REFORMING INSURANCE LAW: - Law Commission

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Warranties of fact 7.3 Warranties of fact are dealt with very simply by s 24 of the Insurance Contracts Act 1984: 313 “A statement made in or in connection with a contract of insurance, being a statement made by or attributable to the insured, with respect to the existence of a state of affairs does not have effect as a warranty but has effect as though it were a statement made to the insurer by the insured during the negotiations for the contract but before it was entered into.” In short, and following the recommendations of the ALRC, 314 statements may no longer be warranted by basis clauses or by any other means, and all statements are to be treated as representations. 315 They are, accordingly, subject to the rules on misrepresentation discussed above. No distinction is drawn between consumer and commercial policies, and the view of those involved in operating the section in Australia emphasised its effectiveness. Continuing obligations: future warranties, coverage terms and conditions Outline 7.4 Future warranties are encompassed by perhaps the most difficult section in the entire Insurance Contracts Act 1984, namely s 54, which was the result of lengthy deliberation by the ALRC. 316 The overriding considerations on which s 54 is based are the need for a causal link between the assured’s breach of contract and the loss and, if there is such a link, reduction of the claim on a proportionate rather than absolute basis. The section is concerned with the assured’s acts or omissions, including his obligation of continuing good faith under s 13. Section 54 is wide-ranging, extending to any contractual obligation which has “the effect” of entitling insurers to refuse to pay a claim, including provisions governing the assured’s conduct during the currency of the policy (encompassing risk definition insofar as it is based on an act or omission of the assured, 317 continuing warranties and other obligations such as reasonable care clauses) 318 and provisions which regulate the assured’s conduct in the claims process (notifying claims, cooperating with insurers and, in the case of a liability policy, not admitting liability or settling 313 Sutton, paras 3.319 to 3.122. 314 ALRC 20, para 195. 315 A similar recommendation has been made by the New Zealand Law Commission, Some Problems of Insurance Law, Report 46, 1998, Chapter 1. Sections 4-7 of the Insurance Law Reform Act 1977 presently prevent avoidance of a policy for misrepresentation unless it is material. 316 ALRC 20, paras 215-244. 317 Thus a claims made policy which attaches only if a claim is made against the assured during the currency of the policy cannot operate to allow the assured to seek indemnity for a claim made against the assured after the policy has expired: Gosford City Council v GIO General Ltd [2003] NSWCA 34. In such a case there is no relevant act or omission on the part of the assured. 318 ALRC 20, paras 224-230. 61
without consent should the policy so specify). 319 The result is to treat all policy obligations or restrictions affecting the assured’s conduct, whether in the form of risk definition, continuing warranties, conditions or otherwise, in exactly the same way, because they can all have the effect of entitling the insurers to refuse to pay a claim. 320 English law, by contrast, maintains a distinction between risk description, exclusions, continuing warranties whose breach is fatal to the risk irrespective of materiality or causation, suspensory conditions whose breach only precludes a claim during the period of breach, conditions precedent whose breach is fatal to the attachment of the risk or to any claim (as the case may be) and bare conditions whose breach is almost certain not to give rise to any right in the insurers to refuse to pay the claim or to recover damages for breach. English law in effect turns on the classification of the policy provision as defining the risk, or as a warranty or condition. If it is a condition then there is a further need to determine whether it is a condition precedent to any recovery or to the operation of the risk in given circumstances, or a bare condition. English law has been criticised for confering all or nothing rights on insurers based on the drafting of the relevant provision rather than on its causal connection to the loss. Something along the lines of s 54 is clearly called for, and was indeed the very situation which prompted the ARLC to act. 321 7.5 The provisions of the section 322 may be summarised as follows. (1) In a case where the act or omission of the assured could not reasonably be regarded as being capable of causing or contributing to a loss, then under s 54(1) the insurers are not able to refuse to pay the claim by reason only of the act or omission but they are entitled to damages and any liability is to be reduced by the amount that fairly represents the extent to which the insurers’ interests were prejudiced by the act or omission. (2) Where an act or omission of the assured could reasonably be regarded as being capable of causing or contributing to a loss covered by the policy, then on the face of things under s 54(2) the insurers may refuse to pay the claim. (3) Where an act or omission could reasonably be regarded as being capable of causing or contributing to a loss covered by the policy, but the assured proves that no part of the loss was caused by the assured’s act or omission, the insurers may not, under s 54(3), refuse to pay the claim by reason only of the act or omission. (4) Where an act or omission could reasonably be regarded as being capable of causing or contributing to a loss covered by the policy, and the assured proves that some part of the loss was not caused by that act or omission, then under s 54(4) the insurers may not refuse to pay that part of the claim by reason only of the act or omission. (5) Where the act or omission was necessary to protect the safety of a person or to preserve property, or it was not reasonably possible for the assured or some other 319 ALRC 20, paras 231-233 and 238-242. 320 East End Real Estate Pty Ltd v C E Heath Casualty and General Insurance Ltd (1992) 25 NSWLR 400; Antico v Heath Fielding Australia Pty Ltd (1997) 188 CLR 652; FAI General Insurance Co Ltd v Australian Hospital Care Pty Ltd (2001) 204 CLR 641. 321 ALRC 20, paras 216-220. 322 As amended. 62
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REFORMING INSURANCE LAW: IS THERE A
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6 FRAUDULENT CLAIMS 6.1 Meaning of
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legislation as it relates to substa
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different fate. On 9 September 1976
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invaluable in that it was devised a
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Page 72 and 73: 7.20 Treasury Review I, 2003, found
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Page 96 and 97: period. In addition, such policies
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REFORMING INSURANCE LAW: - Law Commission

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