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ombudsman news

issue 36

April 2004

when firms vary the terms of an insurance policy after the customer has bought it

Sometimes, a firm will attempt to vary the terms of an insurance policy unilaterally - after the customer has bought it. We have seen this - for example - with some travel policies. The firms concerned have sought to exclude from cover not only any medical conditions that the customer suffered from before they took out the policy, but also any medical conditions arising between the start of the policy and the start of the trip.

The terms of one of these policies said:

"If your health changes between the date the policy was bought and the date of travel, you should advise us as soon as possible. We will advise you what cover we are able to provide after the date of diagnosis."

We do not necessarily consider the terms of such policies to be fair and reasonable, particularly if they were not highlighted when the policy was sold. By issuing a policy, the firm has effectively promised to cover the policyholder against certain contingencies.

In most cases, if the policyholder's circumstances change during the term of the policy, that is generally just part of the risk the firm agreed to take on. We would not normally expect the firm to then change its mind about what cover, if any, it will provide.

It is well established that the customer's duty to disclose any relevant facts to the firm arises only at certain times. These are:

  • when the firm and customer finish the contract "negotiations" and the customer takes out the policy;
  • when the policy is renewed; or
  • when a claim is made.

Firms cannot normally expect customers to recognise relevant facts and to inform them of these facts - voluntarily - as and when they arise. By varying a contract after it has been agreed, the firm arguably creates a "significant imbalance in the parties' rights and obligations", as defined under the Unfair Terms in Consumer Contracts Regulations 1999.

Schedule 2 of the Regulations gives specific examples of terms that may be regarded as unfair, including:

  • making an agreement binding on the consumer, whereas the provision of services by the seller or supplier is subject to a condition whose realisation depends on his own will alone;
  • enabling the seller or supplier to alter the terms of the contract unilaterally without a valid reason which is specified in the contract; and
  • obliging the consumer to fulfil all his obligations where the seller or supplier does not perform his.

In certain cases, of course, it is reasonable for the firm to vary the terms of an insurance policy after the customer has bought it, such as when the nature of the risk changes so fundamentally that the subject matter of the insurance is completely different. If a customer buys a new car, for example, then the firm can change the terms of the customer's motor insurance policy. And if a policyholder moves house, the firm will alter the terms of their home insurance policy.

There are also instances where the policy cover does not begin on the date of purchase, but on a future date. Since the policy contract has not been finalised at the date of purchase, there is - in principle - nothing wrong with the firm requiring policyholders to disclose any material change in their circumstances that occurs before the cover begins.

However, in these situations the firm should tell customers clearly, at the time of the sale, that it has the right to vary the terms of the policy. It should also make it clear that the customer must disclose any relevant change in their circumstances.

case studies - when firms vary the terms of an insurance policy after the customer has bought it

travel insurance policy - customer cancels holiday - whether customer breached the terms of the policy by not disclosing information

Early in the New Year, Mr C decided to arrange his summer holiday. He booked two weeks in Tenerife for that August. At the same time, he took out a travel insurance policy with the firm.

In February, Mr C's mother was diagnosed with cancer. However, it was only a few weeks before Mr C was due to travel that she was told her illness was terminal. As soon as he discovered this, Mr C cancelled his holiday and put in a claim to the firm for the cost of the trip.

The firm refused to pay out. It said that Mr C should have got in touch when his mother's illness was first diagnosed. Mr C argued that he had not known at that stage that her condition was terminal, or that her failing health would mean he had to cancel his trip. The firm was insistent that because he had not disclosed this information at the earliest possible stage, he had breached the terms of the policy. Mr C then came to us.

complaint upheld
The firm said the policy imposed an "ongoing duty of disclosure" on policyholders. In other words, it said that policyholders had to inform the firm of any illnesses or other "relevant matters" that occurred after they had taken out a policy. If policyholders failed to do this, then it could refuse to pay a claim.

We acknowledged the general point the firm made to us that customers should not delay in cancelling their holiday if a situation arose where there was clear medical evidence or advice that they should not travel. However, that was not what had happened in this case.

We felt the firm's clause arguably amounted to an unfair contract term. It is acceptable for policies to exclude claims from cover if they arise from "pre-existing conditions" - medical conditions that pre-date the start of the policy. But in this case, the firm excluded not only illnesses known about in the three years before the start of the policy, but also those that occurred "before the trip started".

