The breach of a guarantee can no longer be considered an automatic release from liability but rather a suspension of liability. Once the breach of a guarantee is remedied, the insured regains coverage. Guarantees are now considered suspensive conditions. These are provisions that improve the insured’s position, but the contract clauses may alter these reforms somewhat. The English P&I Clubs have already issued statements.

By Dr. Leonidas Villagran

English Marine Insurance Law is undergoing profound changes. One of these is the case of warranties. Before the reform of the new Insurance Act of 2015, they were treated similarly to resolutory conditions (also exclusions), but with a different and stricter connotation in Anglo-Saxon law. The peculiarity was that in the event of a breach, it generated an immediate and automatic release of the insurer’s liability, even if the breach was unrelated to the loss and only temporary. This is known as the “strict performance” doctrine.

The reform modifies this doctrine and ushers in a new era for guarantees in marine insurance, but in practice, it depends on how insurers draft the terms of their contracts.

The strict performance doctrine for guarantees has persisted since the 18th century and was ratified by the English Marine Insurance Act of 1906, now considered an obsolete principle of law.

With the passage of the new English Insurance Act of 2015, which came into effect on August 12, 2016, a dramatic change occurred. A new regime was established in accordance with international standards, as proposed by the Law Commission in 2014, although there had been long-standing calls for amendments. This same commission reveals that when asked about changes to the doctrine of guarantees, 80% of those consulted agreed with the need to reform the law (specifically sections 33 and 34 of the Marine Insurance Act of 1906).

The old principles balanced the insurance relationship in favor of the insurer, categorizing promissory guarantees as draconian requirements that had to be strictly met. These principles stipulated that when a guarantee was breached, the insurance policy became worthless and the insurer was released from liability, with no recourse unless the insurer itself agreed to it. The guarantee did not necessarily have to be related to the risk. Consequently, the insurer was not obligated to pay for a loss when any guarantee had been breached.

According to the English Marine Insurance Act of 1906, a promissory guarantee (or simply guarantee) is defined as a guarantee through which the insured undertakes to do or not do a particular thing, making an affirmation or denial about a specific situation. Examples of guarantees might include phrases in the policy such as: “Guarantee to sail with all firefighting equipment,” “Guarantee not to sail during a hurricane warning,” or “Guarantee to sail only in national waters.” Taking this last example, if the insured vessel carried a promissory guarantee from the insured not to leave national waters, but the insured mistakenly did so, and a loss subsequently occurred in national waters, the insurer could claim that its liability ceases from the moment the insured broke the guarantee, even if the insured returned to national waters, even if the loss occurred in national waters, and even if the mistake of temporarily violating the guarantee had no bearing on the loss.

The old concept of warranties also extended to what is known as the basis of the contract. Consequently, any false statement made by the insured before the signing of the insurance contract that is considered a basis of the contract releases the insurer from liability in the event of any loss, even if it is unrelated.

The Insurance Act 2015: Warrant Reform
The legal reform ushered in a new era for marine insurance in England. The old principle of strict performance in marine insurance was dramatically modified. The result is that a breach of a warranty in the insurance contract only results in a suspension of the insurer’s liability. This suspension of the insurer’s liability remains in effect until the breach is remedied.

English law shifts from automatic release from liability to suspension of liability when a warranty breach occurs. Consequently, insurers are not obligated to pay a loss when it occurs while the suspension is in effect, but if it is remedied…