FOOL'S EYE VIEW
How Safe Is Your Household Insurance Cover?

By Jane Mack (TMFJane)
December 16, 2003

Last week, 40,000 policyholders suddenly found themselves without insurance cover for their homes. Their insurer had been put into provisional liquidation after the Financial Services Authority discovered that it had been operating illegally.

The Edinburgh-based Tribune Risk and Insurance Services had been selling policies to customers without having them underwritten. In other words they were keeping the premium money instead of passing it on to underwriters. Most of the policies were sold via mortgage brokers who recommended the firm to house purchasers.

As a result, the FSA is warning customers who have taken out household and buildings insurance with Tribune (other than those holding Tribune Diamond policies) that they are likely to have no effective cover and that they should act immediately to insure their homes.

So what happens in this sort of situation when it comes to compensation for customers who've lost money? The answer is that depends on whether the seller or intermediary comes under any regulatory authority and, unfortunately, not all of them do. 

It's the FSA who authorise insurance companies and Independent Financial Advisors but, at the moment, they're not responsible for general insurance brokers who are not quite IFAs (That'll come in a year's time).

For insurance companies, and as long as they have a licence to operate, you may be eligible for compensation from the Financial Services Compensation Scheme ( FSCS). The scheme covers investments, deposits and insurance and it will only pay out when an authorised company is unable to pay the claims against it - usually when a company has gone bust or ceased trading. Unfortunately, you may not get back all you're owed. 

For example, there are three kinds of compensation for insurance claims. Compulsory insurance, such as third party motor insurance, will probably entitle you to full compensation. For non-compulsory insurance, such as home and general insurance, the scheme will pay the first £2,000 of a valid claim and 90% of the remainder. For long-term insurance, such as pension plans and life assurance, you also get the first £2,000 in full and then 90% of the remaining value of the policy.

None of the above compensation is applicable to Tribune customers, of course, because the firm was unauthorised in the first place so any claims they have will, have to come out of the firm's remaining assets and from the sounds of it, there isn't much left to dish out.

They might, however, have a claim through the broker who advised them to take out the policy in the first place but only if they were a member of the General Insurance Standards Council (GISC). GISC members are obliged to act with due diligence and if they didn't check out the policy they were selling, the GISC's enforcement committee could require them to pay compensation. However, membership of GISC is voluntary and until the FSA takes over responsibility for the industry in January 2005, general insurance agents, consultants and brokers are not statutorily regulated.

Apart from anything else, the vast majority of these policies were sold by mortgage advisors. While most of these mortgage advisors are regulated by the Mortgage Code Compliance Board for selling mortgages, the MCCB has no responsibility for the insurance side of things. So, a mortgage advisor who was also selling general insurance policies would have to be a member of GISC to come under any sort of insurance regulation. And to date, the GISC has not heard from a single member who is concerned that they sold a Tribune insurance policy nor any policyholders who say they bought one from a GISC member. 

In other words, it appears that Tribune policyholders took the advice of their trusted mortgage advisor to buy a general insurance policy without realising that their advisor was not regulated for such purposes.

The lesson when arranging insurance is to check that you're dealing with a regulated insurance seller by looking for the GISC or FSA logo. If they don't have one or the other, then you probably won't have any comeback should something go wrong. So far, Tribune's provisional liquidators, PriceWaterhouseCoopers, say there are outstanding claims of about £2 million so it appears that policyholders will only be able to get compensation if their broker was a member of GISC (and GISC agrees that their member was negligent).

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