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Case Study: 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.

Read the full article: ‘Notifying third party beneficiaries of derogations from prescribed terms of insurance contracts’.