Warranty and Representation III
Prof. Bill Long 1/19/05
Judicial and Legislative Solutions
The foregoing historical explanation ought to tell you why it is that the law of warranty/representation developed in insurance law and why it has created difficulty in America. Insurers have vested interests in characterizing things as "warranties" with which one has to comply strictly, but often there seems to be no relationship between the warranty and the condition insured against. The whole common law history of warranty, as I described it in the previous two essays, lay behind the Vlastos case, even if neither side, nor the court, seemed to be aware of it.
But the Vlastos court dealt with the reality of warranty in an interesting way. It did two things. First it made a distinction between an affirmative and promissory warranty, though mentioning neither, and then it held that the warranty itself was ambiguous. Only one word on the distinction. An affirmative warranty is a statement concerning the accuracy of a fact as of the time the contract is formed, while a promissory warranty is a statement concerning the future. Usually a court will construe a warranty to be affirmative unless the contrary is spelled out in the insurance contract. Second, it held that there was an ambiguity in the warranty.
But what I really want to do in the remainder of this mini-essay is to show how courts and legislatures have mitigated the harshness of the warranty doctrine.
Legislatures First
Most states have now enacted statutes that lessen the harsh effects of warranties. New York led the way in two statutes in 1906 and then in 1939. The latter is significant: it defined "warranty" so as to include within its scope all clauses, whatever their label, that prescribe as a condition of the insurer's liability the existence of a fact affecting the risk. Then, in the next section, the law stated that "a breach of warranty shall not avoid an insurance contract or defeat recovery therunder unless such breach materially increases the risk of loss, damage or injury within the coverage of the contract." What this in effect did was to collapse the distinction between warranties and representations, precisely 160 years after Mansfield had said that there was a such a "clear" distinction between the two.
Thus, in states like New York, which have a statutory "fix," the issue is whether or not the breach or misrepresentation has materially increased the risk of loss. Various theories have developed regarding whether this has occurred. One test is whether the breach, if known to the insurer, would have affected the insurer's decision to insure the risk at the given premium. A second theory is the "reasonable insurer" theory--whether a reasonable insurer would have raised the premium. Finally, a third theory is whether, as an objective fact, the risk actually and materially increased the risk.
Thus, if the state has a statute collapsing the distinction, and about 25 states have such laws now, then the "problem" of the warranty has disappeared and the courts can go straight to the materiality analysis.
Judicial Answers
The judiciary, when faced with the realities of warranty law, has developed such a jumbled caselaw that any "rule of law" is probably not going to emerge. However, Jerry isolates about three or four approaches that have tended to mitigate the harshness of the traditional warranty. First, courts are inclined to interpret a warranty as affirmative rather than promissory. Thus, it will be an issue of fact for the jury whether the condition was observed at the beginning of the contract. This was the approach of the Vlastos court. Second, a court might want to read a warranty in such a way as to minimize its effect. It can do this by finding ambiguity rather easily (as was done in Vlastos) or cut the insured some slack by interpreting their acts as generally in compliance with the warranty requirement. For example, in one case where the policy required the presence of "employees" of the insured on site in order to have coverage the court interpreted "employees" broadly to include cleaning personnel of the large building in which the employees leased space (See discussion in Jerry, Understanding Insurance Law, p. 786).
Third, a court might interpret the warranty as only extending to a particular risk or as a severable part of the policy. If the court so interprets it, the breach of warranty under one kind of risk will not avoid the policy with respect to other parts of the coverage. Finally, a court might construe the breach as a "temporary breach" which puts a burden on the insurer to declare the policy void immediately. If the insurerer does not so act, it has treated the coverage as only "temporarily breached." This is a sort of legal fiction, of course, but it shows a court's willingness to mitigate the harshness of the common law warranty rule.
Conclusion
This has been a long journey to clarify a piece of legal baggage or furniture which is part of our inheritance but which really has little purpose in our law today. Most courts today will do a "materiality analysis" even if a provision in the policy is called a "warranty." Yet legal terminology and baggage tends to pile up in our tradition like junk in our closets and basements. It often defines us more than we think it does. And, indeed, it defined the issues in the Vlastos case pretty significantly.
Copyright © 2004-2007 William R. Long |