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Determination
Case number | 12-00-1057801 |
Financial firm | Auto & General Services Pty Ltd |
Case number: 12-00-1057801 5 September 2024
The complainants held a home and contents insurance policy with the financial firm (the insurer). They lodged a claim saying their tenants had damaged the insured property by using a barbecue or brazier.
The insurer denied the claim. It said the property was damaged by smoke, not fire. It also said the policy excluded cover for damage caused by:
Yes. The policy covers damage ‘caused by fire’. The insured property was damaged by smoke, which was caused by fire. The insurer must accept the claim, unless it can establish the application of a relevant exclusion.
No. The exclusions raised by the insurer do not apply, because:
The insurer should settle the claim by paying $48,497.63 for repairs, plus interest from 15 December 2023. It should also pay $1,000 for non-financial loss (stress and inconvenience) caused by assessing the claim against an outdated version of the policy.
The insured property has damage caused by fire, which is covered under the policy. The insurer has not established the application of any relevant policy exclusion. Therefore, it is fair for the insurer to accept the claim.
This determination is in favour of the complainants. Within 14 days notification of the complainant’s acceptance of this determination, the insurer must pay:
Yes. The policy covers damage ‘caused by fire’. The insured property was damaged by smoke, which was caused by fire. The insurer must accept the claim, unless it can establish the application of a relevant exclusion.
The house was built in 2021.
The complainants let the property from December 2021.
In September 2023, the tenants vacated the property. The complainants say their agent inspected the home and discovered ‘a large amount of smoke damage’.
The complainants say their tenants did not speak English as a first language, and have now stopped responding to their enquiries. Because of this, they had difficulty finding out how the damage occurred. However, based on their conversations with the tenants, they say:
The complainants lodged a claim for the damage on 2 December 2023.
The insurer appointed a builder, who inspected the property on 7 December 2023. The builder confirmed most of the rooms had been damaged by smoke and poorly painted. The builder said the complainants’ agent reported ‘smoke and fire damage’. The builder did not say whether they saw any damage caused by fire and not smoke.
The insurer appointed a forensic fire scene investigator, who inspected the property on 20 December 2023. The investigator said:
The cover provided by the policy is set out in the certificate of insurance, the product disclosure statement (PDS), and the supplementary product disclosure statement (SPDS). Relevant policy terms are quoted in section 3.2 of this determination.
The PDS says it was prepared on 1 March 2021. The insurer assessed the claim using the terms set out in the PDS.
The SPDS says it was prepared on 14 July 2022. The complainants say the insurer emailed the SPDS to them at least 13 times between policy purchase and claim lodgement. The SPDS says it changes the part of the policy covering fire damage. It says the changes apply to:
It is concerning that the SPDS says it was prepared in 2022 but applies to claims from 2021. However, the updated wording is more favourable to the complainants.
The complainants said the SPDS applied to their claim. This is consistent with the words of the SPDS: their policy was renewed after 12 June 2021, and their claim is for fire damage that occurred after 29 April 2021.
The insurer said the SPDS did not apply to the complainants’ claim because their policy was renewed on 1 June 2023. This is not consistent with the words of the SPDS: the SPDS says it applies to policies renewed after 12 June 2021. The insurer has not explained this.
AFCA asked the insurer why it sent the SPDS to the complainants if it did not apply to their policy. The insurer did not respond.
The SPDS applies to the complainants’ claim. The insurer should have assessed the claim using the terms set out in the SPDS.
A party making an insurance claim must establish they suffered a loss that is covered under the insurance policy. They must establish this on the balance of probabilities (i.e. that it is more likely than not).
If a claimable loss is established, the insurer must accept the claim, unless it can establish the application of a relevant exclusion. The insurer must establish the exclusion on the balance of probabilities.
The PDS (which the insurer incorrectly considered) says the policy covers damage ‘caused by fire’. The insurer says the property was damaged by smoke, not fire. However, the smoke was caused by fire. Any damage caused by the smoke is damage ‘caused by fire’.
