Clash to the Titans: Insurance Law v The Financial Ombudsman Service


It is increasingly common for industries to establish ombudsmen services which, following the exhaustion of internal complaints procedures, are the next step in dealing with a dispute. Such services are beneficial in that they often circumvent the need for parties to participate in court proceedings; this effectively means reduced costs, faster decisions and a less restrictive and fairer approach. For the insurance industry this service is catered for the by Financial Ombudsman Service (FOS). The service provided by FOS caters for claims up to a certain value and boasts that its decisions are taken in the realms of fairness as opposed to a strict application of the law.

However, as I have explained in my upcoming publication (Jay Gajjar, ‘The Doctrine of Insurable Interest in Life Insurance: A Fling of the Past or Till Death Do Us Part?’ (2013) 127 British Insurance Law Association Journal 1) there has been an unhealthy divorce between the FOS and insurance law. To this end, especially with regard to insurable interest, which effectively holds that a party cannot claim on an insurance policy unless they have an “interest” in the subject matter of the policy, the FOS has openly taken a much more liberal view and found that cohabitees, for example, do have an insurable interest in the lives of each other whilst the law has traditionally precluded this. This is not necessarily a criticism of the FOS, and instead indicates that the FOS wishes to move forward with the times when the law has traditionally, and up until the point of the recently proposed reforms by the Law Commissions, remained stuck with antiquated  case law decided centuries ago in the context of wholly different social settings.

Nonetheless, the collective criticism is that the difference between the approach of the FOS and the law surrounding insurance, as applied in the courts, has led to legal uncertainty.

This uncertainty has once again come to the fore in an outlandish announcement by the FOS that when it is to deal with complaints made by consumers regarding the validity of insurance policies, it will not follow the direction of the High Court in the case of Bunney v Burns Anderson Plc & Anor [2007] 4 All ER 246, [2008] Bus LR 22, [2007] EWHC 1240 (Ch) which held that there is a maximum £150,000.00 award limit. The FOS has taken the view that it holds the jurisdiction to require an insurer to reinstate a policy and make good a claim regardless of £150,000.00 threshold.

Regardless of the monetary issue, which will remain a point of contention for both the insurers and the insureds, the problem that transpires is that the law is not being followed by the Ombudsman. The uncertainty this causes in unhelpful from a commercial and actuarial perspective and it is notable that, due to the public body status attached to the FOS, this practice has the potential to be subjected to judicial review by the High Court.

From the viewpoint of the “wider picture”, this disparity between the approach of the courts and the approach of the Ombudsman is far from comforting and presents material commercial dangers. 

Jay Gajjar

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