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ombudsman news

issue 4

April 2001

case studies - loan payment protection insurance

04/01 loan protection - joint insureds - calculation of benefit - whether each insured entitled to full monthly benefit.
04/02 loan protection - accidental death - meaning of "accidental".
04/03 loan protection - eligibility - self-employed insured on "maternity leave" - whether "actively working at her business".
04/04 loan protection - unemployment - fixed-term contract - whether claim for unemployment at end of fixed-term contract valid.
04/05 loan protection - disability - exclusion for any mental or nervous disorder - insured made redundant and affected by stress - whether insurer liable for disability or unemployment benefit.
04/06 loan protection - unemployment - exclusion for employees working outside UK - insured employed abroad but registered as unemployed in UK - whether claim valid.
04/07 loan protection - disability - exclusion for any mental or nervous disorder - insured made redundant and affected by stress - whether insurer liable for disability or unemployment benefit.

04/01
loan protection - joint insureds - calculation of benefit - whether each insured entitled to full monthly benefit.

Mr and Mrs H took out insurance to protect their joint mortgage repayments, choosing a monthly benefit of £500. In October 1998, Mrs H became unemployed and submitted a claim. The insurer made monthly payments of £250. Mrs H and her husband argued that she was entitled to £500 per month. In their opinion, the policy covered each of them for that amount. They said this was what they were told when they bought the policy and it had been confirmed in the insurer's letter accepting the claim.

The insurer did not accept this argument, stating that the policy explained clearly how benefit would be calculated. However, it offered £50 compensation "for the errors and incorrect advice".

complaint upheld
Neither the application form nor the insurance certificate explained the amount of monthly benefit that would be paid in the case of joint applicants. Both documents showed the amount of the monthly benefit required as £500 and contained no more than a general reference to the booklet which detailed the conditions. There was no specific reference to the limitation of cover in the case of joint borrowers.

The layout of the conditions booklet was confusing and unlikely to help anyone wishing to ascertain the position for joint borrowers. On Page 4, "monthly benefit" was defined as "the amount you have agreed with us as specified in your certificate of insurance" but there was no reference to the limitation that applied to joint borrowers. The sections of the booklet, "What we will pay", "What we will not pay" and "How to claim" also failed to reveal the relevant limitation.

The limitation was, in fact, set out under the heading "Eligibility" -"If the mortgage has been taken out by joint borrowers who are all eligible for cover ... each borrower's cover is limited to an equal share of the monthly benefit, eg if the monthly benefit is £600 and there are three borrowers eligible for cover, each would be covered for £200".

The insurer appeared to have accepted at an early stage that there was some substance in the complaint. It accepted our recommendation that it should make an additional payment to Mrs H on the basis that her true entitlement was to benefit payments of £500, plus interest. It also increased its compensation offer to £200.

04/02
loan protection - accidental death - meaning of "accidental".

A young couple, Mr and Mrs R, had mortgage payment protection insurance which included accidental death cover. When Mrs R died suddenly, her husband claimed the policy benefit. The insurer made enquiries and was advised that the cause of death was pneumococcal meningitis and pneumonia. It rejected the claim on the ground that the death was not caused by an accident.

Mr R argued that the policy defined "accident" as "a sudden unforeseen unintentional violent external event" and that his claim was therefore valid, particularly as the policy did not exclude death by sickness or disease.

complaint rejected
An exclusion for death by sickness or disease would only be necessary if the definition of "accident" were wide enough to include such deaths. It was not. Mrs R's death resulted not from an accident but from a viral infection. We accepted that the death was accidental in the sense that it was not anticipated. However, it could not be regarded as due to a "violent external event" in any ordinary use of that term. We did not agree there was any ambiguity in the policy terms and we considered the insurer was entitled to reject the claim.

04/03
loan protection - eligibility - self-employed insured on "maternity leave" - whether "actively working at her business".

Mrs M was a self-employed dietician for a dieting organisation. After the birth of her child in February 1998, she did not return to work for some months. In June 1998, while she was still unemployed, a lender telephoned to offer a loan to her and her husband, who was in full-time employment. She was also offered insurance to cover the repayments and she agreed to take out both the loan and the insurance. The paperwork named only Mrs M as the borrower but she did not consider this important.

Mrs M returned to work in September 1998, but was offered less work than previously and her earnings were only £12 per week. Her husband fell ill in November and was diagnosed as having a brain tumour.

When the couple put in a claim for disability benefits, they were told the policy did not cover him. Mrs M contended that when the policy was sold she had provided full details of her husband's earnings and her own status, and had discussed the recent birth of their child.

complaint upheld
It was up to the insurer to prove that the policy had been properly sold and that the sale complied with the provisions of the ABI Code. The insurer was clearly aware that Mrs M was both self-employed and on "maternity leave". Since she was not "actively working at her business" she was not eligible for the policy. However, we did not consider that the insurer's refunding the premium constituted an appropriate resolution of the dispute.

We accepted the insurer's contention that the policy could have been transferred into the husband's name at Mrs M's request. However, we did not agree that her failure to make such a request meant she had deliberately chosen not to take out cover for her husband. We were satisfied that the policy had not been properly explained at the time of the sale.

The appropriate outcome was for the insurer to amend its records to include the name of the husband on the policy and to meet his disability claim.

