Conditions and warranties are two significant types of contractual stipulations which basically create rights and obligations. Roskill. J. has explained the two terms conditions and warranties in the following words “The use of those two words is not entirely happy because it is well known, in the field of marine insurance law, that the word ‘warranty’ is often used when those who use it in truth mean ‘condition’. I will therefore, define what I mean in this judgment by a ‘condition’ and a ‘warranty’. By a ‘condition’ I mean a contractual term of the policy, any breach of which by the assured will in the event of a loss arising otherwise payable under the policy afford underwriters a defense to any claim irrespective of whether there is a causal connection between the breach of the contractual term and loss. By ‘warranty’ I mean a contractual term of the policy a breach of which will not of itself afford a defense to underwriters unless there is a necessary causal link between the breach and the loss which is the subject of the claim under the policy” This indicates that there is just a thin line difference between a condition and a warranty. Or rather, it should be said that all warranty are conditions but not all conditions are warranty.
Representation, on the other hand, is every piece of information given by an insured for insurance to the insurer during the negotiations. The insurers’ answers to the various questions in the proposal and personal statement are all representations on the strength of which the insurer may be induced to enter into the contract. On the strength of these the insurer estimates the risks and fixes the premium. If a representation is inserted in the policy it becomes a warranty and will have to be exactly complied with. Otherwise a representation as a matter of fact is true if it is substantially correct.
In the current scratch of paper the researchers will elucidate about conditions, warranties and representations made under insurance contract, their difference and the consequences of breach of such conditions.
CHAPTER 1: UNDERSTANDING THE CONCEPT OF CONDITIONS UNDER INSURANCE CONTRACT
“An uncertain future act or event, the occurrence of which determines the existence or extent of an interest or right, or liability or obligation; or which initiates, halts, or terminates the performance of a duty.” In context of an Insurance contract, a condition can be defined as a contractual obligation on the part of the insured to act in a particular manner or omit from doing something. Or it can also be understood as a contingency that affects the validity of the insurance policy or upon which the claim may depend. Conditions basically relate to the demeanor of the insured throughout the prevalence of the policy, commencement of the risk, and the procedures of claims. The nature and types of the Conditions under Insurance contract depends upon the consequences of breach. There are two types of conditions, namely, expressed and implied.
Conditions that are implied by law for the purpose of its application to every contract of insurance irrespective of the fact that there is any specific reference or inclusion of such conditions in the contract itself, such as; a) observance of good faith by both the parties towards each other; b) at the time of the contract coming to existence, the subject matter of the insurance must be in existence; c) insured must have insurable interest in the property. Implied conditions may be either unambiguously and explicitly expressed in the policy or may be excluded from the policy or modified by the conditions expressed in the policy. However, they are applicable in same manner as conditions that are mentioned in the policy.
Apart from this, the conditions that are explicitly expressed and mentioned or set forth in the insurance policy are called the Express Conditions. The express conditions are of two kinds, that are, a) General condition, i.e., those conditions that are common to all the policies of that particularly class and hence, are printed on the policy and; b) Special Conditions, i.e., those conditions that are applicable only to that particular policy and not in general and hence, those are either handwritten or typed or those are stamped.
As per the operative clause recited by the policy, all the conditions, whether expressed or implied are condition precedent to the right of the person insured or the person whose property is insures to recover under such insurance policy. These are generally in forms of (a) Condition Precedent to the validity of the policy; (b) Conditions subsequent to the validity of the policy; (c) Condition precedent to the liability of the insurer. Before the insurer can be called upon to perform their part of contract, the insured persons are expected to comply with the conditions.
1.1. CONDITIONS PRECEDENT TO THE VALIDITY OF THE POLICY
The conditions that are essential for the purpose of the validity of the policy, such conditions precede the formation of the insurance contract. For example, the condition that the statement that are mentioned in the proposal form must be complete and true; or, the condition that the subject matter must be in existence at the time of insurance contract and it must be described adequately. The insurance policy would be void or voidable from the beginning if such conditions are not fulfilled.
1.2. CONDITIONS SUBSEQUENT TO THE VALIDITY OF THE POLICY
Those conditions that are considered by the parties and are essential for the purpose of continuation of the validity of the policy are condition subsequent to the validity of the insurance policy. For example, the condition that the interest in the subject matter cannot be transferred by the insured alone, but have to take the consent of the insurer for the purpose of doing so; or the risk cannot be altered by the insurer at a later stage as described originally; or the condition that the policy of same class cannot be taken from different insurers, etc. Such conditions if not complied can make the policy ceased to be valid and from that date onwards the insurer can avoid the insurance policy.
