The High Court has recently laid down an important decision in relation to the jurisdiction of the Financial Ombudsman Service (FOS). The decision itself concerned the reinstatement of a life insurance policy that had been avoided for non-disclosure. But the case is most interesting because of the judge’s comments about the jurisdiction of the FOS. The decision demonstrates the possibility of a challenge to a FOS decision that is based on what is ‘fair and reasonable’, rather than on the strict legal position and where their reasons are insufficiently explained by the FOS.
In R (Aviva Life & Pensions (UK) Ltd) v Financial Ombudsman Service  EWHC 352 (Aviva) the High Court held that, while not irrational, the FOS decision that Aviva should reinstate the policy should be quashed on the basis that it was inadequately reasoned. Mr Justice Jay, however, had “personal concerns about a jurisdiction such as this which occupies an uncertain space outside the common law and statute. The relationship between what is fair and reasonable, and what the law lays down, is not altogether clear.”
This concern regarding the FOS’s discretion to determine what is ‘fair and reasonable’ will be of interest, not just to insurers, but to all parties seeking decisions from the FOS.
This newsletter considers the effect of the High Court decision.
In July 2006 Mr and Mrs McCulloch (who are “interested parties” for the purposes of the proceedings) took out a 23-year joint life policy (the joint life policy) which included terminal illness benefits and a sum assured of £127,000. This was, in essence, a composite policy whereby Mr McCulloch insured against the contingency of his wife’s prior death, and vice versa. A single premium was payable on the basis of a blended mortality risk. In early August 2013 Mr and Mrs McCulloch cancelled the joint life policy and Mr McCulloch applied for a single life policy on his own life (the single life policy) from Aviva in November 2013. Mr McCulloch failed to disclose on the application form for the single life policy that he had been consulting his GP in relation to possible mental health issues since September 2013, that he had been referred for psychiatric assessment, and that he was awaiting a CT scan.
His responses on the proposal form included:
“Q18: 'Within the last five years, other than in respect of the conditions that you have already declared have you:
1. received any medical attention at a hospital as an inpatient or outpatient, or
2. had or been advised to have any investigations, scans or blood tests?'
'Q19: Other than in respect of the conditions that you have already declared, are you currently:
1. experiencing any symptoms or complaints for which you have not consulted a doctor or
2. receiving any form of treatment or medication or
3. awaiting any medical or surgical consultation or follow up or
4. awaiting any test or investigation?'
A: Yes – groin hernia (and further details were given).”
He subsequently sought to claim for terminal illness benefit on the single life policy when he was diagnosed with a terminal illness identified by the CT scan. Aviva declined the claim on the grounds of misrepresentation, and avoided the policy owing to negligence or careless, rather than innocent, non-disclosure. Aviva stated that it would not have offered the policy if disclosure had been made.
The FOS considered that Aviva should treat the claim as required under the Association of British Insurer’s Code of Practice on the basis that Mr McCulloch’s misrepresentation was due to his illness.
The Ombudsman stated that “Mr McCulloch could be expected to make the same disclosures that I would expect a reasonable person to make” and accordingly “[i]n cases of innocent misrepresentation, the appropriate remedy is to disregard the information that wasn’t included in the application form. So Aviva should reinstate the policy on its original terms and consider Mr McCulloch’s claim”.
Aviva made the following principal arguments:
1. There were two stages in determining whether its decision was ‘Wednesbury’ unreasonable: (i) was the decision unfair or unreasonable; and (ii) if it was unreasonable, what remedy should be given? Crucially, the second test should only apply if the first has been satisfied. Moreover, because Aviva had followed relevant law, guidance and practice, it could not be concluded that the first test had been satisfied.
2. Although the mistake as to the information provided may not have been Mr McCulloch’s fault, Aviva was blameless, yet found itself committed to pay out on the certainty that Mr McCulloch would die during the currency of the term, not the risk that he might. Accordingly, the Ombudsman’s decision was more than inadequately reasoned, it was perverse. The only correct conclusion should have been that, had Mr McCulloch been well, he would have provided the information and the risk would have been declined.
