WARRANTY IN INSURANCE CONTRACT
In contract law, a warranty has various meanings but generally means a guarantee or promise which provides assurance by one party to the other party that specific facts or conditions are true or will happen. This factual guarantee may be enforced regardless of materiality which allows for a legal remedy if that promise is not true or followed.
A warranty in an insurance policy is a promise by the insured party that statements affecting the validity of the contract are true. Most insurance contracts require the insured to make certain warranties. For example, to obtain a Health Insurance policy, an insured party may have to warrant that he does not suffer from a terminal disease. If a warranty made by an insured party turns out to be untrue, the insurer may cancel the policy and refuse to cover claims.
Not all misstatements made by an insured party give the insurer the right to cancel a policy or refuse a claim. Only misrepresentations on conditions and warranties in the contract give an insurer such rights. To qualify as a condition or warranty, the statement must be expressly included in the contract, and the provision must clearly show that the parties intended that the rights of the insured and insurer would depend on the truth of the statement.
Warranties in insurance contracts can be divided into two types: affirmative or promissory. An affirmative warranty is a statement regarding a fact at the time the contract was made. A promissory warranty is a statement about future facts or about facts that will continue to be true throughout the term of the policy. An untruthful affirmative warranty makes an insurance contract void at its inception. If a promissory warranty becomes true, the insurer may cancel coverage at such time as the warranty becomes untrue. For example, if an insured party warrants that property to be covered by a fire insurance policy will never be used for the mixing of explosives, the insurer may cancel the policy if the insured party decides to start mixing explosives on the property. Warranty provisions should contain language indicating whether they are affirmative or promissory.
Examples of warranties: “It is warranted that stock contained in the lowest storey of the Buildings is kept on racks or stillages at least 15cm above the surface of the floor.” or “It is warranted that trade waste, cuttings and clippings are swept, gathered and bagged daily and removed from the premises at least once a week.”
“A warranty must be exactly complied with, whether material to the risk or not”. wow…this is incredibly harsh. So if you store stock at 10cm not 15cm and there is a theft of your computers, the insurer could throw out the whole policy (which would include not paying for the theft claim)
The theory is that if you are not good at keeping promises (which is effectively what a warranty is) then you should not benefit from insurance cover at all.
Thankfully this 18th Century attitude is at long last under review as there are moves afoot (hence the 2012 Law Commission report) to create a fairer response to breaches of warranty, particularly where the breach has no bearing on a claim, but for the foreseeable future, you ignore policy warranties at your peril !!
Conditions precedent to liability
If there is a condition that a burglar alarm is turned on and working whenever the property is unattended then as long as this is complied with at the time of a theft the claim will be paid even if it was not complied with at some other time.
If you had warranted (promised) that the alarm was turned on and working whenever the property is unattended, even if it was so at the time of the theft the insurer could avoid the claim if they could prove that it was not the case at any time during the policy year.
Warranty: Implied warranties
As stated earlier, implied warranties are not expressly represented in the written or oral sales agreement but are created and imposed through application of law, usually the UCC. The two primary implied warranties that accompany the sale or lease of goods are that of “merchantability” and that of “fitness for a particular purpose.”
In the field of ocean marine insurance there are two general types of warranties that must be considered: express and implied. Express warranties are promises written into the contract. There are also three implied warranties, which do not appear in written form but bind the parties nevertheless.
CASE LAW:- Breach of warranty claims and CGL coverage:
A thing that we all generally know and accept is that, typically, a commercial general liability insurance policy doesn’t cover breaches of contract. But, there are exceptions to that rule, and according to one recent decision those exceptions include breach of warranty claims. Considering that warranties generally are treated as contracts, that seems strange! The outcome makes some rough sense though.
Here’s the quick summary of what happened. A raw beef supplier sold a bunch of tainted beef to a wholesaler. The supplier gave a “product guarantee” to the wholesaler which is not reproduced in the court opinion, but probably said something to the effect of “our beef doesn’t have e. coli.” The wholesaler predictably sued, asserting claims for breach of contract, breach of express warranty (premised on the product guarantee), and breach of the implied warranties of merchantability and fitness for particular purpose.
The supplier tendered the claim to its CGL carrier. The CGL carrier filed a suit in federal court seeking a declaration it wasn’t obligated to defend or indemnify the supplier. The supplier made a motion to dismiss the suit for failure to state a claim, insofar as it sought a declaration the CGL carrier wasn’t required to tender a defense.
The CGL carrier argued that the relevant insurance policy included a “Contractual Liability Exclusion.” Basically speaking, the Contractual Liability Exclusion just set out the general rule described above – CGL policies don’t cover claims arising from liability “assumed” by contract. But, the Exclusion contained some exceptions, including one for liability the supplier “would have [even] in the absence of the contract or agreement.”
The Court found that the Contractual Liability Exclusion didn’t apply and, even if it did, the exception to the Exclusion applied. As to the Exclusion, the Court found it didn’t apply because the supplier didn’t “assume” with the product guarantee any liability it didn’t already have. The Court held the term “assume,” as used in CGL policies, refers to assumption of the liability of third parties. On that basis, the Court concluded the Exclusion had no application, because the supplier was sued for its own acts and omissions, not for those of a third party which the supplier had agreed to indemnify or hold harmless.
The Court went on to hold that, even if the Exclusion applied, so did the exception to the Exclusion. Specifically, the Court found that even if the supplier had not given the product guarantee, it still would have been liable for breach of implied warranties which, by their nature, attach even in the absence of express promises or agreements. Thus, the liability was not (at least entirely) liability the supplier would have faced even “in the absence of the contract or agreement.”
This presents a question and a lesson. The lesson is obvious: make a demand on your insurer if you are faced with substantial breach of warranty liability! In fact, I think it prudent to make a demand on insurers for any significant claims unless coverage clearly does not apply (which, in practical terms, is virtually never). It’s what you’re paying for, after all.
The question is interesting and warrants careful consideration. Imagine the supplier had effectively disclaimed all implied warranties and gave an express warranty instead. That’s a thing I advocate for a lot in this column. The disclaimer, of course, would have the effect of precluding implied warranty liability, and the express warranty arguably could constitute taking on liability the supplier would not have faced “in the absence of the contract or agreement.” Might your warranty disclaimers impact insurance coverage?
I think the better answer is “no,” because the disclaimer of implied warranties and grant of express warranty typically will occur in a single contract, and it seems a peculiar outcome that a seller’s entry into a contract that will reduce its exposure could lead to an absence of coverage. But the question might reasonably be resolved the other way if one took a strictly literal view of the insurance contract.