Laurie Slade, the Ombudsman, said that too many borrowers still wrongly believed that a mortgage indemnity guarantee policy would protect them if they defaulted and the lender sold their home for less than the amount of the mortgage.
Publishing the 14th annual report of the Insurance Ombudsman Bureau, Mr Slade warned that the confusion surrounding MIGs - which insure the building societies and banks against any loss but render the borrower liable to a counter-claim from the insurer - was exposing many mortgage- holders to huge potential liabilites when they had lost their homes.and possibly their jobs.
Mr Slade said he had been unable "to do much for unhappy borrowers" who complained to the Bureau in 1994 .
Since the policyholders in these cases were the banks and building societies, not the borrowrs, the complaints were outside his jurisdiction.
He urged lenders and insurers to examine ways in which borrowers could benefit from some form of cover. "If it is an insurable risk for the banks and building societies then why not for the borrowers? When all concerned act in good faith the intention is that the value of the house will be sufficient to discharge the borrower's debt.
"At the very least it needs to be made clear to borrowers that the premium they pay is not something that they are going to benefit from."
His remarks were greeted cautiously by some of the big lenders who were worried that any form of dual protection policy might encourage borrowers to default more readily One said: " The vast majority of forced sales are because of marital breakdown and unemployment. And you can't insure against the former."
The Association of British Insurers said that companies were trying to explain more clearly that mortgage indemnity premiums were a fee for a larger loan than would otherwise be granted. The Building Societies Act stipulates a society must take added security when lending above certain limits, normally over 75 per cent of the value of the property.
The Ombudsman awarded a total of £9.5m to policyholders last year. Of the 7,182 cases adjudicated, 60 per cent went in favour of the insurance company, 36 per cent in favour of the policyholder and the rest were withdrawn. The number of new cases referred was up 4.5 per cent to 8,500. There were 3,693 new financial services cases received in 1994, up 7.8 per cent on a year earlier.