Endowment holders facing a mortgage shortfall are being told to prove they were mis-sold their mortgage endowments but is this missing the point?

Martin Hodson, a lawyer and director of the marketing company Bexon Hodson Ltd, which specialises in residential property and finance, offers an original slant on the gathering endowment mortgage storm:

The Endowment Mortgage Debate is missing the point

Endowment policyholders facing a shortfall between the value of their policies and the amount needed to pay off their mortgages are consistently told that they are entitled to compensation if they can prove that the policy was “mis-sold.” This is close to having to show that they were lied to, which with the passage of time and the gravity of the allegation is not an easy challenge to meet. There is, however, another route to justice.

The insurance companies who invest your money owe you a legal ‘duty of care’, and in the case of an endowment policy, there is a powerful argument that their duty is to make sure you have enough at maturity to pay off the mortgage. They have breached that duty of care and policyholders have suffered loss. These three elements (duty of care, breach, and consequent loss) are the foundation of a legal action for negligence.

The insurance companies will say that funds invested in equities are exposed to fluctuations in stock markets, and the policyholders must accept the downside when those markets turn sour. But very few endowment buyers conceived themselves to be stock market investors – they placed total reliance on the skill and judgement of the professional fund managers employed by the insurers. It was universally accepted that the fund managers would trade and invest in securities to generate over the long term the returns necessary to repay their mortgages. The insurance companies and possibly the fund managers themselves were trustees of the money provided by policyholders. They have clearly been negligent in the way they have carried out their duties as trustees, because the whole basis of that trust was the aggregation of sufficient capital to pay for the customer’s home.

The complaint procedure devised by the FSA to deal with the shortfall problem seems to have become a sack-race that has the effect of slowing the pace of claims. Those with a grievance are told that they may have a claim if the policy was originally mis-sold, and to apply in the first instance to the firm that sold them the policy. The possibility of an action for negligence against the insurance company that issued the policy is not mentioned. Claims are being negotiated piecemeal and many claimants report that they are met with stony denials and evasive manoeuvres, making the process frustrating and fruitless.

Estimates of the total exposure to shortfall claims faced by the financial establishment veer wildly between £3 billion and £40 billion. All we know for sure is that the balance sheets of the companies involved would be hard pressed to remain healthy if they made full provision for the tidal wave of claims that some believe is coming. This issue could escalate from a nagging embarrassment to a national financial crisis.

At present the policyholders are being asked to swallow the losses, and are given helpful advice on how to make up the shortfall at their own expense. But it’s obviously unjust to expect the victims to pay for underpinning the market that has bled them. There have been a couple of half-hearted attempts to launch class actions against insurance companies who issued these policies, but no one has, yet, mustered sufficient resources and determination to issue a writ. (Class actions are legal proceedings by members of a wide class of people, such as policyholders, who have a common claim against a person or organisation that has done them a wrong).

It’s time to pursue the remedy of a negligence claim against each of the insurance companies involved, brought on behalf of all who have lost money on the endowment steeplechase.

For more information, call Bexon Hodson on 01978 667771

Would you like to have your say on this – maybe set up or join a group planing a class action? Have your say on our Forums page.