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.
Most borrowers are urged to protect their loans by taking out insurance to meet the repayments if they become unable to work. But the people who sell this type of insurance are often not specialists in this field and some have little or no knowledge of the policy terms. Their "advice" will therefore not be of great assistance to borrowers, who may be uncertain what they are paying for and unable to judge whether it is suitable for them.
The Code of the Association of British Insurers (ABI) – shortly to be replaced by the Code of the General Insurance Standards Council (GISC) – requires the seller to "ensure as far as possible that the policy proposed is suitable to the needs and resources of the prospective policyholder". But many of the complaints we receive indicate this has not happened.
When determining whether a policy is suitable, a seller – whether a lender or an agent for the insurer – must obviously take into consideration any information the prospective policyholder volunteers. However, we do not consider the seller’s duty is limited simply to recording what the borrower discloses. It is only by asking questions that the seller can properly determine suitability. These questions cannot cover every aspect of a borrower’s personal position and should not be expected to do so. To paraphrase the ABI Statement, only those matters deemed to be relevant by the insurer should be the subject of questions.
If sufficient care were being taken to ensure suitability, we would not be continuing to see complaints from borrowers who have been sold insurance for which they were clearly not eligible. For example, most policies exclude from cover anyone who is not "actively working" on the date of the sale. Take the case of a borrower who is incorrectly sold a policy while on sick leave and later submits a claim, which the insurer refuses to meet. The insurer can leave the borrower in a serious financial predicament if, acknowledging the unsuitable sale, it refunds the premiums. The borrower’s predicament will, of course, be even more serious if his house is at risk. We generally take the view that insurers should meet claims in circumstances.
It is also common for policies to include additional eligibility requirements concerning the insured person’s age and number of hours worked each week. Some policies exclude from cover anyone who is self-employed or employed on a short-term contract. Other insurers deem such borrowers eligible for cover, but restrict the benefits available to them under the policy. The ABI Statement on Payment Protection Insurance requires that
"details of the main features of the cover as well as important and relevant restrictions will be made available and highlighted at the time the insurance is taken out with full details being sent afterwards" (our emphasis).
If the insurer fails to ensure sellers meet these requirements, we regard this as indicating that it waives any right it might have to avoid giving effect to the insurance.
When existing borrowers extend their debt, it is common for the lender to issue a new loan incorporating all the borrower’s liabilities. This will result in the sale of a new insurance policy, but it can leave the borrower unprotected, at least for part of the loan. For example, if a borrower has consulted a doctor before the new policy comes into force, any illness that is later diagnosed as being related to the symptoms for which the borrower saw the doctor is unlikely to be covered. And if the borrower then becomes unemployed, he or she will not be able to claim during the initial period excluded by the policy – often the first 90 days.
Insurers have generally accepted liability for such claims under the borrower’s previous policy (if there was one). However, where the new loan is significantly larger than the old one, the borrower could be left without protection for the balance of the repayments. In such cases, we need to satisfy ourselves that the borrower was told of the effect of the new policy provisions or, at the very least, that the borrower would have acted in the same way if he or she had been told of them, and that the borrower has not therefore been prejudiced by the seller’s failure to highlight these restrictions.
Another type of claim has caused us real concern. Almost all policies exclude claims which arise from stress or other forms of mental illness. We have seen a number of complaints recently where this restriction has meant an unemployed claimant has been left with no recourse.
It seems to us that the clear distinction that was once made between physical and mental illnesses has largely disappeared. Illness (or for that matter disability) is generally understood to cover a range of medical conditions with both physical and mental symptoms and causes. Media reports suggest that some 50% of all illness may be due to mental causes. Excluding claims for all mental illnesses is therefore a significant limitation of cover, and should be made clear to purchasers before the policy sale is completed. An example of such an exclusion states:
"No claim shall be payable hereunder if … caused or aggravated by any psychiatric illness or any mental or nervous disorder."
Clearly, mental or nervous disorders, such as stress or depression, can be difficult to verify and diagnose with confidence – and insurers are concerned about the potential for numerous claims where it would be difficult to assess claimants’ fitness to work. Some insurers have addressed this by excluding mental illness only where the claimant has not received treatment or been referred to a consultant. These insurers will accept claims where the insured person is receiving treatment or seeing a consultant for their condition.
For insured persons who are made redundant and then suffer from depression, the situation is more complicated; they will generally be unable to claim for either unemployment or disability. Unemployment claims are subject to proof that the claimant is seeking work, but a sick claimant will not be in a position to sign on.
Thus, the mental illness exclusion will defeat a disability claim and the effect of the redundancy exclusions means that the unemployment claim will also fail. Neither of these exclusions is generally unreasonable, but we are concerned about their combined impact. Redundancy is likely to be a difficult time and symptoms related to stress and/or depression must be common in such cases. When someone’s sole reason for not looking for work is that they are sick, we consider it unreasonable for an insurer to reject an otherwise justified claim by relying on the largely procedural requirement that a claimant be registered as unemployed and actively seeking work.
It is relevant to contrast this situation with that of someone who is made redundant and then suffers an illness which, if it had arisen before the redundancy, would have given rise to a successful claim under the policy’s disability section. At face value, both claimants would be in a similar position. The wording of the redundancy provision which requires a person to look for work would apply and, generally, policies of this type require the claimant to be in employment on the day the disability started. Despite the wording of these policies, in a number of cases we have concluded the insurer should pay benefits in such circumstances. In essence this is because either the redundancy claim would be valid were it not for the disability or the disability claim would be valid were it not for the previous redundancy.
Of course, where an insurer offers on-going payments in the case of redundancy, it is not unreasonable that it wishes to confirm that a claimant is seeking new employment. But it is also not unreasonable for it to accept that people made redundant may sometimes suffer periods of ill-health which prevent them seeking work for a time but have little, if any, impact on their prospects for re-employment.
When looking at individual cases, we therefore need to consider whether the illness was so severe that it would have prevented the person from working. We also need to consider the extent of any prejudice to the insurer’s position (that is, how likely it is that the insured person would have found work were it not for the illness).