In our view, in turning down a claim because of circumstances that arose between the time Mr C took out the policy and the date when his holiday began, the firm was acting unfairly. Its clause effectively relieved it of any obligation to pay health-related claims. By seeking to remove the element of risk, the policy undermined one of the fundamental principles of insurance. We upheld Mr C's complaint and told the firm to meet the claim.

annual travel policy bought online - cover to start from a specified date - customers cancel holiday before cover starts - whether firm should pay cancellation costs

Mr and Mrs B bought their annual travel policy online in March, but specified that the cover should not begin until 1 June, the day they were due to fly to Malta for a holiday.

At the end of May, Mr B's father died and the couple cancelled their holiday. When they put in a claim to the firm, they were dismayed to be told that they were not covered. The firm explained that the policy had not yet come into effect because the couple had chosen 1 June as its start date.

As a gesture of goodwill, the firm offered the couple a sum towards the costs of the cancelled holiday, although it refused to pay the whole of the claim. Dissatisfied with this, the couple complained to us.

complaint rejected
We felt that the firm's offer had been more than fair. The online sale process was very straightforward, with clear instructions. The firm's website explained that if customers asked for the cover to begin at a future date, rather than from the time of the sale, the customers would not be covered if they cancelled their holiday before the cover began.

This was not a case of the firm varying the terms of the policy after it had come into effect. The policy had not been in force when the couple made their claim. We therefore rejected their complaint.

house insurance policy - unoccupied house burns down - whether firm right to reject customer's claim

Ms G left her home unoccupied while she was working abroad for six months. While she was away, her house was broken into and set on fire. The house was so badly burned that it was beyond repair.

Ms G was covered for "malicious damage" to her property and she put in a claim to the firm. However, it told her it was not liable in cases where the property had been "left unoccupied" and it said she should have notified it when she moved abroad.

complaint upheld
We agreed with the firm that it was not obliged to pay Ms G's claim for any "malicious damage" to her home. The policy clearly defined the term "left unoccupied" in relation to this type of claim, and it did not cover claims for this kind of damage to unoccupied properties. However, the primary cause of the damage to Ms G's house was a separate, insured event - "fire and explosion". There was no general or specific reference to the firm not being liable for such an event if the house was unoccupied.

While acknowledging that this was the case, the firm insisted that Ms G should have told it when she moved out of her house. The firm said this had changed the "nature of the risk" and that, because she hadn't disclosed the fact she had moved out, it was entitled to vary the terms of the policy and cancel it.

We disagreed. We did not feel that Ms G had been obliged to disclose this fact to the firm, in the way she would have had to do if - say - she had sold the property and bought another house. We thought that by attempting to vary the policy after Ms G took out her house insurance, the firm had acted unfairly. We upheld Ms G's complaint and told the firm to meet her claim.

travel insurance - customer disclosed medical condition after taking out policy - whether firm right to invalidate policy

In February, Mr and Mrs J took out a travel policy to cover the holiday they had booked for May.

Mrs J was unexpectedly admitted to hospital in April for a clot on the lung. Her treatment was successful and her consultant said there was no reason for the couple to cancel their forthcoming trip.

When she was double-checking all the arrangements the day before the holiday, it occurred to Mrs J that she ought to ring the firm just to update them on what had happened. She was shocked when the firm told her it would have to invalidate the policy and refund the premium.

As there wasn't time for Mr and Mrs J to arrange any alternative cover, the couple felt they had no option but to go on holiday without any insurance. When they returned home, they complained to the firm about its actions and about the "unnecessary distress and inconvenience" they had suffered as a result. When the firm dismissed their complaint, they came to us.

complaint partially upheld
This was not a case where the policyholders had failed to disclose a material fact. At the time the couple took out the policy, Mrs J had not been suffering any ill health. And in any event, the firm had never asked the couple any questions at all about their health.

The firm told us it had invalidated the policy because there was a "continuing duty of utmost good faith" that required policyholders to "notify the firm of any change to the risk" after the policy was taken out.

We cited Professor Malcom Clarke's Policies and Perceptions of Insurance, together with Ivamy's General Principles of Insurance Law, to support our view that - generally - there is no duty on a policyholder to disclose "material facts" once the firm and policyholder have agreed on the contract.

In addition, we noted that there was nothing in the terms of the policy that entitled the firm either to "avoid" it (in other words, to treat it as though it had never existed) or to cancel it. Although there was no claim to consider, we required the firm to pay Mr and Mrs J modest compensation for the distress and inconvenience they had been caused.

Walter Merricks, chief ombudsman

ombudsman news issue 36 [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.