Warranty (insurance)

A warranty in insurance is a term by which the insured undertakes that some particular thing shall or shall not be done, or that some condition shall be fulfilled, or whereby the insured affirms or negatives the existence of a particular state of facts, and which is reformed by the Insurance Act 2015 to operate as a suspensive condition.

Definition §

A warranty in insurance law is a contractual undertaking by the insured that is strictly construed and material to the insurer's acceptance of the risk. The classic definition appears in section 33(1) of the Marine Insurance Act 1906: a warranty is "a promissory warranty, that is to say, a warranty by which the assured undertakes that some particular thing shall or shall not be done, or that some condition shall be fulfilled, or whereby he affirms or negatives the existence of a particular state of facts."^[1]

Warranties differ from ordinary contractual terms in three important respects. First, they must be exactly complied with, whether or not material to the risk (section 33(3) of the 1906 Act). Second, prior to the Insurance Act 2015, breach of warranty automatically and permanently discharged the insurer's liability from the date of breach, regardless of remedy, as established by the House of Lords in The Good Luck. Third, warranties are typically created by express words but may, in limited circumstances, be implied by law (such as the warranty of seaworthiness in voyage policies under section 39 of the 1906 Act).^[2]

The Insurance Act 2015 reformed the law of warranties in two important respects. Section 9 abolished "basis of contract" clauses in non-consumer insurance, preventing pre-contractual statements from being converted into warranties by general words in the proposal form. Section 10 reversed The Good Luck by providing that breach of warranty suspends, rather than discharges, the insurer's liability — the liability resumes once the breach is remedied.^[3]

Legal / Regulatory basis §

The statutory framework for warranties is found in sections 33 to 41 of the Marine Insurance Act 1906, as modified by sections 9 to 11 of the Insurance Act 2015. Sections 33 to 35 deal with the nature, creation and effect of warranties. Sections 36 to 41 deal with specific implied warranties applicable to particular classes of marine insurance.^[4]

The Good Luck (Bank of Nova Scotia v Hellenic Mutual War Risks Association (Bermuda) Ltd) established that a breach of warranty automatically discharged the insurer from liability for losses occurring after the breach, regardless of whether the breach had been remedied or the loss was connected to the breach. The decision was widely criticised for producing disproportionate outcomes; it formed a central focus of the Law Commission's review.^[5]

The Insurance Act 2015 sections 9 and 10 implement the Law Commission's principal recommendations on warranties. Section 9(2) provides that a representation made by the insured in connection with a proposed insurance contract is not capable of being converted into a warranty by means of any provision of the insurance contract or proposal form. Section 10(1) provides that any rule of law that breach of a warranty results in the discharge of the insurer's liability is abolished. Section 10(2) provides that the insurer has no liability for losses occurring during a period of breach, but liability resumes when the breach has been remedied (where capable of remedy).^[6]

Section 11 addresses terms not relevant to the actual loss, providing that an insurer may not rely on non-compliance with a term tending to reduce the risk of loss of a particular kind, at a particular location, or at a particular time, where the insured shows that non-compliance could not have increased the risk of the loss that actually occurred. Section 11 applies to terms whether described as warranties or otherwise.^[7]

The pre-IA 2015 case law remains relevant to questions of construction (whether a term is or is not a warranty) and to consumer insurance policies issued before the relevant CIDRA 2012 provisions came into force. Young v Sun Alliance and London Insurance Ltd is a classic illustration of strict construction in favour of the insured where the disputed term could not clearly be identified as a warranty.^[8]

How it works in practice §

In practice, the Insurance Act 2015 has reshaped market practice on warranties, though warranty wordings remain common in many classes of commercial insurance. Property policies routinely include warranties relating to fire protection systems (sprinklers, alarms, smoke detection), security arrangements (locks, intruder alarms, CCTV), and operational matters (waste management, hot-work procedures). Marine policies include warranties on classification, trading limits and survey requirements. Liability policies sometimes include warranties on professional registration, accreditation status or contractual practices.

