Express warranties

Express warranties

1. Definition Of Warranties

Two different types of warranties should be distinguished:

a) Promissory warranties, the breach of which will discharge the insurer from liability.

b) Descriptive or suspensive warranties, the breach of which will merely suspend the insurance cover while the assured remains in breach.

i) Promissory Warranties

Section 33(1) MIA defines a warranty as ‘a promissory warranty, that is to say, a warranty by which the assuredundertakes 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’.

There are two types of ‘promissory warranty’ which are identified in s.33(1)MIA:

a) Where the assured undertakes that a particular thing will or will not be done or that some condition shall be fulfilled (g. that a survey of the vessel will be completed or that no hot work will be undertaken on board the vessel). Such warranties are sometimes referred to as ‘future’ or ‘continuing’ warranties.

b) Where the assured affirms or negates the existence of a particular state of facts (g. that a survey has already taken place). This type of promissory warranty should be distinguished from representations made to the insurer as part of the insurance presentation. Such pre-contractual representations are sometimes incorporated into the insurance contract, for example by way of a ‘basis clause’.

If a promissory warranty is not complied with, the effect is to discharge the insurer from liability as from the date of the non-compliance or breach (section 33(3) MIA).

ii) Descriptive Warranties

Descriptive or suspensive warranties do not require the assured to promise that something will or will not be done or that a certain state of affairs exists. Descriptive or suspensive warranties delimit the scope of the risk (i.e. such warranties define those perils or risks which are insured or excluded from cover). For example, in older marine policies which did not intend to cover war or political risks there was often a provision stating that ‘warranted free from capture or seizure’, meaning that capture and seizure are not insured perils under the policy. In GE Frankona Reinsurance Ltd v CMM Trust No. 1,400 (The Newfoundland Explorer), the Courtexpressed the tentative view that the policy provision ‘warranted vessel fully crewed at all times’ was a suspensive (or ‘delimiting’) warranty.

If such descriptive or suspensive warranties are not complied with, there will be no cover only so long as the ‘warranty’ is not being complied with. That is, if the ‘breach’ ceases or is remedied, the cover will be reinstated. For example, if a descriptive or suspensive warranty provided that the insured vessel would not trade in certain parts of the world, say the Pacific Ocean, if the vessel entered the Pacific Ocean, the vessel would be uninsured, but once the vessel left the Pacific Ocean, the insurance cover would reattach to the vessel.

2. Identifying A Warranty

A promissory warranty can be express or implied:

a) Express warranties. Under section 35(1) MIA, an ‘express warranty may be in any form of words from which the intention to warrant is to be inferred’. Under section 35(2) MIA, an ‘express warranty must be included in, or written upon, the policy, or mustbe contained in some document incorporated by reference into the policy.’

b) Implied warranties – Most implied warranties apply as a matter of law by reason of the MIA (sections 39 and 41 MIA unless they are inconsistent with the terms of the contract (section 87 MIA) or with an express warranty (section 35(3) MIA). It is conceivable, however, that there may be a warranty implied by reason of the parties’ agreement (e. by which the intention to warrant is inferred) (section 33(2) MIA). It is to be noted that under section 35(3) MIA, ‘an express warranty does not exclude an implied warranty, unless it be inconsistent therewith.’

It is essential that an express warranty be included or written upon the policy or incorporated by a reference in the policy (section 35(2) MIA). The warranty or reference may be found anywhere in writing in the policy. It may be in the margin of the printed policy.

How does one determine whether or not the insurance contract contains a promissory warranty? It is a question of construction of the contract, taking into account all of the terms of the contract as well as the background to the making of the contract, which background was known to both parties at the time of the contract. The following considerations will be relevant in construing the insurance contract:-

a) The language of the policy and the provision itself. For example, is the word ‘warranty’ used? However, it is not essential that the word ‘warranty’ should be used for the provision to be construed as a warranty. Similarly, the use of the word ‘warranty’ does not automatically make it a promissory warranty.

b) A promissory warranty is more likely to be found to exist where the term concerns a statement of existing fact which has a bearing on the risk being insured.

c) If the provision relates to the very essence of the risk being insured or goes to the root of the transaction, it is more likely to be a promissory warranty. If, for example, the failure to comply with the provision would mean that the risk being insured has increased, even after the breach ceases, then it is more likely that the provision is a warranty.

