The FOS has publicly stated that when dealing with complaints about the validity of insurance policies it will not apply the principles established in the High Court cases of Bunney & Cahill that a 'direction' (like a 'money award') is also subject to the maximum award limit. Instead, FOS believes it has jurisdiction to direct insurers to re-instate a policy and, if valid, pay the claim regardless of the £150k maximum award limit.
In cases we have seen involving findings of unfair avoidance of insurance policies, the Ombudsman has taken a considered decision to uphold complaints and direct insurers to reinstate the policy and consider the policyholder's claim in accordance with the policy terms and conditions (on threat of another complaint about the decision subsequently reached).
The Ombudsman emphasises that these are directions, not money awards and, therefore, insurers are not entitled to take into account the maximum award limit in settling the policyholder's claim. What we thought were isolated decisions or, at most, informal internal policies have since been stated as published FOS policy.
The FOS' latest Annual Review of 2012/13 made perfectly clear in May the intention to claim jurisdiction in this regard:
"There have been several cases this year where confusion has arisen over the difference between:
- “money awards” – where we can tell a business to pay compensation of up to £150,000 …; and
- “directions” – where we can tell a business to reinstate a policy and deal with a claim in line with the other terms and conditions of the policy.
"Where we tell an insurer to reinstate a policy that has been cancelled (“avoided”), the limit for “money awards” does not apply."
In August, FOS published its technical note on misrepresentation and non-disclosure cases conveying the same message:
"If we decide that cover should be reinstated…our £150,000 award limit does not apply – because we are telling the insurer to re-instate a policy and then deal with a claim. The award limit applies only where compensation is a money award for financial loss the consumer has suffered – not as a limit to any future amount that is paid only if the insurer accepts the claim."
This is all notwithstanding the FOS' own technical guidance on compensation (which was updated at the same time in August this year) which states unambiguously: "A formula or direction are also both subject to the maximum limit of £100,000 (£150,000 for complaints we received after 1 January 2012). This limit applies, for example, where we direct a business to: …; pay an insurance claim;…".
It is therefore somewhat disingenuous for the Annual Review to say: "Given the availability of this information on our website … it is disappointing that some insurers still insist on pursuing individual cases to the last stage of our process, an ombudsman’s final decision". The FOS' own guidance appears contradictory.
The Ombudsman draws a subtle but significant distinction between a 'direction' to validate a policy and consider a claim from a 'direction' preventing insurers from relying on an exclusion not to pay an insurance claim. According to FOS reasoning, the former does not necessarily require a monetary payment whereas the latter does. This is the FOS approach that will be applied to future policy validity cases. The FOS believes it has the requisite jurisdiction to direct insurers to consider claims, subject only to the policy's limit of cover.
We hope that the right case will soon be found to take to the High Court to clarify this important jurisdictional point by way of a Judicial Review. The longer the industry leaves it, the longer the FOS will be able to say its policy has been publicly known and gone unchallenged. For the time being, insurers should bear in mind that the FOS is actively looking at ways to compel them to pay out more than the maximum award.