What is a “Warranty” in Insurance

19/04/2017

Insurers have the right, seldom exercised, to limit their risk by placing warranties in their policies that state if the warranty is breached the policy is void as of the breach. They are not used, it appears, because modern insurers do not understand the effect of warranties or the ability of a warranty to protect the insurer from risks it is not willing to take.

A “warranty” is a promise by an insured to do or not do something. It is defined in California by the following provisions of the California Insurance Code:

    § 440.    A warranty is either express or implied.
    § 441.    A statement in a policy of a matter relating to the person or thing insured, or to the risk, as a fact, is an express warranty thereof.
    § 442.    A particular form of words is not necessary to create a warranty.
    § 443.    Every express warranty made at or before the execution of a policy shall be contained in the policy itself, or in another instrument signed by the insured and referred to in the policy, as making a part of it.
    § 444.    A warranty may relate to the past, the present, the future, or to any or all of these.
    § 445.    A statement in a policy, which imports that there is an intention to do or not to do a thing which materially affects the risk, is a warranty that such act or omission will take place.
    § 446.    When, before the time arrives for the performance of a warranty relating to the future, a loss insured against happens, or performance becomes unlawful at the place of the contract, or impossible, the omission to fulfill the warranty does not avoid the policy.
    § 447.    The violation of a material warranty or other material provision of a policy, on the part of either party thereto, entitles the other to rescind.
    § 448.    Unless the policy declares that a violation of specified provisions thereof shall avoid it, the breach of an immaterial provision does not avoid the policy.
    § 449.    A breach of warranty without fraud merely exonerates an insurer from the time that it occurs, or where the warranty is broken in its inception, prevents the policy from attaching to the risk.

Insurers that use warranties must, therefore, include the warranty in the policy and state that it is material to the decision of the insurer to insure or not insure the insured, that the warranty is material to the risk and that breach of the warranty shall cause the policy to be void. [De Campos v. State Compensation Insurance Fund, 122 Cal. App. 2d 519, 265 P.2d 617 (Cal.App.Dist.1 01/15/1954)]
 
In a case where the plaintiff, accepting the policy where the plaintiff made the warranties specified in the policy wording when the warranty was broken at the inception date of the policy was held to prevent the policy from attaching to the risk (Emery v. Pacific Emp. Ins. Co., 8 Cal. 2d 663, 669 [67 P.2d 1046]).
 
When an insured made a warranty that he would not take the insured vessel outside specifically described waters the insured argued that breach of the cruising warranty was immaterial because the actual loss occurred while the vessel was in appropriate waters failed as a matter of law because California Insurance Code § 448 which allows voidance of even an immaterial warranty will void a policy “where the policy expressly declares that it shall avoid it.” [Fountain v. Connecticut Fire Ins. Co., 158 Cal. 760, 765, 112 P. 546, 549 (1910).] Because the policy expressly states that a breach of the cruising warranty will render the policy “null and void” the consequences of a breach were clear, not buried in a maze of small type, but rather are clearly set forth in a separate paragraph on policy Endorsement No. 1. [Certain Underwriters at Lloyd’s v. Montford, 52 F.3d 219 (9th Cir. 04/04/1995)]
 
Warranties are, for reasons know only to insurance sales and underwriting personnel, are fairly rare in property and casualty policies and more common in a marine policy and some inland marine policies like a jewelers block or furriers block policy.
 
Two of the more common warranties found in property policies relate to theft, namely Burglary Alarm Warranty and Locked Vehicle Warranty. Theft is a typical covered peril.
 
The Burglar Alarm Warranty requires that the insured must maintain a fully connected , operational and certified alarm system during off-hours. If the system fails to meet all these conditions and there is a break-in, the policy warranty has been breached. There is no theft coverage.
 

The Locked Vehicle Warranty requires that insured property left in an unattended vehicle must be locked. If the vehicle is not locked and there are no visible signs of forced entry, there will be no theft coverage.


If an insurer wishes to use an effective warranty it should include words like the following:

Locked Car and Alarm Warranty

The insured hereby warrants and agrees that while the insured automobile is in use but is left unattended all openings thereto shall be locked by means of the manufacturers’ approved devices, and where the automobile is fitted with an alarm, that alarm must be activated. The insured also warrants that to establish compliance with the warranty the insured shall submit to the insurer evidence that there are visible signs of forcible entry into the vehicle.

The insured agrees that the warranty made is material to the decision of the insurer to insure against risks of loss to the vehicle or its contents and that failure on the part of the insured, or any person in charge of the insured automobile, to fulfill the requirements of this warranty shall cause the policy to be void.

Failure on the part of the insured, or any person in charge of the insured automobile, to fulfill the requirements of this warranty shall cause the policy to be void.

Another warranty might read:

WATCHMAN WITH APPROVED RECORDING SYSTEM WARRANTY

        It is warranted by the insured that at all times the property that is the subject of the insurance shall be protected by one or more watchmen (with approved recording system or watchclock) who shall keep a continuous watch in and about the insured premises:

        (A) Sundays and holidays during the entire day or portion thereof whenever said premises are not open for business or are shut down or are not in operation; and

        (B) During the entire night, except that such watch service need not be maintained in those portions of buildings or yard areas that are in actual operation and in which employees are at work.

A breach of this warranty suspends this insurance during such brief and the insurer, at its option, may declare the policy void from the moment of the breach.

Warranties in an insurance policy can also include all statements of fact contained in an application or proposal for insurance as long as the application is attached to and forms a part of the policy and is stated to be grounds for voidance if any of the facts warranted on the application or proposal for insurance are false.

Originally publish on zalma.com

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