e) It appears the Court will be inclined to construe a term as a descriptive or suspensive term, rather than a promissory warranty, if it purports to impose a continuing obligation on the assured. In GE Frankona Reinsurance Ltd v CMM Trust No. 1,400 (The Newfoundland Explorer), the Court tended towards the view that the provision was a suspensive or descriptive warranty where the provision imposed a continuing obligation on the assured.

f) Given the draconian nature of promissory warranties, such terms will be construed, in the absence of a clearly expressed provision, against being a continuing warranty, although this is not always the The warranty might be construed to be limited in its scope to a discrete part or section of the policy, rather than to the entire contract.

g) Promissory warranties will generally be construed so that any ambiguity is resolved against the insurer. However, there must be an ambiguity, before this rule of construction is applied.

3. Examples Of Express Warranties

The following are examples of express promissory warranties commonly found in marine insurance policies:

a) Trading warranties, that is, warranties requiring the insured vessel not to trade in certain geographical areas of the world (Colledge v Harty (though this was argued to be an exception to cover); Provincial Insurance Co of Canada v Leduc, Simpson SS Co v Premier Underwriting Association).

b) Warranties requiring a survey of the subject-matter insured in order to evaluate its quality or condition (Kirkaldy & Sons Ltd v Walker).

c) Warranties requiring the vessel to be in class or compliance with the recommendations of a surveyor or of a classification society towards the maintenance and repair of the insured vessel (The Game Boy, Sun Alliance & London Insurance plc v PT Asuransri Dayin Mitra TBK (The No. 1 Dae Bu)).

d) Warranties as to the number or presence of crew or passengers on board the insured vessel (Bean v Stupart, GE Frankona Reinsurance Ltd v CMM Trust No. 1,400 (The Newfoundland Explorer) (although the judge expressed the view that the provision was not a promissory warranty), Pratt v Aigaion Insurance Company SA).

e) Warranties as to the nature or type of cargo to be carried or not to be carried on the insured vessel (Hart v Standard Marine Insurance Co, Aktieselskabet Grenland v Janson).

f) Warranties as to the use to which the insured vessel is put or not put (Inversiones Manria SA v Sphere Drake Insurance Co plc (The Dora), The Buana Dua). Warranties as to other insurances on the vessel (clause 22 of Institute Time Clauses – Hulls (1/11/1995); Muirhead v Forth and North Sea Mutual Insurance Association, Roddick v Indemnity Mutual Marine Insurance Co, Samuel v Dumas).

g) Warranties as to the nationality of the owner or the flag of the vessel (e. country where the vessel is registered) (The Tiburon).

h) Warranties as to the safety of the vessel insured (Blackhurst v Cockell).

i) As to warranties requiring compliance with the International Safety Management (ISM) Code; Sea Glory Maritime Co v Al Sagr National Insurance Co (The Nancy).

j) As to typhoon warranties. (Amlin Corporate Member Ltd v Oriental Assurance Corporation (The Princess of the Stars)).

k) As to warranties as to the characteristics of an insured vessel or a carrying vessel (The Ho Feng).

4. Consequences Of A Breach Of Warranty

The consequences of a breach of any term of an insurance contract will depend on its proper construction and categorisation. Subject to the true construction of the insurance contract, the MIA provides for the consequences of a breach of promissory warranty.

Under section 33(3) MIA, a ‘warranty, as above defined, is a condition which must be exactly complied with, whether it be material to the risk or not.’ If there has been any departure from a warranty, no matter how slight (except possibly if the departure is de minimis), there has been a breach of warranty. If a term of the insurance contract is a promissory warranty, sections 33 and 34MIA set out the consequences in the event of a breach of warranty:

a) If there is a failure to comply with a warranty, 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 33(3) MIA).

b) Where a warranty has been breached, ‘the assured cannot avail himself of the defence that the breach has been remedied, and the warranty complied with, before loss’ (34(2) MIA). The consequences therefore may be summarised as follows:

Immediately upon the breach of warranty, the insurer will be discharged automatically from liability as from the date of the breach, whether or not the insurer is aware of the breach. However, the breach must be actual and not an apprehended or intended breach.

The fact that the breach of warranty ceases after the initial breach does not result in the insurer coming on risk again. The breach need have no connection with any loss which is the subject of a claim under the contract or with the risk being insured.

The breach may occur without any fault on the part of the assured (depending on the terms of the warranty).

