What happens when you discover that your insurance broker hasn't handed over your premiums to your insurance company?
Earlier this week the city watchdog, the Financial Services Authority, banned a Brighton-based firm from operating as an insurance broker after discovering that it had failed to pass on client premiums to insurers.
ICM was a small firm that carried out credit checks on potential tenants for landlords and letting agencies. Part of their service included offering home and contents insurance as well as policies that protected landlords against non-payment of rent and the cost of evicting tenants.
Unfortunately, although the firm's directors happily collected the premiums, they didn't send them on to the relevant insurance companies, using the money instead to run the day-to-day activities of its business. By the time the FSA stepped in, around £50,000 in insurance premiums had disappeared into the ether leaving hundreds of clients potentially uninsured.
So what happens in this sort of situation when it comes to compensation for customers who've lost their premiums or who have an outstanding claim?
As long as your broker or insurance company is regulated by the FSA then you're likely to be eligible for compensation from the Financial Services Compensation Scheme (FSCS) which refunds people who've lost money after a financial services firm has collapsed. The scheme covers investments, deposits and insurance although it will only pay out when an authorised company is unable to pay the claims against it - usually when a company has gone bust or ceased trading. Unfortunately, you may not get back all you're owed.
There are three kinds of compensation for insurance claims. Compulsory insurance, such as third party motor insurance, will probably entitle you to full compensation. For non-compulsory insurance, such as home and general insurance, the scheme will pay the first £2,000 of a valid claim and 90% of the remainder. For long-term insurance, such as pension plans and life assurance, you also get the first £2,000 in full and then 90% of the remaining value of the policy.
The important thing when arranging insurance is that you should always check that a firm or adviser is authorised by the FSA before you do business with them. If they are not authorised and things go wrong you will not have access to the compensation scheme.
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