Key Takeaways

  • A warranty in an insurance contract is a binding promise that, if breached, can void coverage.
  • Breach of warranty insurance provides financial protection when a warranty is broken, particularly in commercial transactions and M&A deals.
  • Courts often differentiate between conditions, warranties, and representations—each carries distinct legal consequences.
  • Not all breaches lead to denial of claims; courts may consider the materiality of the breach and insurer prejudice.
  • Policyholders should clearly understand the scope and consequences of warranties in their insurance policies.
  • Seeking legal advice is vital when drafting, interpreting, or disputing warranty clauses in contracts and policies.

A breach of warranty clause helps ensure that your company is protected against claims or lawsuits made by clients for not guaranteeing that your products or services are not of proper quality.

In general, a breach of warranty is less severe than a breach of contract. In a breach of contract case, because one party did not meet the terms of the contract, the complainants can sue for damages and invalidate the contract entirely. However, because a warranty isn't a determining factor of contract validity, a complainant can only sue for damages in a breach of warranty case, but can't invalidate the contract.

Types of Warranties

The main types of warranties are:

  • An express (i.e., expressly stated) warranty is clearly stated in writing or verbal, and guarantees that a company will repair its products if they become defective within a defined period of time. For example, an appliance manufacturer might guarantee that their oven won't have any defects for the first year of purchase or the manufacturer will repair or replace it.
  • An implicit warranty does not have to be written or oral, but guarantees that a product will be able to perform its intended purpose. For example, an appliance manufacturer can guarantee that their oven will be able to cook food.
  • A lifetime warranty has no expiration date and typically applies only to the lifetime of the original buyer, not the lifetime of a product itself. For example, if a grandparent bequeaths a watch with a lifetime warranty to you upon their death, the lifetime warranty is no longer valid once the grandparent has passed away.
  • An extended warranty has a time limit that generally expands beyond the express warranty and may only cover certain components of the product. For example, certain parts of a car may be covered beyond the initial purchase period.

The Uniform Commercial Code

Warranties are covered by the Uniform Commercial Code (UCC), which has been adopted throughout the United States. According to this code, in a breach of warranty case, the amount of damages a company is liable for is the difference in value between the product the buyer thought they were receiving and the product they actually received.

What Should Be Included in a Warranty?

As with many clauses included in contracts, warranty clauses should be as specific and detailed as possible. Some elements to include are:

  • The amount of time covered by the warranty, such as one year from the date of purchase.
  • The steps the customer should take to obtain any warranty services, such as mailing a product to the manufacturer.
  • The information the customer should provide to obtain warranty services, such as a receipt or purchase order.
  • The services supported by the warranty, such as repairs or replacement.
  • Any exceptions to the warranty, such as using the product for a purpose other than the manufacturer intended.

Insurance and Breach of Warranty

Commercial general liability (CGL) insurance protects an organization against claims for bodily insurance and property damage caused by the company's operations or products. This insurance doesn't typically cover breaches of contract, but there have been recent cases that debated the role of CGL insurance coverage in breach of warranty lawsuits. If your company is at risk for a lawsuit due to a breach of warranty, you should review your CGL insurance policy and find out whether these claims are covered.

Some CGL insurance providers have claimed that they are not responsible for defending or indemnifying the insured parties in breach of warranty cases. These insurers argue that due to certain contract liability exclusions within the policies, they are not responsible for covering claims arising from liability assumed by the insured party's contracts, such as when a company includes a product guarantee in their contract. Each case is different and the court's finding on the arguments have varied, with some courts finding in favor of the insurance companies and others finding in favor of the insured parties.

If your company is faced with a breach of warranty claim and your insurer says that your coverage doesn't cover this type of claim, you may want to consult an attorney and determine if there is any case law to substantiate your side.

Breach of Warranty Insurance in M&A Transactions

In mergers and acquisitions, breach of warranty insurance—commonly referred to as Representations and Warranties Insurance (RWI)—is widely used to protect buyers from unknown risks tied to the seller's warranties.

