Following a round table involving the Financial Ombudsman Service (FOS) and other stakeholders in the insurance industry in April 2023, the FOS highlighted concerns regarding underinsurance in consumer policies. It has now provided a number of recommendations which it says will help to prevent the issue of underinsurance and lead to better outcomes for consumers.
During the round table, the FOS noted that many consumers struggle to accurately estimate rebuild costs, particularly when using limited tools in order to best estimate any rebuild cost when incepting or renewing a policy (more likely than not the BCIS calculator which is embedded in many customer journeys).
In stressing the complexities of estimating rebuild costs, the FOS pointed to situations where professional loss adjusters may not be able to agree on rebuild costs and where labour and material costs may fluctuate. These are cited as indicators of the difficulty a consumer may face in estimating rebuild costs when purchasing a policy.
It was also highlighted that, though some insurers offer unlimited sum insured policies, increased premiums which account for ‘unlimited cover’ may not be affordable for all customers and will only benefit those who can afford the additional premium.
The implications from the FOS were that insurers should carefully consider the questions posed during the policy purchase process and ensure consumers receive clear guidance.
The FOS suggested that when underinsurance is identified during a claim, insurers must consider the role they played in the purchase process and, since consumers lack the expertise to provide accurate estimates, insurers should be prepared to indemnify policyholders even if the sum insured is exceeded – provided the consumer has acted reasonably and in the spirit of the Consumer Insurance (Disclosure and Representations) Act 2012 (CIDRA). The rationale is that the sum declared was a good faith estimate at a point in time and one which is difficult for the average consumer to get right.
If a complaint is made and it is found that any offer put forward by the insurer represented a more favourable outcome for the consumer than by virtue of any remedy that the insurer may have had under CIDRA – including declaring the policy void or applying a proportionate remedy – the FOS suggests that it is likely to consider such an offer as reasonable and that the insurer was acting in good faith.
While insurers cannot unilaterally waive the Insurance Act, parties to commercial insurance contracts (but not consumer insurance contracts) can contract out under specific conditions provided transparency requirements are met.
Any contractual term that disadvantages the insured compared to the default position in the Insurance Act will be ineffective unless these transparency standards are upheld.
The FOS has set out that, where relevant, it will take this into account when considering a complaint in addition to what is fair and reasonable in the circumstances.
With the implementation of the ‘Consumer Duty’ on 31 July 2023, insurers and brokers must now meet higher standards of consumer protection. This includes ensuring that products and services offer fair price and value and the insurer provides clear communications and delivers appropriate consumer support when applicable.
The FOS considers that the Consumer Duty will be considered in relation to complaints relating to underinsurance and that consideration will be given to how the product is designed and the information and support provided to the consumer when the policy was purchased. Also considered will be the relationship between the price paid and the value of the insurance (including at renewal) as fair value is an important consideration for the FOS when taking into account the limits of any policy.
The FOS has stated that it will continue to consider the implications of the Consumer Duty and how it applies in the cases it sees, including the action taken by insurers and brokers and how they have adapted to these requirements, so it will be important for insurers to consider these issues when faced with an issue of underinsurance and any subsequent complaint.
If you would like to know more about this, or how we can help you navigate underinsurance, please get in touch.
Sam Burtwistle - Associate & Coverage SIG Member
Email: sburtwistle@keoghs.co.uk
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