Misrepresentation, Non-Disclosure and Breach ... - Law Commission

The FOS approach
C.13 In April 2003 and again in June 2005, the FOS set out publicly the approach they
take to issues of non-disclosure. 5 The FOS start with the legal position, as
explained in Pan Atlantic, but say that this must be tempered by good industry
practice, as clarified in the ABI Statements of Practice and FSA Conduct of
Business Rules. Based on these principles, the FOS say they have developed a
three stage test:
(1) The insurer must provide evidence that it asked a clear question, to
which it received an inaccurate response.
(2) If so, the firm must show that the inaccurate answer influenced its
decision, either to enter into the contract or all, or on the particular terms
that it did enter the contract.
(3) If the answers to both 1 and 2 are yes, the ombudsman will consider the
customer’s state of mind, asking if the misrepresentation was deliberate,
reckless, inadvertent or innocent.
C.14 If the misrepresentation is deliberate or reckless, the insurer is entitled to avoid
the policy. If the misrepresentation is innocent, the insurer will be obliged to pay
the claim. If, however, the misrepresentation is inadvertent, the ombudsman
enquires into the terms the insurer would have offered, had they had been aware
of the information. In some cases, this may result in a proportionate payment; in
others, it may involve an exclusion. Sometimes, the insurer may be able to show
that it would not have written the insurance at all, and the policyholder will receive
nothing.
C.15 This is a complex and difficult test, which we look at in more detail below.
Stage 1: Clear questions
Was a question asked?
C.16 We recorded whether the consumer had been asked a specific question about
the relevant information. To understand this information, it is important to realise
that a non-disclosure may arise at different stages of the policy. Although in most
cases the insurer alleged that the consumer failed to tell them something at
application, it is also possible to fail to disclose information at other stages. We
identified four stages at which a non-disclosure could occur: at application;
between the application and the start of the policy; at renewal; and during the
course of the policy.
5 Ombudsman News, Issue 27, April 2003, p 7 and Issue 46, May/June 2005, p 8.
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