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‘Paul’s indemnity period pickle’

In June 2015, a building Paul owned suffered flood damage following a bad weather event. Paul ran a small business out of the premises and he made a business interruption (BI) claim under his business’s insurance policy, and a material damage claim for the building repair costs.

Indemnity period for 12 months, not 24 months

In early 2016, Paul was in contact with his broker because he discovered that the indemnity period for BI cover was only for 12 months following the event causing interruption. Paul had thought the BI cover was placed with a 24-month indemnity period. Paul was concerned the repairs would not be completed within the 12 months following June 2015.

In March 2016, Paul contacted FSCL and complained about his broker. Paul said he had made it clear to his broker that he wanted business interruption cover placed for 24 months, not 12 months. Paul wanted his broker to compensate him for losses he was likely to incur after the expiry of the 12-month indemnity period, in June 2016. With repairs likely to be completed by October 2016, Paul sought four months of lost BI cover from the broker (approximately $55,000).

The broker’s view

The broker said it had not erred in the placement of Paul’s insurance, and that Paul was responsible for his loss.

After speaking with Paul about his insurance needs at the time cover was arranged, the broker emailed Paul the schedule for the business policy which noted a 12-month indemnity period. The broker asked Paul to review the documentation to ensure it accurately reflected the cover he sought. The business policy application form Paul completed and signed also showed he had ticked the box indicating he wanted 12 months of BI cover.

The broker said that:

a) Paul had the opportunity to raise an issue about the indemnity period with her, several months before the flood.

b) A 12-month indemnity period was suitable for Paul’s business. A business of his type would usually be back up and running within 12 months.

c) There was cover for Paul to move his business to another premises, which he did not do. In other words, the broker said Paul did not mitigate his loss.

Although the building and business policies were separate, the broker said she could appreciate that because Paul ran his business out of the building he owned, it was likely to be the case that if the property was damaged and remained damaged for longer than 12 months, this was going to affect the business. However, this would not have altered her advice to Paul at the time of policy placement, because it was suitable to place BI cover for a business of the type Paul owned, for 12 months

Paul’s view

Paul said he spoke with his broker at length over the telephone about the placement of insurance. Specifically, Paul said he spoke with her in 2012 about his building policy requiring an indemnity period of 24 months.

In early 2015, Paul said he told his broker he wanted the cover for the business to be the same as that for the building. Paul said it was understood between him and the broker that he wanted 24 months of BI cover because he told her he knew people who had moved outside BI indemnity periods as a result of building repair delays.

Paul accepted his broker sent him information about the insurance placed and that he should have picked up the error about the indemnity period. However, in Paul’s view the greater responsibility was on the broker to make sure he had the cover he sought.

Although the broker said that 12 months of BI cover was adequate, Paul said his case proved this to be incorrect.

Lastly, moving his business to another premises was not possible because there were no suitable premises nearby. However, Paul’s broker should have pointed out to him that he had that available cover for the costs of moving the business premises.

Our view

There were no telephone call recordings or file notes made of the discussions between Paul and the broker about the indemnity periods required. In a ‘he said, she said’ situation such as this, we place more weight on the documentary evidence available.

We said that regardless of what was discussed over the telephone between Paul and the broker, the biggest hurdle for Paul was that he signed the application form where he ticked the box for a 12-month indemnity period. Paul also received a schedule noting the 12-month indemnity period and had the opportunity to correct the error.

We said Paul was responsible for reading the schedule and ensuring the cover placed met his needs. Accepting Paul’s evidence that he discussed the indemnity period at length with his broker, we would have expected him to have carefully checked the indemnity period noted on the schedule.

In addition, we did not consider it reasonable for Paul to have assumed his broker would determine, based on the discussion about indemnity periods in 2012, that his expectation in 2015 was that the BI policy should have an indemnity period of 24 months. Without a clear instruction from Paul in 2015 about the BI indemnity period required, it was reasonable for the broker to send Paul the application form to complete and for him to choose which indemnity period option he chose.

Cover fit for purpose and mitigation of loss

It was a moot point whether the cover placed was fit for purpose. However, we noted that it appeared to be reasonable to have placed the business policy with a 12-month BI indemnity period. There was no way to anticipate there would be circumstances where the material damage repairs would take longer than 12 months. Based on what the parties knew at the time of policy placement, a 12-month indemnity period was reasonable.

Final decision

We did not uphold Paul’s complaint. Paul decided to pursue a complaint about the insurer, on the basis he considered it was the insurer’s delay in completing the repairs that moved Paul outside the BI indemnity period of 12 months.

Our insight

We often investigate complaints where there is a ‘he said, she said’ situation, with the parties having conflicting recollections about what was discussed. In this case the documentary evidence available favoured the broker. However, we always encourage financial service providers to keep detailed notes of any advice provided.