Even though the breach relates to only a part of the subject-matter insured, the insurer may be discharged from all liability under the contract (depending on the proper construction of the contract).

The insurer remains liable for any losses incurred by him or her before the date of the breach of warranty. 

The premium will not be returnable (unless the policy otherwise provides) unless the breach of warranty occurred before the risk commenced (see section 84(3)(b) MIA).

The burden of proving that there has been a breach of warranty lies on the insurer.

5. Warranties And The Duty Of Utmost Good Faith

If the policy contains a promissory warranty, any circumstance which is covered by the warranty need not be disclosed, because such disclosure would be ‘superfluous’ (section 18(3)(d) MIA) (Cantiere Meccanico Brindisino v Janson, Inversiones Manria SA v Sphere Drake Insurance Co plc (The Dora), O’Kane v Jones, Garnat Trading & Shipping (Singapore) Pte Ltd v Baominh Insurance Corporation, Synergy Health (UK) Limited v CGU Insurance plc).

A warranty may exist because a representation of fact may be incorporated into the contract, for example, by way of a ‘basis clause’ (Thomson v Weems, Dawsons v Bonnin). As to the operation of a ‘basis clause’, see Genesis Housing Association Ltd v Liberty Syndicate Management Ltd.

Such warranties should be distinguished from a mere representation of fact (which has not been incorporated into the contract) on which the insurer relies in entering into the contract:

a) The representation of fact will be true if it is ‘substantially correct’, that is, if the difference between what is represented and what is actually correct would not be considered material by a prudent insurer (section 20(4) MIA) (see In re Universal Non-Tariff Fire Insurance Company).

However, a representation which is warranted to be true will be true only if it has been strictly or ‘exactly’ complied with (i.e. it is true in every particular (De Hahn v Hartley).

In order that the representation be actionable as a misrepresentation, the representation must be material (section 20(1) MIA) and must have induced the insurer to enter into the insurance contract. However, there is no need for the warranty to be ‘material’ to the risk (section 33(3) MIA). Of course, if the provision is not material, it is less likely that it will be a warranty, unless the clearest language is used to indicate the parties’ intention that the provision is a warranty. The insurer will be discharged from liability by reason of a breach of warranty whether or not the warranty was material and whether or not the warranty induced the insurer to enter into the contract.

6. Defences To A Breach Of Warranty

The MIA identifies three defences to a breach of warranty:

a) Non-compliance with a warranty is excused when, by reason of a change of circumstances, the warranty ceases to be applicable to the circumstances of the contract (section 34(1)).

b) Non-compliance with a warranty is excused when compliance with the warranty is rendered unlawful by any subsequent law (section 34(1)). It may be that compliance with the warranty is unlawful at the time of the contract; in such cases, there are arguments in favour of holding that the warranty need not be complied with, although it will depend on the nature of the warranty and the illegality.

c) A breach of warranty may be waived by the insurer (section 34(3)). The insurer may waive a breach of warranty. It had traditionally been thought that a waiver could be effected in one of two ways:

Firstly, a breach could be waived by the insurer, with full knowledge of the relevant facts, stating that the breach of warranty would not be relied on or acting in a manner which was consistent only with an intention to continue to be liable or ‘on risk’ under the contract (Compagnia Tirrena di Assicurazioni SpA v Grand Union Insurance Co Ltd). This has often been referred to as waiver by election.

Secondly, by the insurer unequivocally representing (by words or conduct) that he or she will not rely on the breach of warranty and by the assured relying on this representation to his or her detriment or by changing his or her position. This is referred to as waiver by estoppel.

Doubt has been cast on the first method of waiver because no election is in fact made by the insurer, because he or she is automatically discharged from liability by the breach of warranty and no election is required by the insurer (unlike, for example, where the insurer elect to avoid the insurance contract for breach of the duty of utmost good faith). However, the words of section 34(3) are explicit and may (although it is unlikely) still allow an express waiver which falls short of an estoppel (but provided that the insurer has the requisite knowledge). The Court of Appeal has recently held that waiver by election is not available forbreaches of conditions precedent (Kosmar Villa Holidays plc v Trustees of Syndicate 1243.

