the risk of contracting on unfair terms as an insurer
Published in issue 125 of the Journal of the British Insurance Law Association
Consumer insurance: the risks of contracting on unfair terms
by Alice Carse and Alison Padfield
Introduction
The Unfair Terms in Consumer Contracts Regulations were first enacted in 1994, in
order to implement Council Directive 93/13/EEC on unfair terms in consumer contracts
(“the Directive”). After five years, the Regulations were replaced by the Unfair Terms in
Consumer Contracts Regulations 1999 (“the Regulations”). Although the Regulations
have given rise to little in the way of reported cases in the insurance context, the Financial
Services Authority has used its enforcement powers under the Regulations to secure
undertakings in relation to unfair terms from a number of UK firms in the insurance
sector. These include AXA Insurance UK plc, National House-Building Council, Legal &
General Insurance and RBS Insurance.
This article considers the current state of the law in relation to terms in contracts between
consumers and insurers or brokers or other intermediaries which are found to be unfair.
It discusses the impact on Bankers Insurance Co Ltd v South1 of the recent decision of the
European Court of Justice (“ECJ”) in Case C-618/10 Banco Español de Crédito SA v
Camino2 and the approach of the Financial Services Authority (“FSA”) to enforcement of
the Regulations in relation to the insurance market.
The Directive and the Regulations
The Directive is a consumer protection measure which applies to unfair terms in contracts
concluded between sellers or suppliers and consumers where those terms are standard (or,
in the words of the Directive and the Regulations, “have not been individually
negotiated”).3 The earlier domestic legislation on unfair contract terms – the Unfair
Contract Terms Act 1977 – excludes contracts of insurance from its scope, thereby
increasing the importance in the consumer context of the 1999 Regulations. The
Directive and Regulations require that contract terms be in “plain intelligible language”.
Where there is doubt about the meaning of a term, the interpretation most favourable to
the consumer must prevail.4
This reflects the English principle of interpretation of contracts against the party putting
forward, or benefitting from, the wording (commonly denoted by the Latin phrase “contra
proferentem”), and is therefore not of great significance. Of potentially greater significance
is Article 6(1) of the Directive, which sets out the consequences of a term being found to
be unfair, as follows:
“Member States shall lay down that unfair terms used in a contract concluded with
a consumer by a seller or supplier shall, as provided for under their national law, not
be binding on the consumer and that the contract shall continue to bind the parties
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Published in issue 125 of the Journal of the British Insurance Law Association
upon those terms if it is capable of continuing in existence without the unfair term.”
This is implemented in the United Kingdom by Regulation 8, “Effect of unfair term”,
which provides as follows:
“(1) An unfair term in a contract concluded with a consumer by a seller or
supplier shall not be binding on the consumer.
(2) The contract shall continue to bind the parties if it is capable of
continuing in existence without the unfair term.”
A term is unfair if, contrary to the requirement of good faith (which is not defined), it
causes a significant imbalance in the parties’ rights and obligations arising under the
contract, to the detriment of the consumer.5
Bankers Insurance Co Ltd v South
Neither Article 6(1) nor Regulation 8 gives any hint that a national court is expected or
even permitted to modify an unfair term in a contract between a consumer and a seller
or supplier. However, that was the approach taken by Mr. Justice Buckley in 2003 in
Bankers Insurance Co Ltd v South6
, a decision in relation to the 1994 Regulations the
reasoning of which is equally applicable to the 1999 Regulations. The insured’s travel
insurance policy stated that the payment of claims was dependent on him observing
certain conditions. These included requirements to report in writing to the insurers, as
soon as reasonably possible, full details of any incidents which might result in a claim
under the policy and to forward to the insurers immediately upon receipt every writ,
summons, legal process or other communication in connection with the claim.
The judge construed these requirements, with which the insured had failed to comply, as
conditions precedent. This meant that the consequence of the insured having failed to
comply with them was that insurers were not obliged to pay his claim even if his failure
had caused them no prejudice.
Having reached the conclusion that the requirements were conditions precedent, the
judge decided that the fact that they entitled the insurers not to pay the claim even if they
had suffered no prejudice meant that they caused a significant imbalance in the parties’
obligations to the insured’s detriment. They were accordingly unfair contract terms within
the meaning of the Regulations. He then considered the consequences of this finding, and
decided to hold that it was “only that part of the clause denying recovery whatever the
consequences of the breach, which is not binding on the insured”. In so doing, the judge
recognised, at least implicitly, that this was inconsistent with the strict wording of the
Regulations, saying: “I regard this as consistent with the spirit, at least” of the Regulations.
The judge went on to hold that the breaches of the conditions precedent by the insured
were “manifestly serious” and had caused the insurer significant prejudice. On this basis
the insurers were entitled to rely on the insured’s breach of the conditions precedent in
order to deny liability under the policy.
