REMEDY OF INSURERS FOR BREACH OF DISCLOSURE OR WARRANTY

By Jide Bodede

1. Introduction

Section 55 of the Insurance Act 2003 is about the breach of warranty or condition in insurance contracts. Those statutory provisions of altered the common law but complicated the law on the matter.  The situation is not helped by the absence of appellate judicial interpretation of the provisions of section 55 of the Act. I have therefore attempted to plot a path through what is at present largely uncharted territory in an attempt to explain the current position of the law. 

• New Duty of Disclosure under the Insurance Act

2.1 Section 54(1) of the Insurance Act 2003 states that,

“Where an insurer requires an insured to complete a proposal form or other application form for insurance, the form shall be drawn up in such manner as to elicit such information as the insurer considers material in accepting the application for insurance of the risk and any information not specifically requested shall be deemed not to be material”

2.2 At common law, an insured was under a duty to disclose every fact that they knew or ought to have known and which would influence an insurer in underwriting the risk or fixing a premium. This duty was known as uberrimae fides or utmost good faith. Section 54 of the Insurance Act altered the common law duty of disclosure. Now, the duty of the insurer is no longer a passive one but an active one which requires the insurer to indicate what facts would be material to the risk and which the insured must disclose. Therefore, the failure of the insured to disclose any fact which was not required by the insurer will not be a breach of the duty of disclosure.

• Duty of Disclosure in Marine Insurance

Section 20 of the Marine Insurance Act 1961 requires that, the insured shall disclose to the insurer every material fact which is known to him and the insured shall be deemed to know every fact which, in the ordinary course of business, ought to be known by him. There is divergence in the statutory provisions on the duty of disclosure in marine insurance and other forms of insurance but this matter has been settled by judicial authority. The Supreme Court held in Jombo v Leadway Assurance (2016), that the no premium no cover provision in section 50 of the Insurance Act also applied to marine insurance contracts and being a later legislation, overrides the earlier provisions of section 23 of the Marine Insurance Act. Therefore, it follows that the provisions on disclosure in section 54 of the Insurance Act 2003 should also apply to marine insurance contracts and being a later legislation also overrides the earlier provisions of section 20 of the Marine Insurance Act 1961.  

• Remedy for Breach of Duty of Disclosure

At common law the principle of utmost good faith placed a duty of disclosure on the insured and where the insured failed to disclose a material fact the insurer was at common law entitled to avoid the contract. The Insurance Act 2003 created a new duty of disclosure in section 54 of the Act but did not state the remedy of an insurer for beach of the duty of disclosure. Therefore, we can safely conclude that the Insurance Act 2003 has not altered the common law remedy of an insurer to avoid a contract for breach of the duty of disclosure. The new duty of disclosure in section 54 of the Act only applies to the proposal stage but the common law duty of disclosure continues throughout the duration of the insurance contract and if there is a change in the subject matter or the circumstances of the risk, then the insurer must be informed.

• Breach of Warranty or Condition under the Insurance Act

5.1 The answers in a proposal form are regarded as promissory warranties incorporated into the insurance contract and form the ‘basis of the contract’. The Insurance Act 2003 does not define a warranty but the Marine Insurance Act 1961 states that, a warranty means a promissory warranty by which the assured undertakes that some particular thing shall be done or shall not be done or that some condition shall be fulfilled or where the assured affirms or negatives the existence of a state of facts. The common law required strict compliance with warranties. In Royal Exchange Assurance v Chukwura (1976), the Supreme Court held that,

“Consequently where a proposal is made the ‘basis’ of a contract of insurance, any misstatement in it, whether material or not, is a good ground on which the insurer may avoid liability under the policy and is a good and valid defence to an action for indemnity by the policyholder.”

This decision represented the law in Nigeria until the enactment of the Insurance Acts of 1997 and 2003 but it is no longer good law.

5.2 The Insurance Act 2003 altered the common law on the effect of breach of a warranty or condition. Now, an insurer cannot rely upon the breach of a warranty or condition to repudiate a claim unless the term is material and relevant to the risk or loss. Section 55(1) of the Insurance Act 2003 states that, “In a contract of insurance, a breach of term whether called a warranty or a condition shall not give rise to any right by or afford a defence to the insured unless the term is material and relevant to the risk or loss insured against.” The word relevant means that the warranty or condition must be related to the risk and the word material means that the breach of warranty or condition must be significant to the risk.

