The man in the middle
While consumer complaints to the UK’s Financial Ombudsman Service continue to increase, travel insurance insiders are beginning to complain publicly about the Service. Critics tell David Kernek about inconsistency, time-wasting, and inadequate training
First published in ITIJ 131, December 2011
While consumer complaints to the UK’s Financial Ombudsman Service continue to increase, travel insurance insiders are beginning to complain publicly about the Service. Critics tell David Kernek about inconsistency, time-wasting, and inadequate training
Heard the one about the Financial Ombudsman Service (FOS) and the man who didn’t like the timeshare industry? Mr JK booked a villa holiday with a tour company – so far, so good. On discovering, however, that the holiday company also owned timeshare apartments, he cancelled his trip because, he said, he disapproved of ‘timeshare scams’. It took two years for Mr JK to get round to making a claim on his travel policy, a claim the insurer rejected. That, the proverbial Man From Mars might reasonably have assumed, ought to have been the end of the matter, since the grounds of the claim were clearly way beyond the terms of his or anyone else’s holiday insurance cover.
But it wasn’t. His next step was to take his complaint to the FOS which, instead of telling Mr JK not to be so silly, took up his case for adjudication despite a) the lack of valid grounds and b) the time lapse. The cost for the insurer was the £500 FOS case fee and the time and paperwork involved in responding to a compliant that should never have been taken seriously.
A one-off case of a frivolous claim that ought never to have been allowed to clear the first hurdle in the FOS’s three-stage adjudication procedure? No, not quite. It gets better, or worse. In a trawl of the Service’s published adjudications, I found these:
- Mr T claimed unsuccessfully for medical and associated expenses after he was repatriated from Tenerife, where he had collapsed and been taken to hospital as an emergency case. A dodgy prawn curry had floored him, he told the insurer before taking his case to the FOS. But Mr T was a liar, and a heavy drinker – evidence from the Tenerife medics who treated him said he’d been floored not by a lethal prawn curry but by a five-day whisky binge. The FOS adjudication rejected the complaint because the policy cover clearly excluded medical emergencies caused by alcohol abuse. But how did the complaint to the FOS reach the adjudication stage in what was clearly an open and shut case?
- Mr and Mrs C cancelled their holiday when four of their eight dogs fell ill. Their policy provided up to £5,000 cover for unrefundable accommodation and travel costs in the event of the ‘serious illness of a relative’. The distraught dog owners argued that their pets were ‘family members’ and therefore should have been covered, adding that although their policy specifically excluded cancellation claims arising from the death of a ‘pet or other animal’, it did not expressly exclude claims that arose from a pet’s ill health. Mr and Mrs C’s shaggy dog complaint was rejected by the FOS, but only after an adjudicator had studied and concluded – unsurprisingly – that although the term ‘relative’ was not defined in the policy (as if it needed definition), it could ‘properly mean only other human beings’ … and, of course, only after what was clearly a ridiculous complaint had incurred an FOS case fee and administration costs for the insurer.
A question that arises immediately from these case histories focuses on the FOS’s workload: is it so light that its 1,500 staff (up from 300 in 2000) has time to pick up complaints that are obviously spurious or frivolous? It clearly isn’t. As an ITIJ conference was told earlier this year by Tricia Pearson, a policy underwriter at Union Reiseversicherung AG, FOS adjudicators and ombudsmen handled 163,012 insurance dispute cases in 2009/10, 28 per cent higher than the previous year, and up from 25,000 in 2000. That amounts to millions in case fees alone, plus the statutory annual levy FSA-regulated companies (currently £300,000 for large insurers) must pay to the FOS.
“The industry still incurs cost regardless of the frivolity of any complaint and the insurer has no deterrent against the most unreasonable of submissions,” says Greg Lawson, formerly with Citybond Suretravel and now head of retail at Collinson Insurance. “The outcome is often to settle and ignore principle to avoid expense in time and money, and that cannot be right.”
The policy puzzle
Travel insurance disputes in 2009/10 accounted for three per cent – 4,890 – of FOS adjudications. Almost all of them were about the outcome of claims, and 44 per cent of them were upheld by the FOS. “That 44 per cent are upheld is disappointing,” says Tricia Pearson. “With a £500 case fee at stake, however trivial the complaint, most firms allow only those cases they expect to win to go forward unresolved to an adjudicator. This means either that half the time we are wrong in our assessments, or it could be looked at as a mismatch between what we as underwriters think is fair and reasonable and the ombudsman’s views.”
Surely, its role is not one of consumer champion but of a regulator ensuring the quality of service and product within the industry
She concedes that travel insurance is an inherently complicated contract that can be difficult for the average consumer to comprehend, and that the industry has so far failed to manage his or her expectations. She recalls the FOS noting in 2001 that while for many customers travel insurance would be the most complex financial product they purchase in the course of a year, there remained ‘a general expectation that travel policies provide a financial remedy for almost every loss that can occur on a holiday’, and she fears that not much has changed since then.
