Judicial review: Financial Ombudsman decision
R (Aviva Life and Pensions (UK) Limited) v Financial Ombudsman Service (and Mr & Mrs M) [27.02.17]
In judicial review proceedings, the Court agreed to quash a Financial Ombudsman Service decision (FOS) (that involved an applicant with cognitive problems) in circumstances where the Ombudsman provided insufficient reasons for departing from the relevant law regarding misrepresentation.
The Court also stated that it would be good practice for the FOS to spell out that a FOS direction to reinstate a policy shall be limited to the jurisdictional limit of £150,000.
In 2006, Mr and Mrs M took out a £127,000 joint life with terminal illness policy.
In early August 2013, Mr M approached the insurer to cancel the policy as it was no longer required. The insurer correctly made enquiries with Mrs M who said that the premiums could no longer be afforded. The direct debit for premiums was stopped and the joint policy was cancelled.
On 7 November 2013, Mr M applied to the same insurer for a £500,000 single life with terminal illness policy. Mr M did not disclose in the application:
- His GP appointments from 20 August 2013 when his siblings discussed their concerns about personality changes and possible mental illness was considered.
- Referrals to a psychiatrist for assessment in September and October 2013.
- Referral in October 2013 for a CT brain scan.
- The insurer accepted the application and cover started on 12 November 2013.
Ten days later, Mr M’s early on-set dementia was diagnosed following the result of his CT scan. The £500,000 terminal illness claim was declined and that policy was avoided on the grounds of misrepresentation as the insurer would not have accepted the application had full disclosure been given.
Mr and Mrs M complained about the handling of both the joint life policy and the single life policy.
Ultimately, an Ombudsman rejected the complaint regarding the joint life policy, stating that the insurer had followed the right process when cancelling it, but upheld the part of the complaint that related to the single life policy stating:
I think special consideration needs to be given to the illness that [he] was suffering from at the time. I don’t think [he] could be expected to make the same disclosures that [one] would expect a reasonable person to make
…and directed reinstatement of the single life policy and reassessment of the terminal illness claim.
Judicial review was sought on various grounds including inadequacy of the Ombudsman’s reasoning, and the decision being ‘Wednesbury unreasonable’. FOS stood by its decision, but early in the Court case consented to a quashing order conceding only that there were inadequacies in the Ombudsman’s reasons.
The Court acknowledged that the remit of the Ombudsman was to determine what in his or her opinion was fair and reasonable in all the circumstances. This included taking into account, but not being bound by, relevant law and practice.
The law on misrepresentation arose from the Consumer Insurance (Disclosure and Representations) Act 2012 (CIDRA 2012) which came into force in April 2013. CIDRA 2012 does not recognise the concept of “innocent misrepresentation” (which the Ombudsman had referred to). A “qualifying misrepresentation” under CIDRA 2012 is either deliberate/reckless or careless. A careless representation entitles the insurer to avoid the policy if it would not have accepted the risk at all.
The standard of care required when applying for insurance is that of a “reasonable” consumer, but if the insurer was or ought to have been aware of any particular characteristics or circumstances of the actual consumer, those are to be taken into account in assessing what is reasonable.
The insurer did not know about Mr M’s cognitive disability arising from his early onset dementia until the claim was made on 11 December 2013.
The Judge stated that at some point before August 2013, and possibly as early as 2008, Mr M had developed the condition. Mr M had not had insight about his personality changes and behavioural issues, which close family members had noticed. The personality changes had led to the breakdown of his marriage and impecuniosity.
Although the Ombudsman was not required to follow relevant law and practice, the Judge stated that the Ombudsman should have explained why she did not. The Ombudsman’s reasoning was inadequate, which the FOS had conceded earlier in the case.
Regarding the unreasonableness/irrationality ground for judicial review, the Judge stated that:
The question which should be posed and answered is whether a different Ombudsman properly directing herself as to her powers, could rationally conclude that it would be fair and reasonable to uphold the complaint.
Although the Judge had the power to limit the quashing order to the single life policy, he decided that the whole complaint decision should be quashed (regarding the joint life and single life policies) and all aspects returned to the FOS for re-determination. It was possible that the effective cause of Mr Ms marital breakdown as well as his impecuniosity was the dementia – the Ombudsman “might” rationally conclude that it is fair and reasonable the insurer should reinstate the joint life policy. The Judge did comment, however, that had Mr and Mrs M brought legal proceedings against the insurer in the County Court, the insurer would have succeeded.
The Judge in passing expressed some concerns about the FOS’s jurisdiction “which occupies an uncertain space outside the common law and statute. The relationship between what is fair and reasonable, and what the law lays down, is not altogether clear” and he emphasised that the FOS was not absolved from consistency in its decision making.
This decision has helpfully explicitly clarified, at least with a lump sum policy such as this one, that where the FOS directs reinstatement of a policy it can only be reinstated up to the FOS jurisdictional limit of £150,000. It is not enough for the £150,000 limit to be implied.
Therefore, if insurers receive a provisional FOS decision which does not adequately explain why the law and practice has not been applied and/or proposes reinstatement of a policy without explaining the monetary limit, insurers should refer to this Judgment in order to obtain clarification.
This case also highlights the difficulties associated with complaints where cognitive problems of the customer arise, whether this is in the context of misrepresentations or instructions to cancel insurance cover.