James runs an aviation engineering business and needed a rare engine part for a helicopter he was working on. James found and purchased the part from a USA supplier. James transferred $28,000 into the supplier’s bank account, believing that the part would be shipped to New Zealand. Two weeks passed and, as there was no sign of the part, James emailed the supplier.
The supplier assured James that the issue was being investigated and they were testing the part to make sure it was satisfactory before shipping it. As time passed it became apparent that this was not the case. Eventually the communication broke down and it became clear that James had been defrauded by the supplier company.
James made an insurance claim under the crime section of his business insurance policy. Even though the insurance company accepted that James was a victim of fraud, they declined the claim on the basis that James received an invoice, with the part to be shipped when the invoice was paid.
The insurance company concluded this meant a ‘credit arrangement’ was entered into. Within the terms of James’s policy, an exclusion clause stipulated that if the loss arose because of a default under a credit arrangement, the claim would not be paid.
James did not accept this offer and he complained to FSCL.
The insurer said that the supplier company rendered an invoice for the engine part which was to be shipped in return for payment, and this was a ‘credit arrangement’ for the purposes of the exclusion clause. The supplier company defaulted under this credit arrangement in that the part did not arrive.
The insurance company also said that the policy exclusion was intended to exclude cover for such a default, whether or not an invoice is genuine.
James said that there was no genuine ‘credit arrangement’, as the supplier company never intended to supply the part.
James considered the supplier company’s invoice was fake or dishonest and was not a normal business credit arrangement. James had suffered a loss as a result of a crime, which he was insured for.
James felt that, if the claim was covered under the policy, it should be paid in its entirety.
The invoice was only one element of the deception. In this case, the fraud also involved email exchanges, fake websites, social engineering and phone calls.
The key issue for us to determine was whether James entered into a credit arrangement and, if a credit arrangement was entered into, whether a default occurred.
We agreed with James that a credit arrangement for the purposes of the exclusion clause never existed. To start with, the ordinary meaning of a credit arrangement suggests that goods or services will be supplied before payment, based on the trust that payment will be made in the future. In this case James had paid for the part in full before it was supplied.
We considered that the policy definition of Credit Arrangement, which used terms such as ‘’extension of credit or hire purchase, loan, lease or rental agreement… otherwise evidence of debt…’, was consistent with the ordinary meaning of ‘’credit arrangement”.
In this case, the fraudster sent their invoice to James for payment and the scam company told James that they required payment before the part would be supplied. Therefore, no Credit Arrangement had been entered into.
We found that James’s claim should be paid in full, minus any excess.
The insurer accepted our view and agreed to pay the claim. James was very happy with this outcome and used the money from the claim to buy the part from a legitimate company and finish his work on the helicopter.
Insights for consumers
Transactions made internationally are inherently risky because the seller and the buyer are geographically separated. This can cause challenges for the buyer in assessing the sellers’ ability and willingness to fulfil the order, and their trustworthiness.
If you have fallen victim of fraud, report the scam to Netsafe, who can advise you on what to do next.
This complaint is a good reminder for insurers to ensure they carefully consider exclusion clause wording before declining claims and make sure they are applying the exclusion correctly. Although there are often subtle differences in the way exclusion clauses are worded, those subtleties can be the difference between a claim being paid or not.