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ombudsman news

issue 39

August 2004

applying the principles of the Association of British Insurers' (ABI's) Statement of General Insurance Practice to commercial insurance complaints

The Statement of General Insurance Practice (the "statement") is issued by the Association of British Insurers (ABI). It sets out normal practice for general insurance that is taken out, in a private capacity, by policyholders who are resident in the UK. It does not apply to commercial insurance (insurance for companies or for an individual's business or trade). Strictly speaking, therefore, the statement cannot be taken into account when dealing with claims made under commercial policies. However, as this article explains, in certain circumstances we may consider it fair and reasonable to apply the principles of the Statement to disputes about commercial insurance that are referred to us.

Some aspects of insurance law are generally considered rather harsh when strictly applied to private individuals. For example, in its 1980 report, the Law Commission identified the following defects in the way insurance law dealt with a policyholder's failure to adhere to a "warranty" (an undertaking made by the policyholder in connection with their policy):

  • (a) it seems quite wrong that an insurer should be entitled to demand strict compliance with a warranty which is not material to the risk and to repudiate the policy for a breach of it.
  • (b) similarly, it seems unjust that an insurer should be entitled to reject a claim for any breach of even a material warranty, no matter how irrelevant the breach may be to the loss.

It should also be noted that in the case of Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co Ltd [1994] - which related to a commercial case of reinsurance - Lord Mustill said: "These were no shorn lambs who needed the winds of the common law rule to be tempered". He did not specifically say so, but we have always assumed the reference to "shorn lambs" meant personal policyholders. The "winds of the common law" are "tempered" for them by the ABI's statement but, as we have said, the statement does not apply to commercial policyholders.

The rules under which the Financial Ombudsman Service operates state that we will determine a complaint by reference to what we consider to be "fair and reasonable" in all the circumstances of the case. In doing this, we take into account the relevant law, regulations, regulators' rules, guidance and standards, relevant codes of practice and, where appropriate, what we consider to be good industry practice.

It does not always seem fair and reasonable to us to ignore totally the principles of the statement when we look at commercial insurance disputes. Is it fair, for example, to say that a self-employed (sole trading) contractor should benefit from the protection given by the statement when he insures his house contents, but not when he insures the tools he uses to carry out his job-

If the statement represents "normal insurance practice" then is it fair not to apply it to someone who takes out an insurance policy for their business or trade but who is, in essence, no different from a policyholder insured in a private capacity-

In assessing whether it is reasonable to apply the statement's principles to a commercial policyholder, we take into account the specific circumstances of the case. We look carefully at the nature of the policyholder's business - and the resources available to it.

If the policyholder's circumstances and, in particular, their likely understanding of the relevant insurance issues, appear to us to be similar to those of most private customers, then we would be more likely to think it appropriate to apply the principles of the statement. This is especially likely if the dispute involves something that is commonly covered under personal insurance.

This situation might occur, for example, where a commercial policyholder was:

  • self-employed (perhaps running a corner shop or a similar small business);
  • lacking experience in financial and legal matters; and
  • without easy access to expert advice on insurance matters.

We would normally consider a policyholder who uses an insurance broker to have the benefit of access to expert advice.

We are less likely to conclude that the principles of the statement should apply if the commercial policyholder is:

  • a limited company;
  • employs a number of staff; and/or
  • could reasonably be expected to have a greater understanding of business issues than a private individual.

Examples here could be policyholders that own or rent substantial business premises, employ large numbers of staff, or have detailed legal agreements with suppliers.

We also take into account the fact that some individuals who take out an insurance policy for their business may, because of their personal background, be far better informed about the law and what is required of them than the majority of people running a small business.

For example, on the face of it, it might seem appropriate to apply the Statement's principles where someone sets up a small gardening business after their retirement, and takes out insurance for the vehicle they use for their new business venture. Certainly, there is probably little difference between that insurance and the insurance for any car owned and used in a private capacity.

Things might be different though if, before retiring, that individual had been employed as, say, the director of a large company, a solicitor, or an insurance broker. In such circumstances, we might think they ought reasonably to have sufficient business/insurance acumen to mean that the principles of the statement should not apply to their commercial insurance.

