The Pipe Company was hired to repair a business’s plumbing. While it was performing the work, one of its employees tipped over a valuable piece of the client’s drainage equipment, heavily damaging it.
The Pipe Company immediately repaired the damaged equipment, which involved replacing a few expensive parts. After the repairs were finished, The Pipe Company lodged a claim with its public liability insurer for the cost of its repairs.
The insurer accepted the claim, but said it would not pay The Pipe Company’s full invoice. The insurer said it would pay the cost of the parts and labour The Pipe Company used in the repairs, but it refused to pay any profit or overhead margins.
The Pipe Company thought the insurer should pay its full invoice.
The Pipe Company said if it was not allowed to recover its overhead margin, it would be losing money on the repairs. It said its overhead margin covered real costs which The Pipe Company had paid as part of the repairs. In particular, The Pipe Company used a lot of specialised parts in the repairs, and its overhead margins covered storage and transport costs for those parts.
The Pipe Company also said it should be allowed to claim a profit margin for the repairs. It said it had given up valuable work to perform the repairs, because it thought it was fully insured. The Pipe Company did not think it should be punished financially for its decision.
The Pipe Company complained to FSCL.
We found that the insurer had applied its policy correctly. The policy did not allow The Pipe Company to claim a profit margin on its repairs. This was due to a legal rule called the ‘indemnity principle’, which states that you cannot profit from an insurance claim. The rule makes sure that people are not incentivised to make fraudulent insurance claims, in order to make a profit.
The Pipe Company’s insurance policy did not allow it to claim an overhead margin either. The policy clearly stated that the insurer was not liable for any of The Pipe Company’s overhead costs incurred managing a claim. We found this exclusion applied to any overhead costs The Pipe Company incurred repairing insured damage.
We found that the insurer had acted reasonably when it refused to pay The Pipe Company’s overhead and profit margins.
However, we considered the insurer had failed to clearly set out the reasons for its decision. The insurer’s poor communication had caused significant inconvenience for The Pipe Company, so we recommended that the insurer pay The Pipe Company $250 as compensation.
We issued a formal recommendation, requiring the insurer to pay the Pipe Company $250 as compensation for inconvenience.
Key insights for the complainant
It is always important to let your insurer know about a claim as soon as possible. If The Pipe Company had called its insurer as soon it damaged its client’s equipment, the insurer might have agreed to pay The Pipe Company’s full invoice. However, The Pipe Company only told its insurer about the damage after it had finished its repairs. This meant there was very little room for The Pipe Company to negotiate over the terms of the repairs, and it set The Pipe Company up for a nasty surprise when it made its insurance claim.