Taking Care with Cancellation Clauses

A recent arbitration case has highlighted the importance of insurance intermediaries understanding, and adhering to, contractual terms and conditions, particularly where policyholders pay for their insurance through premium finance or credit agreements.

A well-known insurer has warned intermediaries that, where policyholders pay insurance premiums under a premium finance credit agreement, and default on credit repayment, they must ensure that policies are cancelled appropriately in line with the terms and conditions of the customer’s credit agreement.

The warning comes after a dispute over a claim led to an arbitration ruling against the insurance company due to an erroneous policy cancellation by an intermediary, leaving the insurer liable to pay a considerable settlement.

In this case, the policyholder took out motor insurance via an intermediary, who was responsible for managing the policy on the insurer’s behalf. The policyholder entered into a premium finance credit agreement (arranged by the intermediary) that they were expected to pay off in monthly instalments, whilst the intermediary paid the full premium to the insurer at the start of the policy.

However, the policyholder defaulted on their credit repayments and failed to heed warnings from the intermediary that the policy would be cancelled if payments did not resume. The intermediary consequently cancelled the policy on behalf of the insurer. However, instead of cancelling under the terms and conditions of the customer’s credit agreement, they relied on a section of the insurance policy relating to non-payment of a premium.

Subsequently, the policyholder had an accident, and the policy did not respond, as, from the insurer’s perspective, the policy had been cancelled. At arbitration, however, the Motor Insurers Bureau’s view, which was upheld, was that the policy was not cancelled, as the intermediary’s cancellation letter referred to a non-payment clause in the insurance company’s policy. As the premium had in-fact been paid in full at inception, the policy could not be cancelled under those terms and should, instead, have been cancelled under the terms and conditions of the credit agreement. Therefore, the insurer was liable to pay the claim.

What does this mean for intermediaries and insurance companies?

Following the outcome of this arbitration, intermediaries should ensure that, when arranging and collecting policy premiums where credit agreements are entered into, cancellation should be in line with the terms and conditions of the customer’s credit agreement only. The intermediary should take care not to reference payment between the insurance firm and the customer, or the cancellation rights of the insurance policy unless the policy specifically states a right to cancel due to the non-payment of the loan under third-party finance agreement.

Firms should review and, if necessary, update the wording of their terms and conditions and cancellation clauses to ensure clarity- specifically in relation to cancellations in the event of non-payment of a premium.

It is also advised that firms offering policies under a co-manufactured arrangement review their terms and conditions imminently to ensure that they permit agents acting on behalf of an underwriter to cancel a policy in the event of the non-payment of a premium - specifically in relation to a credit arrangement.

What next?

It would be prudent for premium finance providers and insurance intermediaries to consider utilising further training to avoid similar errors regarding policy management. Both those new to the industry and experienced intermediaries could benefit from solidifying or refreshing their knowledge of key areas, such as applicable law and terms and conditions of policies offered - both of which the FCA consider as core competencies.

The Development Zone offers a range of courses which help learners to grow and develop their knowledge and skills in these areas, whilst helping to complete and record CPD in line with regulatory requirements.

The IDD Pathway in particular offers courses to enrich the knowledge of intermediaries managing policies: Understanding Policy Documents, English Law for Insurance Intermediaries, Claims- Duties to a Client, The Role of Insurance Brokers, and Consumer Credit Laws in the UK.

In addition, the IDD Refresher Course has been designed to test and refresh the knowledge of more experienced brokers.