The UK Insurance Act 2015: The Shift in Marine Insurance Warranties Regime

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From 12 August 2016 English law switches from automatic discharge of liability to suspension of liability in case of a breach of a warranty as long the breach is material to the loss.


Leonidas Villagran

For more than a century the English Marine Insurance Act 1906 has been keeping principles of marine insurance law regarding warranties which according to law commentators became obsolete and out of market. These principles were subject to fundamental changes with The Insurance Act 2015 that will come into force on 12 August 2016. This is a new regime according to international standards proposed by the Law Commission on 2014. (Law Commission, 2014).

The introduced reform provides a new era for marine insurance warranties law in the UK but in practice it also depends on how insurers draft their terms in the contracts of marine insurance.

The UK Law Commission revealed that in the consultation process about insurance warranties 88% of respondents related to the industry agreed that there was a need to reform the law (in relation to sections 33 and 34 of the Marine Insurance Act 1906).

These old principles balanced the insurance relation in favor of the insurer and categorized promissory warranties as drastic requirements which must be exactly complied with. When the breach of warranty occurs the insurance policy is no longer valid and the insurer is discharged from liability and there is no remedy for this, unless the insurer waives the breach. The warranty does not have to be material to the risk. Therefore, the insurer is not obliged to pay for a loss when a breach of any warranty has occurred.

The old concept in warranties was also extended to what is understood as basis of the contract. Therefore, any failed statement from the insured before the execution of the contract of insurance which is to be considered as basis of the contract exonerated the insurer from liability in event of any loss even when the breach is not material to said loss.

The Insurance Act 2015: reform on warranties

The introduced reform provides a new era for marine insurance warranties law in the UK. The old strict compliance principle in marine insurance warranties was fundamentally modified. The result of non-compliance with a term in the contract of insurance is the suspension of liability of the insurer under the contract of insurance. This suspension of liability remains until the breach has been remedied. English law switches from automatic discharge of liability to suspension of liability when a breach of warranty takes place. Therefore, insurers are not obliged to pay for a loss occurred at a moment that the suspension was active, but if the breach has been remedied, and a loss occurs then liability of the insurer is not affected.

“Basis of the contract” clauses from non-consumer insurance contracts have been forbidden. Therefore, any representation made by the insured is not able to be considered as warranty. They should be expressly mentioned in the insurance contract.

Finally, the causation principle is adopted for marine insurance warranties. If a loss takes place, and a term (express or implied) has not been complied with, the insurer is not able to argue non-compliance to exclude, limit or discharge its liability for the loss if the insured has satisfied that the non-compliance with the term could not have increased the risk of the loss that actually occurred in the circumstances in which it occurred.

The need for this reform was also in order to maintain the competitiveness of the English Insurance Market, which is the third in the world behind the United States and Japan. The Law Commission considered that the UK was out of line with an international marketplace. Indeed, the Marine Insurance Act 1906 served as basis for marine insurance statutory law in common law jurisdictions, but most of this countries have reformed the law adopting new criteria.

The Law Commission reproduced a comment of one consultee that brought the impact of maintaining those law principles in force: “The current law in relation to warranties brings English law into disrepute and puts the English market at a competitive disadvantage against other jurisdictions. The draconian nature of a warranty under English law leaves insureds too often at the mercy of the goodwill of insurers in the event of the breach.”

The Old Principles in Warranties

Vanishing principles of marine insurance law on warranties are the result of Lord Mansfield opinions who was considered the dominant judicial force behind common law developments (Oldham, 2004). In De Hahn v Hartley, dated 1786. Lord Mansfield stated that “there was a breach of warranty to sail with a complement of fifty hands in fact sailed with less and made up the deficiency later”. He ruled that warranties must be strictly complied with, considering that when the warranty is not performed then there is no contract.

Lord Mansfield also stated that it is perfectly immaterial for what purpose a warranty is introduced; but being inserted, the contract does not exist unless it be literally complied with. (Goble, 1931)

This is the same approach by Lord Mansfield In the case Pawson v Watson, dated 1778, in which he stated that the warranty was “a term of the contract of insurance which must be strictly complied with and upon any breach of which, however trivial, the insurer is entitled to repudiate the policy”.

Automatic Discharge of Liability

The opinion by the House of Lords in The Good Luck ruled that when non-compliance with a warranty occurs then the insurer is automatically discharged from liability. Lord Goff considered that the words of section 33(3) of the Marine Insurance Act 1906 were clear, stating the automatic discharge of the insurer from liability, and that there is no necessity to have the insurer decision to terminate the contract. The term warranty is to be understood as a condition precedent.

It is true to say that this judgment contributed to increase the misbalance of the insured in the contract of marine insurance. It appears that not only there is no room for the insurer for a remedy of the breach which may be not material to the risk but also the automatic discharge effect may generate cases in which the insured is not advised that the cover has ended with no way return.

