You’re offline. This is a read only version of the page.
Determination
Case number | 12-00-1072514 |
Financial firm | QBE Insurance (Australia) Limited |
Case number: 12-00-1072514 18 October 2024
The complainant operates a beauty salon. She holds a business insurance policy with the financial firm (the insurer). The policy insures a laser designed for hair removal and skin treatments. The complainant lodged a claim after the laser broke down.
The policy has underinsurance clauses which say that if property is underinsured, the insurer will only cover a portion of any damage. The cost of repairing the laser was $18,069.70. Because of the underinsurance clauses, the insurer says it will only pay $7,286.17.
The laser was insured for $50,000 (its approximate value). The insurer says it should have been insured for $155,000 (the cost of buying a new laser).
No. The laser was 17 years old, obsolete, and purchased second-hand. It was not worth more than $50,000. It was not underinsured.
The insurer says the laser should have been insured for the value of a brand-new, current-model laser purchased from the manufacturer (with a warranty). The policy does not require this.
The insurer must settle the claim for $17,569.70 ($18,069.70 for the cost of repairs, less $500 for the excess).
The insurer says the complainant should have insured the laser for $155,000. However, it would never have paid more than $50,000 for damage to the laser. The insurer seeks to charge premiums based on a sum insured of $155,000 while only being on risk for $50,000. This is unfair.
This determination is in favour of the complainant.
The insurer must pay the complainant $17,569.70 (less any amount already paid) plus interest at the rate determined under section 57 of the Insurance Contracts Act 1984 (Cth) from 1 March 2024.
No. The laser was 17 years old, obsolete, and purchased second-hand. It was not worth more than $50,000. It was not underinsured.
On 3 February 2024, the complainant says the laser stopped working.
On 7 February 2024, a technician inspected the laser and found parts of it were damaged. The technician quoted a repair cost of $18,069.70.
On 8 February 2024, the complainant lodged a claim with the insurer. The insurer accepted the damage was covered under the policy, and the quoted repair cost was reasonable.
The laser was manufactured in 2006. The complainant says she bought the laser in 2012. She says it was second-hand and refurbished, and she paid $66,000.
The complainant bought the insurance policy in December 2023. According to the insurer’s records, she said she bought the laser in 2011, and chose a sum insured of $50,000.
The complainant says a refurbished laser of the same model as hers would cost $30,000 to $45,000. The insurer does not dispute this.
I accept the laser was not worth more than $50,000 when the complainant bought the policy.
The technician who inspected the laser said the model has been discontinued. According to the insurer, the technician said the manufacturer’s current model cost about $155,000. The insurer says the complainant should have insured her laser for $155,000.
In an email to the insurer, the technician said the manufacturer’s current model cost about $165,000.
The insurer obtained a quote from the manufacturer for a new laser of the current model (with a two-year warranty) for $136,895. The complainant does not dispute that this is the cost of a current-model laser purchased new from the manufacturer.
The terms of the policy are set out in the policy endorsement and the product disclosure statement (PDS). Relevant policy terms are quoted in section 3.2 of this determination.
The laser is covered under the Electronic Equipment section of the policy, which says:
These terms indicate that if the laser was damaged beyond repair, the insurer would not replace it with a new laser. The insurer would pay the cost of replacing the complainant’s laser with a similar laser in a similar condition (i.e. an obsolete model, purchased second-hand, with 17 years of wear and tear). This cost would not be more than $50,000.
The policy contains several references to underinsurance.
The policy endorsement says the policy’s underinsurance clauses mean: ‘we require you to insure for the full value or maximum potential risk’.
Page 6 of the PDS says the policy’s underinsurance clauses apply ‘if you understate a sum insured’ and ‘the declared value of the property is less than 80% of the insurable value’.
The Electronic Equipment section (pages 62-64 of the PDS) says its underinsurance clause applies if the sum insured is less than ‘80% of the total new replacement value of the insured property’.
The underinsurance clauses indicate the sum insured should be the same as (or at least 80% of) the ‘full value’, ‘maximum potential risk’, ‘insurable value’, or ‘total new replacement value’. The policy does not define any of these terms. The policy uses these terms interchangeably, which implies they all have the same meaning.
The word ‘new’ in ‘total new replacement value’ implies it is the cost of buying a new laser. However, this is not consistent with the other terms relating to underinsurance. The ‘full value’ of the complainant’s laser was much lower than the cost of a new laser. As stated above, the ‘maximum potential risk’ to the insurer was the cost of replacing the complainant’s laser, not the cost of buying a new laser.
The wording of the underinsurance clauses is inconsistent and unclear. However, when the policy is read as a whole, it indicates the laser should be insured for its full value, or what it would cost to replace with a similar laser in a similar condition. This is not more than $50,000.
The insurer has not shown the laser was underinsured. Therefore, it is not entitled to apply the underinsurance clause.
The insurer must settle the claim for $17,569.70 ($18,069.70 for the cost of repairs, less $500 for the excess).
Section 57 of the Insurance Contracts Act 1984 (Cth) says an insurer must pay interest on a claim settlement payment from the time it was unreasonable to have withheld payment. In the circumstances, I consider this to be 1 March 2024, the date its loss adjuster advised the damage was covered under the policy and the quoted repair cost was reasonable.
The insurer must settle the claim by paying the complainant $17,569.70, plus interest from 1 March 2024.
The insurer says the complainant should have insured the laser for $155,000. However, it would never have paid more than $50,000 for damage to the laser. The insurer seeks to charge premiums based on a sum insured of $155,000 while only being on risk for $50,000. This is unfair.
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.
Electronic Equipment Section (page 2) | ||||||||||||||||
| ||||||||||||||||
Underinsurance (page 4) |
The classes of insurance listed below contain provisions as to average and underinsurance. This means we require you to insure for the full value or maximum potential risk. If you do not do so, and you are underinsured, we will pay you less in the event of a claim, calculated by a formula in the policy which takes account of the degree of underinsurance. Classes of insurance containing underinsurance clauses:
…
… |
Important Information (pages 6 – 7) |
Significant risks Under-insurance Certain cover sections; fire, business interruption and electronic equipment, contain under-insurance (also known as ‘Average’) clauses that may limit the amount that we pay when you have a claim. This will only happen if you understate a sum insured or declared value. Example: The insurable value of your property, insured in accordance with the basis of settlement at the commencement of the period of insurance, upon which the sum insured or limit of liability is based, is declared as $1,000,000. Property damage amounting to $400,000 occurs from an event covered by the Policy. The insurable value of such property at the commencement of the period of insurance calculated as stated, is actually $1,500,000. Under-insurance applies because the declared value of the property is less than 80% of the insurable value calculated in accordance with the Basis of Settlement applicable. Claim payment = ($1,000,000 x $400,000) / ($1,500,000 x 80%) = $333,333. In this example, we would pay $333,333 for the cost of reinstating your property, subject to the application of any excess(es). |
Electronic Equipment (pages 62 – 64) |
Cover We will pay up to the sum insured for the cost of either repairing or replacing insured property as a result of breakdown, which occurs during the period of insurance. … |
Limitations of cover
We will either:
…
In the event of damage, we will not be liable for more than the proportion of the damage which the sum insured bears to 80% of the total new replacement value of the insured property at the commencement date of the period of insurance. Provided that this will not apply if your claim is less than 10% of the sum insured. |