“We perhaps hoped,” she says, “that the wisdom, specialist training and experience of those at the FOS entrusted with arbitrating our complex contractual obligations would as a very minimum take some notice of the terms and conditions of the policies sold. But time and time again at the quarterly meetings of the Travel Insurers Claims Committee, when the FOS – a permanent item on our agenda – is raised, members have steam visibly pouring from their ears as they describe the latest unexpected and extraordinary decision issued to them by the FOS.”
Critics of the FOS point with increasing frustration to adjudicators’ demands for policy wordings – especially the exclusions – that are both brief and specific. That’s a tough call when even the FOS accepts that consumers – perhaps encouraged by aggregator websites – are much more interested in prices than the detail of the cover policies provide. Says Pearson: “Underwriters despair of ever being able to create a travel insurance masterpiece that is simultaneously clear to the consumer and watertight. Many of us have abandoned the standard Key Facts document in favour of a brief summary of sums insured and cover, but even this is often criticised by adjudicators as being insufficiently detailed.”
She points out that the same contentious areas come up repeatedly, and that most come down to the same issue – management of customer expectations and ‘what is realistic to explain to the punter at the time of purchase before he or she falls asleep with boredom’. “We thought that asking web buyers to tick boxes confirming that they had read and understood the salient points about the product they were buying would be sufficient, but apparently this, too, is flawed and unreasonable to the minds of some adjudicators,” says Pearson, “Such concepts as ‘duty to mitigate loss’, ‘utmost good faith’, ‘consequential loss’ or even the commonplace word ‘curtailment’ are all regarded as too difficult for the man or women in the street to grasp.”
It ill-behoves the regulators, she says, to encourage or compel insurers for commercial reasons to offer premium refunds to all comers – no matter how spurious their case – in order to avoid paying FOS fees. “Or am I wrong? Is it the declared aim of the Financial Services Authority and the FOS to drive smaller niche players out of the market and favour the mass-produced offering over and above the individually underwritten? Large players can write off losses in the travel market against more profitable lines of business such as household insurance. They can also cherry pick the best risks, leaving the elderly and those with life-threatening illnesses to the specialist niche players in the market. The media has often focused on the lack of affordable cover for these categories.”
Greg Lawson expresses his frustration with what the travel sector sees as inconsistency in FOS adjudications and the willingness of ombudsmen to come down on the side of the consumer on the skimpiest of grounds. “There continues to be a mix of rules and principles, with criticism of lengthy policy wordings yet judgement often in favour of the consumer because wordings are not specific enough. It is not possible to preach the need for less complex documentation when decisions are often justified due to the lack of clarity and detail within a policy wording.”
With so many conflicting pressures on policy wordings, from contract law and the Unfair Contract Terms Act to both the FSA and the FOS, he says it is no surprise that consistency and clarity have run for the hills: “Ironically, the test of reasonableness has been dismissed due to 'reasonable' being deemed an unfair contract term. Once common sense interpretation has been removed, the insurer’s approach has, by default, to become generic and will always reflect the worst case scenario, giving us longer wordings that the FOS has said it does not believe are read by customers.”
Judges: who needs them?
Greg Lawson takes the FOS to task for its refusal to have key disputes settled by judges as test cases – a refusal that’s hardly surprising when the Service’s website is subjected to a tone-of-voice reading. Consumers are introduced to ‘Juliana’ – there’s a picture of her smiling – described as an ombudsman. She explains that her job is to ‘review complaints independently – and make an official final decision on them … Where I believe a customer has lost out, I have the power as an ombudsman to get things put right – and financial businesses have to do what I tell them in these cases’.
If FOS decisions are final, there is clearly no need for judges, as was made clear by the Service’s refusal to allow a claim dispute arising from the 2010 Icelandic ash cloud travel crisis, the pivotal issue of which was whether or not the ash plume that had planes grounded and passengers stranded across the globe was a weather event.
The insurer – supported by the Met Office’s opinion – said it wasn’t, while the FOS ombudsman backed the complainant. Accepting, however, that the decision could have consequences for the entire travel insurance industry, the ombudsman invited the insurer to set out an argument for letting a court make the final judgement. Its case was rejected by the ombudsman: “I think consumers who are delayed by atmospheric conditions which they believe to be poor weather conditions would not unreasonably expect this to be covered by the consumer travel policy they have taken out for unexpected eventualities outside their control.”
So when do you think the first test case will be referred to a court, asks Greg Lawson, pointing to this explanation from the FOS as to why it believes there is no need to take these key disputes to judges: “The approach of the court is to look at the ordinary and natural meaning of the words. That is the approach adopted by the ombudsman. Where there is ambiguity in a standard-form contract, the court will interpret the term in the way that is less favourable to the party who supplied the wording. That is also the approach adopted by the ombudsman.”
What the FOS appears to be saying here is that because it believes its approach in adjudications is the same as that of the courts, judicial oversight is rarely if ever needed. “Without any visible desire to test even the most important and influential cases within the judicial system,” says Lawson, “there remains the concern that the FOS is losing touch with the travel insurance market. Surely, its role is not one of consumer champion but of a regulator ensuring the quality of service and product within the industry, and ensuring that customers are treated fairly. That requires all parties to have respect for each other and a deeper understanding of each other’s expectations.”