The SPDS (which the insurer should have considered) says the policy covers damage caused by:
The property was damaged by fire. It was also damaged by smoke that was a direct result of a fire within 100 metres of the insured address.
The policy also covers accidental damage. However, this section of the policy excludes cover for damage caused by a tenant.
The complainants have established a claimable loss for damage caused by fire. The insurer must accept the claim, unless it can establish the application of a relevant exclusion.
No. The exclusions raised by the insurer do not apply, because:
The PDS says the policy excludes cover for damage caused by ‘smoke or soot when no damage from fire has occurred’. The insurer applied this exclusion to deny the claim. This was incorrect, because:
In any case, the SPDS removed this exclusion from the policy before the damage occurred.
The PDS and SPDS both say the policy excludes cover for damage caused by ‘scorching or melting when there is heat but no flame’.
On 17 January 2024, the insurer told the complainants this exclusion applied to their claim. In its later submissions to AFCA, the insurer did not mention this exclusion.
The complainants say the tenants’ barbecue or brazier produced flames. The insurer has not provided any information to refute this. The insurer has not provided any information indicating there was ‘heat but no flame’.
The policy excludes cover for wear and tear. Information about the meaning of ‘wear and tear’ is provided in section 3.3 of this determination.
The complainants say the damage was caused by a single incident involving a barbecue or brazier.
The insurer’s builder said the damage was ‘consistent with the tenant's living conditions and actions over a period of time.’ However, the builder did not say why they thought the damage occurred over time, and not in a single incident.
The forensic fire scene investigator’s report said the damage was caused by a fire on 12 November 2023. This date is not correct; the complainants say they were informed of the damage in September 2023. The report also says: ‘The precise time of the fire is not known.’ However, the report’s references to ‘the fire’ indicate the investigator thought the damage was caused by a single fire, and did not see any indication that it developed over time.
The insurer has not established the damage occurred over time. However, even if it occurred over time, it would not be wear and tear. Wear and tear is the deterioration of an object caused by its ordinary use. The ordinary use of the property includes cooking, but does not include:
The insurer should settle the claim by paying $48,497.63 for repairs, plus interest from 15 December 2023. It should also pay $1,000 for non-financial loss (stress and inconvenience) caused by assessing the claim against an outdated version of the policy.
The complainants have established a claimable loss, and the insurer has not established the application of a relevant exclusion. Therefore, the insurer must accept the claim and settle it in accordance with the policy terms.
The policy says the insurer can settle a claim by repairing damage or paying the reasonable cost of repairs.
The complainants have sold the property. Therefore, the only way the insurer can settle the claim is by paying the reasonable cost of repairs
The complainants provided a repair estimate dated 4 December 2023 totalling $37,807.15.
The insurer’s builder prepared a repair quote dated 15 December 2023 totalling $39,327.79.
In the circumstances, I consider it fair for the insurer to pay a settlement based on its builder’s quote.
The complainants provided an undated quote for $1,774 for new blinds.
The complainants’ real estate agent did not record any damage to the blinds. The insurer’s expert reports did not say the blinds were damaged. However, the insurer’s builder took photographs showing damage to the blinds. I am satisfied the blinds were damaged by the smoke.
The insurer’s builder’s quote does not include new blinds. The insurer has not provided information indicating the complainants’ quote for new blinds is unreasonable.
The complainants provided a quote for $7,395.84 to $9,039.36 for new carpet.
The complainants’ real estate agent did not record any damage to the carpet. The insurer’s experts did not record any damage to the carpet.
The insurer’s builder, who inspected the property on 7 December 2023, said most rooms were poorly painted by the tenants, resulting in further damage due to overpaint and dripping. It is likely that this overpaint and dripping damaged to the carpet.
On 11 December 2023, the complainants told the insurer the tenants damaged the carpets when they were painting the walls. The insurer did not dispute this, and did not subsequently inspect the carpet.
