Breach of warranty would no longer discharge insurers from liability, under Law Commission proposals
Insurers face rising claims costs if proposed changes to the law on warranties are adopted, legal experts have warned.
Initial proposals put forward by the Law Commission would mean that a breach of a warranty by a policyholder would no longer result in the insurer being automatically discharged from liability.
Lawyers described the proposals as "far reaching" and said they would result in higher claims costs for insurers.
Liam O'Connell and Gabrielle Folliard of law firm CMS Cameron McKenna, said: "Although the paper has not been subject to formal scrutiny by the Commissioners and does not yet represent fixed policy, the tentative proposals are far-reaching and may overturn a number of established principles of insurance law.
They added: "Invariably more claims will be paid by insurers and reinsurers, which would be likely to increase premiums."
The Law Commission's proposals on reform of the law on warranties are part of their over-reaching review of the insurance contract law.
The 'issues paper' on warranties follows a paper on reform of the law on non-disclosure.
Tamara Goriely, a lawyer working for the Law Commission, played down the proposals' impact.
She said: "The core of what we are suggesting is that a breach of warranty would only invalidate a claim if it has a causal connection to the loss."
Goriely added: "What we are interested in finding out is an indication from insurers of how often they already refuse claims on warranty issues and how much they rely on it.
"Any examples of that would also be really helpful."
Meanwhile, the ABI has said it was looking closely at the potential cost benefits to the industry from the reform of insurance contract law.
Chris Hannant, head of financial crime prevention and market regulation, told Insurance Times: "We will have a very hard look at whether that cost is justified in terms of a benefit to the industry and its customers and obviously it is essential that that sort of test is passed before the ABI can support that kind of reform in this area.
"At the end of the day an extra cost borne by the policyholder is not in the best interest of the industry."
The next issues paper on agency aspects of misrepresentation and non-disclosure is expected in the first quarter of 2007.
The first of two consultation papers is anticipated next summer, at which point the Law Commission's proposals are likely to be finalised.
A final report and draft Bill is suggested for 2010.
