A restaurant owner applies for a commercial property insurance policy. As part of the agreement, a clause is written directly into the contract stating that the owner guarantees an automatic fire suppression system is installed and will be kept fully operational at all times. Six months later, the system breaks down, and the owner decides to delay repairs to save money. A week later, a severe fire destroys the kitchen. Based on insurance contract law, how is the owner's original statement classified, and what is the likely outcome for the claim?
- It is an express warranty; because this absolute guarantee was breached, the insurer has legal grounds to void the policy and deny the claim.Answer
- BIt is a representation; the insurer must pay the claim because the statement regarding the fire system was true at the time the application was originally completed.
- CIt is an unauthorized application change; the claim must be paid because the insurance agent did not have the owner initial a formal modification to the original agreement when the system broke.
- DIt is an example of waiver; by initially approving and issuing the policy, the insurer voluntarily gave up the right to enforce the fire system requirement later in the policy term.
Answer
The statement is an express warranty, and its breach gives the insurer the right to void the policy and deny the claim.
The correct answer identifies the statement as an express warranty. In insurance law, a warranty is an absolute guarantee of truth that is formally included in the contract. If a warranty is breached (such as failing to maintain the required fire suppression system), the insurer generally has the right to void the policy and is not obligated to pay the claim.
Step-by-Step Solution
Key Concept
Express Warranties vs. Representations