Damage Waivers - On a collision course with regulation

As regulatory advisers, we’ve seen a recent flurry of enquiries for regulatory advice on damage waivers and the contractual drafting of them.

You’ll have encountered these peculiar creatures of contract if you’ve stood for an eternity in a car hire queue in an airport terminal and been presented with two choices - either pay an astronomical excess and/or the full repair or replacement costs if your hire vehicle is damaged or stolen; or cough up more of your holiday budget for a collision damage waiver and/or excess waiver to give you peace of mind that you won’t be bankrupted if you prang the car.

In most cases, damage waivers are not insurance products and there is good Financial Conduct Authority (FCA) guidance and court authority which places them firmly on the outside of the regulatory perimeter.

If they’re not usually insurance products, where’s the risk when including them in contracts?

Well, it all depends on how the damage waiver is structured and operates.

We all know that H20 is good for us and that we should all be drinking our eight glasses of water a day. But if you change water ‘slightly’ by adding an extra oxygen molecule (H2O2, for the scientists amongst you) you get hydrogen peroxide. Both are near colourless and odourless at room temperature and normal atmospheric pressure, but one will quench your thirst and the other might quench your life.

So, what can turn a damage waiver into insurance?

Always, the starting point is to look at the accepted definition of a ‘contract of insurance’.

For that, we look to the case of Prudential -v- Commissioners of Inland Revenue [1904] 2 KB 658. From the Prudential case, insurance is a contract under which a provider undertakes:

• in consideration of one or more payments;
• to pay money or provide a corresponding benefit (in some cases services paid for by the provider) to a recipient;
• in response to a defined event, the occurrence of which is uncertain (either as to when it will occur or as to whether it will occur at all) and adverse to the interests of the recipient.

You’d be right in thinking that most damage waivers seem to fit that definition. But we regulatory lawyers look for two other key things:

• the assumption of third-party risk by the provider of the waiver - if you’re providing a waiver of rights which aren’t yours to waive in the first place, you aren’t waiving anything; you are assuming the risk of the recipient’s liability!
• the time when the benefit is given or crystallises - under contractual waivers the benefit of the waiver is conferred at the time the contract is entered into. Under insurance contracts, the benefit is conferred in response to the defined, adverse, and uncertain event.

We’re seeing damage waivers pop up in B2C and B2B contracts across many sectors and we would encourage everyone to take some specialist advice before including one or more of them in your terms and conditions. A proper blend of insurance and commercial contract advice will help you structure the waiver correctly so that:

• you aren’t effecting contracts of insurance when you shouldn’t be - which is a criminal offence;
• its inclusion doesn’t adversely affect the rest of your agreement;
• where applicable, it doesn’t prejudice your supporting insurer’s rights or remedies, giving the ability to avoid claims or, worse still, your policy.

For further information, please contact Josh Bates or Phil Bowers or call 0151 906 1000.