A warranty is a clause in an insurance contract that prescribes, as a condition of the insurer�s liability, the existence of a fact affecting the risk assumed under the contract.

When a contract is created between two parties, it makes a great deal of difference whether the statements made by each side are warranties or representations. If a statement is a warranty and it later turns out to be untrue in any respect, the other party may rescind the contract. If the same statement is a representation that later turns out to be untrue, the other party may rescind the contract only if the representation was material to the formation or the contract.

The doctrine of warranties originated in marine insurance more than 200 years ago, and it still plays an important role in that branch of insurance. It was developed for the purpose of controlling the risk associated with a particular insurance venture. If a certain state of affairs was deemed to be a risk-reducing factor and insurance was arranged on the assumption that such a state of affairs would continue throughout the term of the policy, the policy would condition the coverage on the existence of the favorable state of affairs. The policy would warrant that the desired conditions would prevail. For example, the frequent wars during the 18th century made it highly desirable that British merchant vessels sail under the convoy of British warships, and it was customary for marine insurers to require an insured vessel to sail under convoy or pay a higher premium. If a shipowner warranted that his vessel would sail only under convoy and then permitted it to sail alone, his coverage would be nullified. It was not necessary for the insurer to prove that the breach�the failure to sail with a convoy�materially increased the risk; materiality was assumed. Neither was it necessary to establish bad faith or fraud on the part of the insured. The insurer had only to prove that the warranty was breached.

The use of warranties gradually spread to other branches of insurance where they were less suitable. They were no longer confined to contracts sold to businesses familiar with trade and insurance practices but were liberally interspersed in contracts sold to the general public, who had no concept of the significance of warranties. Abuses inevitably developed. The situation was particularly bad in fire insurance where there was no incontestable clause to ameliorate the effect of a breach of warranty.

Warranties are no longer of major importance in the law of life and health insurance. It used to be that statements made by the applicant for life insurance were warranties. But this is no longer the case. In the 1800s insurance companies developed a bad reputation because they strictly enforced their contractual right to rescind contracts if they discovered that any statement made by the applicant was inaccurate in the slightest respect. The courts strained the law in an effort to protect the insuring public, but most states found it necessary to provide statutory relief for those persons procuring life and health insurance and, less commonly, those seeking other types of insurance. The general effect of the statutory modifications is that no breach of warranty will void a contract unless it increases the risk, contributes to the loss, or occurs with fraudulent intent.

The special legislation directed at life insurance�and, in many states, at health insurance�was brought about by the fact that, for one reason or another, most companies had begun to incorporate the application into the policy, which, according to common-law doctrine, made all statements in the application warranties. To make doubly sure of this result, some companies, by express provision, made the applicant warrant the truth of all statements in the application. This meant that the company was in a position to void the contract if any one statement in the application was not literally true.