Blog Question: Non-Vitiation Clause afternoon Allan,

Can you please explain what a Non Vitiation clause is all about?


Steve [surname and email provided]

Hi Steve,

Another name for a Non-Vitiation clause is a Breach of Conditions clause.

In most jurisdictions, a mistake or misrepresentation of a material fact by the Insured entity gives sufficient reason for the insurance company to argue that the insurance policy to be void or under the Australian Insurance Contract Act 1984 (Cth) to reduce a payment by the amount the insurer has been prejudiced.

This could harm the interests of the financiers who in the normal course of their due diligence investigations prior to lending, would not be in a position to identify such a breach.

Including a non-vitiation clause in the insurance policy prevents the insurer from refusing to pay the project company on the basis of defences based on such mistakes or misrepresentations.

In Australia, the Concessions Agreement, which the major finance providers and insurers were signatories in Australia, provided protection to financiers in a similar way but this agreement was let lapse in, from memory the late 1980’s and no longer has relevance.


4 responses to “Blog Question: Non-Vitiation Clause”

  1. Matthew Frost says:

    That’s the clearest explanation of non-vitiation I have seen so many thanks. Why, in the interests of simplicity and transparency, can’t such clauses be named in a more simple manner reflecting what they do?

  2. Allan says:

    Thanks Matthew for your kind words. As for the name, I could not agree more. One of my personal crusades, working with Steve Manning and some underwriters is the whole language of insurance. Customers often do not understand what we are saying and are embarrassed to ask for fear of looking silly. We owe it to them to simplify the contracts/coverage.

  3. Peter Mikkelsen says:

    Thank you for the explanation of the clause.

    Why would a insurance company accept such clause? As a Underwriter I would be very frustrated to pay a non covered claim to any party, even if the financier is innocent and not the one breaching the terms and conditions of the insurance policy.

  4. Allan says:

    Hi Peter

    I am not an underwriter and so cannot answer the question. As a claims person I always felt the Concessions Agreement was biased to the financier. I would explain why using a case I was involved in when it was in place. Insured sets fire to an insured property. He is convicted and jailed as a result of the good work of the team I was working with. Bank seeks payment under the concessions agreement and is paid out the equity owing on the debt of the crook. Bank no longer have equity and return the title of the land, which obviously has some value to the Insured. Bank is protected, Insured gets his title back and can probably sell the land for a good sum and the only loser is the Insurer – I accept that the person does jail time but so he ought.
    Back in the day, the payback from Concessions Agreement for the Insurer was that if the Insured failed to pay the premium, the financier would step in and pay it. The question then is, if the Insured cannot afford the premium or is not prudent enough to protect their asset with insurance, are they the type of Insured you want on your book?
    So, my answer remains, I do not know for sure but my guess is that the financiers seek to protect themselves and I assume they advise the Insured and or their broker they will not accept the insurance. It is then up to the Insurer to build into their price the added risk.

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