GIGI 3.5 Cancellation (ICOB 6)

This section briefly sets out the cancellation rights that an insurance company must offer retail customers when they purchase or renew certain non-investment insurance contracts. The requirements do not apply to contracts with commercial customers.

The cancellation rules do not apply to insurance intermediaries directly. As such, this Guide does not set out the detail of the cancellation rules, which are in ICOB 6. However, you will find it useful to understand the rules because:

1. (1)

   under the product information rules in ICOB 5, you, as an insurance intermediary, must provide information to retail customers about cancellation rights; and

2. (2)

   the cancellation rules might affect the arrangements you have in place with the insurance company for payment of commission.

In general, cancellation rights apply to non-investment insurance contracts taken out by retail customers. There are, however, a number of exemptions, which are set out in ICOB 6.1.5 R to ICOB 6.1.10 G.

Before conclusion of the contract, you must inform your retail customers of their cancellation rights. These requirements are in ICOB 5.3.12 R. See also Chapter 3.4 above.

For general insurance contracts, insurance companies must give a cancellation period of 14 days and for pure protection contracts the cancellation period must be 30 days. For mixed contracts which include both pure protection and general insurance policies, the cancellation period is 30 days (ICOB 6.2.1 R to ICOB 6.2.4 R).

For pure protection contracts, the cancellation period starts on the day on which the customer is informed that the contract has been concluded, or the day he receives the terms and conditions in a durable medium, whichever is the later. For general insurance contracts, the period starts on the day on which the contract is concluded or the day the customer receives the terms and conditions in a durable medium, whichever is the later (ICOB 6.2.5 R).

The Financial Services (Distance Marketing) Regulations 2004 require that when a distance financial services contract is cancelled, any attached contracts are automatically cancelled. This is unless the customer gives notice that cancelling the main contract does not cancel the attached contract. This is referred to in guidance at ICOB 6.4.2 G. Broadly an attached contract is one which is subsidiary to the main contract. For example, creditor insurance taken out to protect a loan would be an attached contract and the loan would be the main contract. This means that if the loan (the main contract) is cancelled, then the creditor insurance (the attached contract) would also be cancelled automatically. The reverse, however, does not apply - i.e. the loan (the main contract) would not be automatically cancelled if the creditor insurance (the attached contract) was cancelled.

Where a customer cancels a contract, an insurance company must return to the customer any sums paid to it without delay, and no later than 30 days from the date of cancellation, though it may charge for any costs incurred in connection with a general insurance contract (ICOB 6.4.3 R). This might include administrative costs for intermediaries and/or a time on risk charge for insurance companies. The charge for costs incurred must not exceed an amount that is in proportion to the service provided and must not be capable of being construed as a penalty. So the insurance company must not profit from cancellation by a customer and may only retain an amount that accurately reflects its costs. An insurance company is not permitted to make a charge to a retail customer for a cancelled pure protection contract.

As well as returning any sums paid to the insurance company by the customer, the customer must return any sums and property the customer received from the insurance company (such as a motor insurance certificate) within 30 days of cancellation (ICOB 6.4.3 R (4)).

Under ICOB 6.4.9 R, if cover started during the cancellation period and the insurance company has made a charge, the sums and property returned by the customer under ICOB 6.4.3 R (4) must not include any claims money that the insurer paid out in the cancellation period. This does not mean, however, that if the insurance company chooses not to charge, that it has the right to refuse claims made during the cancellation period if cover commenced during the cancellation period.

As mentioned above, the insurance company can recover the administrative costs that intermediaries incur in the charges it makes for cancelled general insurance contracts. In addition, where you charge the customer a separate fee for the mediation service you have provided this is unaffected by the cancellation rules in ICOB 6 (although the cancellation rules in ICOB 8 may apply if you have a distance mediation contract and this will affect what fees you can recover). If you charge a fee you will need to disclose it to the customer (see paragraph 3.3.16) and you should make clear that it will not be refundable if the non-investment contract is cancelled if this is the case.

If you charge a fee and also receive commission, then the insurance company is restricted in the amount of commission it can recover from the retail customer when a general insurance contract is cancelled to an amount which, when added to your fee, is sufficient to cover your costs (see ICOB 6.4.5 G(3)).