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ombudsman news

issue 31

September 2003

insurance case round-up

a selection of some of the insurance cases we have dealt with recently

household insurance policy - mistaken cancellation of policy - no cover for theft claim - multiple parties - shared liability

Mr I put in a claim to the firm after his home was burgled. He was shocked when the firm said it was unable to pay out, as he no longer had any cover. The firm said it had cancelled his policy six months earlier because he had failed to pay his premiums. It had been informed by Mr I's bank that he had cancelled the direct debit.

Mr I complained to the firm, saying it should have contacted him to let him know it had not received his premiums. He also complained to his bank, asking why it had misinformed the firm about the direct debit. Unhappy with the responses he received, Mr I came to us.

complaint upheld in part
We established that Mr I's bank had been responsible for incorrectly cancelling the direct debit. And although the insurance firm should have contacted Mr I when it noticed his premiums had stopped, there was no evidence that it had done so.

But we thought that - over a period of six months - Mr I should have realised the direct debits were not leaving his account. We decided that although the bank and the firm were equally to blame for the problem, Mr I's failure to notice what was going on made him partly responsible too. We therefore apportioned liability between all concerned: 40% to the firm, 40% to the bank and 20% to Mr I.

We required the firm to deal with the claim in accordance with its usual policy terms and conditions. However, we said that (provided the claim was successful) the firm should only pay 40% of it, less an amount equalling the premiums that Mr I had missed.

The bank had already offered £8,000 in "full and final settlement". Mr I had accepted this offer and we were satisfied that it was fair and reasonable. The bank was prepared to run the risk that Mr I's claim might ultimately be rejected (under the policy's terms and conditions) or be adjusted down, in which case it would have overpaid him.

legal expenses - reasonable prospects of success - whether supplier of secateurs liable for failing to warn about danger of personal injury

After Mr B's wife accidentally cut off the tip of her finger while she was pruning her rose bushes, Mr B decided to take legal action against the shop where they had bought the secateurs. He thought that the retailer should have ensured that safety warnings were printed on the packaging and he obtained advice that supported this view.

Mr B had assumed that he would be able to claim back the costs of the legal action through the legal expenses policy he had with the firm. So he was very disappointed when the firm rejected the claim, saying the proposed action had no reasonable prospect of success. After complaining unsuccessfully to the firm, Mr and Mrs B brought their complaint to us.

complaint rejected
In cases where a firm has said the policyholder's proposed legal action has no chance of success, it is not for us to try to reach a conclusion on the merits of the proposed action. Instead, we need to establish whether the firm gave the claim proper consideration. We therefore look at the steps the firm took before it rejected the claim.

Legal expenses insurers are entitled to rely on the professional advice of their legal experts. So if an insurer has obtained independent legal advice from suitably qualified lawyers - whether they were panel solicitors, non-panel solicitors or counsel - and has acted on that advice, then we will not generally question the advice.

In this instance, the firm sought advice from two firms of solicitors and from counsel before it concluded that Mr B's proposed action had no reasonable chance of success. None of these legal experts considered that a court would hold the retailer liable.

Mr B had, in part, based his decision to take action on the opinion of an "accident expert" who cited the General Product Safety Regulations 1994. These regulations include a requirement that consumers should be given relevant information to enable them to assess the inherent risks in a product.

However, the counsel consulted by the firm pointed out that there was an important qualification to this regulation - the requirement only applied "where such risks are not immediately obvious". In the counsel's view, "it should be immediately obvious that if you put your hands too close to cutting blades, you are in danger of injury".

We were satisfied that the firm had taken appropriate steps to determine whether the proposed action had a reasonable prospect of success. We therefore rejected the complaint.

commercial policy - whether appropriate to decide case on "fair and reasonable" basis

Mr C was a self-employed forest management adviser. In December 1999, a tree on land owned by one of his clients, Mr A, fell down and injured a third party, who was driving on a nearby main road. The third party made a claim against Mr A.

It was nearly 18 months later when Mr C discovered that liability might be passed to him. He notified his professional indemnity insurer of the situation, but the insurer said it would not meet the claim. It said Mr C was in breach of contract because he had taken so long to inform it that a claim was likely to be made against him. It also said he had prejudiced its position. The firm cited several legal cases in support of its stance.

complaint upheld
We established that Mr C had been told of the injury caused by the tree almost as soon as it happened. And he was told a couple of days later that the third party was taking legal action against Mr A. However, there was nothing to suggest that Mr C had any idea that he might be held liable until he received a letter to that effect from Mr A's solicitors on 9 May 2001.