1.3. CONDITION PRECEDENT TO THE LIABILITY OF THE INSURER
These conditions are those which are needed to be complying with by the person insured when the loss occurs for the purpose of claiming the insurance amount. The insurer, even if the loss is covered under the insurance policy, will not be held liable for the insurance claim if these conditions are not fulfilled. For example, the notice of the loss must be given to the insurer immediately after the loss is occurred; insurer must be assisted by the insured in investigating the cause of the loss; every notice of claim must be forwarded by the person insured to the insurer, etc. In case of life insurance, proof of age and certificate of death are some condition precedent to the liability of the insurance company of insurer for the loss. Non-compliance with these conditions would not allow the insurer to avoid the policy on the whole but he cannot be held liable for that particular claim.
1.4. EFFECT OF BREACH OF CONDITIONS
If a condition subsequent is broken the policy ceases to be operative from the date of the breach. The breach of a condition precedent to the liability of the insurer prevents the insured from recovering indemnity for the loss. However if he complies with the condition where it can still be performed, he can hold the insurer liable. The breach however does not affect the validity of the policy and so it continues in force. If another loss occurs before the policy expires the insured is not precluded from recovering indemnity provided he complies with the conditions on that occasion.
CHAPTER 2: UNDERSTANDING THE CONCEPT OF WARRANTY UNDER INSURANCE CONTRACT
The term ‘warranty’ is used in the law of insurance in a different sense from that in which it is used in other branches of law. Warranty here may be defined as a stipulation or engagement by a party insured that certain matters relating to the subject matter affecting rist exist or shall exist or have been done or shall be done. In Thompson v Weems Lord Blackburn, observed that in all policies of marine insurance any statement of fact bearing upon the risk introduced into the policy is construed as a warranty and compliance with that warranty is a condition precedent to the attaching of the risk. The Marine Insurance Act, 1963 in section 35(1) defines warranty as: “A warranty, in the following sections relating to warranties, means a promissory warranty, that is to say a warranty by which the assured undertakes that some particular thing shall or shall not be done, or that some condition shall be fulfilled, or whereby he affirms or negatives the existence of a particular state of facts.” Thus according to this definition a warranty comes into existence in one of the following ways:
i) Where the insured undertakes that some particular thing shall or shall not be done ; or
ii) Where he undertakes that some condition shall be fulfilled ; or
iii) Where he affirms or negates the existence of a particular state of facts.
A warranty has been defined as a stipulation collateral to the main purpose of the contract, the breach of which gives rise only to a claim for damages but not to avoid the contract altogether. A condition may be treated as a warranty, however not vice versa, that is, the party entitled to avoid the contract by a breach of condition may not avoid the contract but may elect to be satisfied with the lesser remedy of damages. The insurer is discharged from his liability if the conditions are not strictly complied, whether it is material with the risk or not. In Lakshmi Insurance Co. v Bibi Padmabathi, it has been held that the warranty is a statement forming the basis of the contract, on the truth or falsity of which the validity of the entire contract depends.
Some other Characteristics of Warranty are:
1) A warranty must be exactly complied with.
2) The warranty need not be material to risk.
3) There is no remedy for breach.
4) There is no defense for breach.
5) A warranty is a condition precedent
2.1. KINDS OF WARRANTY
Warranty may be classified into the following types:
2.1.1. IMPLIED WARRANTIES
These are warranties implied by law or from the circumstances. They are recognized only in marine insurance policies, and they have no counter-parts in other branches of insurance. There is no implied warranty in a fire policy, for example, that the insured will do nothing to increase the risk. In life insurance also, where the assured is already dead, the policy no doubt becomes void, not on the ground that is breach of implied warranty that the life insured is in good health or even alive, for there is no such implied warranty, but on the ground that there is a mutual mistake of fact essential to the contract. However, an implied term that ht risk will not materially change will be imported into an agreement to issue a policy.
2.1.2. WARRANTIES AS TO PRESENT
These are warranties relating to a fact of a set of affairs warranted to exist at the time of the contract. These are sometimes called warranties as to present only. For example, in the life insurance, a warranty that the insured is in good health is treated as a warranty as to the present. A breach of such a warranty has the same legal effect as a fraudulent misrepresentation made by the insured before the completion of the contract and the insurers can avoid there liability under the contract.
