Insurance Law : Terms and Conditions

Where two parties enter into a contract, there is some form of understanding between the parties on what is agreed between them and the rights and obligations of each party towards the other arising out of the contract. These understanding, rights and obligations are what is known as terms and conditions of the contract and in insurance contracts, terms and conditions also pretty much stipulates the rights and obligations of the insurance company and the policy holder.

It goes without saying that properly drafted terms and conditions are crucial to ensure that the parties are not left wondering what they have agreed upon and to prevent disputes from arising. In most insurance litigation, the core issues revolve around the interpretation of the terms of the insurance contract to see what was agreed between the parties. Therefore, a lot of time is spent by the under-writers to ensure that the terms and conditions are properly drafted so that they can be understood with no error of ambiguity.

Insurance contracts use a variety of legal terms such as "Conditions", "Warranty" or even "Condition Precedent". Suffice to say, using a word "Condition" or "Warranty" or "Condition Precedent" does not automatically confer it the legal status of the term. The test of the parties' intention is still warranted.

Of interest would be the fact that the terms "Warranty" and "Condition" have a special place and meaning peculiar only to insurance law. One good example would be by looking at the English Sale of Goods Act 1979. Under Section 11(3) of the English Sale of Goods Act 1979, a stipulation in a contract of sale is regarded as a condition if the breach of the term gives rise to a right to treat the contract as repudiated and a stipulation is treated as merely a warranty if the breach gives rise to a claim for damages but not the right to reject the goods and treat the contract as repudiated. In insurance law, however, the opposite is true. As aptly put by Lord Mansfield in the case of De Hahn v Hartley [1786] 1 Term. Rep. 343, "a warranty in a policy of insurance is a condition or a contingency, and unless that be performed, there is no contract. It is perfectly immaterial for what purpose a warranty is introduced, but being inserted, the contract does not exist unless it be literally complied with". 

The nett effect of a term described as a warranty in an insurance policy is that an insurance company is entitled to avoid liability if there be a breach of warranty on the part of the insured person. When the warranty is promissory in nature, strict observance of the warranty is required throughout the duration of the insurance policy. The moment the warranty is breached, the insurance company is discharged from all its liabilities thereafter. It does not, however, mean that the insurance company is discharged from liabilities incurred prior to the date of breach of warranty.
Conditions precedent is usually inserted by an insurance company requiring the insured person to comply with the term before liability attaches. In other words, the insured person has to fulfil those terms stipulated as conditions precedent before they are qualified to make a claim under the insurance policy. Notwithstanding the terminology used, in the event a term is inserted which has the effect of taking away all benefits under the insurance policy in the event the term is not complied with by the insured, that term in itself is construed to be a condition precedent even in the absence of the words "condition precedent".

It is therefore advisable, like for any other types of contract, that the insured person familiarises himself with the terms of the contract of insurance to ensure that warranties are complied with and condition precedents are satisfied at all times. This will prevent the dreaded consequence of not being indemnified by the insurance company when the insured peril occurs to the detriment of the insured person.