Insurance payout insufficient to replace damaged sofa

In December 2021, Alison and Vaughn relocated from the United States to New Zealand as Alison’s employer had offered her a role here. Her employer provided insurance under an international assignments policy that provided cover for household goods and personal effects in transit.  

Alison and Vaughn’s furniture were damaged in transit. 

In January 2022, Alison and Vaughn lodged a claim with the insurer. The insurer appointed a loss adjuster to assist with the claim. There were difficulties in obtaining quotes for replacement goods and it was not until April 2022 that Alison was able to provide quotes on the items that were able to be repaired. Other items were unable to be repaired to an acceptable level. 

In late May 2022, the insurer put forward an interim settlement offer of $27,000 for everything in the claim, apart from three items where the extent of the damage needed to be further assessed (two beds, a dining set and a sofa). Alison and Vaughn accepted the interim offer. 

Over the period June to November 2022, the parties continue to negotiate on the claim. Alison raised concerns about the role of the loss adjuster and the advice they gave on various matters. She also raised a concern about the calculation of the excesses.  The insurer said the excesses had been calculated correctly. However, they agreed to waive them on a goodwill basis.

By November 2022, the claim for the beds and the dining set had been settled. The remaining item was the sofa. Alison had made a claim of $40,000. Her particular sofa was not available in New Zealand, and she considered a similar one in terms of quality would cost about $40,000. The insurer’s final offer at this time was $23,093.48, which included a cash settlement for the retail price of the same sofa in the US converted to NZD ($20,493.48), a 10% contingency for price variations for a replacement in the New Zealand market, and estimated delivery costs. The offer was based on the insurer taking possession of the damaged sofa for salvage. If Alison and Vaughn wanted to retain the damaged sofa, there would be a deduction of $3,000 from the settlement to cover this. This amount had been suggested by the loss adjuster. 

Alison and Vaughn were not happy with the offer for the sofa or the salvage amount. The parties could not agree on an outcome, and so Alison contacted FSCL in December 2022. 

Dispute

Alison and Vaughn

Alison and Vaughn said it would be cheaper to bring a replacement sofa from the US to New Zealand than purchase a similar one domestically. They complained that the insurer wrongly declined to cover the costs of shipping and duties (about $11,000) to import a replacement from the US. 

In response to the insurer’s point that the policy was silent as to shipping costs, Alison and Vaughn said that such costs should have been specifically excluded if the insurer did not intend to cover them. 

Alison and Vaughn did not agree with the $3,000 the insurer proposed to deduct for salvage. They thought the sofa had no value after taking into account the costs of repairing it, transporting it to an auctioneer, and paying a sales commission. 

They also complained about the length of time the insurer had taken to deal with the claim. 

The insurer

The insurer said their settlement offer was fair and in line with the policy terms.  They did not think it was practical or reasonable to settle the claim based on importing a replacement from the US given that the costs of this would be more than 50% of the agreed value of the sofa. 

The insurer thought it was reasonable for them to rely on the $3,000 salvage figure suggested by the loss adjuster. 

Review

The sofa

We reviewed the policy which said that it would insure for ‘replacement cost’ for goods. However, if it was not practical or reasonable to repair or replace an item to exactly its condition before the loss, any repair or replacement made to settle the claim would be reasonably comparable with that condition. 

We considered the replacement cost would be the cost to purchase an identical sofa. However, the cost of importing an identical replacement from the US would be about $11,000, which was more than half the retail price for the sofa. In those circumstances, we thought it was fair for the insurer to say it was not reasonable to replace the sofa with an identical one only available in the US.

At first, we thought the insurer’s offer to settle the claim by paying the actual retail value of the sofa in NZD, along with a 10% contingency, to allow them to find a suitable replacement in New Zealand was reasonable. 

In terms of the shipping costs, while we thought it may have been helpful if the insurer had expressly disclosed that it was excluding such costs, we did not consider they needed to do so. 

Our preliminary view was that the insurer had made a reasonable offer to settle the claim.

The salvage

There is no general obligation on an insurer to allow the insured to retain the salvage. This is a matter for negotiation between the parties. Given this, we did not think it would be fair to require the insurer to reduce the deduction for salvage. 

The insurer’s handling of the claim

There was a lengthy claims process in this case. It was 10 months from the lodging of the claim until the insurer’s final settlement offer. There were some gaps in the insurer’s communications, which suggested there were opportunities for the claim to have been progressed in a timelier manner. 

However, in considering what would be a fair resolution, we needed to consider the concessions the insurer had already made, including waiving the excesses.  The excess for the sofa was $2,309.  This sum was at least as much as we would generally award for inconvenience experienced from avoidable and undue delay.  Given this, we did not think it would be fair to say the insurer should pay compensation for the way the claim was handled. 

The parties’ responses to the preliminary decision

Alison and Vaughn accepted what we had to say about the salvage amount and the insurer’s handling of their claim. However, they did not accept our preliminary view on the settlement offer for the sofa. They said it was not possible to buy a reasonably comparable sofa in New Zealand for the amount of the insurer’s offer. Their sofa had been designed by an acclaimed Italian designer, was an original piece, and had been made from high grade Italian leather. Alison contacted stores in New Zealand that stocked high quality furniture and asked for recommendations for sofas of the same quality (in terms of design, style and materials) as their sofa. They received recommendations for such sofas in the range of $34,000 to $52,000. 

The insurer responded, after a further delay, to say their offer of settlement was based on the exact model of the sofa, and so they had accounted for the actual replacement cost of the sofa as required under the policy.

They were, however, willing to make a contribution towards the costs of importing a sofa from the US. The total value of the insurer’s settlement offer was now $29,054.82. 

The insurer  did not respond to Alison and Vaughn’s evidence on the costs of similar sofas in New Zealand. 

Resolution

We noted the starting point to assess the claim was that the sofa was insured for replacement cost. The policy did not define this term. However, the insurer was now indicating that the term simply meant the replacement cost of the exact item. We noted that if this was the case, the second part of the insurance clause about what would happen if it was not practical or reasonable to replace an item appeared to have little meaning.

We remained of the view that, where it was not possible to purchase an identical replacement sofa, the second part of the insurance clause applied. It was simply not practicable or reasonable in this particular case to replace Alison and Vaughn’s sofa because it would have to be imported from the US, with the additional time and costs involved. They had put forward evidence to show that to buy a reasonably comparable sofa in New Zealand, the price would start from $34,445.41, rising to over $50,000. 

Taking a fair and reasonable approach in all the circumstances, we decided that the insurer’s settlement offer was insufficient. A fairer resolution would be for the insurer to increase its offer by an additional $5,390.59:

Price of a reasonably comparable sofa in New Zealand$34,445.41
Value of the insurer’s settlement$29,054.82
 $5,390.59

Alison and Vaughn agreed with our final decision, and the case was settled on that basis. 

Insights for participants

There will be occasions where it is not possible to replace a lost or damaged item with an identical one. In such cases, an insurer must carefully consider, in line with the wording of the policy, what is required to settle a claim for a reasonably comparable item. Sometimes it may be more efficient to take a fair and reasonable approach when negotiating a settlement of a claim where the parties are not too far apart on cost.

Lenders must also assess a claim within a reasonable time, and be alert to all opportunities for timely settlement.