Chapter 8. Contractual Terms

• Pages: 162-182

CHAPTER 8

CONTRACTUAL TERMS

8.1 INTRODUCTION

Not all ter ms in an insurance policy are of equal importance. The basic classifi cation of terms

that exist in general contract law of warranties and conditions applies to contracts of insurance.

There is, however, a distinction between general contracts and contracts of insurance. Accord-

ing to general contract law, a condition is a fundamental term, the breach of which entitles the

innocent party to repudiate the contract, while with respect to a breach of a warranty, the con-

tract continues to exist but the innocent party is entitled to sue for damages. This is not the case

with respect to contracts of insurance, in which the position is reversed. Thus a warranty, as

opposed to a condition, is considered a fundamental term of the insurance contract, the breach

of which automatically discharges the insurer from liability.

1 This distinction between general

contract law and insurance law extends beyond the form– the label describing the term– to

consequences that fl ow.

Permeating insurance law, there exists a noticeable, indeed a manifest tension between

general commercial contracts and contracts of insurance. An overabundance of regional juris-

prudence as displayed, reveals the tension readily apparent from the prevalence with which

courts have resorted to the import of contractual terms in deliberations on contentious mat-

ters. In the House of Lords decision Bank of Nova Scotia v Hellenic Mutual War Risks Association

(Bermuda) Ltd, The Good Luck , 2 Lord Go made reference to the Court of Appeal’s confusion

between conditions as fundamental terms of a contract and conditions precedent, referring

to the ‘inveterate practice in marine insurance of using the term “war ranty” as signifying a

condition precedent.’ The imperceptible line between general contracts and those of insurance

is exacerbated by insurance law’s utilisation of general contract principles to resolve problems

within insurance law. Thus for example, where the strict categorisation between warranties and

conditions is inappropriate, the concept of innominate terms has emerged in insurance law as a

hybrid term.

3 Under general contract law, a breach of a fundamental term entitles the innocent

party to elect to repudiate the contract.

4 This position held and was applied in insurance law to

breaches of war ranties until the decision in Bank of Nova Scotia v Hellenic Mutual War Risks Asso-

ciation (Bermuda) Ltd, The Good Luck . 5 Thereafter the term ‘repudiation’ ceased to be considered

appropriate. It became settled law that a breach of a warranty automatically discharged the

insurer’s liability.

6 At the core of the di culty for insurance law in the Commonwealth Carib-

bean sits the ongoing debate on whether recently enacted consumer legislation in the region

1 Prior to 1992, the prevailing thought was that a breach of a warranty entitled the insurer to repudiate the

contract. Since the House of Lords decision of Bank of Nova Scotia v Hellenic Mutual War Risks Association (Ber-

muda) Ltd, The Good Luck [1992] 1 AC 233, it is settled that a breach of a warranty automatically discharges

the insurer from liability.

2 [1991] 2 WLR 1279.

3 Hong Kong Fire Shipping Co. Ltd [1962] 2 QB 26; J. Davey, ‘Insurance Claims Notifi cation Clause: Innominate

Terms and Utmost Good Faith’ [2001] JBL 179.

4 [1989] JBL 348; J. Birds (1991) 107 LQR 540; Bennett [1991] JBL 598; Clarke [1991] LMCLQ 437.

5 Supra n. 2.

6 Supra n. 1.

Contractual terms 163

applies to insurance law. In this regard, to ascertain the nature of contractual terms, the Marine

Insurance Act and the common law provide the best source of guidance. Marine insurance

legislation has now assumed larger signifi cance for contemplation of contractual terms than it

had in the past as a result of the House of Lords decision Bank of Nova Scotia v Hellenic Mutual

War Risks Association (Bermuda) Ltd, The Good Luck .

8.2 REGIONAL AUTHORITY 7

There is considerable regional authority. In Antigua and Barbuda, De Castro v Edinburgh Insurance

Co. Ltd 8 considered whether the plainti had breached a warranty of seaworthiness. According

to the insured, who loved the boat ‘more than he loved his wife,’ the express warranty was

breached, the ship being sent out in an unworthy state, so the insurer was not liable. In Royal

Caribbean Hotels v Barbados Fire & General , 9 we see conditions must be strictly complied with. The

di erence between conditions and exemption clauses is displayed in Mallalieu v Excess Insurance

Co. Ltd , 10 arising from St Kitts and Nevis.

11 Citing Bond Air Services Ltd v Hill , 12 the di erence

between a condition and an exception is that the former places some duty or responsibility on

the assured, while the latter restricts the scope of the policy. In Charles v The Ne w India Assurance

Co ., 13 an insurer sought to avoid the insured’s claim on the grounds that there was a misrepre-

sentation of the age of the driver– whether 25 was a term in the contract– since the policy

merely asked for the driver’s age and it being a written contract could not be varied except in

writing. Parnell J stated the true position seems to be that during the currency of the insurance

policy there is no implied condition that the risk may not be materially altered. Wiles J put the

matter clearly nearly 120 years ago:

14

In e ect, there being no violation of the law and no fraud on the part of the assured, an increase

of risk, to the subject matter of insurance, its identity remaining, though such increased risk is

caused by the assured, if it is not prohibited by the policy, does not avoid the insurance.

15

Condition subsequent to liability

An example can be found in Smith v Motor Owners Mutual Insurance Association Ltd . 16 Here, clause

19 provided: ‘In no case whatever shall the Association be liable for any loss or damage after

the expiration of twelve months from the happening of the loss or damage unless the claim is

the subject of pending action or arbitration.’

A fi re took place in 1976 and the action was fi led in 1978. It was argued that the contract

was voidable at the defendant’s instance. As to whether the institution of proceedings within a

7 Hetu v Trinidad & Tobago Insurance Ltd , BB 1985 HC 36.

8 VG 1977 HC 8.

9 BB 1992 CA 31.

10 KN 1971 HC 1.

11 The question involved the construction of the terms of the insurance policy. The damage to the vehicle was

caused by fl ood, and it was a term of the contract that the company would not be liable for the damage in

those circumstances.

12 [1955] 2 All ER 479.

13 DM 1982 HC 7.

14 Thompson v Hopper [1858] EB & E 1038 at 1049.

15 Ibid.

16 BS 1983 SC 21.