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ombudsman news

issue 86

June/July 2010

a selection of recent recession-related insurance cases

Over the past year we have noted a general increase in the number of complaints referred to us where the consumer is facing financial difficulties - reflecting the tough economic climate and the harsher times that many consumers and businesses are currently facing.

This selection of case studies illustrates some of the situations we have been starting to see more frequently in insurance complaints. They include cases where, after losing a job through redundancy, consumers complain that they have not received the cover they were expecting from policies they thought would cover their mortgage repayments - or the cost of cancelling a holiday - in such circumstances.

Some insurers have reported an increase in fraudulent claims that they think may be related to the recession. In response, they have been stepping up their measures to deal with instances where there is any suspicion of fraud. And as we show in case 86/13, they are subjecting such claims to closer scrutiny than usual.

consumer loses his job through redundancy - mortgage-protection policy fails to provide the cover he expected

Mr G complained that his insurer refused to meet the claim he made under his mortgage-protection policy. The policy had been recommended to him when he took out a mortgage to buy a small house in the west of England. He and his wife intended to use the property as a holiday home until they retired, when they would move there permanently.

He said the adviser had assured him the policy would cover his mortgage repayments if he became unemployed as a result of redundancy or ill-health.

However, when Mr G unexpectedly lost his job through redundancy some eighteen months later, the insurer refused to pay out. It told him the policy terms only covered mortgages that were 'held against the policyholder's principal residential property.' Mr G's mortgage was secured on a holiday home, so he was not eligible for cover.

Mr G said he had made it clear from the outset that he was taking a mortgage in order to buy a holiday home. So he could not understand why the adviser had recommended the policy - and why the insurer had collected premiums for it.

The insurer accepted that the policy had been mis-sold, and it offered to refund all the policy premiums Mr G had paid, plus interest. However, it said there were 'no grounds' on which it could pay his claim. Mr G then brought his complaint to us.

complaint upheld
The fact that Mr G had been sold an inappropriate policy was not in dispute. The onus had been on the adviser to ensure that the policy he recommended would provide the cover Mr G needed. The adviser had already admitted having failed to check, at the time of the sale, whether the policy was suitable for Mr G.

We concluded that this was a serious mis-sale by the adviser, who had been acting on behalf of the insurer when selling Mr G the policy. Because Mr G was told that this particular policy would cover him, he had not looked for any alternative policies that would have covered his mortgage payments.

We told the insurer that instead of returning Mr G's premiums, it should meet his claim, subject to any other relevant terms and conditions.

travel insurer rejects claim for cost of cancelling holiday when consumer is made redundant

Mr J planned to celebrate his 40th birthday by going on a holiday to the West Indies with his wife. He booked their trip almost a year in advance and took out travel insurance at the same time.

Just two months before the start of the holiday, Mr J lost his job because of redundancy. He put in a claim to his travel insurer for the cost of cancelling the trip, and said he was 'bewildered' when the insurer told him it was unable to meet the claim.

He complained about unfair treatment, saying that he and his wife had bought the policy in good faith, believing that they would be covered for any 'legitimate reasons' that forced them to cancel their holiday. As he had provided documents proving that his employer had made him redundant, he could not see that the insurer had any reason to refuse the claim.

When it first wrote to Mr J about his claim, the insurer had said it was unable to cover his cancellation costs because his 'circumstances' did 'not comply' with the section of his policy relating to redundancy.

The insurer had quoted the relevant section of the policy, which said: 'Reasons for cancellation which are covered by this insurance are ... If you are made redundant and are entitled to a payment under the Employment Protection (Consolidation) Act 1978 or any changes to that Act.'

Mr J then contacted his insurer to complain about its decision and to ask for a 'proper explanation'. The insurer told him it was unable to pay his claim because, at the time he was made redundant, he had only been working for his employer for 15 months.