Benefits of RWI in M&A:

  • Clean Exit for Sellers: Sellers can walk away without setting aside large escrow amounts.
  • Risk Transfer: Buyers gain assurance that they can claim against the insurer if a warranty proves false.
  • Deal Acceleration: Facilitates faster negotiations by limiting post-closing disputes.

Typical warranties covered include accuracy of financial statements, compliance with laws, ownership of assets, and pending litigation. However, insurers may exclude known issues discovered during due diligence.

Case Law Trends in Breach of Warranty Insurance Disputes

Courts are increasingly examining breach of warranty claims in light of evolving contract doctrines and fairness principles. Notable trends include:

  • Enforcement Based on Prejudice: U.S. courts may deny insurers the ability to void policies unless the breach caused actual prejudice to the insurer.
  • Distinction Between Conditions and Warranties: Some courts treat warranties as representations if the policy language is ambiguous.
  • Burden of Proof: Insurers generally bear the burden of proving that a warranty was breached and that the breach falls within a valid exclusion or condition of the policy.

Understanding these trends helps both policyholders and insurers manage expectations and litigation strategy in breach of warranty insurance disputes.

Drafting Effective Warranty Clauses in Insurance Contracts

To reduce ambiguity and litigation risk, warranty clauses in insurance contracts should be drafted with care. Effective drafting involves:

  • Clarity: Define each warranty precisely to avoid confusion with representations or general conditions.
  • Materiality Standard: Consider including language that limits insurer remedies to material breaches.
  • Cure Provisions: Allow the insured a reasonable opportunity to remedy the breach before the insurer can deny coverage.
  • Examples of Warranties:
    • Alarm systems must be active at all times.
    • The insured must notify the insurer within 30 days of a material change in risk.
    • Goods sold comply with specified legal or quality standards.

Legal Consequences of Breaching Insurance Warranties

In insurance law, a warranty is a strict condition. A breach—regardless of whether it caused the loss—can entitle the insurer to void coverage from the date of the breach. Courts typically enforce warranties rigidly unless modified by statute or policy language.

Legal implications include:

  • Automatic Discharge: The insurer may be discharged from liability from the moment the warranty is breached.
  • No Causation Required: Unlike general contract breaches, breach of warranty in insurance does not require the breach to be connected to the insured event.
  • Statutory Reform: Some jurisdictions (like the UK via the Insurance Act 2015) now require the breach to be material to the loss or give the insurer a right to suspend, not terminate, coverage.

Understanding Breach of Warranty Insurance Coverage

Breach of warranty insurance is a specialized form of coverage that protects a party—typically a buyer or an insured—against financial losses resulting from the breach of a contractual warranty. This type of insurance is most often used in complex commercial transactions such as mergers and acquisitions, real estate deals, and supply agreements.

Key features include:

  • Risk Allocation: It transfers the risk of warranty breaches from one party (usually the seller) to an insurer.
  • Indemnification: If a breach occurs, the insurer compensates the policyholder for losses, subject to the policy limits, deductibles, and exclusions.
  • Common Use Cases:
    • M&A transactions where sellers provide warranties about the business’s financials, tax compliance, or legal status.
    • Insurance policies that contain warranties—e.g., marine or property policies with safety maintenance clauses.

Frequently Asked Questions

  1. What is breach of warranty insurance?
    It’s a type of insurance that protects an insured party from financial loss if a contractual or policy warranty is breached.
  2. Does a breach automatically void my insurance policy?
    In many cases, yes—particularly in jurisdictions that treat warranties strictly. However, modern laws may limit this if the breach is immaterial or unrelated to the loss.
  3. How does breach of warranty insurance work in M&A deals?
    Buyers purchase it to cover losses if the seller’s representations about the business turn out to be false. It helps reduce post-closing disputes.
  4. Are all warranties in insurance policies enforceable?
    Not always. Courts may decline to enforce ambiguous or overly broad warranties, especially if doing so would be unfair or against public policy.
  5. Can I recover under breach of warranty insurance if the breach didn’t cause the loss?
    Yes. Unlike negligence claims, breach of warranty typically doesn’t require causation—though some modern statutes now impose a materiality or causation requirement.

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