Insights for participants
Brokers should explain the difference between market value and agreed value to their clients and explain why it’s important to review the ‘sum insured’. That is one of the main reasons a client uses a broker – to have expert assistance at policy placement and renewal.
What happened?
In 2012 Farah bought a new vehicle and arranged insurance through her insurance broker. In 2023 Farah’s vehicle was in an accident. The insurer’s assessor said that the vehicle was uneconomical to repair, and it was deemed a total loss.
Farah submitted a claim for $9,000. The insurer declined the claim because Farah was insured for market value, which was only $4,000. Farah referred to her ‘sum insured’ amount of $9,000 and said she always thought she was insured for an agreed value of $9,000, and not a market value.
The insurer disagreed and said it was clear from the policy wording and schedule that Farah was insured for market value. The insurer explained that the ‘sum insured’ is used as an estimate to calculate the premium. It also acts as a payment cap where the vehicle is deemed a total loss. For example, if the market value of Farah’s car was $10,000, she would be paid a maximum of $9,000.
Farah accepted the insurer’s view but said that her broker misled her to believe she was insured for an agreed value. Farah complained to FSCL about her broker.
What were the parties’ views?
Farah said that:
- Her sum insured was the same for more than 10 years. She said her broker did not adjust the sum insured to reflect the market value, and that she’d overpaid premiums.
- Her broker should have explained the difference between an agreed value policy and a market value policy.
- Her broker should have told her she was insured for market value.
The broker said it wasn’t their responsibility to explain the terms of the policy to Farah. They said they don’t advise on vehicle sum insureds because they are not qualified to determine the market value of vehicles, especially sight unseen. The broker also said they were satisfied they asked Farah to review her policy when they added the following paragraph in her yearly renewal email:
“Information on your current insurance cover is attached. Please review these details to make sure they are accurate, particularly the assets you have covered and sums insured.”
What was FSCL’s view?
Farah had not suffered a financial loss because the vehicle was only worth $4,000 when she made her claim, and she was only insured for market value. To ask the broker to pay an amount above this in relation to the vehicle would have been unfair, because Farah had received the correct amount of cover under her policy.
However, our case manager spoke to two other broking firms who confirmed that they usually discuss their clients’ sum insureds and adjust them where needed. Although we could see that Farah’s broker asked her at each renewal to review the sum insured, there was no evidence that they explained why the sum insured should be renewed.
In our view it:
- Was reasonable to have expected the broker to clearly explain the difference between agreed and market value to Farah at the time the policy was placed.
- Also reasonable to have expected the broker to discuss the sum insured with Farah, and the importance of ensuring it was accurate, at renewal time.
- Appeared that the broker and Farah never discussed the policy over the course of 10 years, so they had not done enough to ensure Farah understood her policy.
We said the broker’s shortcomings meant Farah experienced unnecessary disappointment when she discovered her vehicle was only insured for market value. We said she also lost the opportunity to reduce the sum insured and pay a lower premium.
What was the outcome of FSCL’s investigation?
We said a fair outcome was for the broker to pay non-financial loss compensation of $750. Farah accepted this and her complaint was resolved.
