Financial difficulty

Dealing with urgent disputes

Relevant legal principle

Possible scenarios

Insurance policy excesses and financial difficulty

Consumers experiencing financial difficulty may be unable to pay a policy excess. This should not mean the claim cannot progress.


Set out below is FOS's approach to general insurance disputes where consumers, who are experiencing financial difficulty, are unable to pay their policy excess.

Dealing with urgent disputes

Where a dispute is lodged by an applicant who is experiencing financial difficulty, the TOR provide that FOS may vary the dispute resolution process to address the need for urgent resolution that these situations often require.


The TOR provide that where a matter is urgent or special circumstances exist, FOS may:

  • reduce the IDR timeframe (paragraph 6.4), and
  • proceed to a Determination without a Recommendation first being made (paragraph 8.6).

A dispute involving an applicant's inability to pay an excess is often a dispute brought by an applicant who is experiencing financial difficulty.

Relevant legal principle

When deciding a dispute, FOS is required to do what in its opinion is fair in all the circumstances having regard to:

  • legal principles
  • applicable industry codes or guidance as to practice
  • good industry practice, and
  • previous relevant decisions.

A recent Court of Appeal decision dealt with the issue where an insured was unable to pay their policy excess.


The insured in that case was covered under a broad form liability policy. A claim was lodged on this policy regarding a third party demand. The insured was unable to pay the policy excess and, as a result, the insurer denied liability for the claim.


The Court stated the insurer could not avoid its liability under the policy because of the insured's inability to pay the excess. The Court did not accept it was a requirement for an insured to pay the excess before the insurer becomes liable to indemnify the insured.


The Court also indicated these types of policy provisions would be regarded as an 'unusual term' within the meaning of section 37 of the Insurance Contracts Act 1984. As such, the notification requirements associated with this provision would apply.


The approach taken by the Court is relevant to how FOS will assess its approach to resolution of a dispute where an applicant is unable to pay the excess because of financial difficulty.


FOS takes the view that:

  • an applicant's inability to pay the policy excess does not automatically allow an insurer to avoid liability for a claim which would otherwise fall within the policy terms, and
  • an applicant's inability to pay the policy excess does not prevent FOS from considering a dispute.

Possible scenarios

The following scenarios provide practical examples of the application of this approach where an applicant can establish they are in financial difficulty.


These are not exhaustive examples but are designed to give both insurers and applicants a guide to the FOS approach to these matters in order to avoid unnecessary disputes.


Example 1

An applicant, who held comprehensive motor vehicle insurance, was involved in a single vehicle accident.

The applicant lodged a claim with the insurer for the damage to the vehicle.

The damage fell within the cover provided.

The applicant was unable to pay the policy excess because of financial difficulty.

The insurer denied the claim on the basis of the applicant's failure to pay the excess.


Result

FOS would consider the dispute and might conclude that:

  • the insurer is liable to indemnify the applicant for the amount above the policy excess
  • the applicant is obligated to pay the policy excess to the insurer, but an arrangement should be made to:
    • pay this excess over time, or
    • allow the insurer to pay a sum of cash in settlement of the claim from which the excess can be deducted.

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Example 2

An applicant, who held comprehensive motor vehicle insurance, was involved in an accident with another vehicle.

The applicant was responsible for the accident and lodged a claim with the insurer for the damage to both vehicles.

The damage was covered by the policy.

The applicant was unable to pay the policy excess because of financial difficulty.

The insurer denied the claim on the basis of the applicant's failure to pay the excess.


Result

FOS would consider the dispute and might conclude that:

  • the insurer is liable to indemnify the applicant for the amount above the policy excess
  • the applicant is obligated to pay the policy excess to the insurer, but an arrangement should be made to:
    • meet the third party's claim
    • pay this excess over time, or
    • allow the insurer to pay a sum of cash in settlement of the claim for the damage to the applicant's vehicle from which the excess can be deducted.

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Example 3

An applicant, who held a home building policy, lodged a claim under their policy when their home suffered storm damage.

The applicant was unable to pay the policy excess because of financial difficulty. The insurer required the applicant to pay the excess before it would authorise repairs to be carried out.


Result

FOS would consider the dispute and might conclude that:

  • the insurer is liable to indemnify the applicant for the amount above the policy excess
  • the applicant is obligated to pay the policy excess to the insurer, but an arrangement should be made to:
    • pay this excess over time, or
    • allow the insurer to pay a sum of cash in settlement of the claim from which the excess can be deducted.

Example 4

An applicant was involved in a collision with a third party's vehicle.

The applicant was responsible for the accident and is insured for third party property damage.

The third party issued a letter of demand against the applicant for the cost of repairs.

The applicant was unable to pay the policy excess because of financial difficulty.

The insurer denied liability for the claim.

The third party has commenced or is threatening legal proceedings.


Result

FOS would consider the dispute and might conclude that:

  • the insurer is liable to indemnify the applicant for the amount above the policy excess, or
  • the applicant will still need to deal with the third party's claim for the amount representing the policy excess.