Upon this decision it has been considered that “an insurer who does nothing after a breach of a promissory warranty can now no longer be accused of having, by his inactivity, impliedly waived or affirmed the contract” (Hodges, 1996). Basically the law on warranties has received prolonged criticism from legal commentators as “The Omnipotent Warranty: England v the World”, “Let us consign the toxic English warranty to the obscurity where it belongs” (Hare, 2000). Benevolent comments say that the old warranties regime developed in the UK are extreme, unattractive and confusing (Rösiö, 2014)

Case Law in the Common Law World

While the UK maintained the old warranties principles in spite of critics by commentators and judges, other countries in the common law world which initially adopted these principles were incorporating statutory changes to their draconian terms and adopting new principles in their court decisions.

On 1955, the Supreme Court of the United States of America denied the adoption of the old common law doctrine of forfeiting all right of recovery in the absence of strict and literal performance of warranties. The Court commented said doctrine to be a harsh rule, and mentioned that Most States, deeming the old rule a breeder of wrong and injustice, have abandoned it in whole or in part. This was the case Wilburn Boat Co. v Fireman´s Fund Insurance Co. in which the Court ruled that marine insurance contracts were subject to State Law.

In the scope of application of state law, US Courts case law approach towards warranties includes the doctrine that a breach of a warranty can be remedied; therefore, the coverage is only suspended. The assured is able to cure the breach and maintain the protection. In regard to causation some Courts have adopted the principle that the insurer is not liable when the breach of a warranty is the proximate cause of the loss as in the leading case of United States Fire Insurance Co. v. Cavanaugh but many other US Courts maintain the old principle of strict compliance regardless the cause of the loss (Schoenbaum, 2004).

In the case of the Pilbara Pilot, The Western Australian Supreme Court reversed a decision regarding direct breach of warranty. In this case the Judge ruled that the legislation stating that a warranty is a condition which must be exactly complied with, whether it be material to the risk or not was not to be taken too literally.

In the case Bamcell II the Canadian Supreme Court decided that the named warranty that a watchman is stationed each night from 2200 to 0600 was only a condition contained in the clause constituted a limitation of risk insured but it was not a warranty, due that the loss occurred at mid-afternoon time.

Lord Hobhouse in The Star Sea commented: “It is a striking feature of this branch of the law that other legal systems are increasingly discarding the more extreme features of the English law which allow an insurer to avoid liability on grounds which do not relate to the loss”.

Moves by the Judiciary at Improving the Position of the Insured:

Kier Kintwear Ltd v Lombard General Insurance Co Ltd

In Kier Knitwear Ltd v Lombard General Insurance Co Ltd the contract of insurance included a warranty in which a sprinkler was subject to inspection 30 days after renewal. It happened that the inspection was performed 60 days after renewal. After that, a loss not related to the sprinklers occurred and the insurer denied payment based on breach of the 30 days inspection warranty. Mr Justice Morland pointed out that the clause was to be considered “a suspensive condition”, to be applied during the 60 days of non-compliance for the inspection.

The New Foundland Explorer

In the case The Newfoundland Explorer Justice Gross in the High Court of England and Wales stated that the warranty “fully crewed at all times” was ruled to be delimiting and not promissory. It means that the breach of the warranty suspended the liability but did bring the effect of voiding the policy. Justice Gross said that he “would accordingly have been reluctant to go further and hold this was a promissory warranty, so that any breach would discharge the insurer from liability automatically, as from the date of the breach”

The Resolute

In The Resolute Sir Anthony Clarke allowed the appeal filed by the insured and agreed that an ambiguous warranty will be construed against the insurer, as a particular application of the contra proferentem principle. He also considered that the warranty should be given a reasonable and businesslike interpretation in its context and purpose.

The Princess of the Star

The recent decision in The Princess of the Star by the Court of Appeals upheld the judgment by the Commercial Court (2013) in which Judge Field stated that the wording in a warranty must be given the ordinary and natural meaning unless the background indicates that such meaning was not the intended meaning..”where the language used has more than one potential meaning, the court is entitled to prefer the construction which is consistent with business common sense and to reject the other… However, where the parties have used unambiguous language, the court must apply it , however improbable the result”

In his decision Judge Field recognized that a continuing warranty is a draconian term, and also pointed out that it is the duty of the insurer to express warranty clauses in clear terms

Implications of These Legislative Changes

Insurers must take into consideration that the so called basis of the contract clause is no longer effective under the Insurance Act 2015. Any warranty to be effective must be part of the contract of insurance.

The breach of a warranty is no longer considered as an automatic discharge of liability but as suspension of liability. Once the breach of warranty is remedied then the insurer recovers liability. Warranties are now considered as suspensive conditions. As an example if the contract of insurance includes the clause: warranted 5 watchmen at all times the vessel is navigating, then if the insured fails to comply results on the liability of the insurer being suspended until the breach is remedied. If a loss takes place when the insurer recovered liability then the indemnity should be paid, but if the loss occurs while the liability is suspended then the insurer is able to provide the proper defense unless the breach is not material to the loss.

