What do you mean $10,000 limit?!

Mark has a construction business which regularly has projects all over the Waikato. In 2020, Mark had contracts for the construction of two new buildings. After starting the work, Mark stored one of his diggers at each site.

Both of the projects were riverside, and a large flood washed away the diggers whilst they were being stored at the sites overnight.

Mark arranged the recovery of the diggers, and he later made a claim with his insurer for the cost of the recovery, as well as replacement diggers, and the labour cost to re-do the work that was undone by the flood.

Mark’s insurer told him that the policy limit for damaged equipment was $10,000 per event if the damage occurred whilst the insured property was away from Mark’s registered business address (off-site).

Mark spoke to his insurance broker because he had deliberately arranged a sum insured of $150,000, and the $10,000 limit was going to mean his claim would not be covered in full.

Mark’s broker reviewed the policy wording and confirmed that the $10,000 limit applied to property that was damaged whilst away from the registered business address. Mark was not happy with the policy that his broker had recommended, because his equipment was regularly stored off-site. Mark complained to FSCL.

We told Mark that we could look at a complaint about his broker, but that he would first need to pursue his claim with his insurer – because it was necessary to know what the shortfall would be after the claim was settled.

Mark contacted us again after his insurer settled his claim. His insurer paid him $10,000 per digger, and the full $40,000 recovery costs, but did not cover the labour cost of re-doing the work at each site.

Mark wanted his broker to compensate him for the additional $20,000 it would cost to replace his diggers, and the $30,000 labour cost to re-do the work.

Mark’s broker offered to pay the $20,000 for the diggers, but not the labour cost.

Dispute

The total cost for new diggers, recovery, and labour was $110,000 and Mark’s insurer had paid him $60,000. Because Mark had asked his broker to arrange a policy with a sum insured of $150,000, he thought he should be covered for the full $110,000 and he wanted his broker to pay the balance of $50,000.

Mark’s broker agreed to pay the $20,000 shortfall for the replacement diggers, but not the labour costs because they said the labour costs were not covered under Mark’s policy.

Review

To decide whether we thought the broker had made a fair offer to resolve Mark’s complaint, we considered the broker’s offer in the context of what had happened.

Mark regularly stored high-value equipment off-site due to the nature of his business, so the policy his broker had recommended was not ideal because of the $10,000 policy limit for damaged equipment. However, the broker had offered to compensate Mark for the shortfall between the $10,000 his insurer paid him per damaged digger and the $20,000 replacement cost for each one, which we thought was fair.

Next, we considered the labour costs Mark was claiming ($30,000). We reviewed the policy wording and agreed with the broker that these costs weren’t covered under the policy, but that they may have been covered under a business interruption policy.

We asked the broker for the needs analysis they completed for Mark’s business and for copies of their statements of advice.

We could see that the broker had discussed business interruption insurance with Mark when he first came to them as a client, and when his policies were due for renewal. Mark opted not to take out business interruption insurance, despite being advised of the benefits.

We didn’t think it would be fair to ask the broker to cover the labour costs that weren’t insured under Mark’s policy. We explained to Mark that these costs would likely have been covered under the business interruption policy his broker recommended, but that he chose not to take that type of cover.

After our review, we told Mark that we believed his broker’s offer was a fair one, so we recommended he accept it.

Resolution

Mark then decided to accept the broker’s offer and the complaint was settled.

Insights for participants

Recommending a policy with a $10,000 limit for the equipment stored off-site was a costly mistake for Mark’s broker. This complaint highlights the importance of conducting a thorough needs analysis before recommending commercial insurance policies, to make sure that you understand your client and the nature of their business.

Mark regularly had equipment worth more than $10,000 stored off-site, so his broker should have kept this in mind when recommending different policies. The broker did the right thing here by ‘standing in the shoes of the insurer’ and reimbursing Mark for the gap in insurance cover.