A small claims court decision could see the FOS clamp down on insurers hiding behind small print

Clive Tucker had good reason to pop open the champagne after winning a legal battle in the small claims court last week.

The former lawyer took Insure & Go to Yeovil County Court in Somerset after the insurer refused to pay out for his costs when he was stranded in Mexico following the ash cloud that closed airports last summer.

The insurer had refused the claim because the ash cloud was not defined as a 'weather event' under the policy’s wording.

Tucker may only have won £1,009 but his win was a victory of principle. Increasingly, insurers are coming under pressure to pay ash cloud compensation to thousands of policyholders whose travel plans were thrown in disarray last year following the arrival of the ash cloud.

When does the FOS step in?

Europ Assistance, the underwriters of Insure & Go’s policy, were sufficiently worried about the judgment to demand that the Financial Ombudsman Service (FOS) test in court whether the ash cloud, should be defined as a weather event.

While the small claims court cannot set legal precedent, legal experts are warning that the case could have ramifications for insurers who refuse to pay out to disgruntled policyholders. The FOS has 600 complaints on its books and legal experts are warning that it could be about to clamp down on insurers.

Berrymans Lace Mawer partner Matthew Ford explains that while the FOS cannot normally force insurers to pay up, it can do so in exceptional circumstances where a large number of consumers are affected. “In normal cases, the ombudsman can’t enforce any of its decisions on businesses. But there is an exception if there is an issue with wider implications … It has to impact on a lot of consumers.”

Pressure is on to pay up

The crux is this: the courts and the FOS will have a different perspective on the issue. While courts will accept policy wordings that in the majority of cases exclude the ash cloud as a weather event, the FOS will look at whether insurers treated customer’s fairly by not drawing their attention to this omission when they bought the policy.

Welch explains that if the FOS is under pressure because if it is weak on policyholder’s demands for compensation, this will reflect badly on the body’s regulatory function.

He believes that it is only a matter of time before the FOS demands that insurers pay up.

“The FOS is going to be motivated in the same way the judge was motivated – not to let insurers get off by way of the small print. The FOS has indicated that they expect insurers to be paying up on these cases,” he says.

Therefore, he adds, Tucker’s win will bolster the arguments of the FOS and insurers will have to face the inevitable. “There will be continuing pressure coming from the FOS for insurer to pay out,” he says.

Insurance giant AXA has already bowed to pressure from policyholders and has confirmed that it has changed its stance and will now pay the majority of claims for ash cloud compensation.

Airlines 'an easier target'

The ruling in the small claims court is likely to attract more complaints to the FOS, giving it more ammunition to flex its regulatory muscles. The saga doesn’t end there, however.

Law firm Kennedy’s partner Dominic Thomas explains that the ruling is likely to mount pressure on airlines and and their insurers. Unlike travel insurers, airlines are bound by strict rules under EU regulations to meet customer’s demand for compensation in the case of disruption to flights. Consequently, most of the airlines are accepting liability for thousands of claims.

“Airlines are an easier target in many ways because it is much easier for individuals to receive compensation from their airlines,” Thomas says.

He adds that the firm is currently pursuing 400 claims against airlines, the majority against Easyjet, Ryanair and British Airways.

Could cost tens of millions

He explains that if travel insurers are hit by the Tucker judgment and forced to pay out, travel insurers could pursue subrogated claims against airlines. “If other travel insurers accept the Tucker judgment, one could expect many more subrogated claims against airlines, so it could be extremely important,” he says.

He predicts that airlines could be facing compensation payouts that run into the tens of millions of pounds. This, Thomas explains, could then place pressure on airline’s insurers.

Next summer may be just around the corner but it look like last year’s ash cloud is set to cast its shadow over insurers for quite some time.