Payment protection insurance (often referred to as 'PPI') is intended to provide cover against risks that might lead to an individual having difficulties making the repayments for their mortgage, credit card debts, or loans. It is a feature of this type of insurance that it pays out for only a limited period and is seldom intended to pay off the whole debt.
Complaints about payment protection insurance have always formed a regular part of our workload and have tended - in the main - to involve situations where an insurer has refused to pay a claim.
Increasingly, however, we are starting to see complaints about other aspects of this type of insurance. These include complaints about the administration or operation of the policy, or about the sale of the policy by an intermediary (often the bank/building society or other institution making the loan or the provider of the goods or services for which the loan is being taken out).
The following case studies illustrate how we have dealt with some recent complaints involving payment protection insurance.
Mr F took out a loan from his bank to consolidate his debts, which included an existing loan with the bank. The bank also offered him payment protection insurance to cover his monthly loan repayments if he became unemployed or incapacitated. The insurance premium was payable as a lump sum of £1,700. The bank added this to his loan for £7,800, which was to be repaid - with interest - over 60 months.
Mr F's financial situation improved over the next year and he asked the bank if he could pay off the entire amount outstanding on his loan. The bank agreed, but told him he would not be entitled to any pro-rata refund of the amount he had paid for the insurance.
He later told us that it was only as a result of this conversation that he realised just how much the insurance had cost him. And he said it was only at this stage that he discovered the insurance had been optional, as the bank had told him he could only have the loan if he also took the insurance.
The bank rejected Mr F's complaint about its sale of the policy and its refusal to give him a pro-rata refund, so he referred the matter to us.
The bank denied there had been anything wrong with the way in which it had sold the policy. And it said it had been correct to refuse Mr F a pro-rata refund of his premium. This was because the policy contained a valid and enforceable term saying that customers were not entitled to a pro-rata refund if they cancelled their policy before the end of the term.
The bank could not produce any record of the meeting at which Mr F claimed he had been told that taking the insurance was a necessary condition of getting the loan. However, the bank said it never insisted on a customer taking out payment protection insurance with a loan. The representative concerned no longer worked for the bank and was not available to comment.
The bank could not find a signed copy of its agreement with Mr F, detailing his acceptance of the loan and the payment protection policy. It did, however, produce a copy of the standard agreement that it said Mr F would have been asked to sign, as part of its normal procedure.
In our view, in selling the payment protection insurance, the bank was acting as an insurance intermediary. It therefore had a responsibility to ensure Mr F was able to make an informed choice about whether or not to take out the policy. It also had a responsibility to draw his attention to significant features of the policy. We thought that in this instance it should have stressed that:
We saw no evidence that these features had been specifically drawn to Mr F's attention, either during the sales process or in any of the documents he was given. The bank said that Mr F had taken payment protection insurance on the two previous occasions when it had given him a loan, so he must already have been fully aware of how these policies operated. However, it was clear to us from Mr F's response to our questions that he had no understanding of how the policies worked.
We accepted Mr F's evidence that he had wanted the loan in order to consolidate his debts and reduce his outgoings, and would not have added to the overall cost of his loan by taking the insurance if he had realised it was optional.
We decided that the bank's sales process in this case had been flawed, and that the bank had failed to bring significant features of the policy to Mr F's attention. We upheld the complaint and required the bank to refund the full amount of the premium, plus all the interest that Mr F had paid on this amount.
Some eight months after he had taken out a loan, together with payment protection insurance, Mr M asked the lender to clarify details of the policy benefits and restrictions. As a result of what he was told, he asked the lender to cancel the policy and refund all the money he had paid for it.
Mr M had concluded that the policy was unlikely to be of any value to him. He was 66 years old and the loan ran until he was 71. Although the policy offered cover for death, temporary total disability and hospitalisation, any pre-existing medical conditions were excluded from cover and the death benefit only covered policyholders up to the age of 70.
The lender was only prepared to offer Mr M a refund equivalent to 75% of the cost of the policy. He insisted that he should have a 100% refund and eventually he referred the dispute to us.
Mr M had arranged the loan over the telephone. He said he had thought the insurance was compulsory, as the cost of the premium had been automatically included in the details quoted to him over the phone. He had not been asked any questions about his health and had not been told that the policy would not cover him for any pre-existing medical conditions.
The lender said it had no record of the specific telephone call during which the loan was arranged. However, it sent us a copy of the script that it said its representative would have followed. We considered the exclusion from cover for a pre-existing medical condition to be a significant feature of the policy. It therefore needed to be drawn specifically to consumers' attention. However, the script made only a passing reference to the fact that 'entitlement to benefit could be affected' if the consumer suffered from a pre-existing medical condition. This was not given any particular prominence.
We noted that Mr M had asked the lender to cancel the policy as soon as he realised the implications of the exclusion for pre-existing medical conditions. So we accepted that he was unlikely to have taken the policy if he had fully understood the significance of the exclusion at the time of the sale.
The script did mention that the insurance was not compulsory. However, it did not highlight that:
In the circumstances, we decided that the policy had been mis-sold. We required the lender to refund the whole of the insurance premium, together with all the interest charged on the premium from the outset of the policy.
Mr J arranged a personal loan from his building society and took out a payment protection policy to cover his repayments for periods of sickness or unemployment.
