When is an individual a consumer for insurance purposes?

The law distinguishes between businesses and consumers in many areas, with the consumer benefiting from a more favourable regime as a result of their need for greater protection in the commercial market place.

In the insurance arena, consumers can look to a number of statutory and regulatory provisions designed to protect their rights, including those contained in the Consumer Insurance (Disclosure and Representations) Act 2012, the Unfair Terms in Consumer Contracts Regulations 1999 (UTCCR), and the Insurance Conduct of Business Sourcebook (ICOBS) rules.

Often the distinction between a consumer and a business will be readily apparent.  Occasionally the line is more blurred, and it is recognised that private individuals can act in a number of capacities.  A recent Court of Appeal case, Mohammed Ashfaq v International Insurance Company of Hannover plc, has provided guidance on how to ascertain whether an individual is acting as a consumer when taking out an insurance policy.

In that case, the insured was seeking to have set aside a judgment of the Technology and Construction Court dismissing his claim for indemnity following a fire at a property he owned in Huddersfield.  He argued that the court should have taken into account his consumer status, and that if it had, it would have reached a different conclusion.

The insured had incorrectly given a negative answer in his online proposal form for residential let property insurance to the question as to whether he had ever been convicted or had any prosecutions pending.   The policy contained a ‘basis of contract’ clause as a result of which any incorrect information provided in the proposal form could amount to a breach of warranty.  The insured had in fact a pending prosecution for common assault.  When this was discovered insurers sought to avoid liability under the policy on a number of grounds including breach of warranty.  The insured argued that had the consumer protections contained in UTCCR and ICOBS been taken into account the insurers would not have been so entitled.

The UTCCR defines a consumer as “any natural person who, in contracts governed by these Regulations, is acting for purposes which are outside his trade, business or profession.” ICOBS similarly defines a consumer as “any natural person who is acting for purposes which are outside his trade or profession.  Further, where the individual is acting in more than one capacity, ICOBS provides that, if in relation to particular contract of insurance, the customer entered into it mainly for purposes unrelated to his trade or profession, the customer is a consumer.

The insured submitted that his trade or profession was that of a company director of three companies whose business was IT not property ownership or letting.  He further submitted that the main purpose of taking out the insurance was to protect his property asset against fire and other risks and the insurance against loss of rent was subsidiary.  The main purpose of entering into the contract of insurance was therefore unrelated to his trade or profession and he fell within the definition of a consumer.

The Court of Appeal disagreed.

It was clear from the face of the policy documentation that the purpose for which the insurance was taken out was to protect the property which the insured was using for the business of letting to students for rent, against fire and other risks.  The purpose of the insurance was therefore related to the insured’s trade, business or profession of property letting.  Further, part of the cover sought was loss of rent for up to 12 months: this was not an application for ordinary domestic house insurance.

The fact that insured was a company director and carried on the trade or profession of company director did not mean that he was not also carrying on the trade business or profession of a building owner letting out property for profit.

This finding is consistent with guidance given by the FCA as to how individuals acting in certain capacities should be categorised.  One of the examples it gives of a commercial customer is a person taking out a policy covering property bought under a buy-to-let mortgage.

The judge did not consider whether the appellant would have been considered a consumer under the Consumer Insurance (Disclosure and Representations) Act 2012 which was not in force at the relevant time for the purposes of this case.  On the basis that that Act takes a similar approach, defining a consumer insurance contract as one between an individual who enters into the contract wholly or mainly for purposes unrelated to the individual’s trade business or profession, it would seem unlikely that a different conclusion would have been reached.

This case serves as a reminder that a person’s status as a consumer is not synonymous with that of being an individual.  Any business activity undertaken, including as an adjunct to that individual’s usual trade or profession, may make them a commercial consumer for insurance purposes.

See Mohammed Ashfaq v International Insurance Company of Hannover plc [2017] EWCA Civ 357.

Joanna Grant is a partner at Fenchurch Law.