In my view, it is more likely than not that the carpet was damaged by the tenants attempting to paint over the smoke damage. This damage was indirectly caused by the fire, so it is covered under the policy.
The insurer’s builder’s quote does not include new carpets. The insurer has not provided information indicating the complainants’ quote for new carpets is unreasonable.
In some circumstances, the policy covers loss of rent while the home is unliveable. The policy says a home is ‘unliveable’ if ‘normal domestic activities like cooking and sanitation cannot be performed’.
The damage to the home was mostly smoke damage to paint, and new paint poorly applied to try to cover up the damage. This damage did not mean the home could not be lived in, or that normal domestic activities could not be performed.
The home was not unliveable. Therefore, the policy does not cover loss of rent.
The claim settlement payment should be calculated as follows:
Item | Amount |
Building damage | $39,327.79 |
Blinds | $1,774 |
Carpets | $7,395.84 |
Total | $48,497.63 |
The complainants were entitled to receive this money earlier, but the insurer has not yet paid them. To compensate for the delay in receiving payment, the insurer should pay interest from 15 December 2023, the date of its builder’s quote.
The insurer must settle the claim by paying the complainants $48,497.63, plus interest from 15 December 2023.
The complainants say they suffered severe stress and inconvenience because the insurer denied the claim. They say they had to:
AFCA considers that if a complainant is entitled to money, and there is a delay in receiving payment, an award of interest will usually be sufficient to compensate for the delay.
This determination awards the complainants interest from 15 December 2023, the date of the insurer’s builder’s quote. The insurer is not required to pay further compensation for the delay in payment.
Under the AFCA Rules, we can award up to $6,300 compensation for non-financial loss if a complainant suffered an unusual degree of stress, inconvenience, or delay because an insurer mishandled a claim.
We will only award this type of compensation if there has been an unusual degree of stress, inconvenience, or delay. We will not award compensation for the usual amount of inconvenience involved in making a claim. We will not award compensation for delays caused by a complainant, or other factors outside the insurer’s control.
In my view, the insurer mishandled the claim, because:
The insurer applied an exclusion for ‘smoke or soot when no damage from fire has occurred’, which was removed from the policy before the damage occurred. However, the insurer also applied exclusions for ‘heat but no flame’ and ‘wear and tear’, which were in all versions of the policy. If the insurer applied the correct version of the policy from the beginning, it still would have denied the claim.
The insurer’s mishandling of the claim did not affect its outcome. However, it made the claim more difficult for the complainants, who had to consider multiple versions of the policy and argue about which version applied. In my view, this warrants compensation of $1,000.
The insured property has damage caused by fire, which is covered under the policy. The insurer has not established the application of any relevant policy exclusion. Therefore, it is fair for the insurer to accept the claim.
AFCA has determined this complaint based on what is fair in all the circumstances, having regard to:
The respective parties have completed a full exchange of the relevant information, and each party has had the opportunity to address any issues raised. I have reviewed and considered all of the information the parties have provided.
While the parties have raised a number of issues in their submissions, I have restricted this determination to the issues that are relevant to the outcome.
