This note explains our approach to complaints where an insurer says a consumer did not "disclose" (tell the insurer) everything they should have when taking out an insurance policy.
In most of the cases we see, the insurer says the consumer gave an incorrect or inaccurate answer to a question. So this note mainly uses the term "misrepresentation" - which includes "non-disclosure" but has a wider meaning.
The complaints we receive generally arise after the insurer rejects the consumer's claim and "avoids" a policy - in other words, treats the policy as though it never existed by refunding all the premiums paid. The insurer may base their decision to do this on the grounds that the consumer did not provide accurate information when they took the policy out.
But we also see cases where the consumer is unhappy that the insurer wants to charge an additional premium to continue providing cover after discovering a "misrepresentation".
On 6 April 2013, the Consumer Insurance (Disclosure and Representations) Act 2012 (referred to as "the Act" in this note) came into force. The Act says that the consumer's duty is to "take reasonable care not to make a misrepresentation" - replacing the previous duty to disclose all necessary information.
The Act has not changed the way we look into cases about misrepresentation and non-disclosure - because the law now reflects the approach we were already taking.
When deciding whether a consumer has taken "reasonable care", the Act requires the courts to consider:
The Act says that if it is found that the consumer "misrepresented" something and this had an effect on the policy, the way the insurer can respond depends on whether the misrepresentation was deliberate or just careless.
We will take into account the relevant regulations in ICOBS, the insurance sector's own guidelines, and what we generally see to be good industry practice.
For example, if a case involves a health or protection policy we take into account the ABI Code of Practice: Non-disclosure and Treating Customers Fairly: for Managing Claims For Individual and Group Life, Critical Illness and Income Protection Insurance Products
When we look at a case, we consider whether - if the misrepresentation had not happened - the insurer would have:
We will take into account any available evidence that suggests what would have happened if the insurer had been given the correct information. This could include:
If the insurer cannot show that the misrepresentation affected its decision about whether (or how) to offer cover, we are unlikely to agree it was fair for it to:
We will consider whether a consumer took "reasonable care" when answering the questions they were asked.
If we decide that the consumer took reasonable care, we generally say that the insurer should disregard the misrepresentation. This means that if the insurer has avoided the policy, it should be reinstated as it originally was. And if the insurer accepts the claim, it should be settled in full.
If we think the consumer did not take reasonable care when answering, we usually consider a "proportionate" response to be appropriate. There is a section about proportionate responses below.
But where we consider that a misrepresentation was deliberate or reckless, we may say it is reasonable for the insurer to avoid the policy. That means the insurer can:
And where we decide it is likely that the consumer's misrepresentation was made to obtain a benefit they weren't entitled to - for example, cheaper premiums - we may say it is reasonable for the insurer to keep all the premiums when avoiding the policy.
We will look at the available evidence to decide whether the insurer explained:
We will then consider whether the questions the insurer asked were clear - and whether the consumer answered them correctly.
We will bear in mind that a consumer can only answer questions to the best of their knowledge and belief - and it may not be reasonable to expect a consumer to have a precise recollection of when certain events happened. So we will look at whether the insurer made it clear that the consumer should check their records rather than guess.
Once the questions have been answered, insurers often send out a statement to confirm the information provided. We will look to see whether the consumer was asked to check and sign this statement - and we will make sure that questions it sets out match those that the consumer was actually asked.
Generally, it is considered good industry practice for insurers to record sales calls and to keep good records of applications made over the internet or in person. So we will usually be able to examine these carefully.
But if we do not have evidence that clear questions were asked - and that the insurer gave the consumer appropriate warnings about the consequences of giving an inaccurate response - then we are likely to say that the consumer took reasonable care and that the misrepresentation was innocent, rather than careless or deliberate.
We are unlikely to say an insurer should have expected a consumer to provide information if we think:
And we usually say it is not reasonable to expect a consumer to provide:
We sometimes see cases where the insurer says the consumer did not disclose information about something that happened:
In these circumstances, we consider whether:
An insurer might say that when renewing a policy, the consumer did not give important information about something that had changed since the policy started or was last renewed.
