Arthur’s company exports meat products. The meat products are processed at third party processing facilities before being sent to their country of destination. The meat processers have to gain certification to process meats for export to certain countries, and the Ministry of Primary Industries (MPI) monitors and oversees this system.
In July 2018, Arthur’s company had some veal processed for export to the United States (US). However, in August 2018, MPI notified the processer that they had failed to meet the testing requirements for STEC, and as a result all of Arthur’s veal became ineligible for export to the US. STEC is a harmful strain of E. coli which can make people sick if they consume it.
Arthur had to pay to have the veal treated to address the potential STEC issues, and he could only export it to a few overseas markets where it was sold for a cheaper price. Arthur submitted a claim to his insurer for a loss of $170,000 under his contaminated products policy.
The insurer declined Arthur’s claim because there was an exclusion in the policy for claims arising from any change in governmental regulation. The insurer said on 1 July 2018, MPI implemented new STEC testing standards for veal being exported to the US, and Arthur’s veal hadn’t met the new regulations.
Arthur complained to FSCL because he thought the insurer wrongfully declined his claim.
Arthur said the exclusion shouldn’t apply because the change was notified to the industry in mid-June 2018, before the policy took effect on 30 June 2018. Arthur said a reasonable person would interpret the exclusion to only apply to changes first notified during the policy period, because the purpose of the exclusion was to protect the insurer from changes in the risk it chose to underwrite at the time the policy began.
We reviewed Arthur’s complaint and found the insurer had applied the exclusion correctly.
We thought the implementation date of 1 July 2018 should be treated as the date the change took effect, rather than the day the change was notified in mid-June 2018. This is the usual way legislative changes are interpreted to have effect. Therefore, we found the change in regulations had occurred after the policy period began on 30 June 2018.
We also thought the exclusion could apply to changes in regulation occurring outside the policy period, because:
- The wording of the exclusion would specially refer to changes arising ‘during the policy period’ if intended to.
- The ordinary meaning of ‘any change’ in governmental regulation would capture changes whenever they occur.
We issued a preliminary decision recommending Arthur discontinue his complaint.
Arthur did not accept our preliminary decision and raised a new argument. Arthur said the loss was not caused by the change in governmental regulation, but by the processer’s accidental failure to comply for some unknown reason. Arthur said the processer would have been aware of the new STEC testing requirements and had appropriate processing practices in place to meet them, so there was no clear cause of the veal’s failure to meet the new export standards. Arthur referred to section 11 of the Insurance Law Reform Act 1977 (the Act) which prohibits insurers applying an exclusion to a claim if it’s not sufficiently connected to the loss.
We reviewed the loss adjuster’s report and found they had reasonably concluded the tightening of the STEC testing standards was a factor in the loss. Alternative causes had been investigated, but no other causes of the loss were identified.
We issued a final decision recommending Arthur discontinue his complaint. We were satisfied the insurer correctly applied the exclusion to the claim, because the loss arose from a change in governmental regulation which took effect during the policy period. We also thought section 11 of the Act didn’t apply because, based on the loss adjuster’s conclusion on the cause of the loss, the exclusion was sufficiently connected to loss.
Insights for consumers
It’s important to read and understand your insurance policies to make sure the policies suit your business’ needs, and you understand any areas of potential risk and exclusions from cover.