The insurer said that its underwriters took the view that people who had worked for an employer for less than two years were at greater risk of being made redundant than more long-established employees. This was a risk that the insurer was not prepared to cover and it said the terms and conditions of the policy 'stated this clearly'.

Mr J did not think the policy was clear on this point and he argued that his claim should therefore be paid. When the insurer refused to reconsider the matter, Mr J referred the complaint to us.

complaint upheld
Insurers are entitled to decide which risks they will - and will not - cover. However, they are required to set out this information clearly in their policy terms and conditions.

In this particular case, we said it was not unreasonable for the insurer to have decided it would not cover cancellation claims from policyholders made redundant after less than two years' continuous service. However, the insurer had not specifically stated this in the policy. It had referred to the Employment Protection (Consolidation) Act 1978, but had not explained the significance of this reference.

We thought it unlikely that the majority of policyholders would be aware that the 1978 Act stated, among other things, that employees were only entitled to a redundancy payment from their employer if they had at least two years' continuous service with that employer.

And we found it difficult to determine the real purpose of this particular policy term. It seemed to us that it could have been intended to ensure that no unacceptable risks were underwritten (as the insurer later asserted). But it could equally have been intended merely to ensure that claims were only paid where an employee had genuinely been made redundant, not where they had left a job voluntarily.

We said the insurer had not explained the exclusion clearly enough for ordinary policyholders to understand the nature and scope of the cover they were buying. We therefore upheld the complaint and told the insurer to pay Mr J's claim, in accordance with the other policy terms and conditions.

consumer complains about unexpected and steep rise in premiums for mortgage-protection policy

Mrs N took out a mortgage-protection policy to cover her monthly mortgage payment of £1,250 if she was made redundant. Only a few months after she bought the policy, the insurer told her it was increasing her premiums from £25 to £45 a month.

When she complained about this 'unreasonable price rise', the insurer told her its decision to increase her premiums was taken 'following an annual review of premiums and in the light of increased claims by other holder of similar policies'. It also drew her attention to a clause in its policy terms and conditions, which stated: 'We reserve the right to change the terms and conditions of the policy and the premium amount. We will give you at least 30 days written notice of any change.'

Mrs N then referred her complaint to us. She was concerned that she would no longer be able to afford the premiums. She also said she would never have agreed to take the policy if she had known the cost would rise so quickly and by such a large amount.

complaint upheld
It is good practice, before selling a policy, for insurers to draw a consumer's attention to any significant policy terms. This includes the possibility that the premium might vary during the period of cover. When considering complaints such as this one, we therefore look to see what information the consumer was given before buying the policy.

As there are legal constraints on the ability of businesses to change the terms of standard contracts without the consumer's consent, we also review the legal status of the policy's 'variation clause'.

In this case, we raised concerns with the insurer about whether the clause had been specifically brought to Mrs N's attention and whether it was fair in law.

The insurer told us that, together with many other insurers, it had reached an agreement with the Financial Services Authority (FSA) that it would refund the additional amount it had been charging policyholders, following its review of premiums for mortgage-protection polices.

The insurer stressed that it did not 'formally accept' that our concerns in connection with Mrs N's complaint were valid. However, it said it was willing to refund all the money she had paid over and above the monthly amount she had agreed at the outset. Mrs N was happy to settle her complaint on this basis.

insurer rejects claim made under income-protection policy when consumer becomes too ill to work

Miss M had worked for some years as an administrator at the head office of a large high-street retailer. She consulted a financial adviser because she was concerned about her overall financial security, particularly in view of the rumours at her workplace that redundancies might be made in the future.

On the adviser's recommendation she took out an income-protection policy. She said she was told this would pay benefit based on a percentage of her annual gross earnings, if she became unable to work through ill-health.

Miss M's employer eventually made a large number of staff redundant and substantially restructured its operations. Although Miss M's job was not directly affected, she had found it difficult to cope with the lengthy period of uncertainty about her future.

