Loan insurance providers – already under pressure over the fairness of their contract terms – have been accused of using “vague” clauses to turn down claims from borrowers who have lost their jobs in the recession.
Payment protection insurance (PPI) is typically sold alongside credit cards and personal loans to cover monthly repayments if the borrower cannot work due to accident, illness or involuntary redundancy.
But claims on the redundancy element of the cover are being turned down by insurers because of a controversial exclusion relating to a policyholder becoming “aware of any increase in the risk of unemployment” after buying a policy.
Insurers use exclusions of this sort to safeguard themselves against claims by individuals who bought cover knowing that they were likely to lose their jobs.
However, the Financial Ombudsman Service (FOS), which settles disputes between customers and their providers, said the clauses are so broad that they are unfair.
“On a strict reading of the exclusion if, for example, there was any deterioration in the UK economic environment during the first three months of the policy, then this might result in policyholders losing all unemployment cover under the policy,” said the FOS.
“If the insurer wished to exclude cover because a policyholder’s knowledge or circumstances changed within the first three months of a policy, then it needed to work its exclusion very clearly – setting out what change or changes had to take place for the exclusion to apply.”
The FOS comments related to a specific case upheld in a customer’s favour. But in publishing its position, the Ombudsman sent a clear message to the industry on how it is interpreting the small print.
“We would like to see more clarity from insurers on this specific clause,” said Paul Bicknell a spokesman for the ombudsman scheme. “We don’t want vague requirements but expect specific requirements, and this might include, for example, the individual becoming aware of job losses in a department.”
PPI insurers have been facing growing pressure from a sharp rise in jobless numbers. In the past year alone, about 680,000 people have become unemployed with many sectors still facing job uncertainty.
Consumer groups warned that exclusions of the sort highlighted by the ombudsman could be used by the industry to turn down legitimate claims.
“There is a general economic crisis at the moment and, because this exemption clause is so very generally worded, it raises questions about whether it complies with unfair terms in contracts regulations,” said Vera Cottrell, principal policy adviser at consumer group Which? “We would expect to see specific circumstances where the exclusion would apply.”
The Association of British Insurers (ABI) did not comment on the individual case at the FOS but this week said it was important for consumers to understand clearly what they were covered for – and what was expected of them when taking out a policy.
“Most PPI policies will not cover you if you have specific knowledge about the circumstances of your employer that increase the likelihood of redundancy,” said an ABI spokesman.
“Some firms ask a specific question about this in the application form. It is important that people understand this before they take out the policy. The policy summary document should make it clear what’s covered and what’s not.”
The ombudsman’s comments came as mortgage insurance providers prepared to pay £60m in refunds to policyholders for premium increases and benefit reductions that the Financial Services Authority deemed were unfairly imposed.
