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ombudsman news

issue 65

October/November 2007

case studies illustrating the diversity of disputes handled by the ombudsman service

The ombudsman service is able to look at complaints about a very wide range of financial matters, ranging from banking, insurance, mortgages and pensions to credit and store cards, hire purchase and pawnbroking.

This selection of recent case studies illustrates the breadth and diversity of the disputes we handle and includes:

  • a claim made under a marine insurance policy after an explosion on a boat
  • a dispute about interest payments on a mortgage taken out with a credit union
  • a complaint about advice to invest in a film partnership
  • a claim made by a builder, under his contractors' all-risks commercial insurance policy, for serious fire damage; and
  • a customer's problems in getting an electronic payment company to refund her money after the concert tickets she bought over the internet failed to arrive.

issue 65 index of case studies

  • 65/7 - marine insurance - whether explosion and resulting damage caused by policyholder's "recklessness" while installing gas heater in cabin of his boat
  • 65/8 - consumer charged additional interest by credit union because of delays in applying monthly mortgage repayments to her mortgage account
  • 65/9 - couple inappropriately advised to invest in a film partnership when seeking to reduce their tax liability
  • 65/10 - consumer credit - hire purchase company breaches consumer confidentiality when dealing with a customer's arrears
  • 65/11 - stockbroker persuades client to invest in penny shares, despite client's confusion about the level of risk involved
  • 65/12 - contractors' all-risks commercial insurance policy - liabilities to third parties - claim for serious fire damage during renovation work - whether claim can be dismissed on grounds of contractor's carelessness and breach of policy condition
  • 65/13 - electronic payment company declines to deal with customer's complaint about non-delivery of tickets bought over the internet

65/07
marine insurance - whether explosion and resulting damage caused by policyholder's "recklessness" while installing gas heater in cabin of his boat

Mr A was devastated when he had a phone call to say his boat had been badly damaged by an explosion in the cabin. Since buying the boat a year earlier he had put a great deal of money and effort into renovating it and had spent almost every weekend - and most of his annual leave - on the boat.

After inspecting the damage, Mr A put in a claim under his marine insurance policy. However, the insurer refused to pay out. It said that, in installing a gas heater in the cabin, Mr A had "knowingly taken insufficient measures to avert the risk of a faulty and dangerous installation". The insurer said that this constituted "recklessness" and was therefore a breach of a policy condition.

The insurer based its view on a report prepared by the marine surveyor it had appointed to inspect the damage. The surveyor concluded that the cause of the explosion was the gas heater Mr A had installed in the cabin.

Mr A disputed the surveyor's conclusions. He was not convinced that the heater had caused the explosion and he put forward several alternative theories. He strenuously denied that he had acted recklessly in installing the heater, and said that he had considerable experience in installing such appliances correctly and had taken appropriate care.

When the insurer insisted that the circumstances of the case meant that it was not obliged to meet Mr A's claim, he brought his complaint to us.

complaint upheld
To decide whether the insurance company was entitled to refuse Mr A's claim, we needed to consider whether Mr A had been reckless when he installed the gas appliance. In other words, we had to try and establish whether he failed to take adequate measures to avert the risk of a faulty and dangerous installation.

In reaching its conclusions on the case, the insurer had relied heavily on the advice of the marine surveyor. So we reviewed the surveyor's report and his subsequent correspondence with the insurer.

We were concerned by some of the surveyor's findings. For example, he had noted that the heater was not of a type intended for use "in a marine situation". However, our investigations showed that this was not the case.

We also noted that in response to a written query by the insurer, the surveyor had said that he did not feel Mr A had been "reckless" when installing the heater, merely that he had "probably been unaware of the perils involved".

In the light of the available evidence, we concluded that Mr A had understood the risks and had taken appropriate steps to ensure the heater was installed safely.

He had not, therefore, acted "recklessly". We told the insurer it should deal with the claim, in accordance with the terms of the policy.

65/08
consumer charged additional interest by credit union because of delays in applying monthly mortgage repayments to her mortgage account

Ms T took out a mortgage loan from her local credit union. She arranged for her employer to send the credit union an amount of money each month, direct from her salary, to cover her monthly mortgage repayment.

For some while everything appeared to be running smoothly, but then Ms T discovered that the credit union had been charging additional interest. This appeared to be because her monthly mortgage repayments had frequently not been credited to her account until two or three days after the date they were due.

Ms T complained to the credit union, saying that since the payments were made automatically from her salary, the delays must be down to the credit union's slowness in applying the payments to her account. She said it was unfair that she was being penalised for this and she asked for a refund of the extra interest she had been charged. She calculated that the amount she was owed was over £2,000. The credit union denied that it had been responsible for the problem, but it offered Ms T a goodwill payment of £25. Extremely unhappy with this response, Ms T then brought her complaint to us.

complaint not upheld
Our investigation showed that the problem had come about because of inefficiencies on the part of Ms T's employer, when transferring money direct from Ms T's salary to the credit union. So the delays were the fault of Ms T's employer, not the credit union.

