FML Timeline: R (Aviva Life & Pensions (UK) Ltd) v Financial Ombudsman Service

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The Applicant applied for judicial review of the Defendant’s decision – which upheld a complaint by the interested parties (M1 and M2), insurance customers of the Applicant - on the grounds that the decision was Wednesbury unreasonable.

M1 and M2 held a joint life policy with the Applicant, which M2 cancelled in August 2013 following concerns over premium payments. Prior to August 2013, and possibly as early as 2008, M2 developed a rare early-onset form of dementia. On 20 August 2013, M2 contacted his GP in relation to mental health issues, following which he underwent lengthy mental health assessments.

On 07 November 2013 M2 applied to the Applicant for a single life policy with terminal illness benefit. His application was successful and cover commenced on 12 November 2013. M2 failed to disclose that he had seen his GP, had been referred for psychiatric assessment and was awaiting a CT scan. Ten days after cover commenced M2 was diagnosed with a rare form of early-onset dementia.

On 11 December 2013, the Applicant was informed that M2 was in a hospice, his condition was terminal and that he wished to make a claim. The Applicant declined on the grounds of misrepresentation. A complaint to the Defendant was subsequently made on behalf of M1 and M2 in relation to the Applicant’s handling of both the joint and single life policies.

An adjudicator rejected M1 and M2's complaint in relation to the joint life policy but upheld it in relation to the single life policy. The Applicant’s case was that M2 had made negligent disclosures and that it had followed the relevant law and practice in declining his claim. The adjudicator held that M2's misrepresentations were innocently made. The complaint was referred to an ombudsman who upheld the adjudicator's decision and issued a final decision (the Final Decision). She stated that special consideration had to be given to M2's illness as he could not be expected to make the same disclosures expected of a reasonable person.

The Applicant applied for judicial review and sought an order to quash the Final Decision. The Defendant accepted that the Final Decision should be quashed on the basis that there were inadequacies in the reasoning of it. The Applicant maintained its judicial review application should still be heard.

Decision

The Court considered the legal framework that applies to the Defendant as set out in Part XVI of the Financial Services and Markets Act 2000 (FSMA). Section 228(2) of FSMA states that the Defendant must determine complaints by reference to what is, in the opinion of the ombudsman, fair and reasonable in all the circumstances of the case. The FCA's Dispute Resolution: Complaints sourcebook (DISP) states that when determining what is fair and reasonable, the ombudsman must take into account relevant laws and regulations, regulators' rules, guidance and standards, codes of practice and where appropriate, what he considered to have been good industry and practice at the relevant time. The relevant law in this case was the Consumer Insurance (Disclosure and Representations) Act 2012 (CIDRA). CIDRA does not recognise the concept of “innocent misrepresentation” and a careless representation entitles the insurer to avoid the contract if it would not have accepted the risk at all if the representation had not been made. It was accepted by all parties that had M1 and M2 brought legal proceedings against the Applicant in the County Court, the Applicant’s defence would have succeeded.

The Defendant conceded that the Final Decision was flawed for inadequate reasoning. The ombudsman did not follow relevant law, guidance and practice, and while she was not required to do so, it was incumbent on her to explain why she had not, following the case of R. (Heather Moor & Edgecomb Ltd) v Financial Ombudsman Service [2008] EWCA Civ 642, [2008] Bus. L.R. 1486 applied. It followed that the Final Decision should be quashed. Given the Defendant’s statutory jurisdiction in relation to complaints, the legal effect of quashing the Final Decision was that M1 and M2’s complaint remained in fact and should be re-determined.

The Court did not, however, accept the Applicant’s argument that the ombudsman had shown Wednesbury unreasonableness (ie that the Final Decision was so unreasonable that no reasonable person acting reasonably could have made it) in departing from the relevant law. Following Heather Moor and Edgecomb, the ombudsman was able to depart from the relevant law, provided that she gave an explanation for her decision. The court held that it could not be concluded that it would be outrageous to hold an insurer to its contract in unusual circumstances such as those presented in the case. Despite the policy position in law, guidance and codes of practice which supported the Applicant’s approach, an ombudsman properly directing herself as to her powers could reach a different view. However, careful reasons had to be given for any decision to uphold a complaint.

By way of postscript, the Court had concerns about a jurisdiction, such as the Defendant’s, which occupied an indefinite space outside the common law and statute. The relationship between what was fair and reasonable, and what the law laid down was not clear.

Noteworthy/ Novel points

The decision reaffirms the position that the FOS may diverge from the law when making determinations on grounds that are “fair and reasonable in all the circumstances” provided detailed reasons are given. In considering fairness and reasonableness, the FOS should consider the interests of the complainant and the commercial interests of the financial institution.

The FOS can be held accountable for any failure to articulate decisions it arrives at based on fairness and reasonableness, although insurers should note that where the FOS is found lacking in this regard, the complaint will be re-determined and therefore the same decision might be made.

The court recognised that the relationship between what is fair and reasonable, and what the law lays down, is not altogether clear. Indeed, Judge Jay expressed concerns about who, or what, “defines the contours and content of fairness and reasonableness”. This “penumbral space” of FOS jurisdiction therefore creates uncertainty for financial institutions and their complaints handling teams even in instances where they are conducting themselves entirely within the remit of the law and in accordance with industry practice. Accordingly, such tensions between the law and what is fair and reasonable are likely to come under further scrutiny; the FOS’s discretion to determine what is fair and reasonable will be of interest not just to insurers but to all parties seeking decisions from the FOS.