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ombudsman news

issue 74

December 2008/January 2009

complaints made by small businesses about financial services and products

The majority of people who bring complaints to the Financial Ombudsman Service do so in their personal capacity as individual consumers. However, we also look at complaints brought by smaller businesses, charities and trusts that have an annual turnover, income or net asset value of up to £1 million.

Sole traders and people running small businesses may not always register a complaint with us specifically as a business dispute. This is because they often see the issues as essentially personal rather than commercial. In practice, therefore, the proportion of complaints made by smaller businesses (around 2% of all complaints referred to us) may be slightly higher.

This selection of case studies illustrates some recent banking and insurance complaints made by the owners of smaller businesses. It also highlights an important feature in our consideration of many complaints from smaller businesses - namely, the extent to which, in individual cases, smaller businesses should, effectively, be treated as though they are in the same position as consumers.

issue 74 index of case studies

  • 74/8 - owner of small business disputes insurer's rejection of his claim for business interruption and damage to shop contents
  • 74/9 - insurer rejects claim for theft and damage after thieves break into premises of a small business
  • 74/10 - insurer cites policy exclusion when owner of a small groundworks business makes a claim on his commercial insurance policy
  • 74/11 - owners of a small company complain that their bank was too cautious and inflexible
  • 74/12 - a small business processes a "card not present" debit-card transaction that the cardholder denied having authorised
  • 74/13 - the owner of a small farming business complained that his bank failed to "stop" a cheque he had written on his business account

owner of small business disputes insurer's rejection of his claim for business interruption and damage to shop contents

Mr L had a small business selling office supplies. Within the space of 14 days he made two claims on the insurance policy that covered his shop for "trade contents and business interruption".

The first claim related to a leak of water through his ceiling from the flat above, as a result of a faulty washing machine. This damaged some of his stock and other contents.

The incident that led to the second claim happened after a couple of days of severe weather and localised flooding. A large amount of rainwater fell through the flat felt roof that covered part of his premises. The water damaged contents in a part of the shop that had not been affected by the first incident.

Mr L claimed for these contents and also for 16 days' loss of trade. He said he had been advised to close his premises for health and safety reasons after the second incident.

The insurer agreed to meet Mr L's first claim, but not the second one. It argued that there had been a problem with the flat roof for some years - certainly since before Mr L had taken out the policy.

In its view, it was a defect in the roof - rather than the bad weather - that had caused the rainwater to come through into Mr L's shop. The insurer also told Mr L that it did not consider the water damage would have been serious enough to necessitate his closing the premises. Unhappy with this outcome, Mr L brought his complaint to us.

complaint upheld
The insurer had cited a policy exclusion that enabled it to turn down claims where the insured premises were suffering from "inherent vice" or "latent defect". In other words, where the damage had come about because the premises had a structural weakness.

Our investigation revealed that there had been some structural problems with the roof before the date when Mr L took out his policy. However, there was evidence that repairs had been carried out well before the period of severe weather that had led to the claim. There was no evidence that those repairs had been faulty in any way, and there was insufficient evidence to back up the insurer's opinion that the roof had an inherent flaw.

We concluded that it was the severe weather that caused the incident leading to the claim for damaged contents. The policy exclusion did not apply in these circumstances, so we said the insurer should meet this part of Mr L's second claim.

We then looked at the part of the claim relating to Mr L's loss of business. He supplied detailed evidence about the work that had been carried out after the rainwater came in through the flat roof. This showed that the electricity had been turned off at the mains for several days. Several large industrial dehumidifiers had then been required to help dry out the premises before the cleaning up and remedial work could begin.

We concluded, from the evidence, that Mr L had no alternative but to close his premises during that period. We therefore told the insurer that it should meet his claim for business interruption.

insurer rejects claim for theft and damage after thieves break into premises of a small business

Mrs A ran a small graphic design business from premises above a retail unit. One evening, after locking up the premises and going home, she realised she had left some important paperwork behind. She decided to have a meal and then return to pick up the paperwork, as she needed it early the next morning for a meeting with a client.

When she arrived back at her business premises at around 10.00pm, Mrs A discovered that thieves had broken in, stealing computer equipment and causing significant damage in the process.

In due course she put in a claim to her insurer. To her great surprise, this was turned down. Mrs A's policy contained a "condition precedent", stipulating that claims of this nature would only be paid if specific security devices were installed and in use, and all the doors of the insured premises were made of solid wood.

The insurer acknowledged that the correct security devices had been in place. However, it said it was unable to meet the claim because some of the doors (including the one used by the intruders to gain entry to the premises) were not "of the correct construction".

Mrs A did not agree that the doors of her business premises failed to meet the criteria set out in her policy, and when the insurer refused to reconsider the matter she brought her complaint to us.

complaint upheld
It is generally accepted within the insurance industry that claims brought by some smaller businesses should be handled in the same way as if they had been brought by a consumer.

