The United Kingdom’s Financial Services Authority (the “FSA”) recently published a notice of an undertaking given by AXA Insurance UK plc (“AXA”) under which AXA agreed not to use certain terms in its contents and buildings insurance policies. These terms, the FSA found, were considered to be unfair under the UK Unfair Terms in Consumer Contracts Regulations 1999.
Given the Irish Central Bank’s increased enforcement priorities, the FSA’s guidance should provide a useful guide for insurers in Ireland as to terms that might be deemed to be ‘unfair’ by the relevant authorities.
It is also important to remember that in addition to the Central Bank’s administrative sanction authority, failure to adhere to the requirements of the European Communities (Unfair Terms in Consumer Contracts) Regulations 1995 (the Irish equivalent of the aforementioned UK regulations) is of itself an offence which could result in monetary fines and sanction by the Director of Consumer Affairs. Therefore, insurers should be careful to ensure that the terms of their policies are ‘fair’ and where they are in doubt, should seek further advice.
Terms requiring the provision of information and assistance by consumers
An AXA Policy reviewed by the FSA contained the section entitled “What you must do after making your claim”, with this requiring the policyholder to “provide at your own expense all reports, certified plans, specification information and assistance that we may need”. The FSA found that this requirement was excessive and unreasonable in that it required consumers to provide ongoing and unlimited assistance and documentation to AXA. The FSA found that the term had the potential to cause a significant imbalance to the detriment of the consumer.
Similarly, in another AXA policy reviewed by the FSA policy, the section entitled “What you must do when making your claim” contained a term which read “You must give us, at your reasonable expense, all the information, reports, certified plans, specification information and assistance that we may need in progressing your claim”.
While the FSA noted that the term somewhat limited the scope of the requirement by its use of the words “reasonable expense”, it found that the consumer’s obligation remained otherwise unlimited by any reference to relevance or reasonableness. The FSA also found that the term still had the potential to cause significant imbalance to the detriment of the consumer because it might not be clear to the consumer what would be reasonable in the circumstances. Each of the terms in the 2009 and 2011 policies also contained contradictory terms relating to costs of the provision of information and assistance by consumers.
In light of the FSA’s findings, AXA agreed to amend the above terms to make it clear what information and assistance consumers need to provide (eg, receipts, invoices, bank statements, photos, bills, deeds, surveys or plans etc) and expressly limited the scope of such information and assistance as being that relevant to the consumer’s claim.
Additionally, AXA agreed to amend its policy terms to make it clear that AXA, and not the consumer, will pay for any reasonable expenses incurred by consumers in providing any of the required information and assistance.
Terms providing for a discounted cash settlement when insurer is unable to repair or replace
The FSA was also concerned with a term contained in the section entitled “How we settle claims” which stated: "We may at our option repair, reinstate or replace the lost or damaged property. If we can not replace or repair the property we may at our option pay the loss or damage in cash. If we do pay the cash the amount we pay will reflect any discounts we may have received had we replaced the property”.
The FSA found that it was unfair for the term to provide for a discounted cash settlement that reflected a supplier discount, in circumstances where the decision to pay cash was based on the firm’s inability to meet its obligation under the contract to replace or repair the item.
The FSA found that such a term may cause detriment to consumers by not providing for full reimbursement for their insured losses, indicating a significant imbalance in the parties’ rights and obligations and a lack of good faith. Despite inclusion of the above term in its policies, the FSA found that in practice, AXA in fact offered full cash settlement in cases where it was unable to repair or replace.
The FSA required AXA to amend the above term to state that AXA will pay a full cash settlement where no equivalent repair or replacement item is available. The revised term also explains that AXA will offer a discounted cash settlement where the firm is able to offer to repair or replace the item through a preferred supplier but where it instead agrees to pay a cash settlement at the consumer’s request.
The FSA was of the opinion that fairness issues are less likely to arise where a firm pays a discounted cash settlement to reflect the supplier discount it would have received, in circumstances where a consumer has been offered a repair or replacement, but has chosen to receive a cash settlement instead.
In addition to the above amendments, AXA agreed not to rely on the original terms in an unfair way in its contracts with existing customers and undertook to treat existing customers as though they are subject to the new terms.