The insurance ombudsman hates exclusion clauses, especially those hidden deep in the small print. Insurers claim they are necessary. Chris Wheal looks at the arguments.

Tony Boorman has a new TV. When he bought it, he was offered a warranty for just £150. It covered everything, he was told, absolutely everything that could possibly go wrong. He was told this, even after he had revealed his job - he is the insurance ombudsman - and in January he published a report on the use of exclusion clauses to avoid paying claims. Warranties played a major part in his report. Tony Boorman has a new TV, but he didn't buy the warranty.

The problem is that most people don't understand insurance to the same degree as the ombudsman - and even Boorman claims to be a novice. They buy a policy and assume that means they are covered. Only when they come to make a claim do they get the small print pointed out to them. Sometimes that small print is as plain as plain can be. Other times it is obscure or vague and insurers group as many things as possible under one exclusion. Either way, the ombudsman hates it.

Year after year the insurance ombudsman - despite several changes of the person at the top - has made clear in his annual report that he does not like insurers relying on exclusion clauses to refuse claims. As Boorman puts it: "We won't uphold the insurer's view because of an exclusion in clause 276(b) part II. It is not reasonable to expect the customer to have spent that amount of time looking that deeply at the policy. These are complicated documents. My staff spend hours deciphering the policy wordings, and they are experts."

Most customers, Boorman suggests, spend longer deciding what factor sun cream to buy when going on holiday than they do on buying their travel insurance. The sales staff probably give more advice about sun cream than they do about insurance too.

Stick to the codes
And there's the rub. The GISC codes on selling insurance make clear, as the ABI code did before it, that the seller of insurance must point out the major exclusions. The GISC private customer code makes clear under section 3.3 that the seller must explain "any significant or unusual restrictions or exclusion" and "any significant conditions or obligations which you must meet". Perhaps even stronger is section 3.2, which makes clear the seller's responsibilities to ensure the buyer has all the cover needed.

"If we cannot match your requirements, we will explain the differences in the product or service that we can offer you. If it is not practical to match all your requirements, we will give you enough information so you can make an informed decision about your insurance," it says.

The GISC commercial code lays down similar requirements covering "any significant or unusual restrictions, exclusions, conditions or obligations" under clause 10. It expects the seller to take into account the insurance knowledge of the buyer when deciding how detailed an explanation to give of other terms and conditions. The GISC spokeswoman interpreted that to mean: "The giant brokers don't have to explain to the insurance buyer of a huge company every single policy detail." Intermediaries selling to small businesses probably do.

Boorman reckons insurers should make sure the sales environment is right. "It's easy to be a bit glib but they should make these products much easier to understand and rely less on a string of exclusions, particularly when you know as an industry that the sales environment is not as good as it should be. The high-street sales environment is clearly not in line with the codes that exist for selling insurance."

Insurers say that exclusions are necessary and reasonable, and that when clearly written the customer must take some responsibility for reading them. Exclusions cut out things where the risks are too high or where including them would mean bumping up premiums for everyone, even if they couldn't benefit.

Norwich Union says: "Exclusions exist in all dealings in life, not just insurance, so that we know what we are buying and our expectations are the same." NU says the cost of all-encompassing policies would outweigh the benefits. It gives garden fences as an example. "It we paid out for damage to fences, the benefit is relatively small compared to the cost." And according to the insurer, the customer should take some responsibility for spotting such exclusions. "Norwich Union, where possible, tries to point out any specific exclusions to customers at the point of sale but it is also the responsibility of the policyholder to check their policy, as with any document."

Laughable exclusions
Boorman disagrees. "That's not where the industry codes place the main responsibility. The seller has to point out exclusions and take reasonable steps to check that the policy is suitable for the customer," he says. "If the insurer is happy to take the premium, then, in most cases, it should pay the claim."

The Research Department stores details of policy wordings and extracted a handful of exclusions for IT2 (see box). They made Boorman laugh. Take the Asda travel policy demand for receipts for everything worth over £50. "If I say we would never uphold that, it's a dangerous thing to say, but we normally never require people to provide receipts for standard household goods and clothes. It would be an unreasonable and unfair term," he says. Boorman points out that shoes and trousers regularly cost more than £50 and he, for one, doesn't hoard his receipts.

The ombudsman's annual report has regularly condemned travel insurers for trying to exclude alcohol-related accidents. Past reports have referred, for example, to policies sold to young people going on holidays advertised as, and notorious for being, drunken weeks away. But Boorman says the exclusion is unreasonable for anyone going on holiday. "The reason we repeat this is that neither myself nor my predecessors could resist reporting that we sometimes had a drink when on holiday," he says.

The trouble is, Boorman only deals with complaints. He is acutely aware that it is worthwhile for insurers to include these exclusions and to maintain the line that they were clearly written in the policy and the customer should have spotted them. Most people presented with that argument would cave in and accept that their claim has been denied.

"As soon as the ombudsman gets a mention the insurers back down," Boorman says. "But they leave these clauses in for the people who won't complain."

Interesting exclusions

  • Breakage of or damage to fragile articles: audio, video or computer equipment (unless the breakage or damage is caused by a malicious or criminal act).

    Taken from the personal belongings section of Direct Travel Group's Travel Policy

  • Any audio equipment, cassettes, records or compact discs.

    An exclusion under the personal belongings section of Chaucer's motor policy

  • Loss or damage to the car as a result of someone taking it by fraud or trickery.

    An exclusion taken from Highways motor policy

  • In respect of pedal cycles, loss or damage is excluded:
    ii. by theft unless the pedal cycle is securely locked to an immovable object.
    iii. by theft of any pedal cycle if left unattended outside a building for more than 12 consecutive hours.

    Taken from the personal effects and valuables section of Link's home insurance policy

  • Theft, loss or damage to dentures, bridgework, corneal lenses, spectacles, sunglasses, artificial limbs or hearing aids.

    An exclusion taken from Asda's Travel policy

  • Any item set or pair worth more than £50 which you haven't got an original receipt or insurance valuation before the loss.

    An exclusion taken from Asda's Travel policy

  • Any claim resulting from you being under the influence of or in connection with the use of alcohol or drugs.

    Source: The Research Department

    The grey area
    One burglary while a house was empty for a weekend threw up at least two policy exclusions. The villain stole the family passports, and the household insurer, then Eagle Star, and loss adjuster Davies claimed passports were not covered under the policy as they were documents. They would have been covered outside the house on a separate annual travel policy.

    A quick call to the ombudsman by the broker, Sutton Winson, led to the passports - plus the fees for getting them rushed through the Post Office - being paid in full. Eagle Star, however, insists it still routinely excludes passports.

    The burglar also took the spare car keys, though not the car. These were excluded from both the household policy and the CGU Planet motor policy. CGU also insisted that, once informed the keys had been stolen, it would no longer pay for the car if the stolen keys were used to steal the car. It cost £250 to get the lock barrels changed.

    Sutton Winson pointed out that a NU motor policy for £150 a year more would have covered the keys being stolen from the house and paid for the lock replacements. With the CGU/NU merger and the demise of Planet, everything should be safer, if more expensive, in the future.

    Source: The Research Department