Some borrowers could be in breach of their mortgage terms and conditions after the Financial Services Compensation Scheme compensates them for their default insurance policy, the lifeboat scheme has warned.
The FSCS is set to compensate clients of Danish company Alpha Insurance after a proposed deal to provide replacement cover for its policies collapsed.
Alpha Insurance was declared bankrupt in May 2018, and the FSCS has since worked with Financial Conduct Authority and the Alpha liquidator to try and secure replacement cover for Alpha’s latent defect or structural damage insurance policies.
After the negotiations fell apart the FSCS said the consumers involved “cannot be expected to wait any longer” and it decided to start compensation proceedings.
The FSCS is to pay premium refund compensation to around 14,000 policyholders directly and the remaining 6,500 policyholders will be given instructions on how to submit their claim.
Latent defect insurance — otherwise known as a building warranty or structural damage insurance — is a form of insurance taken out for new-build properties to provide cover in the event of an inherent defect in the design, workmanship or materials that becomes known after building is complete.
The majority of UK mortgage lenders require consumers to take out insurance on new-build properties for the length of time until the property becomes 10 years old.
As the FSCS was unable to provide ongoing cover for the clients involved, these borrowers are at risk of breaching their mortgage terms and conditions.
Jimmy Barber, chief operating officer at FSCS, said: "Despite exhaustive efforts of FSCS and other parties, it has not been possible to transfer these Alpha latent defect policies to another insurer. Therefore, FSCS is paying return of premiums to eligible customers.
"We are very disappointed that on this occasion we have been unable to reach the desired outcome for our customers due to the complexity of the issues around obtaining replacement cover so will be paying return of premium.”
The FSCS has recommended all policyholders seek professional advice on obtaining replacement cover as soon as the insurance premium has been repaid.
Dan White, of Champion Hall & White, said advisers should contact any clients they suspect could be affected by the insurance policy ending and help them secure a new form of cover.
He added: "If any advisers do have clients affected then they should make them aware and ask if they need any further help, which will continue to help the strong relationship they have already formed with the consumer and make sure they're not in breach of their mortgage policy."
Meanwhile the FSCS said it had faced challenges in identifying policy holders in this and similar cases in the past, but noted that as part of the ‘prepare’ pillar of the FSCS’s strategy for the 2020s it was working with the insurance industry to improve how data can be handled in the event of an insurance failure.
According to the FSCS, this would enable it to protect customers in a more timely fashion in the future.