It is vital to fully understand your insurance policy. Failure to do so can lead to claims not being paid, putting your business and staff at risk. So what can you do? A good broker will lead you through the pitfalls and explain what you need to know. We at Bromwall take pride in our approach to arranging insurance for our clients and we would like you to take the time to read the following information relating to the “basis clause”. This little understood and very rarely spoken about clause could lead to disaster if not fully understood.
Many businesses across the United Kingdom may be at risk from a hidden peril in their commercial insurance contracts: basis clauses. These clauses allow insurers to void policies based on minor and irrelevant mistakes made by the purchaser when supplying information to the insurer, such as incorrectly filling in part of a proposal form.
Although there are now protections prohibiting the use of basis clauses in consumer insurance contacts under the Consumer Insurance (Disclosure and Representations) Act 2012, they can still apply to business and commercial insurance contracts. Several large insurers have recently removed basis clauses from their commercial contracts, but not everyone has. Make sure that any proposals and forms are filled in accurately and that you know exactly what clauses your policies contain.
What is a ‘Basis Clause’?
A basis clause is a declaration on an insurance proposal form or policy contract stating that representations made by the purchaser (insured) are true and accurate. This clause acts as a warranty, so even a minor inaccuracy or error can be considered a breach, discharging the insurer from liability under the policy. Insurers may be able to void the policy even if the error is unintentional and not material to the risk.
Businesses with a basis clause in their commercial insurance contracts are often unaware of it until their claim is rejected. This can leave a business in a position similar to what it would be in if it didn’t have any cover to begin with. You can prevent this by proactively reviewing the language of your insurance contract or proposal form, which is particularly important when switching insurers.
Since no set wording is required to create a basis clause, the language and placement of the clause may differ from contract to contract. The main element to look for is a statement in the proposal forms or policy wordings that says the representations made by the insured form the ‘basis of the contract’ between the insured and insurer.
Some examples include the following:
‘I/We declare that the information submitted in this proposal form and accompanying enclosures is true and accurate to the best of my knowledge and belief. I agree that this proposal will form the basis of the contract between the insured and insurer’.
‘The proposal or application and completed declarations, and any other supplied information, form the basis of the contract’.
‘All information supplied by the insured or supplied on behalf of the insured in connection with the application for insurance including proposal forms, particulars and any other statements will be incorporated into and form the basis of the policy’.
The Court of Appeal recently upheld the decision Genesis Housing Association Limited v Liberty Syndicate Management Limited confirming the legality of basis clauses in business and commercial insurance contracts. This case involved a housing association incorrectly identifying the builder in a proposal form. The proposal form contained a basis clause and it was held that all statements in the proposal form became warranties which the insurance contract was based on. Even though the builder name error was most likely due to an innocent mistake and confusion, the Court held that there was a breach of warranty and therefore the policy was void.
The Law Commission (with the Scottish Law Commission) has been engaged in a review of insurance contract law since 2006 and has publically criticised basis clauses, stating that they ‘lack logical reason and cannot be explained in terms of legal fairness or economic efficiency’. Therefore, the Law Commission has also proposed to abolish basis clauses from business and commercial insurance contracts and require any specific warranties be set out clearly in policy wording. However, even if changes are made, they will not take place for several years. Business and commercial insurance buyers need to know what clauses are in their policies and make sure that the information they submit to purchase insurance is accurate.
At Bromwall, we can help you avoid the pitfalls of basis clauses. We will walk you through your contract so you know exactly what clauses are in it, and we will work with you to help make sure that you do not have any inaccuracies when disclosing facts to the insurer. Give yourself peace of mind and contact us today.
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