While insurers are prevented from taking critical cases to court, consumers are not similarly restricted, as was demonstrated in February this year, when a small claims court in Somerset ruled that the Icelandic ash cloud was a weather event and backed a policyholder whose claim had been refused by InsureandGo. Underwriters Europ Assistance (EA) asked the FOS to refer the case to a civil court that can set a legal precedent, and when it was refused, EA responded by lodging an application for a judicial review of the FOS’s ash cloud ruling.
time and time again at the quarterly meetings of the Travel Insurers Claims Committee … members have steam visibly pouring from their ears as they describe the latest unexpected and extraordinary decision issued to them by the FOS.
“The proceedings are ongoing,” comments Peter Dingle, Europ Assistance’s commercial director. “Accordingly, although we believe the ITIJ article is extremely timely, raising important issues for the insurance sector and its customers, it would be inappropriate for us to provide any detailed comment on how the FOS operates at this time.”
A non-legal appeal avenue that Tricia Pearson says is often overlooked by insurers is the FOS’s independent assessor – currently Linda Costello Baker, OBE – who is able to look at complaints from consumers and companies – not about the rights and wrongs of an adjudication, but about the way in which the process was conducted. “Last year, only 262 cases were referred to her and only 165 of them met the criteria for a full investigation, but encouragingly, 67 of these complaints, most of which emanated from individual members of the public rather than regulated firms, were upheld and compensation paid. So if an insurer is unhappy with the practical aspects of the handling process, for instance encountering an ombudsman who declines to discuss a case or an adjudication with it, then it too can become a complainant.”
Who are the ombudsmen?
Tricia Pearson does not think FOS frontline staff – who deal with inquiries and complaints at the initial stage – are required to have any relevant qualifications. “Their role, as it has been explained to me, is to log the calls with as much information as the caller has to offer and then to notify the insurance firm concerned that a complaint has been made. The company then has eight weeks in which to resolve it. This leads to problems that are specific to the travel industry. It has so many layers – sales via brokers and travel agents – that it not infrequently happens that the insurance company has no knowledge of the complainant at all. Only in the case of direct sales are the complainant’s personal details likely to be available immediately to the recipient of the complaint. In my experience, this is never understood by the complainant, and rarely by the frontline FOS staff.”
Often, she says, the initial notification by the FOS contains insufficient data for the insurance company to act on because the policyholder does not understand whose insurance they have. They will say simply, ‘I bought it on MoneySupermarket’ or ‘it’s a cruise policy’, so the notification will be sent to the wrong company.
The FOS provides no information about the adjudicators whose job is to try to settle complaints informally. Its website does, however, list the names and previous jobs of its panel of 92 ombudsmen, led by the CEO and chief ombudsman (Natalie Ceeney, previously chief executive of the National Archives and Keeper of the Public Records, operations director at the British Library and McKinsey & Co. management consultant) and Tony Boorman, principal ombudsman and decisions director (previously deputy director-general of Ofgem, the UK’s electricity and gas regulator; director of supply competition at the Office of Electricity Regulation; and director of the Electricity Consumer Council).
Underwriters despair of ever being able to create a travel insurance masterpiece that is simultaneously clear to the consumer and watertight
Tricia Pearson acknowledges that some of the ombudsmen have experience in the financial services sector, but there is nothing remotely resembling a shortage of lawyers, quangocrats of various kinds and people who have risen from the ranks of the adjudicators. “In the main,” says Ms Pearson, “their philosophical disposition in examining a complaint is by their own admission inquisitorial which, unlike the adversarial legal system we have in British and US courts, places the rights of the accused – the insurer in this context – secondary to the search for the truth.” As far the ombudsman service is concerned, she says, truth is of course important, but it should be considered in the light of the terms of the legally binding contract the policyholder has freely chosen to enter. “It might be ‘the truth’ that the complainant had not understood the policy, perhaps because they had not read it, and therefore didn’t know that the existing heart condition of a travel companion was a fact material to the risk proposed,” says Pearson, “But the premiums are based upon carefully calculated perceived risks. If no premium has been charged for this additional risk because the underwriters have not been told about it, then the financial position of the risk carrier has been prejudiced.”
All change at the FOS?
What changes does the industry want to see at the FOS? Suggestions include:
- An increase in the number (currently the first three cases in each year) of fee-free cases for travel insurance companies that a) are especially vulnerable to complaints on low-value claims b) receive high volumes of complaints that do not accurately reflect their performance
- More training for frontline staff enabling them to dismiss spurious or frivolous complaints at the outset
- Two levels of complaints, with those simply about refunds or policy excesses fast-tracked at a lower case fee
- Adjudicators and ombudsmen empowered to utilise common sense in interpreting FSA rules when it is clear that insurers have not breached any regulations
- A modest case fee deposited by complainants, refundable if their complaint is upheld
Tricia Pearson offers a more radical solution: “Is there a better model fit for the 21st century, one in which the different types of financial disputes are once more separated out so that they can be addressed by people who are genuinely knowledgeable and expert in each field?”