In these circumstances, we look at the documents sent to the consumer before renewal and consider how clearly they explained the requirement to tell the insurer about those changes.
We may find that an insurer asked a general question - for example, "has anything changed in the information we asked for in your proposal form?" If we think the question was not specific enough, we are likely to say that the consumer could not reasonably have known what information was important.
When deciding whether the action an insurer has taken is fair, we will consider whether a misrepresentation had an effect on the contract.
For example, if a consumer did not tell the insurer about a conviction that was live when the policy was taken out but had been spent by the first renewal, we are likely to say that the insurer should only avoid the original contract.
Mr M took out a home insurance policy in October 2010. The policy was renewed in October 2011.
When taking out the policy in 2010, Mr M was asked whether he had "had any claims, accidents or losses in the last five years". Mr M mentioned:
There was another escape of water from Mr M's property in December 2011. When the insurer investigated his claim, it found that he was also paid £1,000 in settlement of an accidental damage claim in June 2006.
The underwriting criteria that the insurer used confirmed that cover would not be offered where there had been three or more claims in the previous five years. Mr M said that the claim had slipped his mind - but the insurer decided to avoid the policy.
We upheld Mr M's complaint. We decided that although the 2006 claim was relevant when the policy was first taken out, it wasn't when the policy was renewed. We accepted that Mr M's misrepresentation may have affected the 2010/2011 contract. However, it had no impact on the 2011/2012 contract, so the insurer still needed to deal with his water damage claim.
The Act sets out what an insurer can do when a consumer fails to take reasonable care. The remedies are the same as those that we have always recommended.
Where we decide that a consumer has not taken reasonable care but that this wasn't deliberate, we generally say the insurer should take a proportionate approach. This means that the insurer should base its approach on what it would have done if the consumer had taken reasonable care and provided the correct information.
So if the insurer would have accepted the risk but charged the consumer a higher premium, we usually say that the insurer should consider the claim. If the claim is valid, the insurer should pay it in proportion to the premium that was actually paid. For example, if the consumer had been paying half the premium they should have, then we will say the consumer should get half the settlement if the claim is accepted.
However, if the insurer decides to charge the additional premium and settle the claim in full instead of settling the claim proportionately, we may also decide this is fair - provided the insurer deducts the additional premium from the claim settlement and does not put the consumer in a worse position than they would be in with a proportionate settlement.
Where the consumer hasn't made a claim and the misrepresentation was discovered for some other reason, we generally say it is fair for the insurer to charge an additional premium.
If we think it is likely the insurer would have applied different terms to the policy if it had been given correct information, we may decide that it is reasonable for these to apply retrospectively. In some cases, this will mean that the consumer's claim is no longer covered.
If we think it is likely the insurer would not have offered any cover if it had been given correct information, we may say that it can avoid the policy and not pay any claim(s) made under it. But before we do, we will look very carefully at whether the consumer failed to take reasonable care.
If we decide the consumer did take reasonable care and so it was not fair for the insurer to have avoided the policy, we are likely to say that it should treat the policy as if it was in force and assess the claim - subject to the policy terms and conditions.
If we decide that cover should be reinstated in this way, our £150,000 award limit does not apply - because we are telling the insurer to re-instate a policy and then deal with a claim. The award limit applies only where compensation is a money award for financial loss the consumer has suffered - not as a limit to any future amount that is paid only if the insurer accepts the claim.
Where the consumer hasn't made a claim and the misrepresentation was discovered for some other reason, we generally say it is fair for the insurer to amend the policy terms retrospectively – provided we agree that the consumer did not take reasonable care. We may also say it is fair for the insurer to change any extra premium that would have been payable.
Miss J took out a car insurance policy in December 2010. When doing so, she was asked if she had "had any motoring convictions and fixed penalty offences in the last 5 years. This includes any convictions where the conviction ended in the last 5 years." Miss J answered "no".
In February 2011, Miss J was involved in an accident and made a claim for the damage to her car. As the vehicle was damaged beyond economical repair, the cost of settling the claim was estimated to be the car's market value of £4500.
