Payment Protection insurance

Introduction

Payment protection insurance (PPI) is intended to meet loan repayments if the policyholder is unable to do so through sickness, death or unemployment. Unfortunately, it has achieved some notoriety, with separate investigations being conducted by the FSA, the Office of Fair Trading and the Competition Commission.

Perhaps as a result, there has been a surge in the number of complaints received by the FOS. In 2006/07, the FOS received just 1,832 PPI complaints. This rose to 10,652 complaints in 2007/08, with most of those received in the last few months of the financial year.

In Ombudsman News 4 the FOS identifies the following five main areas of concern:

Suitability

PPI is often sold by those who are not experts and who may have little or no knowledge of the policy terms. It may be difficult, therefore, to ensure that a policy is suitable for a particular borrower. The seller should not merely record information volunteered by the borrower: it is essential that questions are asked about any matters regarded as relevant by the insurer.

Eligibility

PPI is subject to eligibility criteria. Policies may include a range of stipulations – for example, that the borrower is actively working at commencement, is within a certain age range, is employed rather than self employed.

In Ombudsman News 4 the FOS draws attention to the ABI Statement of Practice on Payment Protection Insurance – now withdrawn – which required that “details of the main features of the cover as well as important and relevant restrictions will be made available and highlighted at the time the insurance is taken out”.

The experience of the FOS is that some borrowers are sold PPI for which they were clearly ineligible from the outset. If a claim has been made, a mere refund of premiums is of little help to the policyholder. Instead, the insurer or intermediary may be asked to deal with the claim as if the policyholder had been eligible for the cover.

In Ombudsman News 71 the FOS reports a case in which Mr D was sold a PPI policy by a firm which knew he was self-employed. The firm failed to inform Mr D that for the self-employed the cover was more restricted. No claim had arisen. The FOS instructed the firm to return all the premiums paid with interest.

Consolidating loans

If an existing borrower wishes to borrow a further sum, it is common for the lender to arrange a new loan consolidating all the borrower's liabilities. A new policy may also be arranged. Unfortunately, there may be restrictions applicable to this new policy which would not have applied to the old. For example, there may be a qualifying period of 90 days when claims are excluded, or an exclusion for medical conditions which have developed since the original policy was sold. The FOS will want to see evidence that the borrower was warned of these issues – or would have acted in the same way anyway – before supporting the declining of a claim under the new policy which would have been covered under the old.

Mental illness

The FOS has drawn attention to exclusions which exclude claims “if caused or aggravated by any psychiatric illness or any mental or nervous disorder”. It points out that many conditions have a mental element – with media reports suggesting that 50% of all illnesses have mental causes. Policyholders who are made redundant and then develop depression are left in an impossible position. An unemployment claim requires the policyholder to be seeking work – but the depression, for which no claim can be made, stops the policyholder from doing so. The FOS has made it clear that in such cases it regards the requirement to register as unemployed and to seek work as “a largely procedural requirement” and that it will ask insurers to meet otherwise justified claims.

Post-redundancy disability

Similar problems arise outside the context of mental health – where a policyholder who is made redundant but then suffers a physical illness for which a claim could otherwise have been made under the same policy. An unemployment claim cannot be made because the policyholder cannot seek work, a disability claim cannot be made because the policyholder was not in employment when the disability arose. The FOS has indicated that in a number of such cases it has asked insurers to pay benefits – since a redundancy claim would be valid but for the disability, and a disability claim would be valid but for the redundancy.

Case studies

By the time Ombudsman News 62 was published, the FOS was finding that complaints about PPI increasingly related to matters other than claims. It gave some examples of complaints on selling. Regulated firms were required to refund premiums with interest where they had failed to bring the following features of policies to the attention of consumers:

  • The payment of a lump sum premium covering the whole term of the policy was required at outset.
  • The premium was added to the loan, and therefore interest was payable upon it.
  • A pro-rata refund was not payable if the policy was cancelled when no longer needed by the policyholder.

In a separate case, which did involve a claim, the sales material had referred in several places to “unemployment” cover, whereas the policy excluded unemployment unless arising through redundancy. The policyholder was dismissed for poor performance. In asking the insurer to meet the claim in full, the FOS pointed out that the limitation on cover had not been given due prominence.

The surge of complaints received by the FOS at the beginning of 2008 was reflected in the decision to devote half of Ombudsman News 71 to PPI. Amongst the cases reported were the following:

  • Mr A was sold PPI when he applied for a credit card. His complaint was that he had not been told the insurance was optional. The evidence supported Mr A’s contention that he had simply signed a form completed by the firm’s representative. Mr A was aged 19 and had little experience of financial matters. The FOS instructed the firm to refund the premiums paid with interest. This case provides a good example of the FOS not regarding a signed form as conclusive.
  • Mr and Mrs J were in financial difficulties. They took out a loan and then subsequently twice consolidated their debts by arranging further loans. With each loan they were sold a single premium PPI policy. The policies only provided cover for five years and the premium for each was added to the loan, so that interest was charged on it. The FOS was not satisfied that these implications of the arrangement had been explained to Mr and Mrs J and it viewed the policies as lacking flexibility. It therefore instructed the firm to return the premiums with interest and to adjust the existing loan to the sum which would have been outstanding had the policies not been sold. This case is of some general interest since although the firm claimed it did not offer advice the FOS decided it was liable having “actively encouraged” the purchase of the policies.
  • Mrs A was in a low-paid job and following a split-up with her partner was experiencing financial difficulties. She arranged a second mortgage of £20,000 against her flat. Alongside the loan she was sold a PPI policy. She later complained that the policy was too expensive. The FOS investigation established that just to recoup the premiums Mrs A would have to make three separate claims, each for twelve months benefits, within the five year term of the policy. Although the firm pointed out that the policy included life cover, this was available elsewhere at a modest cost. The FOS concluded that the policy was inflexible and expensive and instructed the firm to return the premiums with interest. It is unusual to see a decision explicitly based, at least in part, on the poor value-for-money offered by a policy.
  • Mr B was made redundant from a specialist engineering post. He claimed under a PPI policy he had been sold in connection with a car loan. After five months the insurer suspended payments, demanding evidence that he was actively looking for work. The insurer offered to accept a letter from Mr B’s Jobcentre, but when this was submitted it refused to accept it as proof. Mr B was able to provide the FOS with some letters of acknowledgement or rejection he had received in response to job applications he had made and the FOS also had some evidence from the Jobcentre. On this basis the FOS decided that Mr B was entitled to benefits for the eight months following the point at which the insurer had ceased payments. In adition to instructing the insurer to pay these benefits with interest, the FOS made an award for distress and inconvenience.