Insights for participants
Professional insurance advisers must understand the policies they recommend so they can give correct advice to their clients. Financial advisers have a legal obligation to provide suitable advice to clients. They are also required to maintain the standards of competence, knowledge and skill for product advice.
If a financial adviser fails to meet their obligations, they may be liable for the losses their clients suffer as a result of the poor advice.
What happened?
A freight company, DG Limited*, arranged business insurance through an insurance broker. They arranged a commercial vehicle policy for trucks and trailers, which included Loss of Use (LOU) cover for specified vehicles . DG Limited specified three trucks. However, they did not include trailers because the broker told them that LOU was not available for trailers.
In 2023, two trailers were damaged in two separate incidents. It took six months to repair the structural damage on the first trailer and two and a half months to repair the other. These trailers were used for DG Limited’s largest haulage contracts. While they were off the road, DG Limited had to hire trailers to carry out their core contracts.
However, DG Limited did not hire trailers for the whole period the damaged trailers were out of action, as trailers were not always available or were only available for very short periods, making it not commercially viable to hire them. During those times, DG Limited used two of their other trailers, meaning those trailers were not available for other work.
During the period the trailers were off the road, DG Limited discussed their situation with other firms in the haulage business, and discovered that LOU cover was available for trailers. Even their own insurance company offered LOU cover for trailers.
DG Limited complained to the broker that he had wrongly told them that LOU was not available for trailers. The broker accepted that he had made a mistake, and was willing to consider compensation. However, the parties couldn’t agree about the amount the insurer would have paid DG Limited if LOU cover had been in place. DG Limited asked FSCL to investigate.
What were the parties’ views?
The broker offered DG Limited $20,000. This included $16,000 to cover the hire company invoices ($114 per day), $4,000 towards legal and accountancy costs, ands the inconvenience of having to pursue a complaint.
DG Limited claimed the loss was $37,500.
It was clear that DG Limited had suffered significant losses due to the trailers being out of action, but FSCL could only consider the losses arising from the lack of LOU cover.
The dispute foscussed on the LOU clause in the policy, which said that if a vehicle was damaged and could not be used, the insured was covered for the reasonable cost of hiring a substitute vehicle of a similar make, model, and specification that was capable of carrying out the activities of the insured vehicle. However, if no similar vehicle was available for hire, the insurer would pay the daily rate shown in the schedule ($330), with a maximum period of cover for any one insured vehicle of 90 days.
DG Limited said the hired trailers were not of a similar make and model as the damaged trailers, and had a lower pallet capacity, so they should be paid the daily rate of $330 for each damaged trailer, rather than $114.
What was FSCL’s view?
We accepted that the hire company’s trailers had a lower capacity than the capacity specified in DG Limited’s haulage contract with their largest customer. However, there was no evidence to suggest that the hired trailers were unable to carry out the runs the damaged trailers usually did, or that DG Limited lost contracts because a higher pallet capacity was needed.
Given this, we decided the hire cost of $114 per day for the periods DG Limited used the hire company’s trailers was a reasonable cost for hiring substitute vehicles.
We also considered the periods the hire company’s trailers were not available and DG Limited chose not to hire trailers because they were only available for short periods of time. DG Limited said the daily rate of $330 should have been used in the calculation for compensation for those periods.
It was difficult to be sure what would have happened had LOU been in place. The hire company would not have had substitutes for the whole period, and DG Limited would likely not have chosen to hire trailers where they were not available for sustained blocks of time. DG Limited would have had no option but to use two of their other trailers. We noted that in the LOU clause of the contract, the insured party could contact the insurer if no similar vehicle was available for hire. If the insurer was satisfied this was the case, they would pay the $330 per day for those periods.
Because the broker gave incorrect information to DG Limited about cover for trailers, DG Limited did not have the opportunity to discuss how the insurer would have looked at an LOU claim in the circumstances of each incident. DG Limited had been significantly adversely affected by the lost opportunity to fully consider their options.
However, we didn’t have enough evidence to determine whether a different daily hire rate would have been a fairer basis on which to calculate the loss. Given this, it was reasonable for the broker to base his calculation on the daily rate charged by the hire company.
How did FSCL suggest that the complaint should be resolved?
We recommended the broker pay compensation of $27,300, as follows:
- LOU cover based on the daily rate charged by the hire company ($16,000)
- Legal and accountancy costs ($6,300)
- The significant inconvenience and disruption to financial planning suffered by DG Limited’s due to the lack of opportunity to consider their options when the incidents of damage occurred ($5,000).
Both parties accepted our preliminary decision and the case was closed.
