Insurers who issue policies to consumers are required by law to make sure they write their policies in plain, intelligible language, and are not unfair. The FSA has also made it clear that unfair contract terms “can provide evidence that firms are failing to treat their customers fairly”.
The Unfair Terms in Consumer Contracts Regulations 1999, and their similar 1994 predecessors, have been in place for well over a decade. So you might expect that by now, there would be a substantial body of policy documents which meet these requirements.
In the area of general insurance, this is broadly true – while there may still be room for improvement, most insurers have made significant strides in improving the clarity and fairness of policy wordings. Concerns tend to focus on whether the insurer has done enough to draw a term to the customer’s attention, rather than whether the policy terms are plain and intelligible.
However, in the life and pensions sector, progress has generally been more patchy. This is not particularly surprising. Relatively few claims on life and pensions policies require reference to the policy wording. Some of the key triggers for claims, such as retirement or death, are unlikely to give rise to a dispute. Even if medical terminology is not plain and intelligible to the lay person, it will generally be a question of fact whether the customer is suffering from the condition described in the policy.
By contrast, in the case of general insurance, the high volume of claims, more complicated circumstances which can give rise to claims, and greater reliance on exclusions have all given insurers greater cause to focus on policy wordings. This means that, for example, a standard form motor or household policy will be subject to regular review.
A pension policy document, however, may go for many years without substantial amendment. In addition, of course, while a new wording on a motor policy will be applied on each annual renewal, existing customers under a pension policy will not generally see any change to their policy terms.
As a result, there may be many life and pensions customers whose policy terms are anything but plain and intelligible.
A personal pension policy taken out up to 20 years ago may never have been reviewed or amended since it was issued. In many cases, even a personal pension policy taken out today is likely to be significantly less readable than the same customer’s motor or household policies.
Appearance is everything
It is important to bear in mind that, in deciding whether a policy term is unfair, the FSA will look at what it says and how it might be interpreted. The fact that, in practice, the insurer might not adopt that interpretation or exercise the right in an unfair way is not relevant for the purposes of the Regulations, although it may mitigate any consequences.
What do insurers need to do?
Insurers should satisfy themselves that all of their policy wordings meet the requirements of the Regulations, both now and in the future. It makes sense to prioritise this work, by adopting a risk-based approach based on customer numbers and risk of detriment. However, over time, all documentation should be reviewed.
It is also important to bear in mind that this should be a continuing process. Views on whether a particular term is unfair for the purposes of the Regulations can change over time, and new rulings from the FSA and OFT need to be monitored to assess whether the insurer’s policy terms need to be changed as a result.
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