The non-compliance with a term designed to reduce the risk of a particular type of loss, or a loss at a particular time or in a particular place, which is demonstrated to have not potentially increased the risk of an occurred loss, does not exonerate the insurer’s liability. Therefore, the insurer is not able to rely on any defense which is not material to the loss (this is not to be applied for terms that define the risk as a whole). As an example if the warranty states that the vessel should have fire alarms and the vessel sinks because of any reason not related to fire then the insurer is not able to refuse payment of the indemnity.

 

Contracting out

The reform is not absolute in case of non-consumer contracts. It is possible to contract out of the new provisions on warranties, with the exception on the “basis of the contract” clauses. The principle is not to put a insured party in a worse position, unless the insured is well informed about less favourable terms contained in the insurance contract than those which appear in the Act. Those terms are to be clear and unambiguous. As mentioned this is only for non-consumer contracts of insurance.

Thus, with the Insurance Act 2015 having entry into force on 12 August 2016, there were eight P&I Clubs to be affected with this new Act : The UK P&I, NORTH, West of England, Britannia, Steamship, London, Shipowners and Standard. All of these Clubs are members of the International Group and having their Rules on England jurisdiction (“English P&I Clubs”). These Clubs decided to contract out some of the provisions of the Act. By November 2015 the Clubs issued a Circular for their members announcing this decision which was finally confirmed with the new Rules of each Club.

Rules 2016-17 for the mentioned P&I Clubs incorporate provisions of the Marine Insurance Act, 1906 and the new Insurance Act 2015 upon entry into force but all of them exclude Sections 10 and 11 of the Insurance Act 2015. (The UK P&I, Rule 5L, NORTH Rule 6(1),(2) (b),(c), West of England Rule 21(1)(b) (c), Brittania Class 3 Rule 3 3(5), Steamship Class 1 Rule 7 IV, London Class 5 Rule 43 43.1.1, Shipowners Rule 1, II A, B, Standard Section A 1.5.1. and 1.5.2)

This means that a breach of a warranty discharges liability on the relevant Association from the day of the breach regardless of any remedy and regardless if the breach is not material to the loss.

English P&I Clubs have responded to the Act with the intention to maintain the strict compliance principle in warranties keeping alive at least in private contracts this doctrine. It may be expected that the Hull insurers in the London market will provide their position with new terms or abiding to the changes. The question is if this is a matter of time or a firm decision to keep alive Lord Mansfield’s doctrine. No doubt that this is a sophisticated market. Time will say.

Bibliography

Gauci, G. M. (2015). Principles of Marine Insurance Law. London: World Maritime University / Lloyd’s Maritime Academy.

Goble, G. (1931). Cases and other materials on the Law of the Insurance. Chicago, United States: THE BOBBS-MERRILL COMPANY.

Gurses, O. (2015). Marine Insurance Law. London and New York: Routledge.

Hare, J. (2000). Marine Insurance at the turn of the Millenium – The Ommipotent Warranty, England v The World. Antwerpen – Groningen – Oxford: The European Institute of Maritime and Transport Law.

Hodges, S. (1996). Law of Marine Insurance. London: Cavendish Publishing Limited.

Law Commission. (2014). Insurance Contract Law: Business disclosure; Warranties; Insurer remedies for Fraudulent Claims; and Late Payments.

Oldham, J. (2004). English Common Law in the Age of Mansfield. Chapel Hill: The University of North Carolina Press.

Rösiö, C. C. (2014, 10 16). Warranties in Marine Insurance: An Unpleasant Necessity? Retrieved 11 03, 2015, from Juridisk Publikation

Schoenbaum, T. J. (2004). Admiralty and Maritime Law. St Paul, MN: West Publishing.


English case law cited:

De Hahn v Hartley [1786] 1 Term Rep 343

Pawson v Watson [1778] 2 COWP 785; 98 ER 1361 at 1362

“The Good Luck” Bank of Nova Scotia v Hellenic Mutual War Risks Association (Bermuda) Ltd [1991] 2 Lloyd´s.Rep.191.

“The Star Sea” Manifest Shipping Co Ltd v Uni-Polaris Insurance Co [2001] Lloyd’s Law Report 389

Kier Knitwear Ltd v Lombard General Insurance Co Ltd [2000] Lloyd’s Rep IR 47

“The Newfoundland Explorer” GE Frankona Reinsurance Ltd v CMM Trust No 1400 (‘The Newfoundland Explorer’) [2006] EWHC 429 (Admlty), [2006] 1 Lloyd’s Rep IR 704)

Pratt v Aigion Insurance Company SA (The Resolute) [2008] EWCA Civ 1314 at [14], [2009]

(“The Princess of the Stars”)[Amlin Corporate Member Ltd v Oriental Assurance Corp (The Princess of the Stars) [2014] EWCA Civ 1135 / Amlin Corporate Member Ltd v Oriental Assurance Corp (“The Princess of the Stars”)[2013] EWHC 2380 (Comm)

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