Introduction

As a qualifying body, we, the Financial Services Authority (the FSA), can challenge firms
using terms that we view as unfair under the Unfair Terms in Consumer Contracts
Regulations 1999 (the Regulations). So we review contract terms referred to us by
consumers, enforcement bodies and consumer organisations. This has led to Direct Line
Insurance Company Limited, Churchill Insurance Limited and UK Insurance Limited (‘the
RBS Insurance firms’) undertaking for all the pet insurance policies they underwrite to not
use the terms identified in the pet insurance policy of Direct Line, which we consider may be
unfair.

We have a duty under the Regulations to notify the Office of Fair Trading (OFT) of the
undertakings we receive. The OFT has a duty to publish details of these undertakings, which
it puts on its Consumer Regulation Website. We also publish the undertakings on our
website. Both publications will name the firm and identify the specific term and the part of
the Regulations which relate to the term’s fairness.

Even if firms have not given an undertaking or been subject to a court decision under the
Regulations, they should remain alert to undertakings or court decisions concerning other
firms as part of their risk management. These will be of potential value in showing the likely
attitude of the courts, the FSA, the OFT or other qualifying bodies to similar terms or terms
with a similar effect. Ultimately, only a court can determine the fairness of a term and,
therefore, we do not recommend terms that have been revised by a firm to address our
concerns as being definitely fair. We cannot approve terms for the purposes of the
Regulations; it is for firms to assess the fairness of their terms and conditions under the
Regulations and in the context of the product or service in question. It is important to bear in
mind that wording that is fair in one particular agreement is not necessarily fair in another.
When we accept an undertaking given to us from a firm to revise a term, this means that, on
the evidence available at the time, we consider the term to be improved enough so that further
regulatory action is not required.

RBS Insurance firms undertaking in relation to Direct Line and all other pet insurance
policies which they underwrite


Name of
business

Direct Line Insurance Company
Limited; Churchill Insurance
Limited and U K Insurance
Limited

Lead
organisation

Trading
sector

Insurance
Contract
identifier

Direct Line Pet Insurance – your
essential policy cover

‘General Exclusion 14
…
We will not pay for the following:
…
14. Any costs that we do not consider reasonable or necessary. To help us determine what is
reasonable or necessary we may seek guidance from other veterinary practices or independent
loss adjusters and we will only pay for costs that we consider reasonable or necessary.’


‘Section 1, Vet fees

What is not covered
We will not cover

…
o any diagnostic laboratory fees, such as (but not limited to) histopathology that originate
outside your usual vet practice that we do not consider to be within a reasonable and
customary amount

o any fees for treatment or complementary therapy that we do not consider reasonable or
necessary

Special conditions relating to claims under this section

…
o Where we regard the vet fees charged are greater than the fees usually charged by a
general or referral practice in a similar area we reserve the right to only pay what we
consider to be reasonable or necessary.’

Application of the Regulations (Schedule 2 paragraph or as indicated)

Under the Regulations, we are generally permitted to assess for fairness terms in standard
consumer contracts, but not those that relate to the definition of the main subject matter of the
contract or to the adequacy of the price or remuneration as against the goods or services
supplied. However, there is an important carve out, under the Regulations, in that if such terms
are not in plain and intelligible language then they may be assessed to determine if they are
likely to be unfair.

Clauses 14 and Section 1 (Vet Fees) (the ‘Original Terms’) are clearly exclusion clauses in an
insurance policy. Exclusion clauses limit the risks that the insurer is prepared to insure, and
therefore may ‘relate to the definition of the main subject matter of the contract’. The Council
Directive 93/13/EEC (which was implemented in the UK by the Regulations), has a preamble
that has been used by the courts in the UK to interpret the purpose and meaning of the law, and,
in this regard, Recital 19 provides useful guidance on this point. It states that terms describing
the insured risk and the insurer's liability should be regarded as coming under the heading of
‘main subject matter of the contract’ and therefore not subject to assessment provided they
clearly define or describe the risk or liability.

For ease of reference we set out the preamble in the Council Directive 93/13/EEC, which states:

‘assessment of unfair character shall not be made of terms which describe the main subject
matter of the contract...whereas it follows inter alia, that in insurance contracts, the terms
which clearly define or describe the insured risk and the insurer's liability shall not be
subject to such an assessment since these restrictions are taken into account in calculating
the premium paid by the consumer.’ (emphasis added).

We also set out Regulation 6(2)(a), which states: ‘In so far as it is in plain and intelligible
language, the assessment of a fairness of a term shall not relate-… to the definition of the main
subject matter of the contract’ (emphasis added).

In our view, the Original Terms are not drafted in plain intelligible language because the terms
‘reasonable and necessary’ are vague and potentially subjective concepts in this context and the
insurer and insured are likely to have different views on this. The Original Terms also reserve
the meaning of ‘reasonable or necessary’ to that which the insurer considers ‘reasonable or
necessary’ which, in the absence of more information from the insurer, the insured can never be
certain of. There is no evidence of any explanatory material provided to the insured at the time of
the conclusion of the contract. Any material provided afterwards is irrelevant to an assessment of
the intelligibility of a term in the contract as entered into.