5.3 In Yadis Nig Ltd v Great Nigeria Insurance (2000), the insured took out a fire insurance policy which stated that the goods were to be stored at 32, Enu Owa Street, on Lagos Island. The insured later moved the goods to another warehouse at Block 3 Ijegun Road, Ikotun-Egbe on Lagos Mainland without notifying the insurer. The goods were subsequently destroyed by fire and the insurer repudiated the claim citing a breach of condition by change of the location of the goods. The trial court held that since the change of address was not endorsed on the policy the cover ceased to attach when the goods were moved and the insurer was not liable. The Court of Appeal agreed and held that the insurer could repudiate the claim. See also, Mattar v Norwich Union Fire Insurance (1965), where the Supreme Court held on a burglary policy that the insurer was entitled to repudiate the claim for breach of warranty by the insured.

5.4 The decision in Yadis v GNI came before the Insurance Act 2003. The question is whether if that accident happened today the outcome would have been different in view of the provisions of section 55 of the Insurance Act. The location of the goods is material and relevant to the risk of loss by fire and therefore a fundamental term of the insurance contract. Therefore, the decision in Yadis v GNI would have been the same today and it is still good law. In my opinion the insured also breached the duty of disclosure by moving the goods without notification but the point was not raised in that case.

6. Fraudulent claims  

6.1 Section 55(2) of the Insurance Act states that, where there is a breach of a warranty or condition of the contract, the insurer shall not be entitled to repudiate the whole or any part of the contract or any claim on the grounds of the breach unless; (a) the breach amounts to fraud; or (b) it is a breach of a fundamental term of the contract.

6.2 What is fraud? The Insurance Act does not state the meaning of fraud but the Black’s Law Dictionary defines fraud as, “the deliberate or intentional misrepresentation or concealment of the truth of a material fact to induce another to act to his detriment.” At common law an insurer reserved the right to repudiate fraudulent claims. In Britton v Royal Insurance Co (1865), it was held that, “The law is that a person who has made such a fraudulent claim could not be permitted to recover at all.” An insurer is not liable under the fraudulent claims rule where either; (a) the entire claim was fabricated; or (b) the amount of the claim was dishonestly exaggerated; or (c) the insured deliberately misrepresented or concealed material facts to deceive or mislead the insurer.

6.3 There is judicial authority that the fraudulent claims rule does not apply to a genuine claim supported by collateral lies. In Versloot Dredging v Gerling Industrie Versicherung UKSC (2016), the ship took on water at sea during bad weather and the engine room was damaged. The insured lied that the crew had been unable to make safety checks because of bad weather but evidence showed that the entry of sea water was caused by the negligence of the owners and the crew. The insurers repudiated the claim and the trial court held that the insured had lied about their claim. On further appeal, the U.K Supreme Court held that that the fraudulent claims rule does not apply to a justified claim supported by collateral lies and since there was a genuine loss caused by a peril of the seas, the collateral lies were irrelevant to the claim.

6.4 The issue of claims is probably the most contentious matter in insurance practice but it remains one major matter which is not covered by the Insurance Act. It is noteworthy that in some jurisdictions the issue of claims is adequately covered by insurance legislation and the common law rule on fraudulent claims has been codified. See section 12 of the UK Insurance Act 2015. Here in Nigeria, the inclusion of statutory provisions on fraudulent claims cannot be over emphasized and is long overdue and there is need for legislative provisions to guide both insurers and Judges in the determination of fraudulent claims.

7. Breach of fundamental term

7.1 Section 55(2) of the Insurance Act states that, where there is a breach of a warranty or condition of the contract, the insurer shall not be entitled to repudiate the whole or any part of the contract or any claim on the grounds of the breach unless; (a) the breach amounts to fraud; or (b) it is a breach of a fundamental term of the contract.