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Published in issue 125 of the Journal of the British Insurance Law Association
Case C-618/10 Banco Español de Crédito SA v Camino
Banco Español de Crédito SA v Camino concerned a loan agreement entered into by a
borrower with a bank. The rate of interest on late payments was 29% and the term of the
loan was seven years. Early into the second year of the term, the borrower had failed to
make seven of the monthly repayments. The bank made an application to the relevant
Spanish court for repayment of the outstanding sum, contractual interest (including
interest for late payment) and costs. The court held that the term was unfair and void, but
amended it so that interest on late payments was fixed at 19%.
One of the questions put to the ECJ was whether Article 6(1) of the Directive precluded
legislation of a member state which allowed a national court to revise the content of a
term which it found to be unfair term.
The ECJ answered this question in the affirmative. In reaching its conclusion, the ECJ
relied on the wording of Article 6(1), which expressly required member states to provide
that unfair contract terms “shall not be binding on the consumer”, and on the objective
and overall scheme of the Directive. In relation to the latter, the long term objective of the
Directive is to prevent the use of unfair terms in contracts concluded between consumers
and sellers or suppliers. The ECJ was concerned to preserve the “dissuasive effect” of the
Directive. It agreed with Advocate General Verica Trstenjak, who had described Article 6(1)
as having a “deterrent effect” on sellers or suppliers, and effectively raising the stakes for
sellers or suppliers who gambled on including unfair terms in their contracts.7
Advocate General Trstenjak had said that if national courts were able to modify, rather than
declaring void, unfair terms, the risks to a seller or supplier from the use of unfair terms
in commercial practices would be reduced considerably. In this way, if national courts were
permitted to revise the content of unfair contractual terms, sellers and suppliers would be
tempted to continue to use those terms. Even if they were declared to be invalid, the
national court could revise the unfair terms in such a way as to safeguard the interests of
sellers and suppliers. Not only would this compromise the attainment of the long-term
objective of preventing the use of unfair terms in consumer contracts by sellers or
suppliers, it would not ensure such efficient protection of consumers as the refusal to apply,
in their entirety, terms found to be unfair.
The implications of the Camino ruling for English law are clear: terms found to be unfair
cannot be modified by the courts and must be disregarded in their entirety. The approach
taken in Bankers Insurance Co Ltd v South to the construction of the Regulations is, in the
light of the interpretation of the Directive by the ECJ, incorrect as a matter of law and
will not be followed.
The impact of the ruling in practice is less certain. It is uncommon for the Regulations
to be relied on in litigation involving insurance policies, and reference is rarely, if ever,
made to Bankers Insurance Co Ltd v South. However, the ECJ also considered an aspect of
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Spanish procedural law, and held that the Directive precluded procedural arrangements in
national courts which did not allow the court to assess of its own motion at the outset or
at any time the fairness of a term. The ECJ also referred to its own earlier judgment in
Case C-473/00 Cofidis8 in which it decided that, in order for the Directive to provide
effective protection for consumers:9
“The protection which the Directive confers on consumers … extends to cases
in which a consumer who has concluded with a seller or supplier a contract
containing an unfair term fails to raise the unfair nature of the term, whether
because he is unaware of his rights or because he is deterred from enforcing them
on account of the costs which judicial proceedings would involve.”
It seems, therefore, that national courts may be obliged in some circumstances to assess of
their own motion the fairness of a contractual term falling within the scope of the
Directive. The answer to the question posed in the Camino case was put in negative terms
– the Directive precludes legislation which does not allow a national court to assess of its
own motion whether a term in a consumer contract is unfair. However, the judgments in
Camino and Cofidis together at least arguably give rise to the intriguing prospect of courts
raising, of their own motion, the question of whether a term in a consumer insurance
contract is unfair within the meaning of the Regulations. They do this at present in cases
which appear to involve illegality.
Wider implications for insurers and intermediaries
Since 2001, the Financial Services Authority (“FSA”) has had power in certain
circumstances to take action against the firms that it regulates to enforce the Regulations.
The firms concerned include insurers and intermediaries and the FSA’s powers extend
to general insurance and life assurance. In 2007, the FSA published guidance in the form
of the Unfair Contract Terms Regulatory Guide (“UNFCOG”). This guide sets out the
FSA’s policy on how it will use its powers under the Regulations. It was updated in
August 2012.
Paragraph 1.3.6 of UNFCOG states that where a court finds a term to be unfair in
litigation between a seller or supplier and a consumer, the seller or supplier will “have to
stop relying on the unfair term in existing contracts governed by the Regulations”. Not
only is this entirely consistent with the decision in Camino, but it means that a finding in
litigation brought by one party will be applied by the FSA to all current contracts which
include that term. The finding will seemingly not be limited to contracts entered into after
the term has been found to be unfair. There is no scope for consideration of the unfairness
of the term in a different contract involving a different consumer and her particular
circumstances.To put it shortly, a finding of unfairness is a knockout blow to a contractual
term in all of the consumer contracts in which a particular seller or supplier (including an
insurer or intermediary) deploys it.
