Insurance Policy Warranties

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Warranties

Certain policies contain the term “warranty.” This is a word of great power. Generally, a warranty can be defined as follows:

A “warranty” in insurance law is a statement or condition forming part of a contract whereby insured agrees that certain acts have been or shall be done, and validity of contract depends upon exact fulfillment of condition, regardless of whether breach relates to or causes loss sustained.

A warranty in an insurance policy is a special kind of representation where the person seeking insurance promises that the statements of fact are absolutely true, that they know that the insurer is relying on the truthfulness of the statements, and that each statement of fact is material to the decision of the insurer to insure or not to insure. Warranty has also been described as follows: The term “warranty” … frequently has the connotation of an affirmation or a promise. However, functionally the significance of a warranty in an insurance policy has been, and continues to be, that it establishes a condition precedent to an insurer’s obligation to pay.

When an application for insurance is attached to the policy and made a part of it, the statements of fact in the application are converted from mere representations to warranties. By accepting the policy with the application attached, the insured acknowledges that it has warranted to the insurer that each statement of fact in the application is absolutely true and that the policy will be void if not true.

An insurance company can extract from the insured a warranty of any factual matter it considers material and may reasonably provide for voidance of the contract if such warranties prove false. To do so, however, it must be stated clearly and unambiguously on the face of the policy.

The United Kingdom Insurance Act of 2015 abandoned the literal compliance rule, so that rescission is no longer the automatic remedy for breach of warranty. Instead, a breach only suspends coverage until it is cured. In addition, an insured who breaches a warranty and fails to cure can recover if it “shows that the non-compliance with the term could not have increased the risk of the loss which actually occurred in the circumstances in which it occurred. [Travelers Prop. Cas. Co. of Am. v. Ocean Reef Charters LLC (11th Cir. 2021)]

Failure to comply with a warranty can convert a clearly covered and compensable claim into one that must be rejected. It is therefore imperative that the adjuster understand what a warranty is and how it affects the investigation and adjustment of a claim.

New York’s Insurance Law defines a “warranty” as:

any provision of an insurance contract which has the effect of requiring, as a condition precedent of the taking effect of such contract or as a condition precedent of the insurer’s liability thereunder, the existence of a fact which tends to diminish, or the non-existence of a fact which tends to increase, the risk of the occurrence of any loss, damage, or injury within the coverage of the contract. [N.Y. Ins. L. § 3106(a); Kephart v. Certain Underwriters at Lloyd’s of London (S.D. N.Y., 2019)]

In Certain Underwriters at Lloyd’s London v. Jimenez, 197 So.3d 597 (Fla. App. 2016) those Certain Underwriters at Lloyd’s London (“Lloyd’s”) appealed a final judgment following a non-jury trial, in which the trial court granted declaratory relief to Raul and Ada Jimenez, the appellees/homeowners, and determined that Lloyd’s was not entitled to rescission of the property insurance policy issued to the homeowners.

In 2007 Raul Jimenez, on behalf of himself and his wife, Ada Jimenez, completed and executed an application for homeowner’s insurance policy on their home built in 1985, with assistance from their insurance agent, A & A Insurance Underwriters (“A & A”). A & A submitted the Jimenez’s homeowner’s insurance application to a managing general agent of Lloyd’s. During the application process, A & A asked whether Mr. Jimenez had a smoke, temperature or burglar alarm, and if so, whether these alarms were monitored. Mr. Jimenez said he had a monitored central station alarm on the property. On the application form, Mr. Jimenez designated the central station monitor as a protection device that monitored for smoke, temperature, and burglary. After signing the application, Mr. Jimenez was given a copy and was given a chance to ask questions and make sure his answers were true and correct. The policy was given a discount because of the representation that the Jimenezes had a central station alarm monitoring for smoke, temperature, and burglary.

The policy was renewed three times with the same representation and warranty about the alarm system.

In August 2009, there was a kitchen fire at the Jimenez’s home.

Delta Alarm Systems monitored and maintained the Jimenez’s alarm system. At trial, Jose Quintero, the corporate representative of Delta Alarm Systems, testified that the Jimenezes had a burglar alarm but not a central station monitored smoke or temperature alarm system. Lloyd’s expert testified why the alarm warranty was material.

New York law has long provided that “the breach of an express warranty [in a marine insurance policy], whether material to the risk or not, whether a loss happens through the breach or not, absolutely determines the policy and the assured forfeits his rights under it.” [Cogswell v. Chubb, 1 A.D. 93, 36 N.Y.S. 1076, 1077 (1st Dept.1896) (navigation limit warranty), aff’d, 157 N.Y. 709, 53 N.E. 1124 (1899)]. As New York’s Court of Appeals has explained, an express warranty in a marine insurance policy “must be literally complied with, and that noncompliance forbids recovery, regardless of whether the omission had a causal relation to the loss.” [Jarvis Towing & Transp. Corp. v. Aetna Ins. Co., 298 N.Y. 280, 82 N.E.2d 577, 577 (1948)]

ZALMA OPINION

A “warranty” in an insurance policy is an important and enforceable promise made by the insured to the insurer as an inducement to issue the policy. A failure to fulfill the warranty voids the coverage. In Marine Insurance a key warranty is a warranty of seaworthiness while in land based policies the warranties one sees are usually warranties of security like burglar or fire alarms, sprinkler systems, the need for a safe or a security guard, or regular inventories. All are important to the risk and must be met and fulfilled by the insured for coverage to apply.

(c) 2024 Barry Zalma & ClaimSchool, Inc.

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