FINEX GLOBAL

TIMELY REMINDER…
may 2013

Basis clauses and warranties

‘Basis’ clauses and warranties will always raise questions and helpfully Mr Justice Akenhead clarified
the law in a case late last year, namely Genesis Housing Association Limited v Liberty Syndicate
Management Limited for and on behalf of Syndicate 4472 at Lloyd’s1. This case provides a useful insight
and a timely reminder into why the details specified within the proposal form must be correct and
mirror the building contract, if not, the insured may become unstuck when a claim is made.

Facts
Genesis provided affordable housing and Liberty underwrote
policies known as ‘Premier Guarantee for Social Housing’, which was
administered by MD Insurance Services Limited (MD). This guarantee
provided decennial cover, amongst other things, against certain types
of defects within the social housing to which it applied.

By a written contract in standard JCT2 form, Genesis engaged TT

Bedford (wrongly named as Time and Tide Ltd) as the main contractor
to design and carry out extensive alterations, refurbishments and
fitting out for this development. TT Bedford was a special purpose
vehicle for the project. Bedford approached MD for cover and a
proposal form was filled out by MD. The name of the Builder was
identified as ‘Time and Tide Construction Ltd’ (‘TT Construction’) and
additional cover was provided in the event of insolvency of the Builder.

Importantly, it is necessary to look at the wording of the ‘Declaration

by the Insured’, which states:

“I/we declare that to the best of my/our knowledge and belief,

the information I/we have given is correct and complete in every
detail and I/we have not withheld any material fact.

I/we understand [sic] that the signing of this form does not
bind us to effecting insurance under the Premier Guarantee
for Social Housing Scheme but agree that should a contract be
completed for a New Development or Housing Unit that [sic]
this proposal and the statements made therein shall form the
basis of the contract between me/us and the Insurer.”

1
[2012] Ewhc 3105 (tcc)
2
The joint contracts tribunal
Around the same time other forms were filled out describing the
developer as ‘TT Bedford’ and the Builder as ‘TT Construction.’
MD subsequently submitted a quotation for Genesis identifying the
Builder as TT Construction. TT Bedford subcontracted the work and
paid the premium for the Premier Guarantee cover. The policy holder
was Genesis, the Builder named as TT Construction and it was expressly
endorsed with cover for insolvency of the Builder during the construction
period. During construction, administrators were appointed for TT
Bedford generating the claim under the Policy and TT Bedford was
eventually dissolved.
In summary, the facts in issue produce a tension between the Proposal
Form, the Quotation and the Initial Certificate on the one hand and
the Policy on the other. Liberty argued that the Proposal Form is
effectively part of the insurance contract between the parties and
contains warranties, breach of which renders that contract void. Liberty’s
position was that because the Builder was not TT Construction (but was
TT Bedford), because the contract cost was £4.6 million and not £3.7
million and because the housing Association was not ‘Genesis Housing
Association’ but Paddington (at time of contract), then Genesis was in
breach of warranty and therefore the contract is void. Genesis argued
that the Proposal was not incorporated in the insurance contract and,
even if it was, the terms of the Policy in effect prevail.
The Issues
The judge posed 13 questions to be determined; however the following
questions are relevant for this paper:
b. Enforceability will be generated by such
clauses or warranties being incorporated
within the contract of insurance or as a
stand-alone warranty by the insured given
to the insurer through the proposal form
or other document in which the ‘basis of
contract’ expression or declaration is given.
c. If the insured has innocently or otherwise
signed a document, usually the proposal
form, as the basis of the insurance
contract entered or to be entered into,
which confirms (either to the best of the
insured’s knowledge or belief or absolutely)
as true the contents of that document,
the insurance contract will be void or
unenforceable if the contents are untrue.
d. The contract of insurance, whether
contained in the policy itself or any other
documents such as the quotation or a
certificate of insurance, may as a matter of
construction modify, amend or even render
of no limited effect the ‘basis of contract’
declaration or warranty.

1. Were the facts disclosed in the Proposal Form absolutely

warranted as to their truth, or did they merely have to be true to
the best of the proposer’s knowledge and belief? Answer: Facts
disclosed on the Proposal form were warranted as to their truth to
the best of Genesis’ knowledge and belief.

2. Did the proposal form contain a breach of warranty as to the

identity of the building contractor and/or the building contract
cost? Answer: Yes

The Law
The judge adopted the following propositions based upon a review of
the relevant case law:

a. In principle ‘basis of contract’ clauses and warranties in relation

to insurance are enforceable in law and not contrary to law or
public policy.
e. Declarations are said to be true or correct to the best knowledge
or belief of the declarer will often be in the case of an individual Comment
person reviewable by reference to the honesty of that person in It is incredibly obvious but the insured really
making the declaration. Thus Mr Zeller3 and Mr Economides4 must be diligent when checking and signing
in their respective cases honestly believed that what they were proposal forms… it is often the obvious points
declaring was true in the sense it was to their best knowledge that are missed! Even if the error is innocently
and belief. In determining particularly whether a corporate made, it could give rise to a breach of warranty.
organisation making a declaration as to various statements being
true to the best of its knowledge and belief is wrongful, the Court One usually needs clear words even in a
must determine what it corporately is likely to have known when it contract of insurance to remove or cancel the
made the declaration. There does not have to be dishonesty as such basis of contract warranty that was made by
on the part of the organisation but, if that organisation actually the insured.
knows that something said to be true on the declaration is in fact
wrong, then it is making a statement which is not true to the best of ‘Basis’ clauses have attracted criticism in
its knowledge or belief. the past on the basis (forgive the pun!) of
how the declaration can become an effective
term of the “contract of insurance even if
Discussion not expressly mentioned in the policy5.”
The judge concluded that TT Bedford acted as an express or implied One explanation “is that the policy
agent for Genesis in securing the cover. There are clear errors on the evidences the main contract between
face of the Proposal form, namely that the Builder was incorrectly the parties but the promises in the
named and the contract cost was also incorrect. The judge also proposal form are collateral warranties
accepted that the error was entirely innocent as there was no evidence given prior to the conclusion of the
to suggest that it was a deliberate or conscious misrepresentation. contract.” Interestingly on a tangential
The error was repeated in the Quotation. The judge viewed this as a point, the Consumer Insurance (Disclosure
material error because TT Construction had a reasonable credit rating and Representations) Act 2012 (not yet in
and had been in business for a number of years, whereas TT Bedford force) shall outlaw ‘basis’ clauses in consumer
was a new single vehicle company with no or established credit rating. contracts. The Law Commission6 has also
This difference could have impacted on the level of premium. adopted the position that insurers should not
be provided with an opportunity of utilising
Genesis had no right of claim under the insurance because it was, albeit contract clauses in the form of warranties.
innocently, in breach of warranty in that the statement made by it in
the Proposal form to the effect that the Builder was or was to be TT
Construction was within its knowledge and belief incorrect and because
such warranty was not displaced or modified materially or at all by any
other terms of the insurance contract.

3
Zeller v British Cayman Insurance Co Ltd [2008] Lloyd’s Rep IR 545
4
Economides v Commercial Assurance Co Plc [1998] QB 587, 598, 599
5
McGillivray on Insurance Law (12th Edition) para 10-023
6
June 2012 Consultation Paper – the Business Insured’s Duty of Disclosure and the Law of Warranties.

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