ombudsman news issue 53 May 2006

insurance at the click of a button

Increasingly, people are buying insurance over the telephone or through the internet. So in a growing proportion of the insurance complaints we see, the sale was carried out by these ‘instant’ means.

Buying insurance at the click of a button may be quick and easy – but what if things go wrong? Does investigating a complaint create particular difficulties without the clear paper trail that more ‘traditional’ insurance sales generate?

We asked Peter Hinchliffe – the lead ombudsman for insurance – what the implications are for insurers and intermediaries.

Does the Financial Ombudsman Service have problems with online or other non-traditional methods of applying for insurance?

No, as long as care is taken during the sales process. We know that using the telephone or internet is convenient for firms and for consumers. It’s economic and time-efficient for both sides – so we certainly wouldn’t want to discourage it.

But it’s important to be aware that the easier and quicker the process, the greater the potential for misunderstanding or errors. People may be led to believe they can go online and buy insurance more or less at the click of a few buttons. But problems can occur – for insurers as well as for consumers – if the arrangements they are entering into are not fully understood.

The application itself can be crucial to the whole policy, so it’s in everyone’s interest to ensure appropriate safeguards are built in. If the consumer fails to realise the importance of disclosing relevant information at this stage and (perhaps feeling rushed) gives approximate or inaccurate answers – then a subsequent claim may be refused on grounds of ‘non-disclosure’.

So consumers should be given sufficient opportunity to understand the insurance arrangements they are entering into. And there should be a permanent record of the sale.

Is that why so many firms still send out the completed form for signature?

Yes, they are simply following good practice. When investigating complaints involving ‘non-traditional’ applications for insurance, we don’t need to see a signed form. But it’s important that there is some permanent record of the agreement that was entered into, and of the information the consumer was given about their situation.

Getting a signature on an application form is a good way of capturing this information and establishing its importance, because consumers still see signing a piece of paper as significant. Allowing consumers to check the details means they can appreciate the implications of their application – and it helps avoid problems at a later date.

Is it important for firms to retain a record of the application once the policy is in place?

Yes. Keeping information from the time of the sale is really important. The record will be referred to later if the firm refuses a claim or if the consumer complains that the policy was not suitable. Problems can quickly arise if the consumer gives a convincing explanation of what was said or done and the firm disagrees but has no records to back up its view.

The risk of not keeping a record of the application frequently lies with the firm. This obligation cannot be passed on to the policyholder, especially when the firm hasn’t given the policyholder a second chance to check the information.

So firms should send out a paper copy for the consumer’s signature after the event?

Not necessarily. Although there is some legal doubt here, we take the view that the permanent record does not need to be on paper. It could be held as a telephone recording or a saved web page. The important thing is that it is made at the time of the sale, is not open to alteration and is kept in a secure manner.

Are there any particular guidelines that firms or intermediaries should follow when selling insurance online or over the phone?

The intermediary or firm needs to ensure that all the same requirements which apply to a traditional sale process are satisfied and that the process, while quick, is still comprehensive. They should be aware of the potential for confusion when applications are made over the phone or online. So they should look at the process from the policyholder’s perspective, and consider whether – if a dispute arose – a policyholder might justifiably say that the firm gave confusing or inadequate information.

If the application was not completed by the policyholder but by an intermediary acting on their behalf, the margin for error and dissatisfaction is much greater. But if the policyholder has not seen a policy summary or had the opportunity to understand all the policy content, then this is true whether the transaction took place online, over the phone or on paper. It’s certainly not a technology-specific issue. The clarity of the information provided, the quality of the records, and the consumer’s ability to understand the transaction will always be what matters.

So could someone actually buy insurance by text message?

Well, I wouldn’t advise it, but it’s certainly possible! We have heard of plans to sell travel insurance in this manner. The issue for the intermediary or insurer to consider is whether they can satisfy the requirements of good practice and the Insurance Conduct of Business Rules (ICOB) in selling this way, and to accept that their ability to rely on exclusions or consumer non-disclosure may be compromised by an inadequate sales process.

Can insurers still raise concerns about a policyholder’s non-disclosure if the sale was made online or over the phone?

Yes, of course. The only difference for the firm to bear in mind is that we might be more easily persuaded that there is an innocent reason for a failure to disclose information where someone who answers a question incorrectly did not see the question for long, did not write the answer down themselves, and did not get the chance to re-read or sign the policy documents.

We will apply the same criteria and the same standards as we would with a traditional application, where the individual had been asked to complete a form, check it for accuracy and then sign it.

So in conclusion, would you say that buying insurance online raises different concerns to those that arise when buying anything else online?

People are generally well aware nowadays of the security and payment issues for most online transactions. But the possibility of mis-selling is more of a concern when dealing with complex, regulated products like financial services than it is with items like CDs or books – or even with electronic items that may prove faulty when they are delivered to the customer.

With insurance – the fact that the insurer may refuse to meet a claim on the basis of information that the policyholder did (or didn’t) give in their application raises particular problems – we are applying 18th century law to 21st century technology. That’s why, as I’ve outlined, firms need to be sure they’ve built appropriate safeguards into their sales processes, and are able to produce reliable, contemporaneous records.