In 1982 Michael Joseph of north London, then aged 31, took out an Allied Dunbar unit-linked, whole-of-life insurance policy for pounds 60,000. It was set up to pay off his mortgage if he died. He liked the policy because it was flexible: if the fund grew according to plan, he could stop paying premiums after 10 years. The units he'd built up would then grow and a few could be cashed in each month. This would maintain the life cover until the money ran out.
By 1992 there was a guaranteed sum assured of pounds 67,899, after paying premiums of pounds 3,600 over 10 years. Allied Dunbar's head office sent an "illustration of benefits" showing that life cover could be maintained if Mr Joseph stopped paying premiums. This information was sent out under the heading "paid up policies - continuation of life cover".
Based on investment returns of 7 per cent and 10.5 per cent, the existing "paid up" fund would pay for pounds 67,899 of cover for 20 and 29 years respectively. "Paid up" is jargon for not making any more payments into a policy. So from the heading, it seemed clear that life cover would continue at no extra cost for at least the next 20 years.
Mr Joseph wrote to his Allied Dunbar agent in January 1993 requesting that his policy be made "paid up". He assumed all was well and that he had life cover. Almost five years later, Allied Dunbar sent a statement showing that the fund value was pounds 6,506 and Mr Joseph had no life cover. At this point Allied Dunbar said it regarded the phrase to mean that no more payments were going into the plan - and that cover was no longer needed.
A senior Allied Dunbar manager said that to maintain the life insurance, Mr Joseph should have asked for the "paid-up term option". He had never heard of this expression and there was no mention of it in the "illustration of benefits".
In a letter to Mr Joseph, Andy Thompson of Allied Dunbar's client services division wrote: "Although [the Allied Dunbar agent] provided you with illustrations to let you know the number of years PUTO [paid-up term option] would maintain the life cover of pounds 60,000, you clearly asked us to make your plan paid up and this is what we did. There is a significant difference between paid up and PUTO. However, we did write to you in January 1993, once we had made your plan paid up, to let you know the effect this option would have on the plan and your sum assured."
Mr Joseph never received such a letter and when he asked for a copy, Allied Dunbar said it was unable to provide one. Mr Joseph's policy was eventually reinstated on the terms he had originally requested and he was given compensation. He has letters from his agent who clearly uses the term "paid up" in the context of maintaining life cover on this type of policy. "It seems Allied Dunbar can use the term 'paid up' to mean different things, but when the customer uses the same term it is taken to have only one meaning - a loss of life cover," said Mr Joseph.
An Allied Dunbar spokesperson said: "When the misunderstanding over Mr Joseph's intentions for his policy came to light, we were happy to reinstate life cover and to provide an ex gratia payment for the inconvenience. However, we were unaware that this policy was designed to cover a mortgage as it was not assigned to a lender and was written in trust.
"We and our advisers have to rely on our understanding of what our customers want, and the fact that problems like this are rare suggests that even if we are occasionally found guilty of using too much jargon ourselves, we generally get it right. The best thing for customers is to avoid using industry jargon and spell out in writing exactly what they want their life company to do with their policies. That way there's no room for doubt."Reuse content