We take the view that it is fair and reasonable to judge complaints from large businesses - and from those with a more sophisticated knowledge of insurance - by legal standards. However, if we think it should have been clear to the insurer or intermediary that the business was an unsophisticated buyer of insurance, we are likely to judge the complaint as if it had been made by a consumer.

Mrs A's business turnover was modest and she had only two part-time employees. So we thought the insurer should have treated her claim as if it had been made by a consumer - not a business.

In such circumstances, if a claim would otherwise be unsuccessful only because of the policyholder's failure to meet a "condition precedent", the insurer can consider whether this failure was actually connected to the loss. Where it is not, the claim should be paid.

In this case, we noted that the thieves gained entry to Mrs A's premises by forcing the front door off its hinges. So we concluded that they would have got in to the premises regardless of the precise construction of the door. We therefore told the insurer to meet the claim.

insurer cites policy exclusion when owner of a small groundworks business makes a claim on his commercial insurance policy

Mr G, who ran his own small groundworks business, was sub-contracted to carry out some work at an RAF base. While he was drilling on a runway at the base he struck a fuel-line. As well as resulting in a loss of fuel, this caused substantial damage to the surrounding area, including contamination of a local watercourse.

Later that same day Mr G learned from the main contractor that he would be held liable for any damage. He therefore contacted his insurer to say he would be claiming on his commercial policy.

The insurer told Mr G that it would not meet any claim in relation to this incident. It considered the RAF base to be an airport, and his policy specifically excluded cover for any works carried out "on or at airports".

Dismayed by this news, Mr G contacted the insurer again a few days later. He said he had studied the wording of his policy very carefully and did not agree that the exclusion applied in this case. In his view, the RAF base was not an "airport". He said that dictionary definitions of the word all related to civil aircraft and the large-scale transportation of the public - not to the specialised functions of an RAF base.

However, the insurer refused to reconsider its position. It said that the statutory definition of an airport would include the RAF base. But regardless of the exact definition, the policy exclusion was intended to cover high-risk locations and the work Mr G had carried out at the RAF base clearly fell into that category.

Mr G then referred the dispute to us.

complaint upheld
When considering disputes involving the precise wording of a policy, we look at whether the insurer has provided a clear definition. If it has not, then we apply the ordinary, everyday meaning to the word in question, rather than a statutory definition.

Following this general approach, we concluded in this case that a reasonable person would be unlikely to think of an RAF base as an airport.

We noted that in the section of the policy that listed exclusions, the insurer had listed the word "airport" next to "railway". We thought this significant, as it suggested these exclusions had a common theme of public transport, rather than of high-risk locations, as the insurer had suggested.

We concluded that the ordinary meaning of "airport" was a narrow one that did not include an RAF base. So we said the insurer could not reasonably decline Mr G's claim by using an exclusion that applied to airports.

We had already established, at an early stage of our investigation, that any claim would be likely to exceed £100,000, which is the statutory limit on any award we are able to make. So before we had finished investigating the complaint, we contacted both Mr G and the insurer. We explained that if we upheld the complaint, we had no power to require the insurer to pay any sum over that £100,000 limit, although we could recommend that it should do so. The insurer confirmed that it would pay any claim in full, and it did that when we subsequently upheld Mr G's complaint.

owners of a small company complain that their bank was too cautious and inflexible

Mr and Mrs B ran their own small company from home, trading collectibles on the internet. They complained that the bank's "inflexible attitude" to lending was damaging their business.

They said the bank had been unnecessarily cautious, had failed to take all relevant information into account when making lending decisions, and had not understood "the nature and particular commercial challenges of e-commerce". The couple added that the bank had forced them to convert their business overdraft into a business loan that they did not want - and had "starved the business of essential cash flow to maintain turnover and fund growth".

When the bank rejected their complaint, Mr and Mrs B came to us.

complaint not upheld
We examined the bank's records of its decisions about lending to Mr and Mrs B's company. We also looked at the way the company had operated its current account, including the way in which it had managed its overdraft facility.

It was clear that the bank had become concerned about the company's dependence on its overdraft facility. The company regularly exceeded its overdraft limit. And the overdraft had become a static debt rather than a facility to be dipped into when needed, to assist cash flow.

The bank had wanted the company to convert this overdraft debt into a loan, and then start to repay it. However, Mr and Mrs B had evidently felt very strongly that the bank should have been willing to negotiate on this point. They wanted the bank to arrive at a compromise which enabled them to keep an overdraft facility and did not require them to take a loan.

Discussion and negotiation between banks and their business customers is generally the right way to approach lending decisions. However, that does not mean a bank may never take a lending decision with which the business customer disagrees.

In this case, we could not see that the bank had been unfair or unreasonable in requiring the company to start repaying its overdraft facility. The loan that it offered meant that the debt could be repaid in monthly instalments, and at a lower rate of interest than before.

