Zhang runs a small business importing farm machinery and selling it to New Zealand farmers. The machinery is complex so as part of the sale, Zhang’s business also installs the machinery and sets it up to the farmers’ requirements. The setting-up of the machinery is commonly called ‘commissioning’, and it requires expert knowledge.
A step was missed by Zhang’s employee during the commissioning of one particular piece of farm machinery. Because of the mistake, the machinery got damaged once the farmer started using it, and Zhang’s business was responsible for repairing it.
The costs to repair the damaged machinery was over $20,000, so Zhang made a claim under his two business insurance policies. Zhang’s insurer considered his claim under both his general liability policy and his professional indemnity policy. After reviewing both policies and all of the claim information, Zhang’s insurer declined the claim.
Zhang was unhappy that his claim had been declined because he believed the repair costs should be covered under at least one of the policies. Zhang asked his insurer to review their decision, but their decision didn’t change.
Zhang then complained to FSCL.
Zhang did not agree with the insurer’s decision to decline his claim and he wanted the claim to be accepted.
Zhang had asked his insurer to consider the claim under a few different clauses in the policies, and they declined cover under each clause.
By the time Zhang brought the complaint to FSCL, the dispute was whether the commissioning of the machinery should be considered a ‘service or repair’. Zhang argued that it was a service or repair and so the claim should be covered, whereas his insurer argued that the commissioning was different to a service or repair – so the claim shouldn’t be covered.
Whilst Zhang had focussed on the ‘service or repair’ issue, we needed to look at the claim in its entirety in order to understand what had happened. It was quite complicated, because there were two policies and both of them had been altered from the standard wording.
When Zhang’s insurer first looked at the claim under his general liability policy, they advised him that, whilst there could have ordinarily been some cover under the ‘defective workmanship’ clause, that clause had been deleted from Zhang’s policy, so it didn’t apply. This deletion was clear in the policy schedule, and we were satisfied that Zhang had accepted this.
In relation to the professional indemnity policy, Zhang’s insurer explained that there was an endorsement that had been added to the policy that amended the clause Zhang was relying on. The amendment removed cover for any product or good (the damaged machinery was a product). The costs Zhang was claiming were for the damaged product only, so we were satisfied that Zhang understood the claim wouldn’t be covered under this policy because of the endorsement.
Zhang’s main argument was that his claim should be accepted under the general liability policy because the commissioning of the machinery was a ‘service or repair’. In order to determine the meaning of the words ‘’service or repair’’, we looked at the dictionary definitions of the words, the context of the clause in the policy as a whole and considered the purpose and timing of the commissioning work.
We decided that the commissioning work was related to the installation of the machinery, so we didn’t think it was correct to say the commissioning work was a service or a repair. In the context of Zhang’s policy, we thought service meant ‘routine maintenance’ (of a machine) and repair meant ‘fixing something that was broken’.
We issued a decision explaining to Zhang that we didn’t think the commissioning of the farm machinery was a service or a repair, and so we believed the insurer was correct to decline the claim. We recommended that Zhang discontinue his complaint.
This was the final step in our process
Insights for consumers
This case highlighted the importance of negotiating the correct terms when taking out an insurance policy for your business.
Both policies that Zhang had for his business had amendments to them which limited the scope of cover. It is important to consider the type of risk you want insured when you are negotiating with an insurer. The insurer might want to limit cover like Zhang’s insurer, or they could charge you higher premiums for a policy with the standard terms and conditions. As a business consumer you really need to think about what possible things could go wrong when you’re doing business so you can make sure you have the right type and amount of cover. If in doubt about what to do, you may wish to seek advice from an insurance adviser.