Alan arranged insurance through his broker for his accommodation lodge business near Kaikoura. The broker recommended business interruption insurance, which would cover Alan if his lodge was affected by a natural disaster. The broker sent Alan the policy and policy schedule, showing business interruption cover of $50,000 was in place.
The November 2016 Kaikoura earthquake caused considerable damage in the region. While Alan’s lodge buildings weren’t affected, Alan’s guests were unable to reach the lodge because the roads were closed.
Alan claimed for a loss of $50,000 under his business interruption policy. Alan’s insurer accepted the claim but offered compensation of $12,500. Alan contacted his broker assuming the insurer had made a mistake given the cover he had in place. The broker explained that because his lodge was undamaged, he was only eligible for contingent business interruption cover. Alan’s policy limited the contingent business interruption cover to 25% of the total amount insured.
Alan did not accept the insurer’s offer and complained to FSCL that his broker did not provide insurance advice with the reasonable care, diligence and skill required of an adviser under the Financial Advisers Act 2008.
He said the broker should have told him, when the cover was arranged and renewed, that the contingent business interruption cover was limited to 25% of the total business interruption cover. Alan said that if he had known about the limit he would have asked his broker to find a policy that would have covered 100% of his loss caused if a natural disaster prevented guests reaching his lodge.
Alan’s broker considered it had placed the best cover available on the market for Alan.
On the basis of expert opinion, we were satisfied that it would not have been possible for the broker to place cover for all Alan’s contingent business interruption loss. We were advised that standard contingent business interruption insurance was limited to 10% of the total gross profit of a business, and it was unusual that Alan’s broker had been able to place cover for 25%.
We explained to Alan that we could not see that the broker had caused him a loss. Even if Alan had been aware of the 25% limit, the broker could not have placed better cover. By failing to advise Alan about the cover, the broker had denied him the opportunity to self-insure for the balance of the contingent business interruption cover, but Alan acknowledged he would have been unlikely to do so.
While we recommended that Alan discontinue his complaint, we were concerned that the service provided by the broker was not as good as it could have been. Insurance policies can be complicated documents that are difficult to understand. A person engages a broker not only to place cover best suited for their needs, but to explain the extent of the cover.
Although the broker could not have placed better cover, the broker could have explained the business interruption cover would be limited to $12,500 if Alan’s buildings were undamaged by a natural disaster, but that damage elsewhere caused a loss. If the broker had given Alan more complete advice, he would not have been surprised by the insurer’s response that only 25% of the business interruption cover was available.
The broker offered Alan an ex gratia payment of $500 as an acknowledgement that its service was not as good as it could have been and we encouraged Alan to accept the offer, which he did.
In our opinion, a broker’s role extends beyond finding cover best suited to their client’s needs to explaining the benefits and limitations of that cover. It is not enough for a broker to simply email a copy of the policy, and leave it to the client to interpret the relevance of the cover available. A client cannot know how the policy relates to other policies on the market or understand how the recommended policy will respond. Best practice is to provide an explanation of the policy, tailored to the client’s specific business risks. Time taken to provide full explanations when the insurance is placed can avoid unpleasant surprises when it becomes necessary to claim against the policy.