December 20, 2009 --After a 17-month investigation, insurance giant Aviva last week threw out Edward Gibbs' £500,000 fire damage claim -- apparently because he had failed to disclose a £604 bad debt from 2004. A day later draft legislation was published aimed at compelling insurers to behave more fairly. But can anything level the playing field between policyholders and insurance companies?

Non-disclosure is the issue that Tuesday's draft Bill, published by the Law Commission, seeks to address, giving greater protection to consumers across all sorts of insurance, including health cover.

But there are fears that the new law will have little practical effect in reducing the unfair advantages that insurers have over consumers when it comes to investigating claims.

Edward, 36, is owner of the 15-bedroom Mount Hotel in the Clent Hills near Stourbridge, West Midlands. On July 30 last year a faulty dryer led to a fire that caused £500,000 of damage.

He was hailed as a hero for re-entering the blazing building to save two guests before fire crews arrived.

Investigators concluded the blaze was "entirely accidental." There has never been any suggestion that fire regulations were breached.

Guests were rehoused in hotels nearby and 15 weddings scheduled for the next three months were moved to other venues.

A claim was made to Aviva, to which Edward had paid £4,000 a year in premiums since 2005. The insurer swiftly sent someone round and Edward was promised "full cooperation." Six weeks passed and Aviva said it would make a decision. It didn't. Nine weeks passed, still no decision.

Soon after, Aviva's lawyers asked for detailed information about the Mount Hotel business. Edward had to produce business accounts and bookings schedules, apparently to prove the business was viable.

He was so outraged when Aviva asked to see his 2007 divorce settlement that he asked his MP for help. On March 23 this year, Andrew Moss, the £2 million-a-year Aviva boss -- who was recently in the headlines for his affair with a subordinate's wife -- wrote to Julie Kirkbride, Conservative MP for Bromsgrove, saying: "I trust we will be able to restore Mr Gibbs' confidence in Aviva."

The matter dragged on for a further-nine months until last Monday when Aviva finally threw out his claim. The hotel is empty and in disrepair.

Edward believes Aviva's main reason was his "non-disclosure" of a County Court Judgment against him for £604. He says this was the cost of a Christmas lunch he served in 2004. The guests paid, but then demanded a refund and took him to court.

Aviva's application required CCJs to be declared and Edward failed to do this. Aviva appears to be relying on this inadvertent non-disclosure to reject his claim.

The draft Bill published last week would impose restrictions on how insurers could decline similar cases but, crucially, the proposed law does not curtail an insurer's powers to investigate policyholders" circumstances after a claim, as opposed to before a policy is entered into.

Edward says: "This is simply a genuine case of a genuine fire. It has taken 17 months. Aviva has not only failed to help me when I needed it most, it has made the disaster incalculably worse and rendered me homeless."

Edward's solicitor, Neil Jones, of Rudzki & Jones in Derby, says: "This was an incredibly distressing incident. Edward had taken out insurance in the reasonable belief that this would protect him. Nothing could have prepared him for the nightmare that he has since had to endure.

"The law unfairly favours insurers and I welcome the Law Commission's recommendations."

Aviva refuses to say precisely what it alleges that Edward failed to disclose and will not explain why it needed so much information.

Instead it states: "Aviva's decision was based on non-disclosure and misrepresentation. Based on the information we now know, Aviva would not have offered insurance to Mr Gibbs." It says Edward's reluctance to provide information had "added an additional four months" to the process.

"This matter now appears destined to go to court," it adds. "With that in mind, we are unable to provide further details."

CRITICAL ILLNESS: WILL BILL MAKE IT EASIER TO MAKE A CLAIM?

Most of the 1,000 complaints brought every year against insurers in connection with alleged nondisclosures (see above) relate to health policies supposed to pay out on the diagnosis of serious diseases such as cancer.

Insurers don't usually conduct full health checks before these "critical illness" plans are entered into. Instead, they conduct exhaustive investigations into policyholders" medical histories only after a claim is made and the policyholder already ill.

In many appalling cases, insurers have seized on unrelated earlier conditions that policyholders did not detail on the application form. Legal & General refused to pay a heart attack victim because she did not disclose a bout of depression (as Financial Mail reported in May 2007).

And Friends Provident refused a multiple sclerosis claim because a policyholder failed to disclose an eye irritation (as we reported in 2006).

In the wake of such cases the insurance industry finally evolved complex guidelines governing how such claims can be handled. But one in 50 CI claims is still rejected for alleged non-disclosure.

The draft Bill would tighten these guidelines and make them law, but insurers will continue to enjoy wide powers to scour for reasons to reject a claim.

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