It is heartening to note that the regulator in India (IRDAI) recently formed a high-power panel to suggest measures for insurance reforms. It is expected to examine various areas of the Insurance Act 1938 and recommend suitable
and adequate amendments in keeping with the changing business trends and requirements of the customers. Modernising the Insurance Act is urgently needed to suit the changing business dynamics. Insurance Act 2015(UK) initiated many changes that suit the requirements of customers and business entities. In this article, an effort has been made to understand the implication of ‘Warranty’ and its evolution over the period.
Section 33(1) of the Marine Insurance Act 1906 states that ‘A warranty, means 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’. Section 33(2) states that A warranty may be express or implied. Section 33(3) states, “A warranty is a condition which must be exactly complied with, whether it be material to the risk or not. If it is not complied with, then, subject to any express provision in the policy, the insurer is discharged from liability as from the date of the breach of warranty, but without prejudice to any liability incurred by him before that date’. Section 34(2) provides that once a warranty has been broken, the insured cannot use the defence that the breach has been remedied.
Non-compliance with a warranty, however, is exempted only in three cases: (a) when the changed circumstances made the warranty inapplicable to the circumstances of the contract or when compliance with the warranty is rendered unlawful by any change of subsequent law. (2)Where a warranty is broken, the assured cannot avail himself of the defence that the breach has been remedied and the warranty complied with before loss. (3) The insurer may waive a breach of warranty.
The Marine Insurance Act 1906 didn’t allow for any remedy of a breach, which changed for the better with the enactment of the Insurance Act 2015(UK)
It may be noted that Conditions and Warranties are contract terms based on the importance of the terms in question and the subsequent consequences if they are breached. In most contracts, the Warranty impacts only some relatively minor aspects of the agreement. The affected or wronged party has a right to claim damages but no right to terminate the contract altogether.
On the other hand, a Condition impacts essential aspects of the agreement as it travels to the root’. The wronged party can both claim damages and terminate the policy as well.
In insurance contracts, the distinction between condition and warranty is somewhat blurred, and all warranties are treated as a major part of the contract. Insurance contracts don’t have the same meaning as the general contract law. In insurance law, the term ‘warranty’ is given a different meaning and refers to a major contract term.
Before the Insurance Act 2015 (IA 2015) (UK) , warranties were the most critical terms in an insurance contract, with severe effects if broken. However, the introduction of IA 2015 gave respite to policyholders as it mitigated some of the drastic effects of a breach of an insurance warranty. A breach of a warranty in an insurance contract is used to terminate the risk before enacting this Act. In this respect, a warranty was similar in effect to a condition in the general contract law.
IA Act 2015 states that any rule of law that breaches a warranty (express or implied) in a contract of insurance results in the discharge of the insurers’ liability under the contract being abolished. Similarly(an insurer has no liability under a contract of insurance for any loss occurring or attributable to something happening after a warranty (express or implied) in the contract has been breached but before the breach has been remedied.
The above changes were effected by IA Act 2015 – by Section 10 (7) – changes were made in the Marine Insurance Act 1906 (a) in section 33 (nature of warranty), in subsection (3), the second sentence( where the insurer is discharged from liability as from the date of the breach of warranty, but without prejudice to any liability incurred by him before that date) is omitted. Similarly, Section 34 (when the breach of warranty is excused) is also omitted.
Nowadays, a flexible approach emphasises the effect of a breach on the injured party. The seriousness of the breach decides whether a condition or a warranty has been broken. This is called as intermediate or innominate terms.- terms not clearly defined beforehand either as a condition or warranty. These conditions relate only to a side issue, such as the premium adjustment. Mere conditions in insurance are interpreted as innominate terms in a contract. As stated above, the severity of the breach decides whether it was a breach of warranty or condition – a minor breach is treated as a warranty and gives rise to damages. In contrast, a major breach is treated as a breach of condition, leading to contract repudiation.
Basis of Contract Clauses-
In India, a pre-contractual statement, like a statement made at the end of the proposal form, is converted into a warranty using the ‘basis of contract’ language. Any inexactness discharges the insurer from all liability for loss. The Act has abolished the basis of contract clauses. A representation cannot be converted into a warranty using any provision in the consumer insurance contract. Converting the statements made by the insured into a warranty is not permitted. In this respect, it is not possible to contract out of the IA 2015.
The ‘basis of contract’ clause is forbidden for consumer insurance. For consumer and non-consumer insurance, a breach of the warranty suspends an insurer’s liability only. Where the breach is rectified before the loss, the insurer must pay the claim.
Terms not relevant to the actual loss – an interesting twist to the warranty
In the case of a warranty or other term intended to reduce the risk of loss of a particular kind, in a specific location or at a certain time, the insurer will not be able to rely on a breach of the term if the non-compliance could not have increased the risk of the loss that in reality occurred. This is according to Section 11(3) of IA Act 2015 (UK), which states, ‘The insured satisfies this subsection if it shows that the non-compliance with the term could not have increased the risk of the loss which actually occurred in the circumstances in which it occurred’ Though this clause is used as a warranty but the sting is curbed significantly.
In other words, the interaction between s.10 (breach of warranty) and s.11 (terms not relevant to loss) explains that a breach of a warranty suspends an insurance policy, and the insurer will not be liable for any claims until the breach is remedied by the insured. However, if the warranty applies to a loss of a particular kind or at a specific location or time, section 11 will apply. If the insured can show that the breach did not increase the risk of the loss that occurred, they should be able to claim under the policy (as stated in section 11 (3)) despite the non-compliance with the warranty. In the case of a warranty or other term intended to reduce the risk of loss of a particular kind, in a specific location or at a certain time, the insurer will not be able to rely on a breach of the term if the non-compliance could not have increased the risk of the loss that actually occurred.
A significant relief to customers as the purpose of section .11 is to prevent the insurer from disallowing a claim for breach of a contractual term where the breach was in no way connected to the actual loss.
Nature of warranty.
We have already stated that in insurance law, the term ‘warranty’ has a different meaning and refers to a major contract term. Under the current law, the breach of a warranty in an insurance policy suspends the insurance cover until the insured remedies the breach.
It may be noted here that warranties may be implied in marine insurance only. For example, Section 39 of the Marine Insurance Act 1906 automatically carries the implied warranty of seaworthiness into every marine insurance policy. In non-marine insurance, warranties must be expressly worded in the contract.
The time has come to modernise the Indian Insurance Act to make it customer-friendly.
By: Prof( Dr) Abhijit K.Chattoraj, Chartered Insurer – Professor of Insurance &Risk Management and Director –MDP & Consulting; IMS Unison University.
