In a recent case, the Court has considered the impact of misrepresentations and non-disclosures prior to conclusion of a variation to an existing insurance contract, as well as the interpretation of burglary and protection maintenance warranties.

The Insured had a "Multiline" insurance policy with the Insurers, which covered risks such as property damage, business interruption, employer's liability and public liability. It also covered losses resulting from theft. The Insured claimed under this policy following the theft of cigarettes and tobacco which were stored in a caged area of a mezzanine floor in its warehouse. Amongst other things, Insurers refused cover for the claim on the following grounds:

(1) Breach of warranty

First, Insurers alleged that the Insured was in breach of two warranties in the policy: the protection maintenance warranty (requiring maintenance of various security protections) and the burglar alarm maintenance warranty (requiring maintenance of the burglar alarm). The Court construed the warranties as qualified warranties. The insured was only in breach of these warranties if it was aware of defects (or was reckless as to the existence of defects) and failed to remedy them. This was based particularly on the fact that the warranties required all defects to be promptly remedied, a requirement which would have been rendered redundant if insurers were automatically discharged from all liability as soon as there were any defects in either the protection systems or the burglar alarm.

The courts have a history of attempting to limit the impact of warranties given that they are strict obligations. They will try to construe warranties in a way which both meets the apparent commercial purpose behind them but which also limits the extent of the obligations placed on the Insured. This approach is motivated to a large degree by the draconian nature of the remedy for breach of warranty.

As this case highlights, inserting extra obligations in a warranty may in fact have the effect of reducing the protection provided elsewhere in the warranty. The key is to consider what the clause says when construed in the context of the wording overall and the admissible factual matrix.

(2) Misrepresentation/Non-Disclosure

Secondly, the policy had contained an endorsement which excluded thefts of cigarettes and tobacco outside business hours unless kept in a secure unit on the ground floor of the warehouse (which they were not in this case). This endorsement was lifted once Insurers were satisfied that various risk improvements had been carried out.

The Court found that there had been a material misrepresentation (or alternatively, non-disclosure) by the Insured that the risk improvements required by Insurers had been complied with. This had induced Insurers to lift the endorsement.

In most cases where there is a misrepresentation or non-disclosure, this occurs during the initial placement and the remedy is avoidance of the whole contract. Here, however, the misrepresentation/non-disclosure occurred prior to the variation, not during the initial placement. The Court held that Insurers were entitled to avoid or rescind the variation, and the endorsement containing the exclusion was reinstated, although the policy remained in place overall. This meant that the Insured was left with no cover for the theft.

Further reading: A C Ward & Son Limited v Catlin (Five) Limited & Others [2009] EWHC 3122 (Comm)

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The original publication date for this article was 14/01/2010.