Cover summary (page 2) | ||||||
Optional cover
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(page 1) |
This Supplementary Product Disclosure Statement (SPDS) introduces changes to your Home Insurance Product Disclosure Statement (PDS). The changes are in three parts and are about your "duty of disclosure", the insured event of "Fire" and "Accidental Damage" option, and the "Personal Effects" option. We prepared this SPDS on 14th July 2022 and it replaces the SPDS we prepared on 31st August 2021. Please read it with the PDS and any other SPDS we have given you or may give you. |
Part 2: Changes to the insured event of "Fire" and the "Accidental Damage" option (page 2) | ||||
This part of the SPDS introduces changes to the Home Insurance PDS prepared on 1st March 2021. The purpose of this part of the SPDS is to introduce changes to the insured event of "Fire" and the "Accidental Damage" option. These changes apply to:
For existing policy holders, we will assess any claim for fire losses that occur after 29th April 2021, using the improved wording in this SPDS. We've made the following changes 1. Fire event – On page 31, replace the wording with the following: Fire You are covered for Loss or damage to your insured home and contents caused by:
Fire is defined as burning by flames. You are not covered for Loss, damage, or destruction caused by:
2. Accidental Damage – On page 50, replace the wording for the insured event Fire in the table under Accidental Damage with the following:
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How we settle your claim (pages 19 – 22) |
If we agree to pay a claim for loss, theft, or damage to your home, contents, or personal effects, we will pay up to the limits stated in your policy documents. Following discussion with you, we will choose to do one of three things:
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The ten events your home and contents are insured for (pages 24 – 39) |
In this section, you’ll find the events your home and contents are covered for at your insured address. Some conditions and exclusions may apply. |
Fire You are covered for Loss or damage to your insured home and contents caused by fire, including bushfires and grassfires. Fire is defined as burning by flames. You are not covered for Loss, damage, or destruction caused by:
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Additional Benefits for Home and Contents Insurance (pages 40 – 45) |
Your Home and Contents Insurance comes with more benefits. We will provide the following cover when we agree to pay your claim for an insured event. |
Landlord benefit when you have home insurance … a) Loss of rent If you intend to repair or rebuild your home, we will pay the amount of net rental income lost during the time that the home is unliveable… … |
Optional Cover: Choose more cover to suit your situation (pages 46 – 53) | ||||||
You may need more cover to suit your situation, so we provide the following options. The optional covers you have purchased and we have agreed to cover, and the premium you will pay, will be stated on your Insurance Certificate. Exclusions applying to the insured events covered by this policy also apply to these optional covers. | ||||||
Accidental Damage Accidental damage is loss or damage caused by a sudden, unintended and unexpected event that is not the result of a deliberate act. For example, spilling red wine on carpet, or dropping and breaking a fragile item, such as a vase. This option is useful if you want to be covered for some damage that is not covered in the ‘ten events’ part of Home and Contents Insurance on page 24. You are covered for loss or damage caused to your insured home and contents by an accident at your insured address. The exclusions applying to the insured events covered by this policy also apply to this optional cover, with the following exceptions:
You are not covered for: Accidental loss or damage caused by: …
…
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General Exclusions: What this policy will never cover (pages 58 – 63) |
Some events and causes are never covered by this policy. These are known as ‘General Exclusions’ and apply to the whole policy. You are not covered for any loss, damage, or legal liability you incur resulting directly or indirectly from events and causes listed below. |
Gradual deterioration You are not covered for loss or damage caused by rust, corrosion, rot, mould, rising damp, mildew, wear, tear, fading, or other gradual deterioration. |
Definitions of words and phrases (pages 69 – 74) | ||||||
Here is a list of plain language definitions for terms and phrases we use in this document.
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The policy excludes cover for wear, tear, and gradual deterioration. These terms are not defined in the policy.
When a term used in a policy is not defined, AFCA will interpret in in accordance with its ordinary meaning. This approach is consistent with that of the courts.
References to ‘wear and tear’ are common in contracts, and many court judgments have considered the ordinary meaning of this and similar terms. A history of these judgments is set out by the Supreme Court of Victoria in JSM Management Pty Ltd v QBE Insurance (Australia) Ltd [2011] VSC 339.
In summary, courts have said wear and tear is the deterioration of an object caused by its ordinary use, and the ordinary effects of natural forces such as weather.
In JSM Management, a tenant used a forklift weighing up to 100 tonnes on a hardstand rated to hold only 40 tonnes. This gradually damaged the hardstand. The Court said the damage to the hardstand was not wear and tear or gradual deterioration because it was caused by improper use, not ‘ordinary use’.
The insurer has not established the smoke damage occurred gradually. However, even if the smoke damage occurred gradually, it was not wear and tear. Filling the home with enough smoke to cause the observed damage was not part of its ordinary use.