3. The FOS’s decision requiring Aviva to reinstate the policy should be quashed because the effect of reinstatement would have led to Aviva paying the full amount due under the life policy, which was £500,000. This was in excess of the £150,000 award limit that would otherwise be applicable if the insurer had refused cover due to a breach of policy terms or the application of an exclusion. By contrast, the FOS contended that the role of the Ombudsman was to determine whether a decision was fair and reasonable, and in doing so, should take into account, but is not bound by, relevant law and practice.
The Court’s decision
The whole of the Ombudsman’s decision was quashed, meaning the FOS has to reconsider the complaints regarding both policies. However, in doing so, the Court did not agree with Aviva’s formulation of whether the Ombudsman’s decision was ‘Wednesbury’ unreasonable, and held that the Ombudsman was correct to use “her own evaluative assessment of the merits of the decision reached.” Further, the Ombudsman did not have to accept Aviva’s decision, simply because Aviva had followed the relevant law, guidance and practice.
Instead, the Court concluded that the correct question to consider was “whether a different Ombudsman, properly directing herself as to her powers, could rationally conclude that it would be fair and reasonable to uphold the complaint.” In considering that question, the Court emphasised the importance of Aviva’s submission that, had it known of Mr McCulloch’s condition, it would not have accepted the risk. In particular, it was noted that:
"insurance is about risk, not certainty. Insurers required proposal forms to be completed accurately so that the risk may be properly valued, and the premium assessed. Moreover, some weight must be given to the argument that fairness and reasonableness is not just about the interests of the insured, but must also accommodate the commercial interests of the insurer.”
However, the Court decided that despite this it was not persuaded that a differentlyreasoned decision upholding Mr and Mrs McCulloch’s complaint would necessarily be irrational. In this sense, the judgment is a reminder of how difficult the Wednesbury test is to satisfy.
The strong statements the judge makes (despite the FOS conceding this point) about the need to explain a departure from the relevant law, guidance and practice are also significant. Mr Justice Jay said that “FOS was right to concede at the earliest possible stage that the Ombudsman’s determination was flawed for inadequacy of reasons. The Ombudsman did not follow relevant law, guidance and practice. Although, as I will explain below, she was not required to do so, it was incumbent on her to explain why she did not […] It follows that a quashing order should be made in this case.” Although the need for the FOS to explain a departure from the relevant law, guidance and practice has been accepted as the law and referred to in decisions for many years, a quashing order on this basis may serve as helpful guidance to the FOS of the importance of this.
Perhaps more significantly, the judge also stated that “[b]y way of postscript, I do have personal concerns about a jurisdiction such as this which occupies an uncertain space outside the common law and statute. The relationship between what is fair and reasonable, and what the law lays down, is not altogether clear. The approach of the Court of Appeal has been to say that a sufficient nexus exists between these two normative categories because (i) the corpus of legal principles and rules is clear, and (ii) the Ombudsman must give clear reasons when she departs from the law. Speaking entirely personally, I am not wholly satisfied that this adequately bridges the gap, or gives sufficient definition to the norms under scrutiny. Who, or what, defines the contours and content of fairness and reasonableness? If the law takes one policy direction, what can rationally survive of a policy which has been eschewed?...”
The combined effect of both points is a helpful reminder, and perhaps even a warning, which may bring more rigour to the FOS’s decision making in the future by encouraging it to think more about its alignment with the law and when and why it is appropriate to depart from it, bearing in mind that fairness and reasonableness should presumably be measured from the perspective of the firm as well as the customer. Reasonableness and predictability are important aspects of the Rule of Law and this case raises interesting questions regarding the circumstances in which it might be fair and reasonable to hold a firm liable for something for which it would not be liable under the law.
A copy of the judgement is available.