The publication of a parliamentary bill could do away with a law that punishes insurance claimants for honest mistakes

An archaic law that means thousands of insurance claims each year are unfairly rejected by insurers could be overturned following the imminent publication of a parliamentary bill.

Claims made on motor, travel, household and health policies are routinely turned down by some insurance companies under an anomaly in the law, which dates back to 1906 and puts a “duty of disclosure” on the policyholder.

This means policyholders are expected to disclose not only things they have been asked for, such as known medical conditions, but also things that they haven’t which could later turn out to be significant. So, someone who is diagnosed with throat cancer, for example, could see their health insurance claim rejected if they had failed to mention a past visit to the doctor for a sore throat when they applied for the policy – even when the doctor prescribed nothing more than a few days’ rest, and the question was not asked by the insurer.

Claims are also turned down when householders accidentally get information wrong. A common example is when applying for household insurance, where the question “Are the locks British ’safety-standard’, a five-lever mortice lock conforming to BS3621, or a cylinder rim deadlock?” is commonly asked. Not surprisingly – especially since a householder would often need to take the lock out of the door to find out – it is often answered wrongly. Yet, if a householder claims on their policy, even for something unrelated to locks, such as a fire, they could find their claim rejected.

Consumer groups, health charities and many insurance companies have long called for a change to the law, saying that it is unclear and unfair.

“At the moment, the obligation is on you, the consumer, to disclose all the facts that might have an effect – decisive or not – on the mind of a prudent underwriter in assessing the risk,” says Peter Tyldesley, a lecturer at the University of Manchester and insurance law specialist. “This is setting consumers up to fail.”

After years of consultation on the issue, on 15 December the Law Commission will present a draft bill to parliament that should spell the beginning of the end to these often disastrous discrepancies in the law.

The Observer understands that the bill will propose the law is changed to abolish the duty of disclosure – volunteering information without being asked – to providing only the information asked for by insurers. It will also propose changes to the way insurance companies deal with policyholders when they get something wrong. So, for example, if a policyholder makes an innocent mistake, they will have their claim paid in full and if they are “careless”, rather than reckless, they should get a proportionate payout. If, for example, they have only paid half the premium which would have been charged had the underwriter known the true facts, they may receive a payout of only half the amount of their loss.

“The issues of non-disclosure and misrepresentation have been running for many years,” says Tamara Goriely of the Law Commission. “We think the law needs to be changed so that it is clear, accessible and easy to understand.”

At the moment, around 1,000 insurance cases a year involving non-disclosure end up with the Financial Ombudsman Service, which often then rules in a policyholder’s favour. The vast majority of these claims are for large amounts of money, says the Law Commission, often involving people going through a particularly vulnerable time such as dealing with a cancer or MS diagnosis.

“We’ve always had a broader view of disclosure than the courts,” says an FOS spokesman. “If the insurer hasn’t been specific enough in its questions, for example, we might rule in the consumer’s favour.”

Marketing consultant Inga McVicar had to turn to the FOS in 2007 when she was diagnosed with ovarian cancer but found herself unable to claim on her critical illness insurance policy. Her insurance company turned down her claim over a discrepancy in her answers on the initial form, which was due to an error by her financial adviser.

As soon as she realised the error, says McVicar, 33, she told her insurer but it treated the policy as if it had never existed. “What shocked me more was the horrific way my insurance company dealt with me over it,” she says. “They branded me a liar, failed to return my calls and, to add insult to injury, in a letter to me referred to my diagnosis as breast cancer not ovarian cancer.”

By February 2008, McVicar had to return to work as she is self-employed, despite the fact she was undergoing chemotherapy. “To add to this, the anomaly in my policy the insurer was referring to didn’t remotely relate to my diagnosis and it turns out even if I had answered that one question correctly I would have been covered, albeit with increased premiums,” she says.

Macmillan Cancer Support provided Inga with a grant to help with her basic needs while she took her case to the Financial Ombudsman Service. The ombudsman ruled in her favour, agreeing that it was a genuine mistake. She got a payout of £46,000 and is now in remission from the cancer.

Many insurers do not apply the letter of the law, taking a more reasonable approach to claims. However, a minority do apply it rigorously.

A spokesman for the Association of British Insurers, said: “We don’t believe there is any need for intervention as far as non-disclosure is concerned. Where there are areas of concern, we believe these have been addressed. We have introduced a code of practice for critical illness insurance and the number of complaints has reduced significantly.”