We did not accept Mr and Mrs B's argument that the problem stemmed from the bank's failure to understand the nature of their business. The evidence we saw did not persuade us that further discussion with the couple - or additional information about their business - would have altered the bank's lending decisions in this case.

The underlying problem seemed to us to be the basic difference of approach between Mr and Mrs B and the bank. Mr and Mrs B had an ambitious business plan and were keen to be given the lending flexibility that would allow them to pursue it. The bank had a more cautious attitude.

We told the couple that the bank had not acted incorrectly and had been entitled to make its own commercial decision about the degree of risk it was prepared to take in lending to their company. We did not uphold the complaint.

a small business processes a "card not present" debit-card transaction that the cardholder denied having authorised

In common with most small businesses, Mr M's car dealership had a facility to accept payment by credit and debit card (a "merchant facility"). His complaint concerned the actions of his bank after he carried out a debit-card transaction for £8,000 that the cardholder later challenged.

The £8,000 represented part of a debt owed to Mr M's son-in-law, Mr K, by a third party (JG Ltd). Mr M said that his son-in-law (who also owned a car dealership) had provided vehicles to JG Ltd but had not been paid for all of them.

Mr M maintained that JG Ltd had given him permission to use its debit-card details in order to make a "card not present" payment of £8,000 through his business account. Mr M intended to pass this money on to his son-in-law.

Initially, Mr M's business account was credited with the £8,000. However, his bank was subsequently contacted by JG Ltd's bankers, who wanted a "charge-back" (in other words, to reclaim the money from Mr M's account), on the grounds that JG Ltd denied having authorised the payment.

When Mr M discovered that the charge-back had gone ahead, he complained to his bank. It told him it had no grounds on which it could have challenged the charge-back. Mr M had no signature or PIN (Personal Identification Number) from JG Ltd for the transaction, nor could he show that he had provided JG Ltd with any goods or services. Mr M then brought his complaint to us.

complaint not upheld
Some months after the charge-back had taken place, Mr M's son-in-law had obtained a court judgment in connection with the money he was owed by JG Ltd. Mr M sent us details of the judgment, saying it was "proof" that his bank had acted incorrectly in permitting JG Ltd's bank to reclaim the £8,000.

We noted that the terms and conditions of Mr M's merchant facility made clear that "card not present" transactions were made at his own risk, and could be charged-back if successfully challenged by the cardholder. In this case, Mr M's bank had not believed it had adequate grounds to resist the claim for a charge-back of the £8,000.

The evidence provided by Mr M to show that JG Ltd had authorised the transaction was not persuasive. It consisted of a vaguely-worded and only partially-legible photocopy, addressed to a third party.

As there was no clear authority for the transaction, and Mr M had not supplied JG Ltd with any goods or services, we agreed with the bank that there were no viable grounds on which it could have refused the charge-back.

We did not accept Mr M's argument that the subsequent court judgment "proved" that the bank had acted incorrectly. The point at issue was whether the debit-card transaction had been authorised, not whether JG Ltd owed money to Mr M's son-in-law.

the owner of a small farming business complained that his bank failed to "stop" a cheque he had written on his business account

A farmer, Mr H, complained to his bank about its failure to act on his instructions to "stop" a cheque that he had issued on his business account. He had arranged to buy a second-hand tractor, on the basis of information given to him by the seller.

Mr H had been unexpectedly called away from the farm on the morning the tractor was delivered. However, he inspected it as soon as he arrived home. He then discovered it was in a much poorer condition than he had been led to believe. He estimated that it was worth no more than £500. But the cheque he had left for the seller when the tractor was delivered was for £1,800 - the price they had agreed.

He said that he rang his bank that afternoon and instructed it not to pay the cheque. However, the seller was able to cash the cheque without any difficulty a few days later.

When Mr H complained to the bank, it told him it had no record of his instruction to stop the cheque and that he would, in any event, have been asked to put such a request in writing. Since he had not done this, the bank said it was unable to uphold his complaint.

complaint upheld
The bank did not dispute that it had received a phone call from Mr H on the day in question. And it insisted that he had not said anything during that call about "stopping" the cheque.

The bank was unable to give a clear account of what it had discussed with Mr H on the phone - and there was no evidence that it told him to put any instruction in writing.

We accepted that the bank would normally require written confirmation - particularly if the sum concerned was a large one. But in the circumstances of this case, on balance, we were satisfied from the evidence that Mr H had asked the bank to "stop" the cheque.

We considered that £1,800 would have been a reasonable price for the tractor, in its advertised condition. And we accepted that Mr H was likely to get only £500 if he sold it in its actual condition, as delivered. So we told the bank to refund his business account with £1,300, and to add interest, back-dated to when the cheque was paid. We said the bank should also pay Mr H £200 for the inconvenience he had been caused.


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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.