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.

The steep rise in insurance costs since 2007 has left homeowners unable to get cover or move house

Flood victims continue to face spiralling costs for home insurance as excesses for flood cover rise to levels that are making their properties virtually impossible to sell.

Many have invested thousands to protect their homes from flooding, but these efforts are rarely rewarded by insurers.

“People are coming to us with huge premiums and flood excesses of up to £30,000, which is as good as having no insurance at all and makes their property virtually worthless,” says Mary Dhonau, chief executive of the National Flood Forum, a charity that advises flood victims. “The problem has got steadily worse over the past year and we are now being overwhelmed by calls from homeowners who have spent a huge amount protecting their property, but are still being charged ridiculous premiums or refused cover altogether.”

Chris Wreghitt’s Axa home insurance premium leapt to more than three times what it had been when his Worcestershire property was flooded in 2007.

“Prior to the flood, I was paying just under £1,000 a year, and when I came to renew in 2008 they put the premium up to £1,638,” he says. “But this year they wanted to increase it to £3,747.”

There was a big excess too, though Wreghitt negotiated it down. “The first time I renewed, they wanted to impose a flood excess of £20,000, but I complained and they cut that to £10,000.”

However, according to Ray Boulger, senior technical manager with mortgage broker John Charcol, even a flood excess of £10,000 can present serious problems if you want to sell.

“Any lender would be nervous if the flood excess was above £5,000, and it could be very difficult for a potential buyer to get a mortgage,” he says. “This could make the property difficult to sell or it would have to be sold at a significantly lower price.”

A spokeswoman for Axa said the company now imposed a maximum flood excess of £10,000, adding: “Mr Wreghitt initially took out his home insurance policy at a considerably discounted introductory price. Following the floods of 2007, the premium was up-weighted to reflect the risk of future flooding, as well as the very substantial six-figure claim that had been settled.

“In 2009, the premium was re-assessed to bring it in line with our normal pricing criteria and the value of his home and contents.”

By 2008 559,000 homes in England and Wales were at serious risk of flooding, according to the Environment Agency, up from 517,000 in 2006. This increase looks set to continue as the agency’s techniques for predicting which areas will flood improve.

“Our mapping processes for identifying flood risk are getting better and more properties are being designated as at risk of flooding,” said a spokesman for the Environment Agency.

Since the floods in 2007, the Environment Agency has invested heavily in flood defences and has set up an early warning service which uses text messages to give those at risk advance notice of an impending flood. But the agency is disappointed that these steps, and those taken by customers, are rarely reflected in lower insurance charges.

“Only a handful of insurers are rewarding people who make their properties safer or sign up to our flood warning service with lower premiums and lower excesses,” the spokesman for the Environment Agency said. “We would urge insurers to take account of floodproofing work and people signing up to our warning service.”

Pensioner Sue Jenkins Clarke thought she would have no problem selling her Cheltenham home after she borrowed £25,0000 to have the garden flat “tanked” to protect it from flooding (the foundations are made waterproof so that moisture cannot rise from the water table), after water had seeped through the floor during the floods of 2007. But in September, a few days before contracts were due to be exchanged, her buyers pulled out.

“They said it was because they couldn’t get contents insurance from anyone because of the flooding,” she says. “I couldn’t understand it because I still had contents cover and the money I had spent meant the water seepage problem couldn’t happen again.”

When Jenkins Clarke checked with her insurer, they told her they were happy to continue providing cover, but would take the same view as other companies when it came to a new owner.

“It seemed illogical that I could get cover but my buyer couldn’t,” she says. “It felt as if there was no way to get out of here and I began to feel angry.”

Fortunately, the National Flood Forum was able to point Jenkins Clarke to a specialist broker who could arrange the necessary cover, but she has yet to find a buyer.

Insurance broker Neil Cook, of Kay International, which specialises in flood insurance, says it can be worth looking beyond the big-name firms when it comes to flood cover.

“Some big insurers had their fingers burnt in 2007 and have become extremely cautious,” he says. “But specialist brokers use smaller underwriters that were not so severely affected and are still willing to look at individual cases and levels of risk rather than imposing a blanket policy.”

In 2002 the insurance industry agreed with the government to continue providing cover to existing customers whose homes were designated at significant risk of flooding and, crucially for people selling their homes, in 2008 this commitment was extended to cover new owners of affected properties. So Jenkins Clarke’s insurer, for example, should have covered the new buyer. However, there are no limits on the premiums or excesses that can be asked of a potential buyer, as Michael McDonald discovered when he came to sell a cottage which had been affected by flooding last January.

When McDonald’s wife inherited the Lancashire property in March, there appeared to be no problems with the insurance. Aviva, the insurer, had only increased the premium from £696 a year to £840 after the flood claim, and the Environment Agency had told McDonald the flood was a one-off occurrence.

But last month, just days before completion, the buyer for the cottage threatened to pull out because Aviva wanted to increase the annual premium to £2,800 and impose a flood excess of £8,500.

“The buyer said these charges were like taking out a second mortgage and he couldn’t afford them,” says McDonald. “I told him I’d find him cheaper insurance and tried the internet comparison sites, but they all rejected the property because it had been flooded.”

Kay International came to McDonald’s rescue. “They managed to get the new owner a home insurance premium of just £750 a year with an excess of £2,500,” he says.

An Aviva spokeswoman said: “The property flooded in January 2008 and we paid out £52,000 in claims costs. The property has had a sizeable flood claim and therefore in our view, is at very high risk of flooding. Only a very small percentage of our customers who have been flooded will receive an increased excess, however it is likely that customers who have made a large flood claim will attract an increased excess.”

Malcolm Tarling, of the Association of British Insurers, says anyone having problems getting flood cover should use a broker to help them get the best deal. But he insists that insurers have good reasons for exercising caution when it comes to flood insurance.

“The average flood claim in some parts of the country can be up to £45,000 and in the summer of 2007 insurers paid out £3bn, the equivalent of four years’ claims, in a period of just six weeks,” he says.

“In addition, there is scientific evidence that severe weather incidents are becoming more likely and more severe, and insurers have to take this into account.”

What to do if you have been flooded

• Use a broker to find the best insurance deal – the National Flood Forum • Do not cancel your insurance policy until you have another in place

• Sign up for the Environment Agency early free flood warning service

• Tell your insurer about any steps you have taken to protect your home from flooding and ask for a reduction in premium or excess

• If you think your insurer is breaking the agreement between industry and government, contact the Association of British Insurers or the Financial Services Ombudsman