The ruling by Michael Beloff QC involved a case where a couple had been sold a low-start mortgage backed by an endowment policy.
The insurance company challenged the right of the Insurance Ombudsman, Julian Farrand, to rule on the dispute as the grievance centred on the terms of the loan and not the insurance-based endowment policy taken out to repay it.
Rather than settle the issue of the Ombudsman's jurisdiction in court, the case went to arbitration.
The ruling made on Monday said that complaints must be made in connection with an insurance policy, and not about something connected with the policy. There has to be a direct link between the nub of the complaint and the policy.
This would appear to rule out home income plans where the elderly are sold a package - an interest-only mortgage loan and an insurance bond designed to generate enough cash to pay the interest on the loan and extra spending money. These plans went badly wrong when interest rates rose, returns on bonds fell and the value of property plunged.
Those who took out plans after advice from independent financial advisers have been looking to the Investors Compensation Scheme for redress after firms are declared in default. Those who were sold plans by tied agents acting on behalf of insurance companies turn to the Insurance Ombudsman after exhausting the companies' complaints procedure.
Under the rules of Lautro, the insurance companies' regulator, only complaints involving the handful of insurance companies which have not joined the Insurance Ombudsman Bureau are passed to Lautro's complaints sub-committee. It cannot make awards, but can put pressure on insurance companies to do the decent thing to avoid disciplinary action.
Mike Abrahams, Lautro's chief enforcement officer, said: 'It does seem that there might be a problem in future. It could be that one answer may be for our complaints sub-committee to look at these cases.'
Dr Farrand intends to ask insurance companies involved in complaints about home income plans to allow him to continue to rule on these cases. There are around 10 companies involved in about 900 cases. They include Legal & General, Royal Life, GRE, Gresham and Hill Samuel.
Richard Barnett, of the solicitors Barnett Sampson, which has been acting for home income victims, said the ruling was 'a major setback'. He said the issue focused on home income plans at the moment, but low-start mortgages with linked endowment policies were potentially a much larger problem.
GRE has six home income cases with the Ombudsman arising from the Leeds-based appointed representative Intercity. Richard Woods, director of marketing, said offers had been made to investors in 1991. But Lautro and the Ombudsman changed the rules, so it is making higher offers.
'We have paid out on a fair number of cases, around 200. There are only six who have not accepted the offer.'
GRE baulks at paying out to replace cash already spent on a holiday, new car or, in one case, fertility treatment. But Lautro says elderly people might not have spent the money had they realised the true position.
Sir Bryan Carsberg, Director-General of Fair Trading, said last week that mortgages could be taken into the Financial Services Act.Reuse content