When a breach is alleged, the section 11 question — is the breach connected to the risk of the loss that actually occurred — is now central. An insurer cannot decline a fire claim by reference to breach of an intruder alarm warranty unless it can show that the breach could have increased the risk of fire. Conversely, breach of a sprinkler warranty during a fire loss is plainly relevant to the loss and section 11 does not assist the insured.

Section 10 means that breach of warranty is no longer the catastrophic event it once was. Liability is suspended during the period of breach but resumes when the breach is remedied. For example, if an insured fails to maintain a sprinkler system for two months but reinstates it before a fire occurs, the insurer is on risk for the fire even if the warranty had been breached during the maintenance period. Where the warranty is incapable of remedy, the period of breach continues indefinitely.^[9]

Brokers commonly negotiate to recharacterise warranties as conditions precedent, exclusions or risk-based terms, depending on the commercial context. The reform of section 9 has reduced the prevalence of basis-of-contract clauses, though some legacy wordings remain in circulation. The market response to the Act has produced clearer, more proportionate warranty wordings in many lines.

Common variations §

Warranties take many forms. "Promissory" warranties relate to future conduct (e.g. "the insured warrants that hot work will only be carried out with a permit"). "Affirmative" warranties confirm the existence of a state of affairs at inception (e.g. "the insured warrants that the premises are protected by a maintained sprinkler system"). "Continuing" warranties apply throughout the policy period; "expiring" warranties apply only at a particular time.

Some terms are described as warranties but are properly characterised by the courts as conditions, exclusions or representations. The label is not conclusive: the courts look at the substance of the term, its position in the contract and its commercial effect. Strict construction tends to favour the insured where ambiguity exists.

In consumer insurance, the Consumer Insurance (Disclosure and Representations) Act 2012 prohibits basis-of-contract clauses (section 6), pre-dating the equivalent reform under section 9 of the 2015 Act for non-consumer insurance.^[10]

Example §

A commercial warehouse policy includes a warranty that "the insured warrants that the sprinkler system shall be maintained in full working order at all times". The sprinkler system is shut down for routine maintenance for one week during the policy period. A fire occurs three months later, after the system has been reinstated. The insurer alleges breach of warranty.

Under section 10 of the Insurance Act 2015, the insurer's liability is suspended during the week of breach but resumes once the system is reinstated. As the fire occurred after reinstatement, the insurer is on risk. In addition, even if the section 10 reinstatement rule did not apply, section 11 would prevent the insurer from declining the claim, since the temporary maintenance of the sprinkler system three months earlier could not have increased the risk of the later fire. The claim is paid.

See also §

• /wiki/insurance-act-2015/ — the parent statute
• /wiki/warranty-to-suspensive-condition/ — the section 10 reform
• /wiki/section-11-insurance-act-2015/ — terms not relevant to actual loss
• /wiki/marine-insurance-act-1906/ — historical framework for warranties
• /wiki/fair-presentation-of-the-risk/ — related disclosure duty
• /wiki/consumer-insurance-disclosure-and-representations-act-2012/ — consumer regime
• /wiki/material-misrepresentation/ — distinguished from warranty

References §

1. ↑ Marine Insurance Act 1906, section 33, https://www.legislation.gov.uk/ukpga/Edw7/6/41
2. ↑ Marine Insurance Act 1906, sections 33 and 39
3. ↑ Insurance Act 2015, sections 9-10, https://www.legislation.gov.uk/ukpga/2015/4
4. ↑ Marine Insurance Act 1906, sections 33-41
5. ↑ Bank of Nova Scotia v Hellenic Mutual War Risks Association (Bermuda) Ltd (The Good Luck) [1992] 1 AC 233
6. ↑ Insurance Act 2015, sections 9-10
7. ↑ Insurance Act 2015, section 11
8. ↑ Young v Sun Alliance and London Insurance Ltd [1976] 3 All ER 561
9. ↑ Insurance Act 2015, section 10(5)-(6)
10. ↑ Consumer Insurance (Disclosure and Representations) Act 2012, section 6, https://www.legislation.gov.uk/ukpga/2012/6