When calculating the amount of additional interest she had been charged, Ms T had assumed the interest would have been based on the whole of the mortgage debt each month. In fact, it had been based just on the amount of the delayed mortgage repayment.

We were therefore able to reassure her that the actual amount of additional interest she had paid in total was very small. It was certainly less than the £25 that the credit union had offered as a goodwill gesture - and that it confirmed it was still prepared to pay her.

65/09
couple inappropriately advised to invest in a film partnership when seeking to reduce their tax liability

Mr and Mrs E had their own limited company, which was their main business. As its profits were below the relevant limit, the company qualified for small companies' tax relief - so less tax was payable.

They consulted Mr J, a financial adviser, about how best to invest some of their spare capital, while also reducing their tax liability as far as possible. Acting on the advice they were given, the couple became investors in a film partnership. Such investments qualify for special tax treatment.

Not long afterwards, Mr and Mrs E were surprised to discover that their tax position had worsened. For tax purposes, the film partnership was treated as an associate of the limited company. This meant the small companies' tax relief they received in respect of their limited company had been halved, and the amount of tax payable increased.

Mr J rejected the couple's complaint about the advice he had given them. He said this had been correct at the time they had consulted him. It was only at a later date that the interpretation of the relevant tax legislation had changed - as a result of the final appeal hearing in the court case of R v Inland Revenue Commissioners ex parte Newfields Developments Ltd in 2001.

Mr and Mrs E remained unhappy with the situation and they brought their complaint to us.

complaint upheld
When we looked into the case it became clear that the adviser had not understood the special rules that apply to film partnerships. He had not looked properly into Mr and Mrs E's financial and tax position before advising them, and should have realised the tax implications of their main business being a limited company.

The tax legislation under which Mr and Mrs E were caught out had already been in existence for some years when Mr J advised them. It was true that the final appeal in the Newfields Developments case had come after the couple had sought advice. However, the first decision in the case (which was upheld in the final appeal) had been issued almost a year before Mr and Mrs E had sought advice from Mr J.

We decided that Mr J should have been aware of the implications of the first court decision and should have informed Mr and Mrs E of the risk that it would be upheld on appeal. If he had done this, Mr and Mrs E would never have invested in the film partnership - they wanted to reduce their tax not increase it.

So we ordered Mr J to compensate Mr and Mrs E for the extra tax payable as a result of his poor advice.

65/10
consumer credit - hire purchase company breaches consumer confidentiality when dealing with a customer's arrears

Miss C lived at home with her elderly parents. They disapproved very strongly of any form of credit, so she thought it best not to reveal that she had taken out a hire purchase agreement in order to buy them a new 45-inch television. This was a replacement for their existing television - a much smaller and very out-of-date model that no longer worked properly and was beyond repair.

Her parents were delighted with the new television, particularly as Miss C had led them to believe she had been able to pay for it outright, after receiving a large and unexpected bonus from her employer. But despite her best intentions, Miss C found it quite a struggle to keep up with the weekly repayments and it wasn't long before she had built up quite substantial arrears.

She was out at work when a representative of the hire purchase company rang her on her home phone number to discuss the arrears. He was far from discreet and the message he left with Miss C's mother, who had answered the phone, made it very clear that Miss C had bought the television on hire purchase and had been having difficulties affording the repayments.

A few days later, the same representative visited Miss C's home to serve notice that the hire purchase agreement would be terminated. Miss C claimed that the representative had been extremely rude and aggressive during the visit, and a few days later she made a formal complaint.

She said the company had behaved in a very unprofessional manner and she objected - in particular - to its failure to respect the confidentiality of its financial relationship with her. Miss C would have liked to keep the television and to work out a way of bringing her repayments up to date. However, once her parents had become aware of the hire purchase arrangement, she felt she had no alternative but to give up the television altogether - which was a huge disappointment to the whole family.

complaint upheld
Miss C referred the matter to us when the hire purchase company failed to respond to her complaint. We were satisfied that the company had breached its duty of confidentiality to Miss C when it disclosed information about her hire purchase agreement - and the arrears - to her mother. And the company admitted that it had failed to serve the termination notice in a professional manner.

These actions had caused Miss C significant embarrassment and distress. Our normal approach in such situations is to assess a suitable amount to be paid as compensation. However, Miss C said she was not bothered about that. All she really wanted was a television set.

After we discussed the situation with the hire purchase company, it offered to compensate Miss C by giving her a smaller, second-hand television set, which she was happy to accept.

65/11
stockbroker persuades client to invest in penny shares, despite client's confusion about the level of risk involved

Mr G decided to buy some penny shares after a stockbroker had contacted him, recommending the shares.

The stockbroker explained to Mr G that as he was a new client he would need to complete various forms and open an account before the sale could go ahead. Mr G duly completed, signed and returned the forms.

One of the forms asked about any investment restrictions, related to the client's attitude to risk. In response to this question, Mr G said he did not want to invest in anything that involved "above normal risk".

