Warranties, conditions and exclusions - The hidden agenda

Most businesses take out insurance cover in the belief that the policy will respond in the event of a claim. Often they do not bother to read the infamous small print and it is only when a loss occurs that they discover that cover offered in one part of the policy has been invalidated by a restriction elsewhere in the wording.

Unfortunately this practice is on the increase and many insurers are using policy conditions, exclusions and warranties to deny liability and avoid paying claims. So how do these restrictions operate and what is the result?

Firstly we have policy conditions and they have been around for a long time. There is nothing sinister about them and for the most part they deal with the information that was supplied to form the basis of the contract or action that must be taken by the policyholder before the policy applies. Examples are a failure to declare information that would have influenced an underwriter in his acceptance of the risk or acting recklessly and thereby increasing the risk of a claim. Failure to lock up at night or maintain fire fighting equipment could come under this heading.

Exclusions are exactly what they say. No policy is exclusion free and it is up to the policyholder to understand at the outset what is and is not excluded. Examples are terrorism, nuclear installations or war.

Conditions and exclusions are up front and if correctly explained by the broker should not present a problem. In any event, most insurers will take an understanding view if there is an inadvertent breach. Warranties on the other hand are absolute and entitle an insurer to treat a breach by outright repudiation or avoidance of the contract. They mean exactly what they say. If it is warranted that the policyholder will take certain actions and then does not execute those actions then the claim is ineligible even if the breach has nothing to do with the circumstances of the loss.

Our advice is to pay a little more premium to retain an insurer who does not use warranties and if they do have to be accepted, make sure that not only are they fully understood but that they are complied with at every level.

Failure to comply can have serious consequences and in extreme cases result in the insolvency of your business.

Spring/Summer 2007

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