Financial regulator warns insurers on confusing phrase

Many insurers exclude cover for consequential losses - losses that are not directly caused by the insured event. But while the phrase may be familiar to lawyers, its technical meaning is not properly understood by most people, who could be left unsure as to what is covered by the policy, the FSA warned in a statement issued this month.

The FSA believes this may be a breach of the Unfair Terms in Consumer Contract Regulations, which prohibit terms that disadvantage consumers by creating a "significant imbalance" in bargaining power between the parties. The regulations also require written terms in standard consumer contracts to be set out in plain, intelligible language.

Examples of alternative wording suggested by the FSA include: 

"You are not covered for any other costs that are indirectly caused by the event which led to your claim, unless specifically stated in this policy", and

"We will not pay for any losses that are not directly covered by the terms and conditions of this policy. Examples of losses we will not pay for include loss of earnings due to being unable to return to work following illness or injury happening while on a trip".

In June this year, the FSA warned insurers that they needed to do more to ensure their consumer contracts do not include unfair terms, including regular reviews of all wordings and monitoring information and updates published by the FSA and the Office of Fair Trading.

"From insurers' point of view, it makes sense to get it right," said Emily Bourne, an insurance law expert at Pinsent Masons, the law firm behind OUT-LAW. "An unfair term will not be binding on the consumer, so insurers could find themselves paying out for claims they thought they had excluded."