Claims under employers’ and public liability (EL/PL) insurance policies are sometimes proportionately reduced or avoided by insurers, typically because of material misrepresentation or non-disclosure.
This may relate to issues such as directors failing to declare previous county court judgments, staff payroll which was understated and other issues which materially affected the risk. Alternatively, insurers may seek to rely on exclusion clauses or condition precedents that have not been complied with.
This will occasionally lead to a complaint by the policyholder. A disgruntled policyholder may seek to have their complaint adjudicated i.e. via the courts or in some instances, by the Financial Ombudsman Service (FOS).
Role of the FOS in insurance disputes
The FOS’ jurisdiction has grown in recent years. It will now hear complaints from individual consumers as well as businesses with a turnover of less than £6.5m and less than 50 employees, or which have balance sheet of less than £5m if the business has over 50 employees.
The FOS currently has the power to make maximum awards up to £415,000 (depending on the date of the complaint) . It can also make directions (e.g. order an insurer to reinstate the policy) and recommend higher awards. It also has the power to make monetary awards for distress, inconvenience, pain and suffering and damage to reputation, as well as interest and costs.
In 2020-2021, the FOS decided on 38,496 complaints relating to insurance, most of which related to claims being declined. Overall, 28% of those complaints were upheld.
How matters are decided
When making a decision, the FOS will have regard to the law, regulators’ guidance, codes of practice and good industry practice.
Unlike the court system, the FOS is not strictly bound by the law and will reach a decision based on what it considers is “fair and reasonable in all the circumstances of the case”. A fairly commonly seen example of where it may depart from the law is where insurers have sought to legitimately rely on condition precedents relating to late notification, which the FOS has considered unfair, due to a lack of any prejudice on the insurers’ part.
After gathering evidence from the parties, the FOS will issue an initial assessment and allow both parties to respond. If the parties agree with the decision, it is considered settled. However, if the parties dispute the decision, it is referred to an Ombudsman. If the final decision is then accepted by the policyholder, it becomes binding on the insurer. On the other hand, if the policyholder does not accept the Ombudsman’s final decision, it is not binding and the FOS is unlikely to have any further involvement in the matter. The policyholder will still be able to pursue the matter via the court.
If the insurer disagrees with the FOS’ final decision and wishes to challenge it, it will be necessary to have it subjected to a Judicial Review.
Issues for insurers to consider
The FOS scheme is a cost effective way for policyholders to challenge an insurer’s position e.g. where indemnity is withdrawn/policy avoided, or the claim proportionately reduced.
There are a number of issues an insurer needs to be conscious of, namely:
- When faced with an initial complaint by a policyholder, insurers should consider whether the insured is likely to fall within the scope of the FOS’ jurisdiction, as this will impact how the insured can proceed with their complaint. It can also affect the likelihood of a complaint being pursued further (it is generally far easier and cheaper for a policyholder to complain via the FOS, than to commence court proceedings).
- As above, an insurer wishing to challenge the FOS’ final decision (which has been accepted by the insured) will need to commence a Judicial Review. However, there are limited grounds available for seeking a Judicial Review, the threshold is high, there are tight timescales in place and it can be a costly exercise. .
- Even a successful Judicial Review can just lead to the FOS being required to reconsider its decision (i.e. if a quashing order is made), and it would be open to the FOS to reach the very same decision (if, for example, the original decision was considered correct, but not properly reasoned). For these reasons, insurers may be more inclined to seek a Judicial Review, in relation to decisions which could have wider implications for their business as a whole, rather than decisions relating to individual/specific facts (save for perhaps where the FOS has made an award at the top end of its powers).
- Insurers should be aware that even though they may have solid grounds for avoiding or proportionately reducing a claim in law e.g. pursuant to the Consumer Insurance (Disclosure and Representations) Act 2012, or the Insurance Act 2015, the FOS may still uphold the policyholder’s complaint if it finds the decision was not fair and reasonable. This can lead to inconsistency and difficulty in predicting how the FOS will determine a complaint. This was reaffirmed in In R (on the application of Aviva Life and Pensions (UK) Ltd) v Financial Ombudsman Service . The Administrative Court agreed that in law, the insurer would have successfully been able to avoid the policy under the CIDRA 2012 had proceedings been brought in the County Court, but reiterated that the FOS was entitled to carry out its own assessment based on what was fair and reasonable (with the position in law being only one factor when reaching its conclusion).
- The FOS will monitor complaints to identify any systemic issues within the insurance industry or with a particular insurer (e.g. claims being regularly and unreasonably being avoided). The FOS also publishes its decisions and data relating to how many complaints it has received about specific insurers. This can lead to reputational issues for insurers.