In July 2013 the Financial Ombudsman Service (FOS) began the systematic publication of all ombudsman decisions on complaints made to it. In this issue of Insurance and reinsurance news we highlight some of the interesting issues that may impact insurers and their business arising from this material.
FOS decisions do not create legally binding precedent. However, the rules of the Financial Conduct Authority require firms to ensure that ‘lessons learned as a result of determinations… are applied in future claims’. This is not limited to determinations that FOS makes against firms themselves. So FOS decisions have begun to take on precedential value in some respects.
Until July this year, the public record of FOS decision-making was highly selective. It was based on very brief reports in its newsletter and a small selection of determinations. These included the famous case of Lucky the dog (see the March 2013 issue of Insurance and reinsurance news). This material was aimed at illustrating its approach to common problems. The situation is very different now. As of September 2013 there were:
- 1083 determinations covering payment protection insurance (PPI);
- 942 covering general insurance; and
- 662 covering investment and pensions, including long‑term insurance products.
A considerable body of FOS ‘case law’ has therefore now been published. Firms need to be familiar with it.
Only cases which get to the stage of a final ombudsman determination are included. Many others will be resolved when the parties accept, or do not challenge, the decision of the FOS ‘adjudicator’. The function of the adjudicator is to try to arrive at a decision acceptable to both parties. If either party disagrees with the adjudicator there is a right of appeal to one of 198 ombudsmen, whose final decision is then binding on the firm (although not the claimant).
In well over half of the cases the complaint was not upheld. The percentage was lower, although still over half, in the case of PPI. A higher number of cases may have been determined against firms in unappealed adjudications.
Not enough determinations have been published so far to allow many general conclusions to be drawn. This does not necessarily absolve firms from applying the ‘lessons learned’. At this stage, though, we concentrate on highlighting a few cases which we consider to be of particular interest.
Many of the investment cases concerned advice to invest in insurance bonds and whether that advice was suitable, having regard to the customer’s true risk appetite and, as often as not, the negative impact of the financial crisis. In some cases the ombudsman considered the firm to have misinterpreted this appetite.
The outcome of these claims typically depends to a large degree on the quality of the documentation retained by the firm and whether it has recorded all relevant telephone calls. However, even where the documentation is perfect firms sometimes lose if the ombudsman disagrees with the firm’s overall judgment on the suitability of the product.
A good example is that of Mr and Mrs A. In that case the ombudsman, Julia Chittenden, a former barrister, remarked in a very fully reasoned determination:
‘This product appears to have had a significant equity holding which would have posed significant risk. The business says that there has been no loss as the product has performed well. However my consideration does not relate to the actual performance of the product, but rather the risk it posed and whether it was one the consumers wished to take. Having considered their existing position… I am not persuaded that their attitude to risk could be described as “balanced”. I also take into account that Mr A had recently been made redundant which I consider would have in all likelihood made him more cautious. I consider that this investment posed more risk then they were willing to accept.’
This case started off as a complaint about commission and subsequently expanded to include a complaint about suitability. The Ombudsman explained: ‘This service has an inquisitorial remit which means it can look beyond the exact words of the complaint and try to identify what may be an underlying part of the complaint.’
Issues of suitability may affect product providers as well as intermediaries. The case of Mr and Mrs R against an insurer was determined by lead ombudsman Caroline Mitchell. She held the insurer to have misdescribed, in its product documentation, the risks to which a linked fund was exposed. However, the fact that it was of an ‘exotic’ nature was apparent at least to the complainant’s financial adviser. So the misdescription did not affect the complainant’s decision to invest. Accordingly the complaint against the insurer was not upheld.
Misrepresentation and fraud
The Consumer Insurance (Disclosure and Representations) Act 2012 only came into force in April 2013, so it is not yet discussed in any of the FOS cases published so far. However, FOS practice to a large extent anticipated and inspired the Act.
In simplified terms an insurer could and can only avoid a policy and keep the premiums if it can prove fraud, ie deliberate or reckless falsehood. Where the representation is merely careless and the insurer would not have entered into the contract if it had known the facts, it must just return the premiums. If it would have entered into the contract albeit on different terms, an adjustment should be made by reference to how the risk would have been underwritten if the true position had been known.
Ombudsman Ray Lawley, a solicitor, explained in a determination concerning Mr K that where fraud is alleged in ombudsman proceedings:
‘Whilst the civil standard of “balance of probabilities” applies, owing to the fact that an allegation of fraud is very serious, strong evidence is required to discharge the burden of proof. It is for [the insurer] to prove its case.’
This is in line with the practice applied in the Commercial Court.
In a number of cases suggesting fraud, however, the ombudsman gave the complainant the benefit of the doubt. In a determination by ombudsman Greg Barham, a former insurance claims negotiator, he recorded:
‘Mr. M was asked:
“…Have you smoked or used any tobacco…in the last 12 months?...” to which he
“…Tobacco products, typical consumption per day:…” to which Mr M answered “0”.
