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Catch me if you can!

Arnie worked as a carpet installer and decided to buy a carpeting business franchise. At the time, the franchise had only one employee, the store manager, Franco.

Arnie trusted Franco who helped Arnie with running the store while Arnie was busy installing carpet for customers. Franco also covered for Arnie and handled all the accounting while Arnie took some time out due to a health issue.  

As Arnie’s business grew, he decided to hire an administrator. One day, the administrator could not reconcile some invoice figures. Upon investigating further, the administrator discovered that Franco, the store manager, had been retrospectively amending the final invoice to show a greater stock of carpet and a smaller profit margin. Franco had designed an elaborate scheme in order to steal carpet from the business and allocate the stolen carpet towards a customer’s job. Franco was able to steal stock worth thousands of dollars over the years.

Arnie made a claim, through his broker, to his insurance company for the stolen stock. The insurance company declined Arnie’s claim, and said that Arnie had not taken sufficient precautions to prevent the theft of his stock.

Arnie and his broker complaint to FSCL. Arnie felt that the insurer did not properly listen or consider the protections Arnie had in place for a small business. Arnie explained that Franco circumnavigated the protections that the business had in place. Due to this, Arnie’s regular stock checks, GST checks and accountant checks did not uncover Franco’s elaborate fraud.



In the insurer’s view, stock controls of any nature appear to have been non-existent. Arnie should have had a “separation of powers” between staff with access to the accounts and to the stock. The insurer relied on Arnie’s policy wording which excluded claims where he had failed to take all reasonable precautions to prevent financial loss.



Upon review, we found that the insurer’s expectations of the protections Arnie’s business should have were not practicable for a business of Arnie’s size.

We wrote to the insurer and explained the protections that Arnie did have, and suggested that the policy was perhaps unsuitable for Arnie’s business. This was because the separation of powers expected by the insurer was practically impossible for a two-person business.



The insurer reviewed their decision and decided to pay Arnie the full amount available under his policy. Arnie accepted this in settlement of his complaint.

Arnie was particularly grateful that we had taken the time to understand his business practice, and noted he had struggled to get the insurer to properly consider what he was saying.


Insights for participants

In this case, the insurer had formed a view about what their policy wording would cover and did not properly consider Arnie’s submissions. Where there is no definition or guidance in the policy wording, insurers are encouraged to take into account what is reasonable in the circumstances of the particular business owner when making a decision about whether or not to decline a claim.