Option meant to protect against inflation saw customer lose out

Income Protection

Marilyn took out an income protection policy with an option to protect against inflation. But when her insurer made changes to its policy, she didn't think this was fair, so came to us.

What happened

Marilyn took out an income protection policy. When she took out the policy, she selected an option that protected her against the effects of inflation. This would increase the benefit by 7.5% each year. It was subject to an annual increase in premium, which Marilyn was happy to pay.

Three years later, Marilyn became disabled and made a claim on her policy. The insurer wrote to tell her how they would calculate her benefit. With the standard policy, two-thirds of someone's earnings before the claim would be restricted.

But because of the option she selected when taking out the policy, Marilyn’s benefit payments were more than this.

For several years, Marilyn’s benefit payments continued to increase at the rate of 7.5% per year. But then the insurer reviewed its policies. They decided that the restriction on the standard policy overrode the increases arising from the inflation-protecting option.

When the firm rejected Marilyn’s complaint about the reduction of her benefit, she came to us.

What we said

We checked both sides of the story and the evidence available. It was clear from the policy documents that the option Marilyn selected was intended to offset the effects of inflation. We could see this was how it was sold to Marilyn.

But neither the policy, or the promotional literature made it clear whether the benefit cap applied to this option. We felt it would be reasonable for Marilyn to have assumed the two-thirds cap wouldn’t have applied, as it appeared to apply only to the standard policy.

If the cap had been applied to this option from the start of Marilyn's claim, it wouldn't have been the best option for her to take. This is because when she started her claim, her benefit was already two-thirds of her pre-disability earnings. With the cap, she wouldn't have benefited from the increase the option intended to provide.

We felt the way the policy was represented and sold didn't make it clear that the benefit cap would limit any increase arising from the option.

We decided it would be unfair of the insurer to restrict Marilyn’s claim to the original benefit limit. So we told the insurer to reinstate the increases arising from the option. We also told them to backdate any payments owing to her, plus interest.