It's payback time for the hard done by

Endowment mortgage shortfall victims are fighting back against life companies - with legal demands.

With at least one lawyer ready to launch legal action, a growing number of policyholders believe they should go on the offensive against insurance companies which told them their endowment would pay off their home loan and give them a tax-free lump sum as well.

Now, following the endowment review ordered by the Financial Services Authority, the same insurers inform them they have the stark choice of either paying more into savings plans or facing huge deficits when their home loans mature.

But instead of meekly accepting the insurance company's latest diktat and dipping into their bank accounts, policyholders are demanding compensation. The Financial Ombudsman Service has already received 5,000 formal complaints about mortgage shortfalls - 50% of the total caseload. And this is before counting the 30,000 who have yet to reach "deadlock" with their insurers, a necessary pre-condition of an appeal.

The Ombudsman believes this is just a trickle; the full flood will come next year. Then everyone with an endowment loan should have received a letter reviewing the policy and have had time to consider its implications.

But Ilford-based lawyer Joseph Aaron is not waiting. He is organising his clients around a legal fighting fund. He aims to force the insurers to make up the shortfall - and pay the promised tax-free lump sum. In one case, he is fighting for a client with endowments designed to produce £1.5m but now unlikely to top £1m.

Mr Aaron, who is also an insurance expert, says he first became interested in the mortgage shortfall issue earlier this year. "We do a lot of mortgage-related work and we saw an increasing number of clients threatened with shortfalls. It started out with one or two victims that had really been hard done by. Then it spread by word of mouth and now I have in excess of 100 who want to fight their insurers through the courts," he says.

The average shortfall is around £15,000, with only a small minority above £30,000. Mr Aaron says his £1m client is "unusual for the amount but not the percentage - most people will be around a quarter to a third short of their target."

Each client is putting between £375 and £475 into a fighting fund depending on the size of their projected shortfall. But Mr Aaron is not just fighting for the shortfall. He says he intends to sue for the tax-free lump sum which was used as a bait to get people to buy endowments. Promised surpluses often amounted to around a quar ter of the final payout.

"We intend to bypass the Financial Services Authority and the Ombudsman and take the fight directly to the insurers. Either they pay up or we go to court," he says. The case will revolve around claims of negligence and dereliction of duty.

The first attack will attempt to establish that banks, building societies and other sellers were negligent in not pointing out the risks of equities and bonds, the main contents of with-profits plans.

"They must have known there was a risk - it is hardly new," says Mr Aaron. "Letters were sent out referring to mortgage payment plans and plans designed to pay off home loans. Whatever small-print caveats there might have been, an ordinary person reading this would believe one thing. And the courts are increasingly com ing to the view that plain English should be considered ahead of small print."

His second strand is to accuse the insurers of a lack of good faith, a dereliction of their most basic duty. "Insurers will refuse to pay out if policyholders do not make a full disclosure of anything which might affect the cover such as a past medical history. The same applies to their side of the contract. But they failed to disclose that the policies would only work with luck - the obvious sales line was that they would produce the goods. No court will be impressed with their double standards. I don't think a second-hand car dealer could have got away with this."

Copywriter Carlo Formicola, 38, from Walthamstow, London, is considering joining the action. Along with his wife Juliana, he now faces a £13,000 shortfall on a £45,000 endowment with the Woolwich. "You're powerless on your own. If you write to these people, they just send a standard letter back - they're laughing at you all the way to the bank. You have to put some pressure on them," he says.

In 1992, the couple saw their ideal first home at a local branch of Woolwich Property Services, the estate agency arm of what was the Woolwich Building Society. The in-house financial adviser told them to take out a Woolwich mortgage and a Woolwich endowment.

"The assumption was clearly that the endowment would not fail - more than that, we would enjoy a decent lump sum after 25 years, in 2017. There was no indication of any risk - basic psychology says that no one wants any doubt about the roof over their head. Had they told us that there was a chance of substantial failure, we would not have gone for this. Now, we are expected to pay £100 a month instead of £65 - and there's no apology or guarantee. I feel duped."

The couple are both ready to back legal action. After eight years and premiums totalling £6,300, the plan has a cash-in value of just £6,700.

· Joseph Aaron can be contacted on 020-8518-0333.

Hard done by

Siddiq and Aysha Khatri wanted to improve their east London home in 1989. They decided to remortgage away from their £30,000 repayment loan with Midland Bank to a £60,000 deal with Abbey National.

At the time, Mr Khatri was 56. But although retirement from his civil engineering job with a local authority loomed large, the Abbey persuaded him into a 20-year endowment mortgage. He was told to give up his original life policy. "I was persuaded into it by the promise of a £17,000 windfall when the plan matured. Otherwise, there was no point in this," he says.

In spring 1999, the Khatris started to worry. He asked Abbey National for compensation, claiming it was missold as it was unsuitable for someone of his age. They refused. Once he had a "deadlock" letter, he went to the ombudsman, who forced Abbey to repay all his premiums plus interest. He accepted £35,000, which has helped repay part of the loan. But the couple have lost valuable life insurance which cannot be replaced due to age and medical records. "I trusted them. That was wrong," he says.