The Financial Ombudsman Service (FOS) decides on financial services disputes by considering what is fair and reasonable in all the circumstances of the case, rather than based on the letter of the law. This more consumer-centric, informal approach is how they have always dealt with complaints and, in an insurance context where the law was until recently very pro-insurer, this was often of benefit to insureds whose claims had been denied.
In a recent case (Aviva Life and Pensions (UK) Limited v Financial Ombudsman Service (2017) EWHC 352), the court was asked to look more closely at what that means in practice. Insurance law has, since April 2013, become more evenly balanced between the interests of the insurer and insured. This led the judge to be somewhat puzzled by the notion that the law might not be considered “fair and reasonable”, such that the Financial Ombudsman Service felt it needed to divert from the law.
On 12 November 2013, Mr McCulloch took out a life insurance policy with a £500,000 benefit. He replied to the standard questions about his health that he was not receiving any medical treatment nor undergoing any investigations. He had, in fact, been undergoing assessments since around September 2013 relating to his mental health and was due to have a CT scan, all of which culminated in a diagnosis on 22 November of a rare form of early onset dementia. This is a terminal condition, and his family made a claim on 11 December 2013 by which time Mr McCulloch was in a hospice.
It was agreed that, had correct information been given during the policy application, the insurance would not have been issued. However, the non-disclosure of the medical tests was a result of the medical condition itself.
Aviva avoided the policy based on the misrepresented medical information and refused to pay out. The policyholder made an application to the Financial Ombudsman Service in June 2014. In November 2014 the Financial Ombudsman Service agreed that it was unfair in all of the circumstances for Aviva not to have honoured the agreement to insure. The misrepresentations, said the Financial Ombudsman Service, had been made innocently.
Claim by Aviva
Although Mr McCulloch wanted to accept the Financial Ombudsman Service decision, Aviva applied to the court for a judicial review of the Financial Ombudsman Service’s decision because, they believed, the misrepresentation was negligent, and that was the appropriate test under the law. They noted that the current law does not recognise any concept of innocent misrepresentation, as had been relied on by the Financial Ombudsman Service.
The Financial Ombudsman Service agreed to its decision being quashed and the matter being considered again, but this was not enough for Aviva. Presumably in fear of the same outcome, even if the Financial Ombudsman Service more clearly explained its reasons, they pressed on at court to clarify how the Financial Ombudsman Service ought to determine disputes.
Aviva’s case was essentially that when considering what is ‘fair and reasonable’ the Financial Ombudsman Service are bound to take into account relevant laws, regulations, codes of practice and industry standards. All of these, they argued, pointed to a negligent misrepresentation being valid grounds to avoid a policy, and that was the law. They rejected the suggestion that innocent misrepresentation had any validity. While the judge agreed that they were all to be taken into account, he nonetheless found that FOS were still entitled to depart from the relevant law provided it gave reasons why.
The insurance claim is, therefore, going back to be considered again by the Financial Ombudsman Service. It does not seem likely they will reach a different outcome, but no doubt will set out very much more carefully what the various laws, regulations and practices they rely on to reach their view that the insurer needs to pay the claim.
It is uncertain whether this case means the Financial Ombudsman Service is likely to apply a category of innocent misrepresentation in the future or whether these particular sad circumstances are an exceptional ’one off’. It would perhaps be surprising if the Financial Ombudsman Service decided generally to depart from the legal landscape considered at length and set out in the Consumer Insurance (Disclosure and Representations) Act 2012 (which came into force in April 2013). What it does establish though is that the Financial Ombudsman Service remains a forum that can consider the fairness of the particular situation more widely, and that is to be welcomed as it allows claims of up to £150,000 to be considered in an environment that does not carry the cost and risk of litigation; and crucially allows more flexibility in outcomes as the circumstances require.
The judge, Mr Justice Jay, appears to have been concerned by the possibility of a jurisdiction that might depart from the law. He commented by way of postscript and hinted that there ought not to be any space between ‘fair and reasonableness’ and the law (although he expressed his views with far more subtlety and eloquence). For our part, we observe that an opportunity for parties to resolve disputes outside litigation, however uncertain the Financial Ombudsman Service jurisdiction might be if it is not strictly held to the law, fits well with the Court’s own preference for litigation to be the last resort.