When the Financial Ombudsman Service (FOS) was established in 1991 as the Claims Review Panel, the issue of what exactly “fair and reasonable in the circumstances” meant raised considerable angst in insurers’ legal departments. Apparently it still does.

Industry claims specialists and lawyers spent the first few years of the organisation’s life debating the point at every opportunity. Founding ombudsman Judith Cohen, a determined former industrial relations judge, was unbending in her defence of the term and how it was applied.

“Fair and reasonable” was designed to move decisions away from insurers’ reliance on the legal interpretation of a policy wording and the Insurance Contracts Act to a decision based more on fairness.

It recognised that legislation alone lacked the flexibility to allow a claim to be decided on such factors as the customer’s understanding of what the policy contained and what they could reasonably expect.

Before the advent of FOS, insurers were in a position where their own view was the only one that mattered. If the claimant wanted to dispute a declinature, he could hire a lawyer and go to court.

FOS is at present undergoing a review, and the Insurance Council of Australia (ICA) has made a submission pointing out problem areas in the relationship.

Beyond the issues of timeliness, process, the need for better communication and exactly how to handle disputes that fall outside the FOS terms of reference, the old saw of what “fair and reasonable” means and how it is applied has re-emerged – or perhaps it never really went away.

ICA says the obligation of FOS in resolving disputes to do what is fair in all circumstances is “inherently subjective”.

“For the sake of consistency and clarity, and to aid in the preparation of submissions, it would be useful if FOS developed guidelines around the principles of ‘fairness’.”

It says consistency issues “are arising in the way in which cases are being handled, the way in which the law is applied to determinations, the application of the principle of ‘fairness’ and the application of prior FOS determinations themselves”.

And therein lies the problem. There really is no way to easily define or devise guidelines as to how the principle of fairness and reasonableness can be applied. And yes, it is indeed inherently subjective.

The Allianz submission, which is signed by Group General Counsel Mathew Kaley, calls for FOS to pay “more regard to legal principles, including the laws relating to contracts, when considering a dispute”.

“We regularly see a ‘fair and reasonable’ test taking precedence over [the] rules a court would apply when considering an indemnity dispute,” Allianz says.

“This creates an unfairness of outcomes for those before the courts as opposed to FOS, and leaves customers and insurers without a clear guide as to the application of the law.

“More focus should be given to the consistency of the application of legal principles across FOS divisions to ensure the interpretation and application of the cases and the Insurance Contracts Act is consistent within FOS.”

ICA says there may be a need for a greater understanding within FOS of “good industry practice” for the insurance industry, as well as “more depth of knowledge about the Insurance Contracts Act 1984, and principles of insurance law”.

“There have been difficulties for insurers that have sought to rely on prior FOS determinations in their submissions on disputes, and in their internal training, particularly because there has also been a lack of consultation where FOS has moved away from its position in prior determinations,” it says.

“Insurers would like to be able to discuss with FOS the reasons behind determinations where they do not follow prior determinations.”

Obviously, better communication over individual cases is an essential path to understanding, although trying to explain a decision that is based on fairness rather than law might just be beyond the parties. Definitions applied to community expectations are, unlike the law, slippery things.

Henry David Thoreau said: “The lawyer’s truth is not truth, but consistency or a consistent expediency.” And there’s the problem. If the experienced decision-makers working on the ombudsman’s general insurance panel were to make their decisions based purely on the legalities of the case, we’d be back where we were before 1990.

It’s worth remembering the ombudsman service was conceived and developed in the age of the Hawke ALP government, which saw the consumerist cause as a vote-winner.

The insurance industry then was unpopular, distrusted and even despised, generally regarded as out of touch with customers and their needs, and facing a raft of legislation designed to bring it into line with community and political expectations.

FOS has played a major part in giving policyholders some of the certainty insurers used to monopolise, by removing the strictly “legal” element that confounded claimants for so long.

So a bit of inconsistency in decisions is a worthwhile alternative to a claims system that adheres strictly to legal interpretation and consistency. Because FOS is consistent in the one thing that really matters – it helps consumers.