2.1.3. WARRANTIES AS TO FUTURE
These are warranties as to future facts or state of affairs, for example, in life insurance, a warranty that the insured will not go abroad, or in burglary insurance, insured warrants that he will use a certain type of lock for the front door are instances of warranties as to future.
2.1.4. PROMISSORY WARRANTY
A warranty as to future is sometimes called a promissory warranty. Generally the adjective ‘promissory’ is used for representations which were warranties or condition precedent. The term promissory warranty is misleading because sometimes it is used with reference to exceptions, for example, where a ship is warranted in a marine policy by FCS clause that the ship and cargo is free from capture and seizure. In such a case it is not a warranty as such but it is only an excepted peril in the sense that if they are breached the insurance is not entitled to repudiate all liability under the policy.
2.2. EFFECT OF BREACH OF WARRANTY
A breach of warranty can arise only on the basis that there is a contract which parties have entered into. In a contract of insurance, the insurer promises to cover the risk on the basis of the truth of the warranties declared by the insured. If there is a breach of warranty, the insurer is not bound to perform his part of the contract unless he chose to ignore the breach. On discovering the breach, the insurer may either elect to treat the contract as repudiated, in which event he is no longer bound by the contract, or he may affirm it in which case he will continue to be bound by the contract. The effect of a breach of warranty is to render the contract voidable at the option of the other party, that is, insurer. Insurer need not avoid the whole contract. He may merely repudiate his liability and take advantage of an arbitration clause, if there is one in the contract. On repudiation, the contract becomes void from its inception if the breach of warranty occurs simultaneously with the formation of the contract. If the breach of warranty occurs after the policy has run for a time, the policy will become void from the date of breach.
The right to repudiate liability must be exercised within a reasonable time after discovering the breach of warranty. Otherwise the right will be lost, unless there is a continuing breach. The insurer will be estopped from setting up the breach of warranty as a defense, when with full knowledge with the breach, he acts or conducts in such a way that the insured is led to supposed that the insurer did not intend to treat the contract as at end on account of the breach. Breach of warranty is a good ground for the insurer to repudiate the contract during it currency. It is also a good defense to a claim under the policy if the breach comes to the knowledge of the insurer only at that stage. It is a good defense to the claim even though the loss has no connection with the breach or the breach was subsequently remedied by the insured during the currency of the policy itself.
CHAPTER 3: UNDERSTANDING THE CONCEPT OF REPRESENTATION
The information which is provided by the person who is seeking the insurance to the insurer at the time of the negations which take place during the entering insurance contract are called representations. The answers which are given by the proposer to the various questions in the proposal are the representations made by him. On the basis of these representations only the insurer agrees to enter into the insurance agreement. Representations if any made after the contract is concluded cannot have any connection with inducing the insurer to enter into the contract and will not affect the validity of the contract.
The representation made must be true on the date when the contract is entered by both the parties. If the representation made the proposer is not true and is fraudulent then the contract entered between the proposer and insurer cannot be said to be entered by the insurer with free mind as the consent of the insurer has been obtained by the fabricated facts. Also, the contract will not be then in accordance with he Section 14 of the Indian Contract Act . The contract since not entered with the free consent is voidable at the option of the insurer as per section 19 of the Contract Act.
In cases of contracts of Life Insurance the proposer must disclose every material fact. The material facts should be disclosed to the insurer till the conclusion of the contract and also the proposer should inform about any changes in the character of the risk to the insurer. In cases of life insurance contract the risk is related to the death of the insured and if there exist any fact which establishes the fact that the life of the insured will not be average life of the human being then in such situations the fact which proves such situation will be material fact. If the fact is not disclosed by the proposer to the insurer then due to the suppression of such fact the insurer may suffer much loss. If the answers which are provided by the insured are false in the personal statement then in such situation the company has the power to repudiate the contract.
3.1. BURDEN OF PROOF
The burden of proof is on the insurer to prove that the consent of insurer was taken by the fraud or misrepresentation of the insured person. If the court is satisfied that the misrepresentation was on a material fact then the court will presume that it is due to misrepresentation that the insurer was induced to enter into the contract with the insured. But the court should be satisfied that the misrepresentation was a material one and not a trivial fabrication of the fact. Representation should be material to the inducement and not necessarily to risk. As per section 22 of the India Marine Insurance Act, 1963 “ A representation is material which would influence the judgment of prudent insurer in fixing the premium or determining whether he will take the risk”
3.2. REPRESENTATION NOT PART OF THE CONTRACT
Representations made during the negotiations do not form an integral part of the contract, in the absence of an agreement to that effect, even where they are embodied in the policy expressly or by reference, to the document in which they are contained. Their effect upon the validity of the contract is same as if they had not been embodied therein. O only the statements as to the subject matter, its identity and the like which are intended to define the risk undertaken by the insurer become part of the contract, that is, they will no longer be representations, but conditions and warranties which must be fully complied with.