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UNFCOG also focuses on the language used in the terms of contracts concluded between
a consumer and a seller or supplier. Under Regulation 6(2), terms written in plain,
intelligible language cannot be reviewed for fairness within the meaning of the Regulations
if the terms relate to either the definition of the main subject matter of the contract or the
adequacy of the price or remuneration, as against the goods or services supplied in exchange.
A recital to the Directive makes plain that, in insurance contracts, these include terms which
clearly define or circumscribe the insured risk and the insurer’s liability, as those restrictions
are taken into account in calculating the premium paid by the consumer. Terms which are
not written in plain, intelligible language do not fall within the exemption. Under
Regulation 13, the FSA has the power to challenge sellers or suppliers using terms which it
regards as unfair. It is clear from the FSA’s approach, which can be seen from its website
publications including its “Library” in relation to unfair contract terms, that there is a
particular focus on the use of language which is neither plain nor intelligible.
Examples of terms which the FSA has challenged as being unfair and which have
subsequently been amended are on the FSA website. For example, a home insurance
policy contained the following term:
“The buildings are insured against loss or damage caused by … subsidence or heave of the
site on which the buildings standThey discuss the recent decision of the European Court of
Justice in Banco Español de Crédito SA v Camino and the approach of the Financial Services
Authority to enforcement of the Unfair Terms in Consumer Contracts Regulations 1999. This
is also a theme in Alison’s book which is reviewed in this issue (see below). or landslip
We will not pay for loss or damage …[c]aused by settlement, shrinkage or expansion”
The terms “subsidence”, “heave”, “landslip”, and “settlement” were not defined in the
policy. The FSA considered that this term was not drafted in plain and intelligible
language because “settlement, shrinkage or expansion” was not defined in the policy. It
believed that the possible definition of these words was very broad and that the average
consumer would have difficulties in determining whether she was insured under the
policy. Nor did this term clearly define the insurer’s liability. As a result of the FSA’s
challenge, the original term was deleted from all contracts of insurance in which it
appeared. It was replaced with a term which provided definitions of the terms used and
set out clearly the extent of the insurer’s liability.
Similarly, the FSA challenged a term in a 2011 home insurance policy which was similar
to one of the terms at issue in Bankers Insurance Ltd v South. This particular term stated,
under the heading “What you must do when making your claim”, that the insured was
required to give the insurer, at the insured’s reasonable expense, all the information, reports,
certified plans, specification information and assistance that it may need in progressing the
claim. A similar clause in a 2009 policy relation to what the insured must do after making
a claim required the provision of the same information, but was to be provided at the
insured’s expense, without the qualification that the expense must be “reasonable”.
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The FSA considered that these terms had the potential to cause significant imbalance to
the detriment of the consumer by being an unreasonable and excessive requirement for
consumers to comply with. They were therefore unfair. The insertion of “reasonable” into
the 2011 policy wording did not in its view redress any potential imbalance, because what
was reasonable might not be clear to the average consumer. Following the FSA’s challenge
the term was revised to clarify what the insured might be asked to provide. It also stated
that the insurer would only ask for information relevant to the insured’s claim and would
pay for any reasonable expenses of providing the insurer with the information.
Nowadays consumers increasingly purchase their insurance policy with the assistance of
price comparison websites. Significantly the Regulations apply not only to the insurer
from whom the consumer purchases her insurance, but also to the providers of such
websites. These providers are precluded from limiting their liability for potentially unfair
circumstances. These might include a failure to highlight unusual or onerous terms in a
contract of insurance, a failure to accurately reflect a quotation for insurance or a failure
to provide a true comparison of available insurance policies. Providers should also ensure
that consumers can properly understand their liability.
Final thoughts
The decision in Camino puts beyond doubt that the powers of courts under the
Regulations are limited: unfair terms in consumer contracts, including policies of
insurance and agreements with insurance brokers, cannot be revised or modified, but only
declared unenforceable against the consumer. Insurers and intermediaries, and those
advising them, should continue to examine policies for any potential unfairness and pay
close attention to the FSA’s guidance. Camino underlines the fact that the stakes are high,
and getting it wrong could be costly.
Alice Carse and Alison Padfield are barristers practising at Devereux Chambers. Alison
Padfield is the author of Insurance Claims (3rd edition, 2012, Bloomsbury Professional). It
is reviewed at page 89 of this issue of the BILA Journal.
Endnotes
1 [2003] EWHC 380 (QB), [2004] Lloyd’s Rep IR 1.
2 Judgment of the European Court of Justice of 14 June 2012.
3 Article 3(1) and Regulation 5(1).
4 Article 5 and Regulation 7.
5 Article 3(1) and Regulation 5(1).
6 See note 1 above.
7 See the judgment, paragraphs 66-70, and Advocate General Trstenjak’s Opinion of 14 February
2012, paragraphs 86 to 89
