Let’s introduce ourselves to an interesting segment of insurance contracts which is a warranty and its breach.
A warranty, a solemn pledge in this intricate dance, binds the insured to specific actions or conditions, shaping the very fabric of coverage. Breach of warranty, a perilous deviation from the agreed-upon path, triggers an immediate release of the insurer from liability, a decree enforced without hesitation.
In this volatile landscape, even the minutest infractions can set off a chain reaction, altering the course of coverage. So, let’s explore the intense legal dynamics of insurance contracts. You may wonder why sometimes the breach of a warranty may go beyond just and may act as an insurer's escape step from bearing the responsibility they should take.
What is a Warranty?
A warranty is a legal commitment wherein the assured pledges to either perform or refrain from a specific action, or fulfill a particular condition, thereby asserting or denying the existence of certain facts.
This definition encompasses assurances related to:
a) past or current facts, termed as affirmative warranties,
b) the future behavior of the assured, referred to as continuing/promissory warranties, or
c) the fulfillment of a certain condition.
It's important to note that an affirmation of fact can serve as either a warranty or a representation, each governed by its own legal framework.
Types of Warranties
Broadly, warranties can be divided into two categories: Express and Implied.
1. Express Warranties
Express warranties are specific, clear, and direct promises or guarantees made by a seller to a buyer regarding the quality, condition, performance, or characteristics of a product or service. These warranties can be written or spoken, and they are explicitly communicated to the buyer.
Examples: Statements such as "This car comes with a 3-year warranty" or "The appliance is guaranteed to be free from defects for one year" are examples of express warranties.
2. Implied Warranties
Implied warranties are not explicitly stated by the seller but are automatically assumed or implied by law to be a part of the sales agreement.
These are further categorized into the following types:
a) Implied Warranty of Merchantability: This warranty implies that the product is fit for its ordinary purpose and is of average acceptable quality.
b) Implied Warranty of Fitness for a Particular Purpose: This type of implied warranty comes into effect when the product is suitable for a specific purpose, especially when the seller knows the buyer's intended use.
Implied warranties are often automatically applied to sales transactions, even if the seller does not expressly mention them.
Get Free Quote in Minutes
Breach of Warranty in an Insurance Contract
Section 25 of the Indian Insurance Act defines a warranty as a promissory warranty, implying an assurance by the insured party regarding the fulfillment or non-fulfillment of a specific action or condition. This warranty can be either explicitly stated or implied. It is crucial to note that a warranty, as defined, must be precisely adhered to, regardless of its relevance to the risk. Failure to comply with the warranty releases the insurer from liability from the date of the breach unless the insurance policy expressly provides otherwise. However, this discharge does not affect any liabilities incurred by the insurer before the breach date.
A warranty in an insurance contract is a strict condition that the insured must follow exactly. If the insured deviates from these conditions, even for necessary reasons, it's considered a violation. In such cases, the insurer is automatically released from any responsibility without needing to take any action – this happens right from the date of the violation, and it doesn't impact claims before that date.
This release of the insurer from responsibility happens because warranties are usually essential terms of the contract that define the nature and extent of the risk the insurer has agreed to cover. Importantly, the insurer doesn't have to prove that the breach directly caused any loss. For instance, if there's a breach in a fire alarm requirement, the insurer is off the hook, even if the loss is due to something like a flood.
Moreover, the insurer is freed from liability even if the breach is brief and has been fixed by the time of a subsequent loss. For example, if a fire alarm warranty was breached a week earlier in the policy period, the insurer won't be liable for a theft in July.
An insurer can only waive a breach of warranty by clearly stating that it won't rely on its right to be released from liability under the policy. The insured must also have relied on this statement in a way that makes it unfair for the insurer to go back on it.
Statements made before the insurance contract, known as pre-contractual statements, can be turned into warranties through "basis clauses." If there are inaccuracies or errors in these statements, it counts as a breach of warranty, leading to the insurer being released from liability.
The current law on breach of warranty means that an insured person might lose coverage without realizing it until they make a claim. Even if a warranty is breached and fixed shortly after, the insured might still not be covered for a completely unrelated loss that happens later on.