However, progress has not been made in other areas, says Goriely. “In household, motor and travel, particularly where the claim relates to a medical condition, there is no evidence that [disputes over non-disclosure] have dropped off.”

“We think it’s ridiculous that consumer insurance is based on an archaic law from 1906,” says Phil Jones, public affairs officer at Which?

“The Law Commission report is an excellent opportunity to address this issue so we urge all political parties to support the bill.”

■ Have you had a claim refused for non-disclosure, and did you resolve the issue? Would you support a change in the law? Email us at cash@observer.co.uk or write to us at Cash, The Observer, Kings Place, 90 York Way, London, N1 9GU.

Maurice Henderson has loyally stayed with Royal Sun Alliance since 1951. His reward? Premiums four times as high as for a new customer

A Leicester teacher is warning those with elderly relatives to make sure they are not being overcharged by insurance companies after her father was quoted almost £650 – four time more than he needed to pay – to insure his modest Derbyshire home.

Elaine Henderson contacted Money after working out that 83-year-old Maurice has paid around £3,500 more than necessary to Royal Sun Alliance (RSA) over the past two decades because he loyally renewed his buildings and contents insurance each year.

When she queried his most recent renewal quote of £648 – for a two-bed bungalow in Clowne, near Chesterfield – she found that RSA’s own online subsidiary, More Than, was offering basic cover, on the same home, for just £135. Adding in additional cover took the price to £161.58 – almost exactly a quarter of what he was being charged.

The case, once again, demonstrates why it is so important to periodically shop around at renewal time. It also mirrors the experience of many other older Money readers who have made dramatic savings by switching supplier for the first time in a decade.

“I happened to be visiting him at the time his renewal came through and he casually asked whether he thought the price was reasonable. When I looked at it I couldn’t believe he was paying so much,” says Elaine, who is a special needs primary school teacher.

When she delved a little further she found that her father, a retired head teacher, had simply renewed it each year, believing that sticking with RSA was the right thing to do.

Incredibly, it also emerged that Mr Henderson has been with the same insurance company since 1951, when he bought his first house. He had taken out the policy after a recommendation by his original mortgage provider, the Halifax, and has never switched. Believing that the RSA had his best interests at heart, he says, he was happy to renew every year until his daughter’s intervention. A look at the insurance schedule shows his premium was actually £865 a year (he lives alone in a two-bed bungalow) which, after a discount, was reduced to £648.

The maximum amount the policy would have paid out for all his belongings was just £41,374 – which may not have even been enough had a fire gutted his home. The maximum, if he had to move out while it was repaired following, say a flood, was just £8,275 – hardly enough to hire a similar property for a year. “When I rang RSA to find out why my father was paying so much, and to say that he would not be renewing, he was immediately offered a further 20%, which, to me, is an admission of overcharging, but it would have still been far too high,” says Elaine.

Mr Henderson keeps a careful record of his payments for various policies. What they show are small price rises until 1990, when they began to increase dramatically. Elaine says that a rough calculation shows that since then he has probably overpaid by £3,500, an amount she has since asked RSA to repay as a “gesture of goodwill”.

“As far as I am concerned it is sharp practice. The premium has simply been raised each year without any regard as to the risk. I would say to anyone else with elderly parents/relatives to take a look at what they are paying because to me this is outrageous.

“These companies are taking advantage of their oldest, and probably most loyal customers, and are milking them. Nothing less.”

A spokesman for RSA was this week maintaining that the policy was “correctly priced”. “It dates back to the 1950s, at this time the method for calculating premiums was far less sophisticated than it is now,” he says. “The new quote referred to in Mr Henderson’s complaint, is for a completely different product with different levels of cover and, as such, comparing the two prices is like comparing apples with pears.

“For example, the original policy includes cover for accidental damage and personal possessions outside the home, whereas the new quote does not. Both of these would increase the premium on the new policy quote if included.

“Furthermore, like many insurers, we offer introductory discounts to attract new business and the new quote benefits from this.”

The company said that, having reviewed the case, it would “not be offering any refund”.

Meanwhile, Mr Henderson remains sanguine about the affair.

“I should have known better, I suppose, but I trusted the company and assumed, wrongly, as it turned out, that they would look after their loyal customers,” he says. “In 58 years I only made three claims, and they were for tiny amounts – the last was for around £20, I think, so they’ve done all right out of me.”