By Dumisani Dlamini – Head of Claims
Warranty Vs Recommendation
Many people often confuse the two to mean one and the same thing in (re)insurance. The truth of the matter is that these two are different and the application thereof is vastly different. Let us unpack the meaning of these two terms in insurance.
What is a Warranty in insurance
In simple terms, a warranty in a traditional insurance contract is a promise. A warranty is a contractual term whereby the insured guarantees that a certain fact is true or that a particular state of affairs will continue during the policy period. Warranties must be strictly adhered to, irrespective of whether the breach is material to the risk or casually connected to the loss.
Once breached, a warranty renders the policy void. It is irrelevant whether the breach was intentional or inadvertent, the consequence is the same, and no liability arises under the policy.
In short, a warranty is a requirement for coverage to apply, and the policyholder is legally obligated to comply in order for the policy to respond.
However, with the evolution of the insurance industry, the UK Insurance Act 2015 marked a fundamental shift. Section 10 of the UK Insurance Act 2015 converts breach of warranty b` from a terminating event into a suspension of cover, while Section 11 prevents insurers from relying on a breach unless it increased the risk of the loss that actually occurred. This reform significantly limits technical repudiations and has influenced global market practice.
The definition of a recommendation in insurance
A recommendation is non-binding advice, often issued by a risk surveyor, which is meant to improve safety or reduce the likelihood of a loss. Unlike a warranty, it does not automatically void coverage if you fail to follow it. An example would be advising a business owner to install a parameter wall around their business premises within 30 days of the commencement of cover to minimize burglary-related losses.
If a recommendation is ignored, the premium might remain even higher at renewal of the policy because the insured failed to reduce the risk. The insurance coverage will remain valid, and the (re)insurer cannot reject or repudiate a claim because the surveyor’s advice was not followed. In many instances the insured is unable to implement the recommendation because of circumstances beyond their control.
The risk surveyor or the insurer may give guidance to reduce risk, but the policy holder is not legally obligated to comply.
It is therefore important to understand the difference between a Warranty and a Recommendation