The Australian Financial Complaints Authority (AFCA) has warned insurers against relying on “legally sound” black-letter arguments for actions that create poor consumer outcomes.

AFCA’s latest newsletter reveals it recently ruled against an insurer that acted unjustly against a client.

The client lodged a complaint after the unidentified insurer removed his name from a joint home and contents policy without his approval, thereby denying him his share of a payout when the house was destroyed in a fire.

The payout for the policy, in place from April 2015 to September 2017, went to his sister, who had his name removed. She had arranged the cover after they inherited the property because the complainant is illiterate.

“The insurer argued the complainant’s sister had the responsibility to inform him that his name was no longer on the policy, and because she didn’t it was not required to pay the complainant, based on the general principles relating to joint policies,” AFCA says.

“We found that while the policy may allow for one party to make changes, we do not accept that this extends to removing policy cover from one of the parties without their knowledge and consent. The insurer’s action in this case was against basic contract principles.”

AFCA raised its concerns with the insurer, which accepted it did not act in accordance with community expectations and has agreed to compensate the complainant.

“This is a prime example of AFCA carrying out our role of doing what is fair in all the circumstances, applying relevant legal principles, good industry practice and codes of practice,” it says. “If a strict black-letter law application leads to an unfair outcome, we will step in… black-letter law arguments that are legally sound and well-articulated will not succeed if they deliver fundamentally unfair outcomes for consumers.”