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

When does the FOS apply the consumer approach?
C.99 One issue we were interested in exploring was how far the FOS applied the strict
letter of the law to small business claims, and how far it tempered the rule in Pan
Atlantic to take into account the ABI Statements or good industry practice.
Technically the ABI Statement of Practice and FSA Conduct of Business Rules
on non-disclosure only apply to consumer claims, but the FOS may apply similar
provisions to small business cases on the grounds that it is fair and reasonable to
do so.
C.100 In one case (SB3) the ombudsman explicitly stated that the policyholder would be
given the same rights as a private consumer. A fish and chip shop had suffered a
fire when an intruder entered the premises. The building insurer attempted to
avoid the policy on the grounds that policyholder had told them that the door was
fitted with a five-lever mortice lock. In fact, it was only a three-lever lock. The
ombudsman took the view that the misrepresentation was innocent. Furthermore,
the type of lock made no difference to the outcome as the intruder had broken
through a panel in the door.
C.101 By contrast, there were four cases in the study where the ombudsman applied
the letter of the law. For example:
(1) In Case SB2, the policyholder was a firm of insurance brokers. The
ombudsman decided that the inequality of bargaining power often
present between small businesses and insurers did not apply. Instead,
the complainant’s size, status and knowledge of insurance law meant
that it would be appropriate to apply normal legal principles. The brokers
had signed a professional indemnity policy, stating that each member of
staff had been asked whether they were aware of any circumstances that
might give rise to a claim. In fact, the firm had not made these enquiries.
A member of staff had been issuing backdated cover notes. The brokers
argued that even if they had made enquiries it would have made no
difference, as they would not have found out about the cover notes. The
ombudsman found that this was irrelevant: the non-disclosure was
effectively a breach of warranty and had the effect of avoiding the policy.
(2) In Case 52 the ombudsman held that the policyholder was under a duty
to volunteer information even though no question had been asked. The
policyholder had insured a shop with a flat above it. At the time the flat
had been empty, but shortly afterwards it was let to a tenant. The tenant
proved unsatisfactory. The owner started possession proceedings
against her, but before the court proceedings ended the tenant smoked
in bed and started a serious fire. The ombudsman found that the
policyholder should have realised that a prudent underwriter would want
to know that the flat was occupied by an unsatisfactory tenant. In
particular, the insurer should have been told that possession proceedings
had been started. Even though the insurer had not asked any questions
about the occupant of the flat, the policyholder should have volunteered
this information.
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