This restriction, rightly, caused the stockbroker concern. Apart from the difficulty of knowing what Mr G meant by "above normal risk", the stockbroker had already recommended what he considered to be high-risk shares to Mr G. So he phoned Mr G to try and clarify the position. After some discussion, Mr G agreed that the stockbroker should go ahead and buy the shares for him.

Some months later, after the shares had fallen considerably in value, Mr G complained to the stockbroker, saying he had been at fault in selling him the penny shares. Mr G said he had not wanted to take so great a risk with his investment. When the stockbroker rejected the complaint, Mr G came to us.

complaint upheld
As part of our investigation into the complaint, we asked the stockbroker to let us have a tape recording of the telephone conversation with Mr G, after Mr G had returned the forms.

In the course of that conversation, Mr G had said that he did not want "anything speculative". The stockbroker had said "Well this particular form of investment is speculative - you do understand that don't you?" Mr G had said he didn't understand that to be the case.

There then followed a brief conversation in which the stockbroker tried to explain that the shares were higher-risk than the blue chip shares that Mr G had mentioned buying in the past. It was not clear, however, that Mr G had understood this. In the end Mr G told the stockbroker to go ahead and buy the penny shares.

When making his complaint to us, Mr G said that he felt he was out of his depth. We agreed. It was clear to us that the stockbroker was more interested in selling the shares to Mr G than in ensuring they were suitable for him.

Having established that Mr G did not want anything that was "speculative" and "above normal risk" - and that he did not really understand the concept of risk - the stockbroker should not then have continued with the sale. Nor should he have sold Mr G similarly risky shares a couple of months after selling him the penny shares. We said the stockbroker should refund all the money Mr G had invested, together with interest.

65/12
contractors' all-risks commercial insurance policy - liabilities to third parties - claim for serious fire damage during renovation work - whether claim can be dismissed on grounds of contractor's carelessness and breach of policy condition

Mr K bought a large house that needed major restoration. It was while this work was taking place that there was a serious fire, thought to have been caused by a blowtorch used by one of the builders. The estimate for repairing the damage looked like totalling at least £750,000 and the building contractor, Mr B, put in a claim under his contractors' all-risks commercial insurance policy for liabilities to third parties.

Mr B was extremely surprised when the insurer rejected the claim. It said he had breached a specific policy condition regarding the preparations necessary during the use of heat in building works. The insurer said that it could also dismiss the claim on the grounds of the builder's carelessness.

Mr B complained to the insurer that the specific policy condition it said he had breached had not been part of his insurance contract, so he could not be bound by it. The insurer disagreed. After a lengthy dispute about which of several slightly different versions of the policy condition applied in this case, and about the precise legal interpretation of these different versions, Mr B referred the complaint to us.

complaint upheld
We concluded that the policy condition could properly be considered a part of Mr B's insurance contract. The differences in the wording of the various versions of the policy condition were immaterial as far as this specific dispute was concerned. That was because none of the versions explained exactly what policyholders were expected to do - over and above taking standard fire-prevention precautions - in order to comply with the policy condition. We were satisfied from the evidence that Mr B had ensured his staff had taken all standard precautions. There was nothing to substantiate the insurer's view that it could also reject the claim on the grounds of the contractor's carelessness. So we said the insurer should deal with the claim. It agreed to our recommendation that that it should pay the full amount due, even if this came to more than £100,000 - the maximum award we have the power to insist on in any individual case.

65/13
electronic payment company declines to deal with customer's complaint about non-delivery of tickets bought over the internet

In early February Miss A bought a pair of concert tickets over the internet, making an electronic payment. The concert - featuring her favourite singer - was scheduled for the first week of August and there was a message on the concert website saying that tickets would not be sent out until four weeks before the event.

However, Miss A failed to notice this. So when the tickets had still not arrived by the beginning of March, she assumed that they had gone astray. She therefore sent a formal claim to the electronic payment company.

The company explained that the tickets had not yet been sent out - but that she would get them in the first week of July, So Miss A agreed to withdraw her claim. However, by the beginning of August the tickets had still not arrived. Miss A contacted the electronic payment company again - saying she needed to re-open the claim for the missing tickets. However, she was told she could not do that. Citing the terms of its user agreement, the company's representative told her that it was not possible to re-open a claim that had previously been resolved. Unable to get any further, Miss A referred the matter to us.

complaint upheld
The electronic payment company's user agreement did indeed state that once a claim has been raised and closed it cannot be re-opened. And the company insisted on sticking to this policy in all circumstances.

In our view, Miss A was fairly relying on the electronic payment company's advertised "buyer protection policy" to ensure that her money would be refunded if the tickets failed to arrive. The policy restriction - that a closed claim could not be re-opened - was not featured particularly prominently in the information that users were given. And we were unable to conclude that, in this particular case, it had been clearly brought to Miss A's attention.

We also thought that, if Miss A had known of the restriction, she would not have agreed to "close" the complaint after she had first contacted the company about the missing tickets. In the light of this, we upheld the complaint and told the business that it should refund in full the amount Miss A had paid for the tickets.

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ombudsman news issue 65 [PDF format]

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.