The absolute truth about warrantees

Warranties in the South African law of insurance have been interpreted in accordance with principles of English insurance contracts and not as understood in the South African law of contract.

A South African contract cannot be cancelled due to a breach of warranty unless there has been a breach of a material term. What effect does this have on our industry? And how do clients figure this out?

Act accordingly

A warranty includes a pre-contractual representation by the insured which may be incorrect.

However, a warranty may also be an express policy term that imposes an undertaking by the insured to act in a certain manner. If the insured fails to do so, the insurer can cancel the insurance contract.

Section 53 of the Short-term Insurance Act provides that a policy may not be invalidated, the obligations of the short-term insurer may not be excluded or limited, nor may the obligations of a policyholder be increased, because of a misrepresentation or nondisclosure of material information.

Non-disclosure role player

Section 63 applies unless that representation or non-disclosure is such as to be likely to have materially affected the assessment of the risk under the policy concerned at the time of its issue, renewal or variation. This deals with pre-contractual representations and the obligation to disclose facts that are material.

A representation or non-disclosure is regarded as material if a reasonable, prudent person would consider that the misrepresented or undisclosed information should have been correctly disclosed to the insurer, so that the insurer could form its own view as to the effect of the information on the assessment of the risk.

This then is the test of the reasonable prudent person and is similar to the test adopted by the courts in the 1985 decision in Mutual & Federal Insurance vs Oudtshoorn Municipality which is that of the reasonable person.

The issue of truth

The above warranties are referred to as affirmative warranties and involve the insured warranting the truth of a representation regarding an existing fact.

They relate to facts past or present; for example, the representation by an insured that it has never had a policy of insurance cancelled by an insurer.

An undertaking as to the future performance of a duty (for example a burglar alarm clause) is referred to as a promissory warranty and is not subject to Section 53 of the Short-term Insurance Act.

According to most authorities, a breach by the insured of a promissory warrantee will entitle the insurer to refuse to indemnify the insured without the breach having any causal connection with the loss. However the onus of proving the breach of warranty lies with the insurer.

So for example, where an insured undertakes to keep the vehicle in a locked garage at night and fails to do so, the insurer will not be liable for loss of damage to the vehicle even where such failure has played no part in the loss or damage to the vehicle.

Causal link criticism

There has been criticism of reliance on promissory warranties on the grounds that there is no requirement for a causal connection between the breach of warranty and the eventual loss for which compensation is sought.

The Short-term Insurance Ombudsman, on grounds of equity, has in matters brought before him, required a link between the breach of warranty and the loss before allowing an insurer to cancel the policy.

With the requirement that insurers treat customers fairly, insurers need to consider advising an insured that, where there is a promissory warranty, an insurer can cancel the policy even where there is a breach which in no way relates to the loss.