According to the above Recital, clearly described exclusions to insured risk should not be subject
to assessment for fairness on the basis that ‘these restrictions are taken into account in
calculating the premium paid by the consumer’. However, in this case, the insured risk and the
insurer’s liability are not clearly defined; they are left to the discretion of the insurer. In the
absence of a clear definition we do not consider that this risk could have been properly
quantified or taken into account by the insurer when calculating the amount of the premium.

Since, in our view, the Original Terms are not clearly defined, and they are not in plain and
intelligible language, they are therefore subject to assessment for unfairness, so we set out
Regulation 5(1):

‘A term is unfair under the Regulations if, contrary to the requirement of good faith, it
causes a significant imbalance in the parties' rights and obligations under the contract, to the
detriment of the consumer.’

i) Significant imbalance to the detriment of the consumer

Under the Regulations, a term will be judged according to how it is drafted in the
contract, namely its potential for unfairness (not its application in practice). In our view, the
General Exclusion 14 ‘We will not pay for …any costs that we do not consider reasonable or
necessary…’ creates a significant imbalance between the parties in that it gives the insurer an
unfettered discretion to refute a claim or pay only a small amount of it. We note that the wording
provides that in determining what is reasonable or necessary the firm ‘may seek guidance’ from
other veterinary practices, but this does not mean that it will.

We consider that reserving such an unfettered discretion to the firm could potentially lead to
detriment for consumers by limiting the cover they receive. Further, although the consumer is
paying the premium from the beginning of the contractual arrangement, he or she has no clear
idea of what is / is not covered by the insurance policy, which is also to his or her detriment.

Section 1, Vet fees, contains similar wording about covering only costs that ‘we consider to be
reasonable or necessary’ and our assessment is that they are likely to be unfair for the same
reasons. The effect of the wording is to give the firm a seemingly unrestricted discretion to
determine what costs or fees are reasonable or necessary and thus what it will pay for.

ii) Good faith

We understand from our correspondence with the firm that, in practice, it provides information
on the limits to cover and treatments when the customer calls to make a claim. In our view, this
is likely to be contrary to the requirement of good faith, as at the claims stage it is likely to be too
late for the customer to switch to another insurer if he or she is not happy with the cover
provided. The fact that the firm may want to change the limits from time to time should not
prevent it from making such information available at the time the consumer enters the contract.



How the term has changed

The Original Terms will be deleted from all RBS Insurance firms’ underwritten pet insurance
policies. They will be replaced with New Terms set out in the table below. The insurer no longer
has the discretion to decide what costs or how much to pay and the consumer has clear
information as to what is/is not covered by the policy and the maximum limits of cover for each
type of treatment from the outset of the contractual arrangement.

The new table of limits will be incorporated in all the pet insurance policies of the firms listed
below, apart from the Royal Bank and NatWest policies, where no limits for treatments will be
given as all eligible claims will be met in full (unless another fair and clearly drafted exclusion
applies).

The RBS Insurance firms have confirmed that new customers will receive a policy with the new
terms from 1 November 2011, and existing policy holders will be notified of the changes at their
annual renewal falling due after 1 November 2011. In the interim, the RBS Insurance firms will
honour all valid claims on existing policies and not apply any limits.

The RBS insurance firms giving the undertaking to change the terms of their pet insurance
policies are Direct Line Insurance Company Limited; Churchill Insurance Company
Limited and UK Insurance Limited.

In addition, UK Insurance Limited has a number of partnership relationships which are not part
of the RBS insurance group of companies but where UK Insurance underwrites and is
responsible for the policy wording. These policies have the same or similar wording as the ones
identified under the Original Terms and this undertaking applies to them as well:

Lloyds TSB Pet Insurance
NatWest Pet insurance
Royal Bank Pet Insurance
Virgin Money Pet Insurance



New Terms (to be placed in Section 1, Vet fees)

We will refund vet fees that you have had to pay for treatment or complementary therapy
providing the condition occurred during a period of insurance and the treatment arose during a
period of insurance when the premium has been paid, under the following conditions:

The most we will pay for each condition is £xx. This amount includes:

-
up to £40 towards consultation fees for each separate visit to the vet as a result of the
condition;

-
up to £100 towards additional out of hours fees for each separate out of hours visit
needed as a result of the condition;

-
up to £45 towards hospitalisation fees for each 24 hour period your pet requires
hospitalisation;

-
up to £65 towards histology fees including any handling and interpretation fees;

-
up to £70 towards cytology fees including any handling and interpretation fees; and

-
up to £25 per session towards hydrotherapy and physiotherapy fees.

Other information

• We remind firms of the Insurance Conduct of Business Rule 6.1.5, which states that:

‘A firm must take reasonable steps to ensure a customer is given appropriate information
about a policy in good time and in a comprehensible form so that the customer can make
an informed decision about the arrangements proposed.’

• The RBS Insurance firms have also confirmed that:

o the significant treatment limits will also be included in the Key Facts document; and

o the treatment limits are exhaustive, and the customer’s claim will otherwise be
covered in full subject to the terms and conditions of the remaining policy
documentation.

The RBS insurance firms were fully cooperative in providing this undertaking to us.

Undertaking published on 25 November 2011