Insurance Bill: Devil in the detail

The decision by the Court of Appeal in Genesis Housing Association Ltd and Liberty Syndicate Management Ltd in October 2013 involved the insolvency of a building contractor. The employer, Genesis, had procured an extension to an insurance policy wording underwritten by Liberty. This dealt with the risk of the contractor’s insolvency during the construction period. The Court of Appeal rejected Genesis’s claim under the policy. The proposal form contained a “basis of contract” clause. This wording allows insurers to subsequently avoid liability for a claim if a statement is incorrect, irrespective of whether this statement was material to the loss. Such wordings are common, but they have been the subject of criticism. The effect given to these wordings is likely to change due to legislation before parliament. The Insurance Bill is likely to become law by May 2015.

The Genesis claim followed from the insolvency in 2009 of a building contractor referred to as TT Bedford. This occurred prior to completion of some 51 residential housing units to premises at St John’s Street, Bedford. TT Bedford was formed as a special purpose vehicle for this development. The contract sum was £4.6m. The limit of indemnity offered by the policy was 10% of the contract price, that is, £460,000. Another firm within the same group was TT Construction, a firm which had traded profitably for some years.

The proposal form for insurance which covered the risk of insolvency of the builder contained an incorrect statement. The name of the builder was shown to be TT Construction. That was incorrect. The builder was in fact to be TT Bedford. The proposal form which had been approved by TT Bedford included a declaration that the information provided was correct and complete in every detail together with the words that “the statements made therein shall form the basis of the contract between me/us and the insurer”. Following acceptance of the proposal terms, the insurance policy was issued which identified TT Construction as the contractor.

The proposal form which covered the risk of insolvency of the builder contained an incorrect statement. The name of the builder was shown to be TT Construction. That was incorrect. The builder was in fact to be TT Bedford

The Court of Appeal emphasised the principle that where a proposal form contained a “basis of contract” clause, the proposal form had contractual effect even if the insurance policy contained no reference to the proposal form. Furthermore, all statements in the proposal form constituted warranties on which the insurance contract was based. This meant that the insurers were able to avoid the policy irrespective of whether or not the statement could be considered material. This was sufficient to defeat Genesis’ claim to be indemnified for its losses following from the insolvency of TT Bedford. Genesis’ rights were furthermore dependent upon TT Construction being the builder and this was the risk covered by the policy. Thus, the policy did not provide indemnity in respect of the particular losses sustained by Genesis, being the insolvency of the contractor, TT Bedford. Genesis’ claim failed on this ground as well.

Nonetheless, this case highlights the criticisms previously made by judges, textbook writers and the Law Commission. The inclusion of “basis of contract” wordings within proposals and, or the policy itself, may seem innocuous and yet they can have significant effect. These criticisms are reflected within the proposed Insurance Act.

Clause 9 proposes to prohibit “basis of contract” clauses. They are already prohibited in the context of consumer insurance. The Insurance Bill prohibits the conversion of “basis of contract” wordings in either the proposal or the policy into warranties. An insurer will retain the right to include specific warranties in the policy but they will need to be identified as such. The Insurance Bill also proposes to repeal the insurer’s discharge of its liability from the time of the breach of the warranty. Instead, the breach of warranty by the insured will suspend the insurer’s liability from the time of the breach until the breach is remedied. The insurer will not be liable for any loss which occurs during this period which it can attribute to something which occurs during this period. However, the liability will be reinstated once the breach is remedied, that is,
if it can be remedied. 

This proposed legislative change will add clarity to insurance policies and will assist the understanding of the benefits and limitations which the policy confers.

Jeffrey Brown is a partner in the London office of Veale Wasbrough Vizards