Differences in how FOS and insurers treat coverage disputes causing industry ‘irritation’

Some insurance coverage disputes are being treated differently by the insurance market versus the Financial Ombudsman Service (FOS), leading to insurers being “quite irritated” about having to pay out certain claims, according to Michael Hogg, a London-based partner at law firm Kennedys.

Speaking exclusively to Insurance Times, Hogg observed that the way in which some coverage disputes are being dealt with has changed “almost by stealth”.

For example, early in Hogg’s career during the 1990s, coverage disputes often formed the “bread and butter” of his workload – however, now it is more common for these consumer complaints to be dished out to the FOS, with only particularly complicated cases landing on Hogg’s desk.

He attributed this change to the “Financial Ombudsman Service having a wider remit” today compared to the past, as well as increases being made to “the types of claims and the value of the claims [it] can handle”.

For example, in October 2018, the FCA published rules to enable small and medium-sized enterprises greater access to the FOS and its remedying routes of action. Also in October 2018, the regulator upped the FOS’ compensation limit to £350,000 regarding acts or omissions by firms conducted on or after 1 April 2019.

Prior to this, the compensation limit was £195,000.

The FOS’ compensation limit is typically adjusted each year in line with inflation, based on the Consumer Prices Index.

In March 2024, the compensation service confirmed that “from 1 April 2024, our award limits will go up to £430,000 for complaints referred to us on or after 1 April 2024 about acts or omissions by firms on or after 1 April 2019”.

Lines of business that the FOS can investigate complaints about include home and buildings, legal expenses, medical, mobile phone, gadget, motor, pet, travel, wedding and business protection. It can also review complaints concerning insurance pricing and renewals, misrepresentation and non-disclosure, as well as extended warranties.

The main area where Hogg is seeing difficulties, however, is property insurance disputes.

Clash in approaches

Hogg explained that as building repair costs have increased in recent years – meaning that insurance premiums for property insurance have also increased – insurers were often “applying average clauses” to their policy wordings in order to mitigate paying out high claims costs for underinsured buildings.

An average clause works to restrict the amount an insurer pays out for a claim to ensure that the sum does not exceed the value of the property destroyed.

Typically, under an average clause, the sums insured for the property would be compared to its value at the time of the risk, with the insurer ultimately paying out a proportionate amount to factor in underinsurance and the fact that the policyholder might not have been paying a high enough premium.

However, Hogg noted that when the FOS received coverage complaints about average clauses in property policies, it dealt with the cases “quite differently”.

He explained that the FOS handled such cases under its non-disclosure remit – this is where the policyholder failed to disclose relevant information they were asked about when incepting the policy. If the insurer had had this missing information, it may have opted to charge a different premium more suited to the risk.

Hogg explained: “[The FOS is] looking at [these cases] and adjusting on the basis of the premium that would be charged for that property. And often, the premium wouldn’t have changed for certain products in the consumer end because that’s just the way it’s priced and a movement in value at risk is not going to change anything for the premium.

“So, insurers have to pay out – they are quite irritated by the fact that they’re paying out on properties that [are underinsured versus what they would pay out under an average clause].”

Hogg added that “there’s potential” for this trend “to keep going” and that it is “worth keeping an eye on” from an insurer perspective – especially as increasingly coverage disputes are being handled “at the complaints level, rather than [via] litigation” as the insurance industry rallies to keep claims out of the overburdened court system.

He concluded: “[This] has the potential to change the way policies are being are being interpreted – and not in a very transparent way.”