It is a first principle of the law of insurance, on all occasions, that where a representation is material, it must be complied with if immaterial, that immateriality may be inquired into and shown; but that if there is a warranty, it is a part of the contract that the matter is such as it is represented to be. Therefore, the materiality or immateriality signifies nothing.
3.3. REPRESENTATIONS MADE WARRANTY
In the new trend the insurance companies has adopted a new practice of including the representations in the insurance contract as it benefits the insurer. The proposer must declare that the information and the personal statement which are given by him/her are true and that he/she agrees to the fact that the information may form a part of the contract between him/her and the insurer. Also, he/she is required to declare that if the information given by the insured is false or fabricated then in such situation the insurer has the power to make the contract null and void and can forfeit the premiums paid by the insured. The policy that will be issued by the insurer shall also contain a provision stating clearly that the information and personal statements of proposal will be part and parcel of the contract. Therefore in these situations the representations are known as warranties. The correctness of the representation will be a condition precedent for ht proposer to claim the insurance amount under the policy. By including the representations in the contract the insurer protects themselves from the burden of ascertaining the truth of the statements made by the proposer. If the warranty is not complied by the insured irrespective of the fact that the warranty is not material to risk, the insurer is discharged from its liability under the insurance contract.
In De Hahn v Hartley , Lord Mansfield stated that there exist big difference between the warranty and representation. The representation may be equally and substantially answered but in case of warranty it must be strictly complied. The warranty in the contract is considered as a condition and without performing this condition there cannot be any contract. It does not matter that for what purpose the warranty is included in the contact, but if it is inserted it should be performed compulsorily.
3.4. DIFFERENCE BETWEEN REPRESENTATION AND WARRANTY
There lies a distinction between the representation and warranty. In this part the researchers will deal with the difference between the above mentioned briefly. The difference between the two is discussed below:
Warranty Representation
1. It is the part of the written contract. 1. It can be oral or can be in writing.
2. In case of warranty the compliance is strict. 2. In case of representation the need for substantial compliance is not required.
3. The warranty comes into picture only after the completion of contract 3. The representation is always made before the final conclusion of the contract
4. The application of warranty will be suspended on changes in the circumstances. 4. The representations can be taken because of various reasons i.e. obtained by fraud, fabrication of facts etc as defined in sec 17 and 18 of Indian Contract Act and under section 19 of the contract act becomes voidable in case of consent was obtained by fraud , coercion etc.
In Farr v. Motor , the insured made a statement that his both the taxis for which he was seeking the insurance, would not run at the same time. One will run at night and another will run at day. But later it was found by the both the taxis were used for two shifts. The court held that it was not a warranty but it was a representation by the insured.
In the case of Benham v. United Guarantee and Life assurance the statement made by the secretary of the institution regarding the checking of accounts in every fifteen days was considered as a representation by the court and not warranty.
CONCLUSION
Warranties and conditions under the Insurance contract seem one and the same thing, if these are looked upon nonchalantly. However, after reading throughout about warranty and condition, it can be said that the warranties are also a kind of condition, i.e., condition precedent. Though, not all conditions are warranty. Condition may be precedent or subsequent to the issuance of the insurance policy, however, warranties are condition precedent. The connection between the losses occurred that has been covered in the insurance policy and the breach of a condition is very much important for determining that whether that it is just a condition or a warranty condition. This connection is immaterial in condition; however, in relation to warranty condition there must be a necessary connection between these two factors. It can be concluded after this study that a condition can be precedent or subsequent, and those conditions that are precedent could be covered under the warranty conditions.
With relation to the representations made during the insurance contract, these are just pieces of information that a insurer must know whenever necessary during the continuance of the policy. A representation need not be inserted in the policy itself; however, a warranty is a condition that is written in the policy itself. Warranty, on one hand, affects the liability of the insurer to cover the loss occurs and representation are used to calculate the amount of risk for deciding the premium of the policy. There are few occasions wherein the representations can become warranty. This happens when the insurers for their own benefit includes representations in the policy by means of underwriting by the insured so that they could avoid liability in case there is any default by the insured.
Warranty, Conditions and Representations are three very important principles under insurance law in relation to the liability of the insurer to pay the insurance amount in case there is any loss and that has a connection with the breach of any of these three principles.