policy itself.
Section 10 is the heart of the reform. Breach of warranty no longer discharges the insurer from all liability. Instead, liability is suspended for the period during which the warranty is breached. Once the breach has been remedied, cover resumes. A claim arising from a loss occurring while the warranty was breached is not covered; a claim arising from a loss before the breach, or after it has been remedied, is unaffected.
Warranties are no longer traps. A firm that briefly falls out of compliance and puts matters right is not stripped of cover for the rest of the period.
Section 11 goes further where a warranty or other term is intended to reduce the risk of a particular kind of loss, loss at a particular location, or loss at a particular time. In those cases, an insurer cannot rely on non-compliance to refuse a claim if the insured shows that the non-compliance could not have increased the risk of the loss that actually occurred in the circumstances in which it occurred.
The section applies whether the term is labelled a warranty, a condition precedent, or something else. What matters is the substance — does the term address a particular kind of loss? If so, unrelated breaches do not defeat unrelated claims.
Worked example. A PI policy for a firm of accountants contains a term: "The Insured shall retain all client files for a period of not less than six years from the date of completion of the relevant engagement." In 2018 the firm destroys the working papers for one particular audit engagement after four years, in breach of the term. In 2020 a separate client — a different engagement, whose files have been retained in full — brings a claim alleging negligent tax advice given in 2019.
Under the old law the insurer might have argued that the 2018 breach discharged cover from that date, defeating the 2020 claim. Section 10 answers that: any suspension attached only to the period during which the breach existed. Section 11 seals the point. A file-retention term is intended to reduce a particular kind of loss — evidential prejudice on a claim where the files matter. The 2020 claim does not depend on the destroyed 2018 files. The insured can show that the non-compliance could not have increased the risk of the loss that actually occurred, and the insurer cannot refuse the claim.
Post-reform, Apex reads PI wordings with three questions in mind. Which clauses are drafted as warranties, and can the language be softened to conditions where the client's exposure is disproportionate? Which clauses are aimed at particular risks and therefore attract section 11 protection, whatever the label? And has the insurer attempted to contract out of any part of the reform under section 16 — if so, has the transparency test been met?
Apex Insurance Brokers Limited is authorised and regulated by the Financial Conduct Authority. Firm reference number 724952. This entry is general information, not advice on any particular policy.