Insurance proposal forms and material inaccuracies

Project iStock 000000224397XSmall 146x219A judge has ruled that a housing association was unable to claim on an insurance policy after a builder it had hired became insolvent. Stephen Homer analyses why.

Companies that innocently sign "basis of contract" insurance proposal forms that contain material inaccuracies may be found to have breached warranties.

Information included in the proposal form will be deemed to be within their knowledge and belief, and this may prevent a successful claim on the insurance policy.

Background

Genesis Housing Association engaged a builder to redevelop several properties. The insurance for the development, including insurance for builder's insolvency, was underwritten by Liberty.

The proposal form was completed by Liberty's agent (although signed by valid representatives of the builder and Genesis) but contained several inaccuracies. Most importantly, the name of the builder, though similar, was incorrect. This was material as the name on the form was that of a reputable builder with a good credit rating. The actual builder was a new company and therefore a greater risk, which could have carried a larger policy premium.

The builder became insolvent, triggering a claim under the policy.

The issues

The court considered several questions, including whether statements on an insurance proposal form constitute "absolute warranties" or whether they merely need to be "true to the best of the proposer's knowledge and belief".

The court drew several principles from case law, including:

  • "Basis of contract" clauses and warranties are well-established as being enforceable in law, either by incorporation into the contract or as a stand alone warranty;
  • Usually if the proposer signed a document that represented the basis of the agreement and which stated that the contents of the contract were true (whether absolutely or to the best of his knowledge or belief) and they were not true, the contract would be void or unenforceable. This was regardless of whether the misstatement was made innocently or otherwise;
  • For individual persons, where a declaration is said to be true to a party's best of knowledge or belief, the declaration is reviewable by reference to the honesty of the person making that declaration, not the reasonableness of the decision; and
  • If a company makes an inaccurate declaration, the court looks at what it is likely to have known, as a company, when signing. Dishonesty is not required to constitute a breach of warranty, merely corporate knowledge that something stated on the declaration is wrong.

The court’s decision

The insurer was discharged from liability.

While the court accepted that the incorrect builder's name may simply have been overlooked in the signing, it held that the parties signing knew, as companies, that this was incorrect. Consequently, Genesis had made statements that were not true to the best of its knowledge and belief.

The court held that the everyday meaning of "belief and knowledge" was that the statements in the proposal form were accurate to the belief and knowledge of the parties and that the "basis of contract" element simply stated that the information in the proposal form (which included the name of the builder) formed the basis of the contract. This meant that a warranty had been breached and the insured had no right of claim.

Conclusion

When signing a proposal form that will be incorporated as the basis of an insurance contract, a company should review the document being signed by it or its agents, even if the declaration is only that the contents are correct to the best of the company's knowledge and belief. The test for what constitutes this will encompass not simply what the individual signing actually knew, but what the company is deemed to have known.

If the insurance proposal contains an element which references statements made as being the basis of the agreement, those statements could be viewed by the court as warranties, the breach of which may mean that a claim will fail.

Stephen Homer is a partner and head of construction at Ashfords. He can be contacted on 01392 333883 or by This email address is being protected from spambots. You need JavaScript enabled to view it..