What can financial advisers and insurers do when faced with a FOS complaint but where they have followed the law? This issue came up in the recent case of R (Aviva Life & Pensions (UK) Ltd) v FOS
Mr and Mrs McCulloch took out a joint life policy with Aviva in 2006 (“the Joint Life Policy”) The Joint Life Policy was cancelled in August 2013 because the couple had separated.
In November 2013 Mr McCulloch applied for a single life policy with terminal illness benefit for a sum assured of £500,000, again with Aviva (“the Single Life Policy”). However, Mr McCulloch failed to disclose that he was receiving treatment for mental health issues at the time. The single life policy commenced on 12 November 2013.
Just over two weeks later, Mr McCulloch was diagnosed with a rare form of early on-set dementia which was aggressive and terminal. A claim was made against both policies. Aviva declined both claims - that under the Joint Life Policy because the policy had been cancelled and the Single Life Policy was avoided on grounds of misrepresentation.
The McCullochs complained to the FOS about how Aviva had dealt with both policies.
Aviva’s response to the FOS complaint was that Mr McCulloch had made negligent disclosures which meant they were entitled to avoid the Single Life Policy in accordance with relevant insurance law and practice. It was accepted that under the relevant law at the time the concept of “innocent misrepresentation” was not recognised and a careless representation would entitle the insurer to avoid the policy. The court noted that if the McCullochs had brought legal proceedings against Aviva, they would have failed.
Both the adjudicator and ombudsman rejected Aviva’s defence in respect of the Single Life Policy and upheld the complaint. They found that Mr McCulloch’s representations were innocently made due to the illness he was suffering, and he should not be expected to make the same disclosures as a reasonable person. The claim for terminal illness benefit should therefore be re-assessed.
Aviva sought judicial review of the decision and a quashing order. The FOS conceded that the decision in respect of the Single Life Policy should be quashed on the basis that it was inadequately reasoned, but disputed that it was incorrect or so unreasonable that no reasonable person acting reasonably could have made it.
Despite the concession, Aviva pressed on with the judicial review proceedings because it was right on the law and a new ombudsman should have the benefit of a written judgment.
The court agreed that the FOS should have made the concession that they did – in agreeing to quash the decision and to that extent, the application for judicial review was allowed.
The judge also expressed "personal concerns about a jurisdiction such as this which occupies an uncertain space outside the common law and statute. The relationship between what is fair and reasonable, and what the law lays down, is not altogether clear".
However, he reiterated that the FOS’s legal framework meant that complaints would be determined by reference to what, in the opinion of the ombudsman, is fair and reasonable in all the circumstances of the case. And, whilst in considering what is fair and reasonable, the ombudsman will take into account relevant laws and regulations, regulators’ rules, guidance and standards and codes of practice, they were free to depart from the relevant law as long as the ombudsman’s decision explained the reasons why.
The decision is cold comfort to financial advisers and insurers when faced with a claim, that would have been unsuccessful if brought by way of legal proceedings.
While not new, it seems bizarre that an ombudsman’s decision can be described as “just, fair and reasonable” where it departs from the law. While it is far from clear how far wrong an ombudmsan can go, it is clear that the court remains unwilling to unpick an ombudsman’s decision.