Airmic 2013: Basis clause guide aims to remove ‘unfair’ restrictions

Airmic today launched a guide and model wording to raise awareness and counteract the impact of basis clauses, which often lie buried in insurance contracts and can result in legitimate claims not being paid.

Basis clauses operate as a warranty that all information given by the insurance buyer at the time of placing insurance is correct. Any minor factual error will discharge insurers from liability under policy even if the error is unintentional and not material to the risk.

Airmic chief executive John Hurrell said: “Basis clauses are currently prevalent in the market, and we think they are unfair, unnecessary and not as well understood as they should be.”

Basis clauses have been criticised by the Law Commission and no longer apply in relation to consumer insurance. The Law Commission is proposing, as part of its reconsideration of the law on warranties in insurance contracts, that they should be abolished in commercial insurance as well.

Following the Law Commissions’ review, AXA Corporate Solutions UK has announced that it will remove basis clauses from its Property and Casualty contracts.

AXA Corporate Solutions UK’s Paul Lowin said: “We welcome the new Airmic guide, which is in line with the Law Commission’s recent review of insurance contract law. Following that review, AXA Corporate Solutions UK has taken a pro-active stance and we will be taking action to ensure that our Property and Casualty contracts do not contain any ‘basis clauses’, and that any existing clauses are removed. The Law Commission’s recommendations reflect our long-standing approach to the use of basis clauses in our UK wording.”

The new guide includes a sample endorsement, drawn up for Airmic by Herbert Smith Freehills LLP, which negates any basis clause included in a policy. The endorsement expressly provides that any basis clause in the agreement will be of no effect, making it impossible for insurers to rely on a basis clause to reject claims.

The sample endorsement reads: “The Insurer agrees, with effect from inception, that notwithstanding any other term of this contract, any provision in this contract of insurance or any other document to the effect that a statement or statements made by or on behalf of the Insured (including but not limited to statements made in proposals for insurance) form part of or are the basis of the contract of insurance shall be of no effect. All other terms and conditions remain unaltered.”

Hurrell added: “It’s important to stress that this clause does not remove the need for firms to produce honest and accurate proposals when seeking insurance cover and the rules of non-disclosure clearly still apply. The insurers to whom we have spoken are mostly accepting of our initiative.”