Income protection insurance

Income protection insurance provides regular payments when a policyholder is unable to work as a result of illness or injury. In Ombudsman News 52, the FOS set out five areas which give rise to difficulties when claims are made under this type of policy, as follows.

Limitation of benefit clauses

What In addition to the restriction of the level of cover purchased, policies typically include a "limitation of benefit" clause. This places an overriding cap on benefits, with the cap being expressed as a percentage of pre-incapacity earnings - perhaps 66.6% or 75%. The purpose of such a cap is to provide policyholders with a financial disincentive to cease work and, where a claim is made, a continuing financial incentive to return to work.

In some cases the FOS has found that the cover purchased exceeds the cap, meaning that the policyholder has paid unnecessarily high premiums and that the benefits paid may be less than anticipated. In other cases, the cover purchased has been inadequate to provide the full benefits up to the level of the cap. The FOS does not immediately assume that such policies have been mis-sold. It looks at all the circumstances, including:

  • the fact find and any other documents relating to the policyholder's circumstances at the time of sale;
  • any policy brochures and marketing material given to the applicant prior to the sale;
  • the advice given by the firm;
  • the calculations made by the firm.

Benefits for the self-employed

The starting point for calculating benefits is usually pre-tax earnings for employed policyholders and net profits for the self-employed. Cases involving the self-employed seen by the FOS include disputes as to:

  • whether net profits is the correct starting point;
  • how elements such as benefits in kind, bonuses, commission and so forth should be treated;
  • whether any income which continues in the period of incapacity should be taken into account.

In dealing with such cases, the FOS concentrates on the wording of the individual policy.

Basis of assessment

In assessing earnings for the purposes of calculating benefits, insurers normally take an average over the twelve-month period preceding the incapacity. The FOS points out that this can produce harsh results - for example where the policyholder's income dropped over a period of months as he or she struggled to keep working. It suggests that it may sometimes be fairer to take an average over a longer period, say three years, but accepts that this may be precluded by the policy wording.

Proportionate/rehabilitation benefits

The FOS is concerned that benefits may be withdrawn even if claimants will find it difficult to return to work because :

  • their businesses have failed, meaning that they can not work part-time, and
  • their disability makes them unfit for any similar occupation.

It suggests that in some cases it may be appropriate to make a proportionate payment, but again accepts that this may be precluded by individual policy wordings.

Deduction for other insurances

Some policies provide that when benefits are calculated any payments received under other insurances should be deducted. The policyholder may find that such deductions mean that the policy is of little if any value. In such cases the FOS considers two issues:

  • whether the firm or the policyholder were aware of the overlapping cover;
  • whether the policy wording makes it clear that such deductions will occur.

When looking at the policy wording, the FOS will interpret any ambiguity in favour of the policyholder. A right to deduct payments made under "similar" policies, for example, will be construed strictly so that an insurer will not be permitted to deduct benefits under a payment protection policy.