The Law Commission has produced a revised draft Clause 11 dealing with breach of terms of an insurance contract which are irrelevant to the loss that is claimed for. The original draft of Clause 11 was omitted from the Insurance Bill, which was introduced to Parliament in July 2014, due to concerns that it might cause uncertainty (and in particular that it might be interpreted as applying to terms which define the risk as a whole) and so would prevent the Bill from proceeding through the expedited process for non-contentious Law Commission Bills.
The revised Clause 11 reads as follows:
1. This section applies to a term (express or implied) of a contract of insurance, other than a term defining the risk as a whole, if compliance with it would tend to reduce the risk of one or more of the following –
a) loss of a particular kind,
b) loss at a particular location,
c) loss at a particular time.
2. If a loss occurs, and the insured has breached a term to which this section applies, the insurer may not rely on the breach to exclude, limit or discharge its liability under the contract for the loss if the insured satisfies subsection (3).
3. The insured satisfies this subsection if it shows that its breach of the term could not have increased the risk of the loss which actually occurred in the circumstances in which it occurred.
The revised Clause therefore applies to terms which could affect the risk of a type of loss occurring (i.e. a no smoking warranty in a fire loss policy) but does not apply to terms which reduce the risk profile as a whole (i.e. the geographical scope of a policy).
The Law Commission has said that it hopes the revised Clause can be agreed in time to be included in the Insurance Bill which is currently before the House of Lords.
The reintroduction of Clause 11 into the Insurance Bill would undoubtedly be welcomed by policyholders. We recently reported that both the British Insurance Brokers’ Association (Biba) and the Association of Insurance and Risk Managers in Industry and Commerce (Airmic) confirmed their support for Clause 11 (see Biba and Airmic give evidence to a House of Lords committee on the Insurance Bill) when giving evidence before a special bill committee of the House of Lords. Such clauses are often included by parties to commercial insurance contracts in any event.