Case Study: M/S.Rajankumar And Brothers ... vs an Indian Public Sector Company 7 February, 2020
The case of M/S.Rajankumar And Brothers vs an Indian Public Sector Insurance Company on 7 February 2020 revolve around the breach of warranty in the context of marine insurance. The appellant, represented by learned counsel, argued that the vessel in question had been classified by the 'International Register of Shipping' (IRS), an independent classification society. They contended that after issuing the Cover Note, they provided all necessary particulars about the vessel to the respondent and explicitly inquired whether the vessel was acceptable.
The appellant claimed that if the respondent had indicated the non-acceptability of the classification at the time of issuing the Marine Insurance Policy, they would have willingly paid an extra premium. They referred to Clause 6 of the Cover Note, which stipulated that coverage for shipments by sea required conformity to the current Institute Classification Clause (ICC), or else an additional premium would be charged.
Additionally, the appellant argued that under the Institute Marine Cargo Clause (A) (Cargo Clause) within the Marine Insurance Policy, there was a waiver of any breach of implied warranties of seaworthiness unless the appellant or its servants were aware of such unseaworthiness. They contended that being a cargo-importer, they were not privy to the vessel's unseaworthiness.
On the contrary, the respondent's counsel asserted that there was a clear breach of the ICC as the appellant failed to disclose that the vessel's classification by Lloyd’s Register of Shipping had been withdrawn. They argued that the term 'I.R.S.' referred to the Indian Register of Shipping, not the International Register of Shipping as claimed by the appellant.
The court identified two key issues: first, whether the appellant breached the warranty regarding compliance with the ICC, and second, whether the respondent had waived such breach.
Upon review, the court found that the appellant had breached the warranty by not complying with the ICC, and the respondent was not estopped from claiming breach due to the issuance of the General Average Guarantee. The court also emphasized that the General Average Guarantee was issued before the respondent had knowledge of the breach.
In conclusion, the court upheld the National Consumer Disputes Redressal Commission's (NCDRC) decision, confirming that the appellant's breach of warranty discharged the liability of the insurer, and the appeal was dismissed.
Frequently Asked Questions (FAQs)
1. What is a breach of warranty in an insurance contract?
Answer: A breach of warranty in an insurance contract occurs when the insured party fails to precisely adhere to the conditions specified in the warranty, regardless of their relevance to the risk. Consequences include the automatic release of the insurer from liability starting from the date of the breach, with no obligation to prove a direct link between the breach and any subsequent loss.
2. How does the law handle the breach of warranty in insurance contracts, and can insurers waive such breaches?
Answer: The law, as outlined in Section 25 of the Indian Insurance Act, defines a warranty as a strict condition that must be precisely followed by the insured. A breach releases the insurer from liability, and this discharge is effective from the date of the breach unless the insurance policy expressly states otherwise. Insurers can only waive a breach by explicitly stating so, and the insured must have relied on this waiver in a way that makes it unfair for the insurer to retract it.
3. Can statements made before an insurance contract become warranties, and how do they impact coverage?
Answer: Statements made before an insurance contract, known as pre-contractual statements, can become warranties through "basis clauses." Inaccuracies or errors in these statements constitute a breach of warranty, leading to the insurer being released from liability. Even if a breach is fixed shortly after, coverage may be lost for unrelated losses that occur later, highlighting the critical importance of accurate pre-contractual statements.
4. Can a breach of warranty in an insurance contract be rectified, and what steps can the insured take to maintain coverage?
Answer: While a breach of warranty in an insurance contract is a strict condition that can lead to the automatic release of the insurer from liability, it's essential for the insured to rectify the breach promptly. The insured can take corrective actions to comply with the warranty, but it's crucial to be aware that even if the breach is fixed, coverage may not be reinstated for losses occurring after the breach date. Seeking guidance from legal experts and ensuring ongoing compliance are vital steps for maintaining coverage.
References
https://www.indiacode.nic.in/bitstream/123456789/2187/2/A187209.pdf
https://www.legalserviceindia.com/legal/article-376-warranties-in-marine-insurance.html
