Insurance Policy Warranties

Important Requirements to Make Insurance Policies Work

Certain policies contain the term “warranty.” This is a word of great power. Generally, a warranty can be defined as follows:

A “warranty” in insurance law is a statement or condition forming part of a contract whereby insured agrees that certain acts have been or shall be done, and validity of contract depends upon exact fulfillment of condition, regardless of whether breach relates to or causes loss sustained.[1]

A warranty in an insurance policy is a special kind of representation where the person seeking insurance promises that the statements of fact are absolutely true, that they know that the insurer is relying on the truthfulness of the statements, and that each statement of fact is material to the decision of the insurer to insure or not to insure. Warranty has also been described as follows:

The term “warranty” ... frequently has the connotation of an affirmation or a promise. However, functionally the significance of a warranty in an insurance policy has been, and continues to be, that it establishes a condition precedent to an insurer’s obligation to pay.[2]

When an application for insurance is attached to the policy and made a part of it, the statements of fact in the application are converted from mere representations to warranties. By accepting the policy with the application attached, the insured acknowledges that it has warranted to the insurer that each statement of fact in the application is absolutely true and that the policy will be void if not true.

An insurance company can extract from the insured a warranty of any factual matter it considers material and may reasonably provide for voidance of the contract if such warranties prove false. To do so, however, it must be stated clearly and unambiguously on the face of the policy.[3]

The United Kingdom Insurance Act of 2015 abandoned the literal compliance rule, so that rescission is no longer the automatic remedy for breach of warranty. Instead, a breach only suspends coverage until it is cured. In addition, an insured who breaches a warranty and fails to cure can recover if it “shows that the non-compliance with the term could not have increased the risk of the loss which actually occurred in the circumstances in which it occurred. [Travelers Prop. Cas. Co. of Am. v. Ocean Reef Charters LLC (11th Cir. 2021)]

Failure to comply with a warranty can convert a clearly covered and compensable claim into one that must be rejected. It is therefore imperative that the adjuster understand what a warranty is and how it affects the investigation and adjustment of a claim.

New York’s Insurance Law defines a “warranty” as:

any provision of an insurance contract which has the effect of requiring, as a condition precedent of the taking effect of such contract or as a condition precedent of the insurer’s liability thereunder, the existence of a fact which tends to diminish, or the non-existence of a fact which tends to increase, the risk of the occurrence of any loss, damage, or injury within the coverage of the contract. [N.Y. Ins. L. § 3106(a); Kephart v. Certain Underwriters at Lloyd’s of London (S.D. N.Y., 2019)]