While the claim was being assessed, Miss J told the insurer that she had received a fixed penalty for speeding in March 2009, receiving a fine of £60 and three penalty points. Miss J said she had rushed the application for the policy and forgot to mention the fixed penalty.
The insurer avoided the policy and rejected Miss J's claim. Miss J was unhappy with this and brought the complaint to us.
The underwriting criteria that the insurer used showed that 10% would have been added to the premium if the insurer had known about the 2009 fixed penalty when the policy was taken out.
We upheld the complaint. We decided that Miss J had not taken reasonable care in answering the question asked by the insurer - but we thought the insurer should have taken a proportionate approach. So we told the insurer to reinstate the policy and consider the claim - and pay the appropriate proportion of the vehicle's market value if it was accepted (approximately 91% in this case).
Mr S took out a home insurance policy in October 2009 and renewed it every following year.
When Mr S took out the policy out over the telephone, he was asked whether anyone at the property had "ever been convicted of, or is awaiting trial for, any crime other than motoring offences". Mr S answered "no".
In July 2010 Mr S's home was broken into, resulting in malicious damage and the theft of various items.
While investigating the claim, the insurer discovered that Mr S had an unspent conviction for assault at the time he took the policy out. Mr S had served a community sentence.
Mr S's explanation for the "misrepresentation" was that he thought the conviction had been spent. But the insurer avoided the policy and refunded the policy premiums to Mr S, who brought a complaint to us.
The underwriting criteria the insurer had been using showed it would not insure anyone with unspent criminal convictions. So the insurer would not have offered Mr S cover if it had known about his conviction.
We did not uphold Mr S's case. We decided he had not taken reasonable care - so it was not unreasonable for the insurer to have avoided the policy.
If an insurer waives its right to avoid a policy after discovering a misrepresentation, we would not generally think it fair and reasonable for it to later change its mind about this.
Even if the insurer did not formally tell the consumer that it was waiving its right, we might conclude that the way it acted suggested that it had taken that decision. For example, if the insurer agreed to settle a claim (or relied on another policy term to reject it) after becoming aware of the misrepresentation, we would usually say that the insurer has effectively waived its right to avoid the policy.
Where a policy was sold by an intermediary - for example, an insurance broker - consumers sometimes tell us that the intermediary was aware of the correct information but:
In these cases, we consider whether the intermediary was acting as the agent of the insurer or of the consumer.
Generally, if an intermediary is "tied" to just one insurer - or a small number of them - and could offer only their products, we are likely to say it is acting as the agent for the insurer. So we will deal with the case as if it were about the insurer.
But if the intermediary was independent and could advise on (or arrange) insurance from a wide range of insurers, then we are likely to view it as acting for the consumer. In these circumstances, we will consider the complaint about the intermediary (although if the sale took place before 14 January 2005, we may not be able to look into the case).
Where we decide in a complaint against an intermediary that a misrepresentation took place because of the intermediary's negligence, we usually tell the insurer to deal with the claim proportionately.
This means that the insurer should not cancel the policy and tell the consumer to get redress from the intermediary - but instead deal with the claim as if the consumer had not taken reasonable care. If the insurer pays only a proportionate settlement, the consumer can then go to the intermediary to make up the shortfall.
Although the Law Commission is consulting on further reform, the Act does not currently apply to commercial contracts. So our approach to cases involving misrepresentation by small businesses is similar to our approach where the consumer is an individual.
If we consider that the small business is financially "unsophisticated" - for example, where it has a small turnover, a simple structure, and is not involved with financial and/or legal services - our approach to deciding whether it took reasonable care is much the same as our approach in cases involving individual consumers.
But where we think a small business may be more financially sophisticated - for example, if it offers financial and/or legal services - we will consider whether it is reasonable to expect it to have shown a higher standard of care.
Our general approach to misrepresentation is applicable to all types of insurance.
