If you run a business in the United Kingdom, you may not realise that you could be at risk from a hidden peril in your commercial insurance contract: 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.
Is This A Widespread Problem?
Although there are now protections prohibiting the use of basis clauses in personal insurance contracts under the Consumer Insurance (Disclosure and Representations) Act 2012, they can still apply to commercial and business insurance contracts.
Several large insurers have recently removed basis clauses from their commercial policies, but sadly, 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 insured (i.e. you the purchaser) are true and accurate.
This clause acts as a warranty, so even a minor inaccuracy or error can be considered a potential breach, discharging the insurer from liability under the policy.
In these circumstances, Insurers may be able to void the policy even if the error is unintentional and not material to the risk.
Don’t Wait Until You Have a Claim Rejected!
Businesses with a basis clause in their commercial insurance contracts are often unaware of it until their claim is rejected.
The net result is that this could leave a firm 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.
How Is The Contract Worded?
There is no set wording used by insurers when creating a basis clause, the language and placement of the clause can 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’.
Legal Challenges And Developments
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 who incorrectly identified 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 likely unintentional, the Court held that there was a breach of warranty and therefore the policy was void.
Law Commission Review
The Law Commission (with the Scottish Law Commission) has been engaged in a review of insurance contract law since 2006 and has publicly 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 the policy wording.
However, even if the proposed changes are made, they will not come into force for several years.
As such, it is of paramount importance that Commercial and Business Insurance buyers know what clauses are in their policies and makes sure that the information they submit to purchase insurance is accurate.
FREE Business Insurance Review
Taking specialist advice from a Commercial Insurance expert such as Insync can help you navigate the maze.
Why not book a free review with one of our expert Gurus at a time that suits YOUR diary, we will walk you through your current contract, so you know exactly what clauses are in it, and we will work with you to help make sure that we find you the right level of cover at the right price.