FOOL'S EYE VIEW
Beware Of The Small Print

By Jane Mack (TMFJane)
October 28, 2004

One of the publications I find very useful to read is the Financial Ombudsman's monthly report on the sort of complaints he's had to deal with recently and how he comes to his decisions.

This month, one of his topics was how insurance companies interpret the meaning of 'own occupation' and 'any occupation' in policies that cover you if you become disabled or too ill to work.

The cheapest form of cover is one which pays out if you become so disabled that you are unable to continue with 'any occupation'. Insurers have usually interpreted this to mean that they only have to pay out if you are unable to carry out any occupation at all.

As the Ombudsman points out, it is a high threshold to pass, since few people are so disabled that they cannot, ever again, carry out any occupation at all. Insurers have, therefore, appeared to use the phrase as a get-out clause when someone makes a claim. However, the Court of Appeal has recently ruled that the term 'any occupation' is ambiguous, so it should be interpreted in favour of the policyholder rather than the insurer.

It made for interesting reading, because only the day before I had been perusing a report by the Citizens' Advice Bureau (CAB) about the uselessness of payment protection insurance (PPI) on loans and credit cards. It's found that when people come to it with help with their debts, those with insurance cover face serious limitations when they come to claim.

A survey found that in cases where clients had debts covered by PPI, policy limitations meant that clients could only make claims just over a quarter of the time. The most commonly cited reason for not claiming on policies (73%) was that there was always something in the small print that prevented them from doing so.  

Even when a claim was submitted, few CAB clients were successful - just 15%. Reasons insurers used to reject claims included common exclusion clauses such as pre-existing medical conditions, mental illness and disputes over medical conditions. Take a look at some of their actual cases:

• A CAB in Somerset reported that its client had experienced mental health problems a year before taking out four loans, each of which was covered by PPI. At the time, she was advised that the insurers would cover her repayments if she were to become ill or unemployed. Two years later, she went into hospital for treatment for her mental health problem and made a claim on her insurance. Her claim was refused, due to the fact that she had pre-existing medical conditions. On one of the loans, the bank had received £1,200 commission. The CAB considered that because the bank had been paid commission, the client should have been entitled to a detailed explanation of the policy and its exclusions when taking out the loan.

Considering how much some of these PPI policies cost, you'd think the consequences would be explained to people, but no: 

• A couple sought advice from a CAB in Lincolnshire about their inability to pay a £74,000 secured loan. Three years earlier, they had inherited a deceased relative's house which, at the time, was mortgage-free, and took out a loan of £1,000 for furnishings and decoration. A payment protection premium of £500 was added to the loan. Within a year of taking out this loan, the lender consolidated their loan no less than five times, culminating in the £74,000 secured loan. With each new loan, further payment protection insurance was sold. Of the £74,000 the clients had borrowed, a staggering £44,000 was accounted for by payment protection insurance. However, as both clients suffer from mental health problems, neither could claim on the insurance policies in the event of not being able to pay due to pre-existing medical conditions.

Although payment protection insurance normally covers people for periods of unemployment, CAB clients often find that such insurance does not cover all reasons for joblessness:

• A CAB in Hampshire reported that an army wife sought advice about a loan for £10,000 that she had taken out the previous year. Her husband had just been posted overseas, but there was no job for her there. Because she had to leave her job voluntarily, the terms of the payment protection insurance would not cover her.

As far as the CAB is concerned, payment protection insurance should be expected to protect people from the effects of unexpected changes in circumstances. However, often it does not help to resolve many of the debt problems their clients face. This is usually because the changes experienced are outside the scope of these insurance policies, or the situations are specifically excluded.

Another reminder, then, to read the small print before taking out these policies!

More: Do You Really Need Payment Protection Insurance?