According to a letter from his GP, Mr M’s cigarette consumption was recorded, some two weeks after the application, as “20”. In the circumstances, the insurer inferred that the answer Mr M provided to the second question was incorrect.
However, I do not believe this is sufficient to show that Mr M was actually smoking at the time of application. There is some evidence that he was trying to give up or cut down his smoking. The last time his cigarette consumption was recorded by the GP it was recorded as “5”. This was some months before the application, so it is not inconceivable that Mr M had stopped smoking at the time of the application only to start again shortly afterwards.’
Mr M also gave carelessly incorrect information about his asthma. So the ombudsman decided that the insurer ‘should reinstate Mr M’s plan on the terms that would have applied had the correct information been disclosed, about his asthma symptoms. It should provide a revised amount of cover based on the amount of cover that the premium he has actually been paying would have bought.’
Had this case gone to trial in the County Courts the cross-examination of Mr M, might possibly have resulted in a different outcome. The rules allow the ombudsman to dismiss a complaint if ‘it would be more suitable for the subject matter of the complaint to be dealt with by a court’ where, for instance, the outcome depends on the credibility of witnesses. Where this course is taken an insurer may sometimes be in a better position to prove fraud, but the costs will be considerably higher. Moreover even where a firm asks for a complaint to be dismissed to enable it to be determined in the civil courts, the ombudsman may decline to do so if he or she considers that it can be dealt with on the basis of the evidence presented.
In another case concerning Mrs E, the ombudsman, Paul Daniel, a former FOS adjudicator, found that she had made a fraudulent statement. But the statement, if believed, ‘would not have deceived the insurer into settling a claim that it otherwise would not have settled’. So the complaint was upheld notwithstanding the fraud. The delays arising from the insurer’s investigation of the fraud were held not to amount to unfair treatment. However, the complainant was, despite the fraud, awarded interest at 8 per cent from the date of the claim, which is perhaps a questionable exercise of the ombudsman’s discretion.
One of the principles of the current regulatory regime is ‘that consumers should take responsibility for their own decisions’. This includes decisions as to the degree of care they exercise when completing insurance forms. It is not clear that FOS practice, or indeed the 2012 Act, supports this objective.
FOS determinations as precedent
In some determinations the ombudsman has no alternative but to interpret the law.
In a claim on directors and officers insurance, the policy excluded claims ‘based upon, arising from or in consequence of any actual or alleged failure to perform or any wrongful act in the performance of, professional services’.
The FOS adjudicator considered property investment advice provided by the claimant director, Mr G, was not provided in his managerial, fiduciary or employed capacity. It was not, therefore, covered by the policy. The ombudsman, Stephen Lilley, a former underwriter at Lloyd’s, disagreed. He considered the policy was not expressed clearly enough for it to be fair for it to apply only to liabilities of directors and officers in relation to activities in the management of the company. In his view it could reasonably be read so thatany insured person engaged in a managerial capacity was included in the cover.
He added, ‘If [the insurer] did not intend to include tasks properly required of the manager if they do not involve “managing” someone or something, I consider it should have made that clearer.’
Lawyers’ role in ombudsman proceedings
In the case of Mr N, his insurer under a legal expenses insurance (LEI) policy insisted that his solicitors should act on a conditional fee basis. They relied on the judgment of the Court of Appeal in Brown-Quinn & Anor v Equity Syndicate Management Ltd & Anor  EWCA Civ 1633. The ombudsman, Harriet McCarthy, a lawyer, held that that case was distinguishable and ruled against the insurer on this point. However, she also noted:
‘Mr N has submitted that his solicitor’s costs of completing the complaint form and supporting statement should be reimbursed, as it would have assisted our understanding of his complaint. However, he did not require professional representation to bring his complaint to us. We are used to dealing with complex issues and how we deal with complaints does not depend on how well they are presented to us.
The outcome to this complaint would not have been any different if Mr N had presented it himself without representation. It therefore remains my decision that it is not appropriate for these costs to be reimbursed.’
The correctness of this ruling is open to question, however, for a number of reasons. First firms opposing ombudman complaints can draw on their own resources to receive help from in‑house and external counsel. It seems odd that complainants who have LEI cover should not be allowed to do the same. It may not be strictly necessary to be represented in ombudsman proceedings, but it may also be quite comforting and reassuring to have that form of help.
Secondly to the extent that FOS creates and develops precedent it should arguably align itself to some extent with the practice in the courts. A judge can also deal with complex issues on her own in a case where litigants are not represented. But she will usually produce a better judgment, particularly in a case which develops the law, when she has the benefit of hearing different points of view fully and expertly articulated.