1 overview

Exclusion clauses are an accepted and well-understood part of all general insurance products. The insurer describes the areas of claim it is prepared to cover, then sets out the particular circumstances it believes it is necessary or appropriate to exclude. The salesperson, in accordance with the industry codes, explains the main elements of the policy (including the exclusions). When choosing a product, the potential policyholder takes account of the cover available and the effect of the exclusions.

That’s the theory. The practice can be rather different – as illustrated by the number of problems policyholders bring to us about insurers’ use of exclusion clauses. Customers are often concerned that insurers use ‘small print’ exclusions to justify rejecting claims where customers thought they were covered. Of course, such concerns do not always lead us to criticise the insurer. Where exclusions are clearly expressed and of general application, they are an entirely appropriate part of the insurance contract and the ombudsman will uphold them. In this issue, however, we set out a number of cases where we concluded we could not support the wording of an exclusion, or where the facts of the case did not justify relying on the exclusion.

Two types of exclusion have given rise to particular concerns and debates with insurers and policyholders:

• those that dramatically reduce the range of cover actually provided from that set out in the cover section of the policy; and
• those where insurers exclude cover unless policyholders exercise a degree of care over their possessions or well-being which goes significantly beyond the degree of care most of us actually exercise.

Exclusions of the first type may occur where the marketing of policies suggests a scope of cover that, taking the exclusions into account, the insurer never intended. Sometimes this is simply a matter of customer misunderstanding. However, in other cases it can raise concerns that the customer was misled when making the purchase.

This problem is not restricted to one sector of the industry but is of particular concern to policyholders of health-related products, where examples include:

• exclusions dealing with pre-existing medical conditions;
• exclusion of mental illness from sickness cover in travel and loan protection policies; and
• exclusion of chronic conditions in private medical expenses policies.

‘Two types of exclusion have given rise to particular concerns and debates with insurers and policyholders.’

Many of these exclusions are problematic. They generally involve terms that are not well understood by policyholders, such as ‘chronic’ and ‘pre-existing condition’, and they can fundamentally alter the value of the product. In section 2 we look in more detail at specific problems that arise from the chronic condition exclusion.

The second sort of exclusion concerns circumstances where insurers exclude cover unless policyholders exercise a degree of care which goes significantly beyond that which most of us actually exercise. Insurers rely on the exclusions to reject claims arising from the very circumstances for which policyholders sought the protection of insurance in the first place – circumstances they may understandably consider part of the normal everyday course of events.

I imagine most of us, for example, have left the car keys in the ignition for a moment while we got out of the car to pay at a petrol station or collect the final item from the hallway of our home before setting out on a journey. Foolish – possibly – but common behaviour and not, I suggest, generally indicative of a policyholder’s failure to take reasonable care of his car. I am concerned by the apparent increase in insurers’ reliance on such exclusions. In section 3 we discuss our stance on unattended cars and keys left in the ignition.

Insurers are, of course, free to decide on the extent of cover they wish to provide. But if exclusions require policyholders to take abnormal precautions to protect their well-being, I do not consider them reasonable unless the significance of the exclusion was brought very clearly to the policyholder’s attention at the point of sale.

I expect most of us view general insurance products as an uninteresting but necessary purchase. As with other products, we rely on marketing material for information about what we are buying. In many sectors of the industry, customers see insurance as a standard commodity – differing very little from one provider to another. The idea that they take the care over choosing a policy that perhaps they should is clearly not borne out by the facts. New and convenient methods of sale, not least the internet, tend to encourage a view that insurance is something we can obtain without too much thought. A recent advertisement for an internet-based service made much of the fact that car insurance could be bought during the television commercial break. We comment on internet sales in section 7 of this issue.

These trends are not new and will not be reversed but they have consequences for the way policies are written. They are also an important background to our view on the degree to which insurers should be able to rely on exclusions in individual cases. My view is that unless insurers take steps to address these issues, the ombudsmen will, over time, have to place less weight on the significance of exclusions and more on the general environment in which the policy was sold.

Tony Boorman
principal ombudsman, insurance division