Mia owned a painting business and had business insurances, which she had arranged through an insurance broker.
The broker initiated a switch of insurers to save on premiums. Under the original cover, Mia’s business paid for cover under an optional defective workmanship policy extension. The business did not have an equivalent extension in place with the new insurer. It appeared that the broker had overlooked to arrange the extension when switching insurers.
Mia was aware the insurer had changed, but she did not know the defective workmanship equivalent extension had not been put in place with the new insurer. Mia found this out when she made a claim to the new insurer, which they declined.
A staff member at Mia’s business mixed two paint products incorrectly when working on a job for a client. When the paint was applied to steel beams, it did not cure properly. The local council would not sign off on the work and the warranty on the steel was voided. Mia’s business had to remediate the beams for their client, which cost around $90,000.
Mia complained to her broker that they had omitted to arrange the policy extension. She believed the claim would have been covered if the policy extension had been in place. The broker did not agree with Mia and believed she had not been prejudiced by the change of insurers. The broker said no insurer would have accepted Mia’s claim.
Mia complained to FSCL.
Under the wording of the new insurer’s policy extension, there had to be physical damage to the beams for cover to be available.
Mia believed there had been a physical change to the beams. The incorrectly mixed paint had impaired the value and usefulness of the beams.
The broker disagreed. They believed the loss was caused by the defective paint. There had been no physical damage to the beams underneath the paint. The broker also believed the former insurer would not have paid a claim.
The broker gave us evidence from the two insurers, setting out their views that a claim would not have been covered under their respective policy extensions.
We concluded the broker had acted negligently when they switched Mia’s business’s insurances. Omitting to arrange the policy extension meant there was a significant change in cover, which Mia had not agreed to.
Mia had been significantly inconvenienced by the broker’s omission. She lost the opportunity to make a claim to the new insurer under the relevant policy extension that should have been in place. Mia had also experienced as significant amount of stress trying to get her complaint resolved.
However, it was less clear whether the broker had caused Mia’s business to suffer a direct loss. In other words, it was not clear whether Mia’s business would have been able to make a successful claim if the relevant policy extension had been put in place with the new insurer or if the broker had not switched insurers in the first place.
We considered that the insurers’ views, that claims under their respective policy extensions would not have been successful, were persuasive but they were not determinative. We undertook our own assessment of the policy wordings.
We concluded it was unlikely the claim to the new insurer would have been covered if the relevant policy extension had been put in place by the broker. Physical damage meant more than an injury or harm to the object that impairs its value or usefulness. There needs to be a physical alteration or change to the object.
In this case, while the paint on the beams was defective, there had not necessarily been a physical alteration or change to the steel underneath the paint.
However, we also concluded that it was possible there may have been cover under the former insurer’s policy extension. Under their policy wording, there may have been cover if there had been a physical injury to the paint (rather than the beams). Physical injury and physical damage have the same meaning. It was arguable there had been a physical injury to the paint because it was physically altered from the state it should have been in.
However, even if there had been a physical injury to the paint, the policy wording was unclear about when the physical injury could occur. If there was a physical injury to the paint, this happened when Mia’s business had control of the paint. It was arguable that the policy wording meant the injury had to occur after Mia’s business had ceased having control of the paint.
Our view on whether there would have been cover under the former insurer’s policy extension was finely balanced. Given this, we suggested to the parties that they should settle the matter on a 50/50 basis.
Both parties agreed to this suggestion and the broker paid Mia’s business around $45,000 to resolve the complaint. Mia believed she would have had a strong claim for the full amount of the remediation costs if she had taken the broker to court, but ultimately decided to settle with the broker.
Insights for consumers
Consumers (including small businesses) can complain to FSCL if they believe their financial adviser made an error (to the consumer’s detriment) when arranging insurances.
If an adviser makes a mistake which means the consumer is not covered for something they should have been, the adviser may need to compensate the consumer for their financial loss. To award compensation, we would need to be satisfied that the insurer would or should have paid the claim but for the adviser’s mistake.