Insurance Contract Law Issues Paper 2 Warranties - Law Commission

B.46 Although ombudsmen are unsympathetic to changes in risk clauses, such
clauses may be upheld in some cases. Case 47 is one such case. Here Mr D
took out an annual travel policy which stated that “if you have a medical
condition, you must tell us about any changes in your medical condition before
you travel”. 3 When he took out the policy, Mr D declared that he had controlled
hypertension. In January, however, Mr D’s hypertension became uncontrolled: he
visited his Accident and Emergency Department and saw a cardiologist. A few
days later he travelled to the USA, where he became unwell and underwent a
triple by-pass operation.
B.47 In this case the ombudsman found that the policy requirements were clear: it was
repeated throughout the policy and “cannot be said to be anything other than
unambiguous”. Although it was unusual for insurers to expect continuing
disclosure throughout the policy, it was not unfair “where the change in
circumstances was so significant that it could be said to create a new insured
risk”. Here the change in circumstances was “so significant that it created a new
insured event”.
REFERRING TO THE UNFAIR TERMS IN CONSUMER CONTRACTS
REGULATIONS
B.48 It was relatively rare for ombudsmen to refer explicitly to the Unfair Terms in
Consumer Contract Regulations in their decisions. Among the 50 cases we
looked at, the regulations were mentioned in only two.
B.49 The first case was Case 25 about the change in risk, discussed above. The
second, Case 9 involved a motor policy. This provided that if the insurer
cancelled the policy, the premium would be refunded on a pro-rata basis.
However, if the policyholder cancelled, the refund would be limited, so that after
four months of cover, the insurer would refund only 40% and after more than four
months, would refund nothing.
B.50 The policyholder decided to sell his car and cancel his cover, at which he was
told that he would receive nothing. The ombudsman referred to term (d) of
Schedule 2 of the regulations, which specifically states that a term may be unfair
if it permits the supplier to retain significant sums if the consumer cancels a
contract, while the consumer is not given similar compensation if the seller
cancels. The ombudsman held that there was no good reason why the consumer
could not be given a pro rata refund, less an administration charge.
3
In general, the FOS follows the law in refusing to give effect to a change in risk clause
unless the effect is to create a significantly different or new insured risk. However, in
periodic travel policies (such as this one) it has been suggested that this rule does not
apply, as the cover is said to incept on a trip by trip basis. The FOS tell us that they will
shortly be publishing an article in Ombudsman News to clarify the position in such cases.
115