The following case studies both concern a "breach of warranty" by a commercial policyholder, where we needed to assess whether it would be fair and reasonable to apply the principles of the statement. The strict legal position allows an insurer to reject a claim if the policyholder was in breach of the warranty, even if that breach has not prejudiced the insurer's position. This means that the insurer can turn down a claim even if the evidence shows that the insurer's position was not prejudiced, or that the loss would still have occurred, whether or not the warranty was breached.

The statement says that (unless fraud is involved), an insurer cannot reject a claim on the grounds of breach of warranty if the circumstances of the loss are unconnected with that breach. This means it is deemed bad practice for an insurer to reject a claim where the loss would still have occurred, even if the warranty had been complied with, or where its position has not been prejudiced by the failure to comply.

case studies - applying the principles of the Association of British Insurers' (ABI's) Statement of General Insurance Practice to commercial insurance complaints

commercial policy - firm rejects claim for theft from café on grounds that policyholders breached warranty

Mr K and Mr L were business partners who ran a small café. One morning they arrived at the café to find that someone had broken in, stolen some cash and damaged the safe.

They put in a claim under their premises insurance but the firm turned it down. It told them this was because they had been in breach of the policy warranty, as they had left cash in the till overnight, had not fitted a specified type of lock on the café windows, and had not taken adequate security measures in relation to the siting of their safe.

The policyholders said that they had not been aware that their policy required them to comply with specific security requirements. They argued that these requirements were largely immaterial to the incident in question, since the thieves had entered and left the premises by breaking down the front door, not via the windows, and the till had only contained a small amount of loose change.

They insisted that they had done all that they reasonably could have done to leave the premises secure, and that the firm should therefore accept the claim. When the firm refused to reconsider the matter, Mr K and Mr L came to us.

complaint rejected: principles of the statement not applied
In our view, the evidence made it clear that, regardless of whether the policyholders had complied with the security measures set out in the warranty, the thieves would still have gained entry to the premises. However, we thought that the thieves would probably not have been able to get into the safe. So although the loss would still have occurred, the amount lost would probably have been smaller.

If we applied the principles of the statement, we might have decided that the firm should pay for the part of the loss that would still have occurred even if the policyholders had complied with the warranty.

However, we noted that the café employed four full-time staff and was run as a limited company. And although Mr K and Mr L told us they had no knowledge of legal and insurance matters, they clearly had access to expert advice because they had bought their policy through a firm of insurance brokers and that firm had represented them when they made a claim for the break-in.

We concluded that the nature of the business, and the resources available to the policyholders, meant that it would not be appropriate to apply the principles of the statement. We therefore rejected the complaint.

39/2 commercial policy - firm refuses to accept claim arising from a legal action against the policyholder, on grounds of breach of warranty

Mr C was a self-employed forestry consultant. While he was working on a large estate, a tree fell down and injured a third party. A few days later, Mr C heard that the third party was planning to put in a claim to the estate owner for the injuries caused by the fallen tree.

Nearly 18 months after that, the estate owner's insurer told Mr C that it would be passing on to him the third party's claim for his injuries. Mr C then contacted his insurer right away, but was shocked when it told him it would not meet the claim. It said that by waiting so long after the accident before contacting it, he had breached the condition in his policy that said he must notify it immediately, in writing, of "any occurrence which may give rise to a claim".

It also argued that its position had been prejudiced by Mr C's failure to notify it as soon as the accident had occurred. It said the delay meant it had lost the opportunity to obtain any evidence from the time of the accident that could have given it a better chance of successfully defending the claim.

complaint upheld: principles of the statement applied
When Mr C referred his complaint to us, we noted that he was a self-employed contractor with no employees. His policy did require him to notify his insurer as soon as he became aware of any potential action being brought against him. 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, by the estate owner's insurer, nearly 18 months after the accident happened.

We concluded that this was a situation where a commercial policyholder was, effectively, in the same position as a private individual with a personal policy. It was appropriate to apply the principles of the statement and we therefore upheld his complaint and required his insurer to deal with the claim.

Walter Merricks, chief ombudsman

ombudsman news issue 39 [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.