The Financial Ombudsman Service (FOS) has confirmed to peers that disclosure errors unconnected to a loss can still result in cover being voided, putting fresh scrutiny on the disclosure conversations that take place when a policy is arranged.
James Dipple-Johnstone, chief ombudsman at the Financial Ombudsman Service, and Rachel Lam, interim ombudsman managing director, gave evidence to the House of Lords Financial Services Regulation Committee on September 2, in the final oral evidence session of its inquiry into regulation of the consumer insurance market.
They followed the FCA's Consumer Duty evidence to the same Lords inquiry earlier that morning, when David Geale and Chris Knight of the Financial Conduct Authority (FCA) told the committee that standard policy wording does not guarantee standard customer understanding.
A committee member put a specific scenario to the witnesses: a fire claim voided because the insurer discovered an inaccurate disclosure about an unrelated issue, such as subsidence. Lam said FOS does encounter such cases.
"We do see some of those issues where we might see complaints where, yes, it's the client claim they've avoided the policy because they've identified that information might not have been shared and therefore they may not have offered that insurance policy. Those become very case-specific, but those are where you can see particular detriment."
Asked how FOS weighs that against a consumer's own sense of fairness, she said: "Our role is to look at the complaint, look at the evidence that's provided by the consumer, look at the evidence that would be provided by the firm, and then balance those evidence, forming a judgment in light of the rules, the legislation that will apply, and industry practice."
Dipple-Johnstone told the committee that FOS changes the outcome for consumers in a significant proportion of declined-claim complaints.
"In terms of travel insurance for declined claims, it's about one in three cases that we change the outcome for the consumer. And in terms of home insurance, it's around one in four cases that we change the outcome."
FOS receives roughly 14,000 home and travel complaints a year out of 45,000 insurance complaints overall, he said.
Disclosure-led avoidance is not a new problem, but it remains a live one. A Scottish court is currently untangling a £5.26 million warehouse fire cover dispute involving undisclosed material at the premises, with the broker among the parties whose potential responsibility remains to be determined.
In Jones v Environcom Ltd [2010] EWHC 759 (Comm), the High Court held that a broker's duty to ensure a policy is suitable extends to considering whether it is voidable for non-disclosure, and that standard written warnings in a proposal form are not enough on their own – the broker must be satisfied the client understood the disclosure obligation. That principle has been applied in subsequent cases and connects directly with the problem Knight described to the committee that morning: identical wording does not guarantee identical understanding.
For brokers, the FOS evidence adds another layer. A disclosure conversation at the point of sale can ultimately affect whether a claim arising from an apparently unrelated peril is covered months or years later. That makes the quality of the fact-find and the client's understanding of their disclosure obligations part of the claims outcome, rather than simply an administrative part of arranging the policy.
FOS also told the committee it cannot currently identify whether a voided or declined policy was sold direct, through a price comparison website or through a broker, although it is looking at capturing that information as part of reforms to its data gathering.
That leaves an important question unanswered. FOS data cannot currently show whether advised, broker-led sales produce fewer disclosure-related problems than execution-only or comparison-site purchases, meaning the industry cannot use those figures to distinguish outcomes between distribution channels.
Dipple-Johnstone closed the session by defending the value of independent scrutiny even where individual numbers appear small.
"It's helpful to have an impartial independent body to be able to cast the mirror back on the industry," he said.
For brokers, the more immediate takeaway is narrower: disclosure remains one of the points at which the quality of advice given when a policy is arranged can be tested against the outcome of a claim months or years later. If an apparently unrelated disclosure error can ultimately determine whether cover responds, ensuring the client understands what must be disclosed matters long after the policy has been sold.
