While ‘consequential loss’ has a well-understood legal meaning – referring to losses which are known to the insurer and are specific to the person suffering the loss and going beyond the foreseeable losses which would normally be expected to flow from the circumstances – the FSA is concerned that the general public would not understand the implications of the term.
We have reported previously on the FSA’s focus on the application of the Unfair Terms in Consumer Contracts Regulations to consumer insurance policies (our blog post can be found here). In its statement, the FSA identifies risks both for consumers – that they may not understand the term, and therefore the scope of their cover – and for insurers – that a court might rule the term to be unfair and therefore unenforceable, leaving the insurer covering a wider range of risks than it expected.
It should be noted that the alternative phrases suggested by the FSA to replace the term ‘consequential loss’ are not direct equivalents. One of them suggests that the replacement of locks following the loss of keys would be an example of ‘consequential loss’, although a court would be likely to rule that such a cost was far from consequential and was, in fact, a direct loss. It is also not entirely clear whether the concept of ‘direct losses’ would mean much more to the average policyholder than ‘consequential losses’.
While descriptions such as ‘direct losses’ and ‘indirectly caused’ might be capable of excluding losses that are special to the policyholder and would not have been incurred by the ordinary man on the street, where an insurer is seeking to exclude losses which arise as a consequence of an event, such as the replacement of locks where keys have been lost or loss of wages as a result of a covered injury, these should be specifically set out as exclusions in the policy.