Mr C's policy required him to notify the firm as soon as he became aware of any potential action being brought against him. In this particular case, however, we did not think it was fair or reasonable to have expected him to know he was potentially liable until this was spelt out to him.

We also considered that the firm should have had regard to the Association of British Insurers' Statement of General Insurance Practice. Strictly speaking, the Statement applies only to non-commercial policies. But since Mr C was a sole trader, he was, effectively, in the same position as a private individual with a personal policy. The Statement says that "an insurer will not repudiate liability to indemnify a policyholder ... on grounds of a breach of warranty or condition where the circumstances of the loss are unconnected with the breach unless fraud is involved".

We did not accept that the firm had been prejudiced by the length of time that had elapsed after the accident before Mr C told it that a claim might be made against him. And none of the correspondence that Mr C had entered into regarding the claim had constituted an offer, promise or admission of liability.

We therefore required the firm to deal with the claim, subject to the other terms of the policy.

motor policy - car stolen from garage forecourt - whether "lady friend" was responsible for theft - reasonable care - keys in car - theft by deception - multiple reasons given for rejecting the claim

Mr K met a young woman in a nightclub and took her back to his place. The following morning, he offered to drive her home. He said that - on the way - she gave him some money and asked him to buy her some chocolate.

Mr K stopped at a petrol station and left her in the car, with the keys in the ignition, while he went to buy the chocolate. When he returned, both the car and the woman had vanished. The car was later recovered burnt out.

The firm rejected Mr K's claim for the theft of his car. Initially, it said that this was because he had breached the policy condition that required him to take "reasonable care". After Mr K challenged this, the firm said there was a policy exclusion that meant it could not pay out if the keys were left in the car. Finally, after he challenged this, it told him that there was a policy exclusion covering "theft by deception". It considered that this applied here because the woman had set out to deceive Mr K in order to steal his car.

Unhappy with the firm's stance, Mr K brought his complaint to us.

complaint upheld
The onus was on the firm to give evidence backing up its reasons for declining the policy. It was unable to do this.

We did not consider that Mr K had failed to exercise reasonable care. He had not acted recklessly by "deliberately courting a risk of which he was aware" - see Sofi v Prudential Assurance [1993] 2 Lloyd' s Rep. 559. On the contrary, the very fact that he had left his car and keys in the care and custody of the woman indicated that he trusted her. It never occurred to him that there was a risk of theft.

The "keys in car" exclusion could not properly apply because the policy was worded in a way that meant the exclusion only applied if the car was left unattended. In other words, the case was similar to that in Starfire Diamond Rings Ltd v Angel [1962] 2 Lloyd's Rep. 217 CA, rather than Hayward v Norwich Union Insurance Ltd. The car had not been left unattended - there was someone inside it.

And we were not satisfied that there was a "theft by deception". In order to reject the claim on these grounds, the firm would have had to show that when the woman asked Mr K to buy her some chocolate, she had already decided to use this as a ruse to enable her to steal the car. In fact, there was no evidence that she had stolen the car. For any number of reasons she may have abandoned the scene, leaving the car unattended, and an unknown third person may then have stolen it.

In the circumstances, we felt that the fair and reasonable solution was for the firm to meet Mr K's claim. We pointed out that the way in which it had handled the claim, citing different reasons in turn for rejecting it, did the firm no credit and suggested that its aim was to avoid payment at all cost.

pet insurance - breach of condition - whether death benefit payable - whether valid claim for "personal accident" to bird

When Mr E's prize-winning parrot died, Mr E put in a claim to the firm for accidental death benefit of £1,200. He also claimed damages of £12,000 for "personal accident" to the parrot. He said it had accidentally crashed into the toys in its cage and became dizzy before it collapsed and died.

The firm rejected the claim. It was a condition of the policy that Mr E should provide a vet's report, certifying the cause of death, but he had failed to do so.

complaint rejected
We agreed with the firm that in failing to obtain a vet's report, Mr E had breached an important and material condition of the policy. Without this information, the firm was unable to verify the cause of death and establish whether the accidental death claim was valid.

As far as the claim for personal accident was concerned, we pointed out to Mr E that his policy did not provide personal accident cover and that this type of insurance was only available for human beings.

Walter Merricks, chief ombudsman

ombudsman news issue 31 [PDF format]

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.