7.2 What is a fundamental term? Section 55(5) of the Insurance Act describes a fundamental term as any warranty, condition or other term of an insurance contract which a prudent insurer will regard as material and relevant in accepting to underwrite a risk and in fixing the amount of premium. In Niger Insurance v Abed Brothers (1976), the Supreme Court explained a fundamental term. Bello JSC said,

“A fundamental term of a contract is a stipulation which the parties have agreed either expressly or by necessary implication or which the general law regards as a condition which goes to the root of the contract so that any breach of that term may at once and without further reference to the fact and circumstances be regarded by the innocent party as a fundamental breach.”

7.3 A fundamental term is one that goes to the root of the insurance contract and is material and relevant to the risk. See section 55(5) of the Insurance Act. For example; (i) the age or health of the insured in a life policy; or (ii) the description of the goods or voyage in a marine policy; or (iii) the type and use of the vehicle in a motor policy; or (iv) the nature and size of the business in a liability policy; or (v) the value and location of the goods or property in a fire or burglary policy and so on.

8. Remedy before the Loss

There appears to be a dichotomy between the remedy of an insurer to avoid the contract before loss and the remedy to repudiate the claim after the loss. Section 55(4) of the Insurance Act states that, nothing in section 55 of the Act shall prevent an insurer from avoiding a contract of insurance on the ground of a breach of a material term, before the occurrence of the loss. It is instructive that section 55(4) of the Insurance Act comes later in the legislation after section 55(2) of the Insurance Act. Therefore and in my opinion an insurer can avoid an insurance contract (not a claim as that will be after the loss) on the grounds of breach of a material term before the occurrence of the loss, without proof of the matters stated in section 55(2) of the Act.

9. Remedy after the Loss

9.1 Now, where there is a breach of a material warranty or condition or any other term of an insurance contract, the insurer shall not be entitled to repudiate the claim after the loss unless; (a) the breach amounts to fraud; or (b) it is a breach of a fundamental term of the contract. See section 55(2) of the Insurance Act. Therefore, an insurer can only repudiate a claim after the loss either, where the insured makes a fraudulent claim or where the insured commits a fundamental breach of a warranty or condition.

9.2 It appears that the remedy to repudiate a claim after the loss is further restricted in liability policies where a 3^rd party is involved. In this event the remedy of the insurer is not guided by the provisions of section 55(2) of the Insurance Act. When a 3^rd party brings an action against the insured after the loss, the insurer cannot rely upon a fraudulent claim or the breach of a fundamental term to repudiate the claim but is restricted by the provisions of section 69(3)(a) of the Insurance Act, the effect of which is that where an insurer does not settle a claim after the loss and a 3^rd party brings an action against the insured the only remedy of an insurer is to prove non-disclosure or misrepresentation of a material fact by the insured. It is noteworthy that section 69(1)(a) of the Insurance Act states that an insurer is liable to settle the judgment of a third party against the insured, “notwithstanding that the insurer may be entitled to avoid or cancel or may have avoided or cancelled the policy.”

10. Conclusion

10.1 Section 54 of the Insurance Act 2003 altered the common law duty of disclosure and the new duty of the insurer is no longer a passive one but an active one which requires the insurer to indicate on the proposal form what facts would be material to the risk.

10.2 The Insurance Act 2003 created a new duty of disclosure in section 54 of the Act but did not state the remedy of an insurer for beach of the duty of disclosure. Therefore, the Insurance Act 2003 has not altered the common law remedy of an insurer to avoid a contract for breach of the duty of disclosure.  

10.3 Section 55(1) of Insurance Act 2003 altered the common law on the effect of breach of a warranty or condition and now an insurer cannot rely upon the breach of a warranty or condition to repudiate a claim unless the term is material and relevant to the risk or loss.

10.4 Section 55(2) of the Insurance Act states that, where there is a breach of a warranty or condition of the contract, the insurer shall not be entitled to repudiate the whole or any part of the contract or any claim on the grounds of the breach unless; (a) the breach amounts to fraud; or (b) it is a breach of a fundamental term of the contract.

10.5 There appears to be a dichotomy between the remedy of an insurer to avoid the contract before loss and the remedy to repudiate the claim after the loss.  

Jide Bodede LLM(Lond)

08035130694

Jide@lawfieldslawyers.com