Conduct which might amount to a waiver includes:

a) Issuing or renewing the policy or possibly accepting premium under the contract (Jones v Bangor Mutual Shipping Insurance Society Ltd); the reason why the acceptance of premium might constitute a waiver is that the assured might remain liable for premium even if there has been a breach of warranty (Bank of Nova Scotia v Hellenic War Risks Association (Bermuda) Ltd (The Good Luck)).

b) Paying a claim (De Maurier (Jewels) Ltd v Bastion Insurance Co Ltd).

c) Issuing a notice of cancellation under a cancellation clause in the policy (Mint Security Ltd v Blair). The conduct which might give rise to the relevant representation waiving the breach of warranty must be unequivocal. There may be circumstances where the conduct referred to above does not amount to a waiver.

The waiver may be expressed in the contract itself, by way, for example, of a ‘held covered’ clause (see e.g. clause 3 of the Institute Time Clauses – Hulls 1/11/1995). Such clauses often require the agreement of an additional premium for the clause to apply (Greenock Steamship Co v Maritime Insurance Co Ltd, Mentz, Decker & Co v Maritime Insurance Co). In addition, the clause may require the assured to give ‘prompt’ notice (Thames and Mersey Marine Insurance Co Ltd v H T van Laun & Co). Even absent a requirement of notice, one may be implied (Liberian Insurance Agency Inc v Mosse).

7. The Insurance Act 2015

There are three provisions in the Insurance Act 2015 relevant to warranties: sections 9, 10 and 11

1. Section 9 prohibits basis clauses (i.e. provisions which convert representations of fact into warranties. Basis clauses had been abolished with respect to consumer insurance contracts under section 6 of the Consumer Insurance (Disclosure and Representations) Act 2012). However, it remains possible to warrant specific representations of fact (paragraph 85 of Parliament’s Explanatory Notes).

2. Section 10 alters the effect of a breach of a promissory warranty. It does not alter the definition of a promissory warranty. The Act abolishes any rule of law that a breach of warranty results in discharge of the insurer’s liability; instead, the insurer is not liable for any loss occurring, or attributable to something happening, after the warranty has been breached but before the breach has been ‘remedied’. Accordingly, the second sentence of section 33(3) MIA is omitted (deleted) by section 10(7)(a) of the 2015 Act. This essentially means that a promissory warranty will operate in the same way as a suspensive warranty.

a. As to the meaning of ‘attributable to something happening’, see para.90 of the Explanatory Notes.

b. Section 10(5) explains when a breach has been ‘remedied’: where the warranty requires something to be done/not done or a state of affairs to exist/not exist by a certain time, the breach will be remedied if the risk to which the warranty relates ‘later’ becomes essentially the same as that originally contemplated for any other type of warranty, if the insured ceases to be in breach of the warranty.

c. It must be queried whether a breach of a specific existing fact warranty can be remedied according to this definition.

d. Section 10(3) sets out exceptions to a breach of warranty. These are the same as the exceptions set out in section 34(1) and (3) MIA. By section 10(7)(b), section 34 MIA is omitted (deleted).

e. Section 10 applies to both express and implied warranties, including the warranties implied under sections 39 to 41 MIA.

3. Section 11 provides that an insurer will not be entitled to rely on a breach of a term of the insurance contract (including a warranty) in certain circumstances.

a. The insurer cannot rely on a contractual term in order to exclude, limit or discharge liability under the insurance contract if the following conditions are satisfied: the term must be a contractual term compliance with which would tend to reduce the risk of (1) loss of a particular kind, (2) loss at a particular location, or (3) loss at a particular time. It is to be noted that the contractual term must not be a term which ‘defin[es] the risk as a whole’ the assured must show that non-compliance with the term ‘could not have increased the risk’ of the loss which actually occurred in the circumstances in which it occurred.

b. However, a direct causal link between the breach and the ultimate loss is not required in order to engage section 11. That is, the relevant test is not whether the non-compliance actually caused or contributed to the loss which has been suffered.

With one exception, it is open to the parties to the marine insurance contract to contract out of the provisions of the Insurance Act 2015 with respect to warranties and other terms.

1. Under section16(1) of the 2015 Act, it is not permissible to contract out of the prohibition against basis clauses.

2. Other than in respect of basis clauses, under sections16–17 of the 2015 Act, where the relevant contractual term puts the assured in a worse position as regards warranties or other terms, that contractual term will be of no effect, unless, having regard tothe characteristics of the assured and the circumstances of the transaction:

a. the term is clear and unambiguous as to its effect, and

b. either (i) the insurer takes sufficient steps to draw the term to the assured’s attention before the contract or variation, or (ii) the assured (or its agent) had actual knowledge of the term.

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