Six months later he had an accident at work and put in a claim under his policy for sickness benefit. However, the insurer refused to meet it. It said the accident was related to a pre-existing medical condition and that such conditions were not covered by the policy. Mr B then referred his complaint to us.
The insurer said Mr J's medical records showed that on several occasions before he had taken out the policy he had received treatment for his knee. It was this same knee that Mr J injured in the accident that gave rise to his claim. After making further enquiries, we were able to confirm that this was indeed the case.
Mr J did not think the insurer's stance was fair. He accepted that the building society had told him there was a policy exclusion for pre-existing medical conditions. However, he said that since the building society had not asked him any details about his health, he had not understood how the exclusion would affect his own particular circumstances.
We explained that we do not consider it necessary for consumers to be asked about their medical history when they apply for a policy that excludes pre-existing medical conditions. It is enough that they are made aware that the policy contains such an exclusion - and are given clear information about how it will operate. We accepted that Mr J had acted in good faith. However, we felt that in the circumstances it was fair and reasonable for the firm to refuse the claim. We rejected the complaint.
Ms B applied for a bank loan in order to consolidate her existing debts and reduce her monthly outgoings. The bank agreed to lend her the sum she needed. It also arranged payment protection insurance to cover her monthly loan repayments if she became unemployed or incapacitated.
There was a one-off premium for the payment protection policy, amounting to just under £3,000. This sum was added to the underlying loan of just over £11,000, which was to be repaid - with interest - in 84 monthly instalments.
Two years later Ms B asked her father's advice on cutting her expenditure, as she was still experiencing financial difficulties. She later told us that it was only at this stage, after her father had looked closely at her loan arrangement, that she realised how much she had been paying in total for the insurance. It was also at this stage that she discovered the insurance had been optional.
When the bank refused her request to cancel the policy and give her a pro-rata refund of the premium, Ms B brought her complaint to us.
Ms B insisted that she would never have agreed to take the insurance if she had known how expensive it was. She said the bank had been aware she had only taken the loan because she was anxious to try and manage her existing debts. So she did not think it should have made her add to her outgoings by taking the insurance.
The bank was unable to provide evidence that the adviser who sold the policy had told Ms B the insurance was optional. However, it said the adviser would have followed its normal sales process, which included an explanation of the implications of opting for the insurance cover.
The bank pointed out that Ms B had signed a loan agreement which included a full breakdown of the figures. She had also been given 30 days in which to study the details of the policy and cancel it without penalty if she was not happy with it.
After reviewing the evidence, we came to the view that there was nothing in the bank's sales process that drew consumers' attention to significant features of the policy. These features included the onerous cancellation conditions and the fact that payment for the policy had to be made up-front by means of a single premium, funded out of a loan on which interest would be charged.
It was evident that Ms B had no experience or knowledge of how insurance worked. There was nothing in the bank's documented sales process that explained - in basic terms - how the policy operated. And the sales process did not allow for any response to situations such as this, where the consumer had expressed a particular need to reduce her outgoings as far as possible.
In the circumstances, we took the view that the policy had been mis-sold and that Ms B was entitled to a refund of the full amount she had paid for the insurance, plus the interest she had paid on this amount.
When Ms G took out a loan to buy a new car, she also bought a payment protection policy to cover her repayments in the event of her unemployment, disability or death.
Some three years later, after losing her job, Ms G put in a claim under the policy for unemployment benefit. However, the insurer refused to pay out. It said the policy only provided cover for unemployment that was the result of redundancy. Ms G had not been made redundant but had been dismissed from her job for under-performance.
Ms G said that the possibility of unemployment had been a particular concern when she took the loan. When she had taken out a mortgage a few years earlier, she had checked that her mortgage payment protection insurance covered her in case she lost her job. She had wanted similar cover when she took out a loan to buy her car and had thought the policy she was offered covered any period of unemployment, irrespective of the cause.
In the circumstances, the insurer offered to refund the insurance premium in full. However Ms G objected strongly to this. She said the insurer should instead pay her the unemployment benefit. Unable to reach agreement with her insurer over this, Ms G brought the dispute to us.
The insurer pointed out that it had sent Ms G a copy of the full terms and conditions as soon as she had said she would take the policy. This document stated clearly that the policy only provided unemployment cover for instances of redundancy.
Ms G admitted that she had not read the full policy terms and conditions. She said she had relied solely on what she had been told when she was sold the insurance, and she had not been told there were any restrictions on the circumstances in which the unemployment cover was provided.
After reviewing the evidence, we accepted Ms G's argument that she had been specifically seeking cover for unemployment before agreeing to borrow the money to buy the car.
We noted that the insurer's summary of the policy terms, which had been shown to Ms G at the time of the sale, referred several times to the fact that the policy covered unemployment. However, the summary did not mention that this cover was only available for unemployment resulting from redundancy. We thought this was misleading.
The document that Ms G was sent after the sale, containing the full policy terms and conditions, only mentioned once that unemployment cover was limited to instances of redundancy. And it did not give this information any prominence.
We upheld Ms G's complaint and required the insurer to pay her the full amount of benefit she would have received under the policy if her unemployment had been caused by redundancy.
ombudsman news gives general information on the position at the date of publication. It is not a definitive statement of the law, our approach or our procedure.
The illustrative case studies are based broadly on real-life cases, but are not precedents. Individual cases are decided on their own facts.