Warranties And Conditions Precedent - Take Care

In this article, we provide a summary of points to have in mind when drafting warranties and conditions precedent.

When agreeing a reinsurance contract, whether at renewal or for a new risk, warranties and conditions precedent may form an important element of the agreement and care must be taken in their formulation. Provisions of this nature may be included 'as standard' in many agreements but there are pitfalls for the unwary, so care is needed when drafting so as to avoid lengthy legal wrangling in the event of a dispute.

Under warranty

A warranty is a clause which goes to the root of the reinsurance contract. It can be used either to confirm the position of the reinsured at inception or to clarify the agreed way the reinsured is to conduct itself during the life of the policy.

Warranties can be agreed in respect of representations given at the time of placement, (for example, a representation as to the reinsured's loss position immediately prior to inception). Warranties can be used to assist in the risk management of the contract by clarifying how the reinsured has agreed to conduct itself going forward, for example limiting the types of business which can be ceded by the reinsured. Breach of a warranty automatically discharges the reinsurer from any further liability under the reinsurance contract from the date of breach. It is irrelevant whether the breach of warranty arose innocently, negligently, or fraudulently and the breach cannot subsequently be remedied by the reinsured. As those operating in the reinsurance market are not protected by consumer legislation, this remedy will apply whether the breach caused the loss or not. It is worth noting that the Law Commission's draft bill is expected in December 2009 and it may propose a significant change to the remedies available for breach of a warranty unrelated to the loss. It appears change is hoped for by some eminent members of the judiciary. Lord Mance, in his judgment in Wasa v Lexington, said of warranties: "This is an area where English law has long been recognised as unduly stringent and in need of review."

Whether change is forthcoming or not, to be effective warranties need to be very clearly drafted. As a reinsured in breach of warranty forfeits its benefit under the reinsurance contract, the court has been unsympathetic to reinsurers seeking to enforce breaches of warranty and this is unlikely to change. Any ambiguity in the wording of the intended warranty and the court...

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT