Legal: Law Commission to close gap between law and ABI, FOS & FSA rules
A proposed alteration to insurance legislation could see a better deal for policyholders not protected by the Financial Services Ombudsman (FOS).
The Law Commission, an independent body created to keep law under review, has proposed to close the gap between insurance contract law and the rules set out by the Association of British Insurers (ABI), the Financial Services Authority (FSA) and the Financial Services Ombudsman (FOS).
Current insurance contract law has been criticised for being both outdated and unnecessarily harsh on policyholders. Fortunately, most policyholders are unaffected by it, as providers now adhere to the rules, codes and principles put in place by the major financial bodies rather than to insurance contract law.
The Law Society has recognised, however, that a few policyholders have been caught by the lack of alignment between the law and the conduct of business.
"Medium and large business policyholders do not, in any event, have the protection offered by the Ombudsman," said Peter Tyldesley, lawyer in the commercial and common law team at the Law Commission.
"We are also conscious of the fact that there are policyholders - including some in vulnerable classes - who are less likely to make use of the service offered by the Ombudsman, and may therefore face the full rigour of the law."
Nick Kirwan, protection market director at Scottish Widows, said: "Over the years, a gulf has opened up between what the law says and what is actually happening in the insurance industry. There are some important reasons to close the gap as not everybody is enjoying the jurisdiction of the Ombudsman. Their only recourse is through the court.
"By closing the gap, these individuals could receive the same protection as those covered by the Ombudsman," he added.
One of the areas of insurance contract law that has caused difficulties in both consumer and business protection is that of non-disclosure.
Under FOS principles and FSA rules, the outcome of a non-disclosed claim depends on its nature, and whether it was innocent, negligent or fraudulent. Under contract law, however, the cause of the non-disclosure is irrelevant.
"It is therefore possible for an applicant to act honestly and reasonably, and still fail to meet the legal standard of disclosure," said Tyldesley.
The Law Commission intends to publish two consultation papers. The first one will be published early next year. The end result of both papers will be a final report, followed by a draft bill if appropriate.
