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Notifying third party beneficiaries of derogations from prescribed terms of insurance contracts

 

A financial services provider (FSP) can provide a contract of insurance that derogates (ie deviates) from the terms and conditions prescribed in the Insurance Contracts Regulations 1985.

Third party beneficiaries may derive a benefit under an insurance policy but are not an actual party to the insurance contract. For example, in the case of travel insurance that a consumer obtains through their bank, the bank is a party to the insurance contract and the consumer is a third party beneficiary.

Examples of the types of insurance contracts that can extend to third party beneficiaries are travel insurance, income protection insurance and group personal accident and sickness insurance. This is not an exhaustive list.

The Insurance Contracts Act 1984 (ICA) has defined certain classes of insurance contracts as ‘prescribed contracts’. These are:

  • home building
  • home contents
  • motor vehicle
  • travel
  • personal accident and sickness
  • consumer credit.

The Insurance Contracts Regulations 1985 outlines the terms and conditions applicable to each class of prescribed contract.

If an FSP wishes to derogate from a prescribed term in a prescribed contract (for example, by excluding flood cover under a home building policy), section 35 of the ICA requires the FSP to clearly inform the insured in writing of the derogation before the contract is entered into. If it is not reasonably practicable to give written information within that timeframe, section 69 of the ICA extends the timeframe where certain conditions are met. Section 69 may operate, for instance, if a policy is entered into over the telephone. Section 13 of the ICA requires parties to a contract of insurance to act towards each other with utmost good faith.

We recognise that sections 13 and 35 of the ICA do not apply in relation to third party beneficiaries. While the legislation is silent on whether an FSP should clearly inform third party beneficiaries of derogations from prescribed terms, common law principles relating to ‘good faith’ and ‘fair dealing’ are sufficiently broad in application to extend to third party beneficiaries.

Paragraph 8.2 of our Terms of Reference requires us, when deciding a dispute and deciding whether a remedy should be provided, to do what in our opinion is fair in all the circumstances, taking into account:

  • legal principles
  • applicable industry codes or guidance on practice
  • good industry practice
  • previous decisions made by us or our predecessor schemes (although they are not binding).

FOS takes the approach that to meet the principles relating to ‘good faith and fair dealings’ FSPs must be able to show they have provided adequate notification to potential third party beneficiaries of any derogation from standard cover.

We will not allow an FSP to rely on a derogation from prescribed terms that adversely affects a third party beneficiary if the beneficiary has not been adequately notified of the derogation. Adequate notification will not necessarily involve providing documentation to third party beneficiaries. However, to establish adequate notification, an FSP would at least need to demonstrate that a clear process was in place with the insured to ensure the contract’s terms and conditions were made available to third party beneficiaries.

If an FSP fails to ensure third party beneficiaries are adequately notified of any derogation from prescribed terms, it runs the risk that it will not be able to rely on the derogation in any dispute that comes before FOS.

The following case studies are practical examples of how we approach this issue.

Case Study 1: Deviation from a prescribed contract – travel insurance

An insurer provided Sharon’s bank with travel insurance for her and other customers who held a bank credit card.

While Sharon was overseas, her travel bag, laptop and a number of other items were stolen from a train’s baggage storage area. The insurer rejected Sharon’s insurance claim, relying on a policy exclusion for items left unattended in a public area. Sharon brought her dispute to FOS.

FOS noted that travel insurance is a ‘prescribed contract’ for which the Insurance Contracts Regulations 1985 set out prescribed terms. The prescribed terms for travel insurance contracts do not exclude unattended baggage.

Neither the bank nor the insurer could show they had made a copy of the insurance policy available to Sharon. FOS said it would have been fair in these circumstances for the credit card holders to have been informed of this exclusion.

FOS also said the insurer could have informed the credit card holders directly through appropriate documentation. Alternatively, the insurer could have directed credit card holders to a publication of the relevant exclusion on its or the bank’s website.

FOS considered that it was not fair in these circumstances for the insurer to rely on its policy exclusion.

Case Study 2: Deviation from a prescribed contract – consumer credit insurance

Sean, who ran a small business, held a credit card provided by a bank. The bank informed consumers about an insurance policy provided by an insurer. The policy provided cover to repay a credit card balance where the card holder became involuntarily unemployed or permanently disabled or died during the period of insurance. In this arrangement, the card holder was a ‘third party beneficiary’ under a contract of insurance between the bank and the insurer. Sean decided to take out the insurance.

Sean had a large balance on his credit card when his business went into liquidation. He could not repay any of the balance and made a claim under the insurance policy.

The insurer denied the claim, relying on an exclusion clause in the policy. It stated the policy did not cover anyone who was self-employed when the event giving rise to their claim occurred.

Sean lodged a dispute with FOS, arguing that the insurer could not rely on the exclusion clause. He said he was unaware of the terms of the policy and would not have obtained the cover if he had known of the exclusion clause. He also said he had told the bank about his working arrangements when he obtained the cover.

Neither the bank nor the insurer could show that they had made a copy of the policy available to Sean.

Could the insurer rely on the exclusion clause to deny the claim?

The policy is a consumer credit insurance contract, which is a ‘prescribed contract’, for which the Insurance Contracts Regulations 1985 set out prescribed terms. The prescribed terms for consumer credit insurance contracts do not exclude cover for self-employed people. So the exclusion in this case amounts to a derogation (that is, a deviation) from the prescribed terms.

Sean had established he had become involuntarily unemployed. The insurer had not taken any action to notify Sean of the exclusion clause.

Therefore, it was not fair for the insurer to deny the claim.

We required the insurer to pay the balance on Sean’s credit card and interest in accordance with section 57 of the Insurance Contracts Act 1984.

 

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