Bernard owned three buildings situated on a single suburban property. He leased each building out to a different small business – a restaurant, a shoe repair store, and a small gym.
In 2017, Bernard’s property flooded. Water flowed in from the neighbours’ property and pooled behind the shoe repair store. From there, it seeped into the back room of the store, which was partially underground. Luckily, this room had concrete floors, so there was only minimal damage. Bernard and the store owner removed the floodwater and carried on as usual.
However, nine months later the property flooded again, in the exact same circumstances: after a brief period of heavy rain, water flowed into the shoe repair store from the neighbours’ property. Bernard and the store owner removed the floodwater again to get the business operational.
After this second flood, Bernard hired engineers to identify the cause of the flooding. The engineers discovered that in 2016, the neighbours had installed a new drainage system which did not comply with the local council’s standards. The neighbours had installed a faulty drainage tank extremely close to their boundary with Bernard’s property. Every time there was a storm, this drainage tank would overflow directly into Bernard’s property and the shoe repair store.
Bernard told his neighbours about the ongoing flooding and the issues with their drainage, but they refused to take any meaningful steps to fix the issues.
Bernard then filed a claim under his material damage insurance policy. He was seeking the cost of the engineers’ report, and for legal action to compel the neighbours to fix their drainage system.
The insurer declined Bernard’s claim, and Bernard brought a complaint to FSCL.
Bernard’s insurance policy had a clause covering protection costs – defined as the costs incurred fighting or controlling damage to Bernard’s property.
Bernard said that the engineers’ reports and legal action against his neighbours were clearly covered under this clause. It was almost certain that his property was going to flood again, so the legal action and reports were both necessary to stop ongoing damage to the property.
Bernard’s insurer disagreed. They acknowledged that the property was very likely to flood again, but said that the protection costs clause was only intended to cover an imminent or immediate threat of damage. They said that the possibility of future flooding was too speculative and far in the future to be covered by the policy.
After closely reviewing Bernard’s policy, we agreed with the insurer.
We said that there must be some limit to the cover for protection costs – the policy could not be intended to cover costs incurred to prevent any risk of damage, no matter how remote or speculative the risk may be. If the clause were that broad, it would cover preventative measures as speculative as earthquake strengthening, or installing a fire reserve at the property. This was clearly not how Bernard’s policy was intended to operate.
So, if there was a limit to the cover for protection costs, we needed to determine how near a threat of damage needed to be before cover for protection costs would be triggered. Again, we agreed with the insurer. We took the view that damage needed to be imminent before preventative measures would be covered by the policy. We based this view on two pieces of evidence:
- The wording of Bernard’s policy implied a sense of urgency and immediacy. It referred to ‘protection costs’ rather than ‘prevention costs’ and costs incurred ‘fighting’ a threat of damage. This wording suggested that the damage needed to be imminent – that the threat needed to be taking place at the time the insured put their preventative measures in place.
- There is a legal rule which says that, by default, insurance polices which cover damage to property will also cover costs incurred to prevent damage. However, they will only cover those costs if damage is inevitable and imminent. We did not think Bernard’s insurer intended to provide any more than this default level of cover.
We did not think that the risk of further flooding was imminent. We agreed with Bernard that it was very likely flooding would continue to occur. But a risk that flooding would take place some time in the next year was not an imminent risk.
It followed that Bernard was not covered for the cost of his engineers’ reports or any legal action against his neighbours. If further flooding damaged his property, Bernard could claim the costs from his insurer. But if he wanted to take action to prevent the flooding, his insurer was not liable for the cost.
Bernard did not accept our interpretation of his policy. He decided to seek legal advice and pursue his complaint elsewhere.
Insights for consumers
Over the past few years, insurers have been working to make their policies as clear and as understandable as possible. However, there will always be cases which sit on the fringe of the policy wording, where it is not immediately clear whether the policy will or will not respond.
These cases are where insurance advisers can be particularly helpful. If you have arranged your policy through an adviser, they will often be there to help you put together a claim, and prepare arguments to the insurer if you think they have reached the wrong decision.
Having help from an adviser may not have led to Bernard’s claim being approved, but it could have reduced some of Bernard’s stress during the claims process. This was a particularly complex claim, concerning some nuanced issues of contractual interpretation. An adviser could have helped Bernard put his arguments to the insurer in the strongest possible form, and taken some of the pressure and responsibility off Bernard.