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The University of Southampton
Insurance Law Research Group

Consumer insurance law

Consumer insurance law is a developing field with many significant changes. This page aims to explain consumer insurance law in England and Wales in a clear and readable manner. Nothing on the page should be understood as legal advice - for such advice, contact a specialist.

To FOS or not to FOS?

The Financial Ombudsman Service (FOS) offers low cost informal dispute resolution for claims against financial services providers. A Court of Appeal judgment, Clark v In Focus Asset Management [2014] EWCA Civ 118 has profound implications on the strategy to adopt when pursuing a claim, and means that a decision needs to be made at an early stage about whether to use the FOS route or whether to go to court instead. This text talks about insurance, but some of it applies also to other types of financial services claims.

What strategy to adopt depends mainly on the size of the claim. A claimant claiming about 500 pounds from their insurer has nothing to lose by declaring to their insurer their intention to go to FOS. The insurer is charged 500 pounds each time a complaint is referred, and will therefore usually be better off paying the claim than being referred to FOS. The mere mention of FOS in such a case can do wonders to speed up the claims handling of the insurer.

If the claim is for more than 500 pounds, but less than 150,000 pounds, a threat to go to FOS may need to be backed up by action. The insurer is then less likely to accept the claim on its face and will want it to be substantiated. In such cases it is useful to know about the FOS procedure. The procedure is well set out on the FOS web site and there are forms and documents that help with the claim so that no legal representation should be needed.

The first step is to make a formal claim to your insurer, who then has eight weeks to resolve that claim and notify you of their decision. Those eight weeks are to give the insurer the chance to properly investigate and consider the claim. If the insurer still does not want to pay, it must issue a formal decision to that effect. Following this decision, you have six months to claim to FOS. Going first to the insurer is a necessary step, to make sure that FOS does not become overburdened with claims.

FOS jurisdiction is available not only to consumers but also to microenterprises. FOS is not bound to follow the law, but can reach a decision that it considers fair or reasonable. This has been very valuable until the entry into force of the new Consumer Insurance (Disclosure and Representations) Act 2012 on 6 April 2013. Historically, insurance law was built gradually over the centuries with the purpose of creating a balance between parties of equal bargaining power such as businesses. The Consumer Insurance Act changes this, but only in a limited way and only for consumers, not for microbusinesses whose contracts are still governed by the common law. Consumers have always had the right to take their claim to court, but until the Consumer Insurance Act entered into force, the law was weighted against them. This is now no longer the case.

If the claim is for more than 150,000 pounds (per insured person), FOS can still receive the claim and it can carry out mediation, but it cannot issue a decision for more than that amount. If you are therefore certain that you will not be willing to accept a decision of 150,000 or less, the Court of Appeal decision in Clark v In Focus Asset Management means that it is better to bypass FOS and go directly to court.

When FOS issues a decision, it is binding on insurers. Claimants however have the opportunity to accept or reject the award. In Clarke v In Focus Asset Management, the Court held that a claimant who has accepted an award, even if it also reserves its rights to go to litigation, loses the right to litigate. The FOS decision makes the matter complained about res judicata, meaning it becomes matter already judicially decided. A judicial decision cannot be reopened. This has profound implications for litigation strategy. It was previously possible to go to FOS and obtain a decision for the capped amount, and then continue the dispute in the courts for the remainder. The Court of Appeal has now said that FOS is a body with a sufficient judicial character to make the subject matter of its decisions res judicata. It did not matter, the Court of Appeal said, that FOS was not bound to apply the law.

A consumer with a complaint larger than 150,000 pounds therefore has to think carefully about its strategy and go to FOS only if it is satisfied with the capped sum. On the plus side, the fact that the consumer now has the protection of the law makes court jurisdiction a less daunting prospect than it might have been in the past.

For microbusinesses, the equation is slightly different. The Consumer Insurance Act does not apply to them. Microbusinesses might therefore consider that the fairness-based jurisdiction of FOS is more attractive, even if the claim is then capped. They will then not need to provide precise arguments on the law, but will only have to convince FOS that their claim is fair or that their insurer is behaving unfairly.

Johanna Hjalmarsson

Who pays for riot damage?

The recent judgment in Mitsui v Mayor’s Office for Policing and Crime [2014] EWCA Civ 682, issued on 20 May 2014, was the first major case to result from the 2011 riots.

The particular events behind the case were the sacking of a warehouse in London by a group referred to as the ‘Get Money Gang’. The claimants were the insurers of the warehouse and of businesses who had held stock there. The defendant was the London Mayor’s Office for Policing and Crime. The insurers had the right to sue the Mayor’s Office because of a statute with ancient roots in the legal system, the Riot (Damages) Act 1886.

The thinking behind the Act was to make sure that the local population helped prevent riots: the population of a ‘hundred’ could be punished if there was a riot. Those rules were first given the form of legislation in 1714 and the liability for compensation was transferred to the Police Authority, along with the duty to prevent riots, in 1886. The main thrust of the Act is that in the event of a riot, anyone who suffers loss or damage to property can claim compensation for that property from the local Police Authority. By extension, insurance companies who have insured some of the property and who make a payout under the policy to their insured are allowed to take over the insured’s rights against the Police Authority under the Act. The Police Authority is under a duty to pay compensation, irrespective of whether they were at fault in failing to prevent the riots.

The Act has been used on a few occasions before but not very frequently. Past cases under the Act have concerned the legal definition of riot Dwyer v Metropolitan Police District Receiver [1967] 2 QB 970, the technical scope of the police authority‘s reinsurance cover in Bedfordshire Police Authority v Constable [2009] EWCA Civ 64 and the question whether a detention centre for immigrants, which performed duties on behalf of and under contract with the Government, was entitled to claim compensation: Yarl's Wood Immigration Ltd v Bedfordshire Police Authority [2009] EWCA Civ 1110.

The question in Mitsui v Mayor’s Office concerned the precise extent of compensation. Could claimants seek compensation not just for the value of the destroyed property, but also for the consequential losses suffered? ‘Consequential losses’ are losses arising indirectly from the destruction of the property, for instance when a business cannot trade for a period after having lost all it stock or if tis business premises have been vandalised. The traditional interpretation of the Act has been that it covers property only, and that consequential losses are outside the scope of the compensation. This was the conclusion of the judge at first instance, which was widely reported as a win for the insurers because the Police Authority had argued that the events at that particular warehouse, although they took place in the wider context of riots nationally and in the rest of London, did not amount to riots but only to burglary and theft, so that the Police Authority was not liable for compensation. However, in the Court of Appeal it was held that not only were the claimants right in arguing that the events did constitute riots, but they were also entitled to compensation for consequential losses under the Act. The Court of Appeal relied on pre-1714 law and on the fact that there is no statement in the 1886 Act that consequential losses should not be covered.

Following the 2011 riots, a government-commissioned review in September 2013 recommended keeping the general idea of compensation from police authorities, but revising the Act so that compensation to insurers should be capped. No action has as yet been taken, but the judgment in Mitsui v Mayor’s Office, with its very expensive outcome for police authorities and their reinsurers, may well prove the effective impetus needed to amend the legislation.

Historical background

Insurance law in England and Wales is historically based on marine insurance law and very commercially oriented. Recent developments in creating a new consumer insurance law are partly a result of EU rules and policies on consumer protection influencing domestic law.

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