This, together with anxieties about adapting to the organisational changes, led to her becoming unable to work because of depression. Her insurer rejected the claim she made under her income-protection policy.

It said she was not covered for 'pre-existing medical conditions' and it had seen medical evidence showing that, on several occasions before she took out the policy, she had been treated for depression.

Miss M told the insurer she thought its view was 'unreasonable and unacceptable'. She said she had made the adviser fully aware of her medical history before he recommended this specific policy. And she said she would certainly never have taken the policy if she had known it would not cover claims relating to her depression. Unable to reach agreement with the insurer, Miss M referred her complaint to us.

complaint upheld
Miss M provided clear and convincing recollections of her discussion with the adviser. She said she had given him full details of all her health problems, including her history of depression.

We were unable to obtain any information direct from the adviser, who appeared no longer to be in business. However, it was clear from the documents he completed at the time of the sale that Miss M had told him about the medical treatment she had received for depression.

We concluded that the adviser had probably not understood the exclusions that applied to the policy. He had therefore not provided Miss M with accurate information about the cover that would be available to her. In our experience, few providers of income-protection policies offer cover for pre-existing medical conditions. It therefore seemed unlikely that Miss M would have been able to obtain cover elsewhere for claims relating to her depression.

Given this, and Miss M's assertion that she would not have taken out the policy if she had been correctly informed about it, we said the insurer should refund all the premiums she had paid since the start of the policy, together with interest.

buildings insurer rejects claim for replacement of a bathroom suite after 'accidental damage'

Mr B phoned his insurer to claim for the cost of replacing his bathroom suite. He said he had accidentally dropped a hammer on the lid of the toilet cistern. The hammer had not only caused serious damage to the cistern, it had bounced into the bath and damaged that too.

The insurer sent him a claim form and asked him to complete and return it, together with quotations for the cost of repairing the damage, or of replacing the bathroom suite if repair was not possible.

When it received the completed form, the insurer noticed that what Mr B had said on the claim form about how the accident happened did not completely tally with what he had said on the phone. On the form, Mr B said that a stepladder, on which a box of tools was balanced, had been accidentally knocked over. The ladder and the toolbox fell on to the cistern lid and bath and seriously damaged them.

The insurer also noted that the quotations for the cost of replacing the suite appeared to have been altered - and they were all dated several weeks before the accident was said to have happened.

After arranging an inspection of the damage, the insurer rejected the claim. It said it had 'serious concerns' that the damage had been caused deliberately - and that its extent had been exaggerated, in order to obtain new bathroom fittings.

Mr B strongly denied this and he complained that the insurer had acted unreasonably. In due course he brought the dispute to us.

complaint not upheld
We asked Mr B to explain the discrepancy in his accounts of how the damage occurred. He said his wife had filled in the claim form because he had been 'too busy'. It had not occurred to him to check the form before signing it. He said his wife had not been at home on the day the accident happened and must have misunderstood what he told her about it.

In response to our questions about the quotations, Mr B said he had been thinking for some time of getting a new bathroom fitted. Just a few weeks before the accident happened he had obtained several quotations. He had thought they were all too expensive, particularly as his wife had just found out that the firm where she worked part-time might soon be closing down. He had therefore decided simply to redecorate the bathroom and put up some new shelves.

It was while he was doing this work that the damage occurred. And as he still had the quotations he had obtained a few weeks earlier, he thought it would 'save time' if he 'altered them slightly' and sent them in with his claim.

Generally, the onus is on people who claim on an insurance policy to establish, at least on the balance of probabilities, that the loss or damage to which the claim relates was caused by 'an insured event' (something covered by their policy). In this case, the relevant 'insured event' was accidental damage to the building, which included the bathroom suite.

There was no dispute over the fact that some of Mr B's bathroom fittings were damaged. However, the insurer was not satisfied that the damage had been caused accidentally.

After considering all the evidence, we concluded that the insurer had acted reasonably in rejecting the claim. We did not uphold the complaint.

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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.