FOS in the D&Ock
FOS is back in Court defending its latest jurisdictional land grab.
Permission has been granted by the Administrative Court for Judicial Review of FOS' jurisdiction to consider a complaint relating to D&O insurance on the basis a director takes the policy in a personal capacity as a consumer and therefore as an 'eligible complainant' (for the purposes of DISP 2.7).
Assuming the Court accepts that FOS jurisdiction is a question of law and not susceptible to FOS' discretion to decide for itself based on what is 'fair and reasonable', the key questions will then be: a) at what point in time the FOS should assess whether the complainant was acting as a consumer or not; and, b) whether the D&O product can involve a consumer.
A 'consumer' is defined as "any natural person acting for purposes outside his trade, business or profession". 'Eligible complainant' is defined in the present tense and the references to other categories (micro-enterprise, small charity or trust) explicitly state the complainant must be eligible "at the time the complainant refers the complaint to the respondent". Although D&O insurance is to cover a director's liabilities that arise in his or her employment, FOS will argue that it protects against personal liabilities. One of the key benefits is cover for defence costs arising from regulatory investigations – which are very much matters of personal liberty and livelihood. However, there is no escaping the fact such liabilities arise in a business context.
The Court will have to grapple with forceful argument that D&O insurance is bought by a commercial customer for business purposes. FOS will say that DISP 2.7.6(5) already allows for individual members of a company's group insurance scheme to complain to FOS. One of the eligible customer relationships listed is: "the complainant is a person for whose benefit a contract of insurance was taken out ... with or through the respondent". This might make sense in respect of a group health plan that provides cover for employees' personal health (regardless of whether ill health is caused by their work) but it is far from clear that it should cover a complex commercial policy that covers both a company's liability to indemnify employees and the employees themselves for liabilities arising from their business activities and the performance of their professional duties.
If FOS defeats this challenge, D&O insurers are going to have to re-think their treatment of individual directors at the proposal, placement, underwriting, claims and complaints stages of the product life-cycle. ICOBS 2.1 already allows for uncertain and mixed use policies – defining them as 'consumer' and 'commercial' respectively - but if the High Court agrees with FOS that a Director benefits from D&O insurance as a 'consumer', insurers may be well-advised to start treating them as such.
Insurers may be even more alarmed by FOS' other and related jurisdictional over-reach. D&O policies tend to offer generous cover, subject only to the right of insurers to avoid the policy for a 'moral hazard' (non-disclosure of known dishonesty etc). If disputes about policy avoidance end up at FOS there is (currently) no statutory limit on the award FOS can make.
This is because, in August 2013, FOS published its technical note on misrepresentation and non-disclosure cases saying: "If we decide that cover should be reinstated...our £150,000 award limit does not apply – because we are telling the insurer to re-instate a policy and then deal with a claim. The award limit applies only where compensation is a money award for financial loss the consumer has suffered – not as a limit to any future amount that is paid only if the insurer accepts the claim."
This is notwithstanding the FOS' own technical guidance on compensation (which was updated at the same time in August last year) which states unambiguously: "A formula or direction are also both subject to the maximum limit of £100,000 (£150,000 for complaints we received after 1 January 2012). This limit applies, for example, where we direct a business to: ...; pay an insurance claim;...". This discrepancy is – and FOS admits as much – ripe for challenge.
If the challenge to FOS jurisdiction fails, we can expect to see another JR following shortly after as the first insurer is forced to confirm cover and pay out under a D&O policy well in excess of the £150k FOS limit.