A professional indemnity policy is a bundle of contractual terms, and not all of them carry the same consequences when broken. The label attached to a clause, and how the courts construe it, determines whether a breach ends cover, defeats a specific claim, gives the insurer a right in damages, or simply reflects a factual statement made at placement. Getting the classification wrong has significant coverage consequences.
A warranty is a promissory term the insured undertakes to observe strictly. Before the reform, breach automatically discharged the insurer from all liability from the moment of breach, whether or not the breach was material to the loss. The House of Lords in Bank of Nova Scotia v Hellenic Mutual War Risks Association [1989] 1 Lloyd's Rep 514 ("The Good Luck") described this as an automatic discharge, not a right to elect.
Section 10 of the Insurance Act 2015 changed that position for contracts placed or varied after 12 August 2016. Breach of warranty now suspends cover during the period of breach, with cover restored on remedy. Section 11 goes further: where a term is designed to reduce the risk of a particular kind of loss, at a particular location, or at a particular time, the insurer cannot rely on non-compliance to defeat a claim if the insured shows the non-compliance could not have increased the risk of the loss that actually occurred. Section 9 abolishes basis-of-contract clauses, so pre-contractual statements can no longer be elevated to warranty status by boilerplate at the foot of a proposal form.
A condition precedent to liability makes the insurer's obligation to pay a particular claim contingent on the insured having complied with the clause. Breach does not end the policy; it defeats the affected claim. The Court of Appeal in Alfred McAlpine plc v BAI (Run-off) Ltd [2000] 1 Lloyd's Rep 437 held that a clause will only carry that consequence if it is clearly labelled as a condition precedent and the effect of breach is spelled out. Labels are not decisive on their own — the court in Kler Knitwear Ltd v Lombard General Insurance Co Ltd [2000] Lloyd's Rep IR 47 declined to treat a term as a warranty despite the wording, looking instead at substance and construction — but a clause that lacks the label is unlikely to be given the effect.
Distinct again is the condition precedent to cover: a clause under which no cover attaches at all until the condition is fulfilled. Payment of the premium is the classic example. Until the trigger is met, the insurer is not on risk. This differs from the condition precedent to liability, where cover exists but a specific claim is defeated by breach.
Terms that are neither warranties nor conditions precedent are ordinary contractual promises. Breach entitles the insurer to damages for any loss caused by the breach, but does not entitle the insurer to refuse cover or reject a claim. Many co-operation, record-keeping and administrative clauses fall into this category.
Representations made in the proposal are not policy terms. They are statements of fact or expectation on which the insurer relied when writing the risk. For commercial insureds — which includes every firm of professionals — the framework is the duty of fair presentation under sections 3 to 8 of the Insurance Act 2015, with proportionate remedies in Schedule 1 (avoidance for deliberate or reckless breach; proportionate reduction, exclusion or additional premium otherwise). The House of Lords in HIH Casualty and General Insurance Ltd v Chase Manhattan Bank [2003] UKHL 6 confirmed that clear words are needed to exclude liability for misrepresentation.
Worked example — condition precedent to liability, after the 2015 reforms. A PI policy contains the clause: "The Insured shall notify the Insurer of any circumstance likely to give rise to a claim within 30 days. Compliance is a condition precedent to the Insurer's liability." A firm learns of a circumstance on 1 March but does not notify until 15 April — a delay of 45 days. On McAlpine reasoning the clause is a condition precedent to liability, clearly labelled, and pre-2016 the insurer could have declined the claim outright. Under the Insurance Act 2015 the analysis is more nuanced. If the clause is construed as a term reducing the risk of a particular kind of loss (late notification prejudicing the insurer's ability to investigate), section 11 may apply, and the insurer would need to show that the delay could have increased the risk of the loss that actually occurred. Alternatively, the delay may be treated as remediable non-compliance suspending cover during the delay only, with cover restored on notification. The old "all-or-nothing" outcome has been narrowed, though the classification of the clause still matters.
The takeaway is that labels matter but do not close the argument. Substance is determined by construction, remedies are shaped by the 2015 Act, and a broker's job at placement is to test the clauses that carry the sharpest consequences before the policy is bound rather than after a notification is made. See also the related entries on the Insurance Act 2015 warranty reforms and the abolition of basis-of-contract clauses, and the profession-specific pillars for solicitors, architects and IFAs.
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.