The United Kingdom (UK) Court of Appeal recently upheld a decision which confirmed that the "basis of contract" clause in a proposal form for insurance cover constitutes a warranty, even where the insurance policy makes no reference to the form.

The Case

The Technology and Construction Court's decision in Genesis Housing Association v Liberty Syndicate Management Ltd held that the insured housing association could not recover under an insurance policy providing cover in the event of insolvency of a building contractor due to the following:

• an incorrect statement as to the identity of the builder in the proposal form; and
• a basis of contract clause in the declaration to that form, providing that the statements made therein would form the basis of the contract between the insured and the insurer.

The Facts

Genesis engaged Time and Tide (Bedford) Ltd (TT Bedford) to construct 51 residential units at a building in Bedford. Genesis submitted a proposal form for coverage, via it's agent, for insurance from Liberty Syndicate 4472 at Lloyds (the insurers) which included an optional extra for cover against the risk of the building contractor becoming insolvent during the construction period (the policy).

The proposal form submitted by Genesis contained one incorrect statement - the name of the builder was shown as Time and Tide Construction (TT Construction) when the building contractor was to be TT Bedford.

On the insolvency of TT Bedford, Genesis lodged a claim with the insurers under the policy. The insurers denied liability and averred that the misstated name of the builder in the proposal form constituted a breach of warranty, with the effect of the policy being void from inception.

The Court of Appeal

The central issues before the Court of Appeal were:

• whether an incorrect statement in a proposal form, which concerned the identity of the builder, enables an insurer to escape liability; and
• what effect a declaration in the proposal form, that statements contained therein would form the basis of the contract of insurance (basis of contract clause), would have.

The Appeal Court confirmed that earlier authorities established the principle that, where a proposal form contains a "basis of contract" clause, such a form has contractual effect (even if the policy contains no reference to it) and that all statements in the form accordingly constitute warranties on which the insurance contract is based.

However, the Court clearly stated that the fact that the policy contained an express "no misrepresentation" clause did not dilute the effect of the "basis of the contract clause" in the proposal. If it is the intention of the parties to the insurance contract to exclude the contractual effect of a basis of contract clause, the parties must do so by clear and unequivocal language. The Court rightly held that the policy in the present case contained no exclusionary words and that the signed proposal form was of contractual effect.

The court held further that the insurer's rights to avoid misstatements cannot only be limited to circumstances where there was intention to defraud, as such provisions confer additional express rights to the insurers rather than to curtail their existing rights.

Where an insured signs a declaration that the contents of the proposal form are true "to the best of his knowledge and belief", a later "basis of contract" clause is not to be interpreted to mean that a misstatement has no effect if the proposer is unaware of the error. Further, since the insurers were providing cover against the risks of insolvency of an identified builder, only that builder's insolvency was covered. Accordingly, the Court found that it was within Genesis’ knowledge and belief that the statement was incorrect and that the misstatement in relation to the identity of the builder on the proposal form was sufficient to void the policy which had been issued by the insurers.

Implications and conclusion

The decision illuminates the harsh impact of a breach of warranty created by the basis of insurance clause, and provides a useful reminder to both insurers and those insured of the consequences of providing inaccurate information in a proposal form, where that information forms the basis of the contract.

It must be mentioned that in the UK the new Consumer Insurance (Disclosure and Representations) Act 2012 excludes the operation of the "basis of contract" clause in consumer contracts. However, it remains relevant in commercial construction and both insurers and those insured should be mindful of its importance.

For the full case click here.

This article was authored by Nicole Abbott (Associate) and Muneer Asmal (Candidate Attorney), Webber Wentzel