The Financial Ombudsman Service (FOS) has warned consumers of the risks in providing incorrect details in relation to insurance policies in a new insight report. The risks include policies being avoided due to misrepresentation or material non-disclosure or potentially facing a significant shortfall due to underinsurance.
The FOS has recently produced a new insight report after it conducted a review into complaints that they have received from members of the public regarding insurance products, identifying that they "regularly hear from people who haven’t taken out sufficient cover, underinsuring their possessions or misrepresenting their circumstances". This can have serious impacts on consumers' ability to make a claim under their insurance policy.
Under The Consumer Insurance (Disclosure and Representations) Act 2012 (CIDRA), members of the public who purchase insurance are under a duty to take reasonable care not to make a misrepresentation when entering into the policy. If a consumer knowingly breaches this duty and this misrepresentation induces the insurer to enter into an insurance policy, the insurer can potentially avoid the policy. Avoidance of the policy renders it void as if it had never been entered into by the parties. The insurer may also be able to retain the premiums paid by the consumer to date. For less serious breaches, where the misrepresentation is honest and reasonable, the insurer may still have a range of remedies, including reducing the amount payable.
The FOS' research focussed on three principle areas of insurance – home, motor and travel, where they most frequently see issues with misrepresentation and underinsurance. Regarding home insurance, the FOS has seen a number of cases where consumers have incorrectly valued their possessions, normally due to insufficient care taken in calculating their value, with jewellery coming up multiple times in their case studies.
For motor insurance, principal areas of complaints relate to consumers having their policies avoided due to failing to disclose to insurers modifications to the car (with modifications to wheels being cited in the case studies), or consumers failing to notify insurers that they are using the vehicle for commuting.
Finally, for travel insurance, the majority of complaints relate to consumers being left without cover and forced to pay expensive medical bills while abroad due to alleged failure to notify their insurers about pre-existing medical conditions.
While most of the advice is principally for the benefit of consumers, there are some takeaways for insurers. Firstly, it is apparent that the FOS is concerned that insurers are taking too hard-line a stance under the act to avoid paying out under policies for minor breaches. The FOS will in such circumstances come to the aid of the consumer and force the insurer to pay out under the terms of the policy.
It is also clear from the FOS' enquiries outlined in the case studies that they will expect to see that proper enquiries were made by the insurer where accusations are made against a consumer of failing to disclose material information. An insurer merely sticking to a telephone script and not following up on potential issues at the time of the initial call to set up the policy may lead the FOS to deem that an insurer has failed to sufficiently follow up on disclosures by a consumer.
However, so long as adequate questions were asked and the consumer can be shown to have either misled the insurer or that they were reckless regarding disclosure, then the FOS may allow the insurer to avoid paying out under the insurance policy. It is important, therefore, for insurers to review their systems and ensure that proper investigations are being made and accurate records being kept, in the event that a future complaint is made to the FOS.