For many years, a number of people within the industry suggested it was not possible to mis-sell an insurance contract. However, we all know all too well that payment protection insurance (PPI) has become the most mis-sold product in history, and that billions of pounds in compensation has been paid to disadvantaged customers.

A recent ruling from the Financial Ombudsman Service (FOS) also illustrates how it is possible to disadvantage customers when selling other forms of insurance. The case of Ms L concerns short-term income protection, which many people see as a possible substitute for PPI.

Ms L was advised to take out the policy by an HSBC adviser back in 2009. Unlike PPI, the policy did not provide unemployment cover, however it did promise to pay 12 months income (after a four-week deferred period) if the client was unable to work due to accident or sickness.

Seven years later, Ms L complained to the bank that it was inappropriate to have advised her to take out the policy, given that she was entitled to six months full pay from her employer in the event of sickness. When HSBC rejected the complaint, Ms L referred the matter to the Financial Ombudsman Service (FOS).

When presenting its case to the FOS, HSBC argued that the policy was still suitable, as were she to have been off sick for more than six months, the insurance would have provided valuable extra protection.

However, FOS ombudsman David Poley’s judgement suggested that the adviser had never enquired about what sickness benefits Ms L enjoyed at work. There is reference in the adjudication to a chart in the client’s suitability report which suggests that she did not have any sick pay arrangement at work, and to other information in the suitability report which suggested she had four weeks of full sickness benefit from her employer followed by over two years of half benefit. To complicate the situation further, HSBC claimed to have been told by Ms L during the advice process that she had one month’s sick pay from work, but during the FOS investigations she denied having said this.

Mr Poley ruled:

“I can’t see that the adviser ever asked Ms L about her employer’s sickness benefit.

“There is no reference to it in the fact find. I would have expected that this would be of paramount important in deciding what type and level of benefit she needed.

“My conclusion is that the adviser didn’t bother to find out this information.

“While recognising that the policy would have paid full benefit to Miss L, the fact is that it was unnecessary for any incapacity which lasted for less than six months because she would have no need for a replacement income during this period. The only need it met was therefore for periods of incapacity of between six and twelve months because this was the only period for which it would have been compensating Miss L for a loss of income.

“I think the adviser should have found out about Miss L’s sickness benefit from her employer before deciding what policy to recommend. If he had done so, I doubt that he would still have chosen to recommend this policy.

“I consider that the adviser’s failure to take into account Ms L’s sickness benefit from her employer means this policy was mis-sold.”

HSBC was ordered to refund all premiums paid by Ms L, plus interest at 8%. The bank attempted to argue that it should only be required to refund the difference between the amount she paid in premiums and the amount that would have been paid under an alternative policy, but Mr Poley rejected this assertion, commenting that HSBC had failed to demonstrate what such an “alternative policy” would have looked like.

The information shown in this article was correct at the time of publication. Articles are not routinely reviewed and as such are not updated. Please be aware the facts, circumstances or legal position may change after publication of the article.