But when we receive complaints involving pure protection insurance - policies that insure against the consumer's death or incapacitation - we also refer to the Association of British Insurers' (ABI) Code of Practice: Non-disclosure and Treating Customers Fairly: Managing Claims for Individual and Group Life, Critical Illness and Income Protection Insurance products
The TCF Code was first introduced as guidance in January 2008, and then as a code of practice in January 2009. It is very similar to our established approach.
When looking at these cases, we may give more weight to answers consumers gave to questions we think are clear than to those we decide are not. The TCF Code gives examples of questions that may be considered unclear:
When an insurer is assessing a claim, we generally say that it is reasonable for it to ask for the information it needs to confirm that the insured event actually took place. But unless we think it is likely some relevant information was not given when the policy was taken out, we are unlikely to say it is reasonable for the insurer to ask for more than this.
We sometimes see cases where insurers have assessed a claim based on information sent to them by the doctor(s) giving treatment to the consumer. In these circumstances, we will consider whether this information was sent in response to a specific, relevant and properly-targeted enquiry from the insurer. We will consider the collection of "lifestyle" information – for example, about the consumer's alcohol consumption – in the same way.
Mrs A applied for a life and critical illness policy in May 2000. In answer to a question about whether she had smoked in the last 12 months, Mrs A ticked the "no" box.
To assess the application, the insurer asked Mrs A's doctor various health-related questions - but did not ask about lifestyle factors like smoking. After receiving the answers, the insurer accepted Mrs A's application on standard terms and the policy started.
Mrs A was diagnosed with a brain tumour in April 2010 and made a critical illness claim on the policy. The insurer wrote to the Mrs A's doctor again and asked for more details about her condition. It also asked whether Mrs A had ever smoked, and for a list of all her significant medical and family history.
The doctor sent the insurer some medical records showing that the symptoms of the brain tumour were first seen in early 2010. The records also said that in June 1999 (11 months before taking the policy out) Mrs A was smoking around one to five cigarettes a day. There were no other references to smoking in the records.
Mrs A said that as far as she could remember, she had stopped smoking before June 1999. She suggested that the entry from June 1999 may have wrongly referred to her past cigarette consumption as being current.
The insurer decided that the Mrs A had not taken reasonable care when answering the questions in its application form. So it paid a proportionate settlement, reducing the amount paid by 50%.
We upheld the case. We did not think it was reasonable for the insurer to believe that the Mrs A had omitted or misrepresented her medical, smoking or family history when she took out the policy ten years earlier - and we did not see any evidence that there was any link between the diagnosed brain tumour and smoking.
We also considered it was likely Mrs A had answered the question about her smoking with reasonable care. Other than the disputed entry in the medical records, there was no other evidence that she had smoked in the 12 months before she applied - and we accepted her answer was likely to have been a reasonable estimate of when she last smoked.
We told the insurer to pay the outstanding balance of the claim, adding interest on that amount from the date of its decision to pay proportionately to the date of settlement.
Our approach to complaints about intermediaries acting negligently is broadly the same no matter what type of insurance was sold. But where the insurance was a pure protection policy, we take account of what the TCF Code says:
"insurers should always try to establish the facts and credibility of allegations that non-disclosure arose as a consequence of failures during the sales process and their effect on the customer, paying special regard to those parts of the process for which the insurer, or those acting for the insurer, is responsible."
The section "intermediaries" above has more information about our approach to this type of case.
The TCF Code says that an increase in risk should be considered "trivial" if it:
Where we agree that a misrepresentation affected the insurer's risk assessment within these limits, we are likely to say that a claim should be treated no differently than if the misrepresentation had been careless. And if we decide the consumer took reasonable care, there will be no effect on the claim.
The TCF Code says that insurers should not turn claims down because of misrepresentation if the missing or incorrect information was only relevant to a "severable" benefit unrelated to the claim. This applies even where the misrepresentation was reckless or deliberate.
The TCF Code says that:
are both "severable" benefits.
If we decide that an insurer caused the consumer distress and/or inconvenience because it avoided the policy or because of how it handled the complaint, we will consider telling it to pay compensation. There is more information about our approach to this in our note on compensation for distress, inconvenience or other non-financial loss.
contact our technical advice desk on 020 7964 1400