04/04
loan protection - unemployment - fixed-term contract - whether claim for unemployment at end of fixed-term contract valid.

A university lecturer, Dr J, took out a loan with loan protection insurance in May 1999. On 1 October that year, he became unemployed and claimed benefit under the insurance. The insurer rejected his claim, stating that the policy did not cover unemployment occurring at the end of a fixed-term contract.

Dr J maintained that his claim was covered, as the policy stated that the exclusion did not apply because he had been "in continuous work for the same employer for at least 24 months, and [his] contract has been renewed at least twice and [he had] no reason to believe that it would not be renewed again".

However, Dr J's employer stated that his contract had been from 20 January 1997 until 1 October 1999 and that he had been told on 27 October 1998 that it would not be renewed.

complaint rejected
It was clear that Dr J had been aware before taking out the loan that he would become unemployed on 1 October 1999. There were no grounds for requiring the insurer to make any payment to him. Moreover, on the facts, Dr J did not meet the other conditions of the exception as there was no evidence that his contract had been renewed twice.

04/05
loan protection - disability - exclusion for any mental or nervous disorder - insured made redundant and affected by stress - whether insurer liable for disability or unemployment benefit.

Miss K was made redundant in January 1999. She subsequently became unwell and her GP signed her off with depression. When she submitted a claim for disability benefits under her loan payment protection insurance, the insurer rejected it on the ground that the policy specifically excluded claims "caused or aggravated by any psychiatric illness or any mental or nervous disorder". She was unable to claim unemployment benefit because her illness prevented her from signing on. She was not therefore "actively seeking new employment". Miss K maintained it was unfair to deny her benefit on either ground because of her circumstances.

complaint upheld in part
We were concerned about the impact of the two exclusions on the claimant. Redundancy is likely to be a difficult time for anyone and stress and/or depression can be common. The policy clearly excluded any claim for mental illness, so Miss K was not entitled to disability benefit.

However, since she would have been entitled to redundancy benefits if she had not been signed off with depression, we did not consider it would be fair for her to forgo all benefits. In the circumstances, we concluded that payment of 50% of the maximum benefit was appropriate.

04/06
loan protection - unemployment - exclusion for employees working outside UK - insured employed abroad but registered as unemployed in UK - whether claim valid.

Mr D worked as an oil industry welder in the UK. In March 1999 he bought a car on hire purchase and took out insurance to cover the loan repayments. In June 1999 his employment was terminated. He obtained work as a welder through an agency in Manchester and was employed in Belgium from August 1999 until January 2000, when that job was terminated. He then returned to the UK and signed on as unemployed.

The insurer rejected his claim for unemployment benefit on the ground that the policy contained an exclusion for anyone working outside the UK.

complaint upheld
Mr D was a UK citizen who had returned to the UK and was registered for employment here. This was not a case where there was a need for the insurer to make enquiries of the relevant authorities abroad to see whether he met foreign criteria for state benefits. We considered that Mr D had complied with the spirit of the policy terms, if not with the strict wording. The insurer agreed to our recommendation that it should meet the claim and reimburse any penalties charged by the lender.

04/07
loan protection - unemployment - insured unable to sign on as disabled - whether unemployment claim valid - whether payment of disability claim reduced entitlement to unemployment benefits.

Mr E was employed as a courier/driver from November 1998 until spring 1999. He submitted disability claims for benefits under a number of loan payment policies, stating that he had been signed off work by his GP from 13 April 1999 for whiplash injuries and anxiety.

When the insurer asked for confirmation of Mr E's employment, his employer stated that his last day at work was 11 April 1999, although on Mr E's P45 the employer had given the date as 31 March. The employer refused to answer all further enquiries from the insurer.

The insurer rejected the claim on the ground that Mr E had ceased working before becoming unwell. However, after Mr E won a claim for unfair dismissal at an industrial tribunal it agreed to review the claim. The insurer paid Mr E disability benefits under the three policies from 13 April until 12 December 1999, the date when his GP said he was fit for work.

Thereafter, Mr E submitted an unemployment claim and was paid benefit under one of his policies for the balance of the policy maximum of 360 days. The insurer rejected Mr E's claims on the other policies because he had cancelled the policies. Mr E said he had only done this because the insurer had refused his disability claims.

complaint upheld
Mr E had taken out protection against both disability and unemployment and both these misfortunes had befallen him at the same time. His first sick note was dated 12 April, immediately after his employment was terminated.

We therefore considered that a separate maximum benefit period applied for the unemployment claim and that the insurer should not have combined this with the disability claim. Both policies clearly provided for a maximum unemployment benefit of 360 days. So Mr E's claims should not have been limited by the payment of the earlier disability benefits and his unemployment benefit should have run from the date he was first able to sign on.

With respect to the two cancelled policies, we put it to the insurer that Mr E had cancelled them simply because of justifiable frustration at the handling of his claims, not because he no longer wished the insurer to consider claims under those policies. The insurer agreed to treat the claims as if the policies had continued in force.

ombudsman news gives general information on the position at the date of publication. It is not a definitive statement of the law, our approach or our procedure.

The illustrative case studies are based broadly on real-life cases, but are not precedents. Individual cases are decided on their own facts.