Sam owned a small business which was ‘yellow stickered’ as a result of the Kaikoura earthquake on 14 November 2016. His business was largely undamaged, but the potential for a neighbouring building to collapse onto his business premises meant that Sam was could not operate his business until the unsafe building had been demolished. Sam had full business interruption insurance and thought that, as a result of not being able to open for eight months, his losses would be fully covered by his insurance.
However, Sam’s building was not sufficiently damaged to trigger the material damage clause in his insurance policy. Because Sam was prevented from trading on the leased premises due to the unsafe neighbouring building, the ‘prevention of access’ clause of his policy was triggered, rather than material damage. This clause limited Sam’s claim to 10% of the sum insured ($27,000.) This sum was not enough to cover his loss.
Before Sam brought a complaint to us about the insurance broker, who placed his insurance, he received legal advice. Sam’s lawyer told him he could not see where the insurer got the 10% limit from.
Sam complained to FSCL about the broker.
Sam believed that it was the broker’s fault that his cover was limited to 10% of the total sum insured. He said that after lessons learned from the Christchurch earthquakes he should have been given insurance cover for this type of situation where his business premises were not damaged, but damage to surrounding buildings prevented him from trading. The broker had an obligation to discuss the amount and level of payment for this type of circumstance.
Sam explained that payment of only 10% of his full policy entitlement was not enough to cover the costs of his lease, payment to suppliers and the fact he had no revenue stream for eight months. Further to this, Sam stated that he had no control over the demolition process and it was the council’s delay (through transitional orders) that had indirectly caused his loss.
Sam explained that he had received $20,000 from the insurer as a ‘progress payment’ on 26 January 2017 and believed more would be forthcoming once it had properly assessed his claim.
Sam alleged that the broker didn’t provide insurance advice with the reasonable, care, diligence and skill required of an adviser under the Financial Advisers Act 2008. Sam believed that the broker should have arranged more, or a different type of cover in order to have protected him for all of his loss. Sam said if he had been aware of this limit in his policy he would have asked his broker to find a policy which covered 100% of loss caused if a natural disaster forced closure occurred.
The broker believed the business interruption insurance obtained was standard to the industry after the Christchurch earthquakes. It maintained that a 10% limit when the insured’s property was not materially damaged was commonplace in the industry.
Because Sam’s building was not ‘materially damaged,’ the broker believed the insurer was correct in declining to pay the full sum insured. The broker maintained that it could not have done more to obtain further ‘prevention of access’ cover because none existed in the industry.
Upon investigation, we determined that a 10% limit for ‘prevention of accesses’ was commonplace in the industry.
It was clear from our research, and consultation with industry experts, that all business interruption policies currently available on the market limit cover to 10% of the insured sum when prevention of access is not caused by damage to the insured person’s building. Sam was not prevented from trading due to damage, rather from the lack of access to his premises. Unfortunately, we did not believe that there was anything else the broker could have done to obtain more extensive cover for Sam’s business or to change the stance taken by the insurer.
We explained to Sam that this 10% limit was standard to the industry. The policy clearly stated that it only allowed for the 10% which had already been paid out. As a result, the broker’s actions had not caused a loss.
The service and information provided to Sam in the situation was adequate. We acknowledged and sympathised with Sam’s loss, but noted that if we had to make a decision, we would confirm that the broker had acted properly. Sam, as a result, advised that he would withdraw his complaint.
Key insight for consumers
‘Fully insured’ doesn’t mean insured against every eventuality. It is important to read your policy to check what limits to cover may apply.