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Determination
Case number | 1006834 |
Financial firm | Berkshire Hathaway Specialty Insurance Company |
Case number: 1006834 23 May 2024
The complainant held a comprehensive boat insurance policy with the financial firm (insurer) for the period 12 May 2021 to 12 May 2022. On 2 November 2021, the complainant lodged a claim after his boat was washed onto shore.
The insurer declined the claim saying the complainant mispresented that the boat would be moored to a jetty. It says if it had known that the boat was being anchored, it would not have issued the policy. It has therefore declined the claim due to the prejudice suffered because of the complainant’s misrepresentation and cancelled the policy.
The complainant says the claim should be accepted because there is no prejudice suffered due to the misrepresentation. He also seeks compensation for the insurer’s claims handling.
No. While the complainant has made a misrepresentation about the storage method of his boat, the insurer has not established it would not have accepted the risk had it known about it. That is, it has not established that it has been prejudiced due to the misrepresentation. Therefore, the insurer is also not entitled to cancel the policy.
Yes. The insurer must cover the claim and pay the policy limit of $120,000. This is in addition to the salvage cost which the insurer agreed to bear and which does not erode the limit.
Yes. The insurer’s claim handling resulted in the boat being a total loss. This has caused the complainant to suffer unusual stress and inconvenience. The insurer is required to pay $2,500 in non-financial loss compensation.
On balance, the insurer has not established prejudice. Therefore, it should not be allowed to decline the claim or cancel the policy. Further, as the insurer has not established an exclusion applies, it is fair that it covers the claim. It is also fair it pays the salvage costs incurred due to its agent’s actions and compensation.
This determination is in favour of the complainant.
Within 14 days of being notified of the complainant’s acceptance, the insurer must pay:
$120,000 to the complainant for the claim; and
$2,500 in non-financial loss compensation.
No. While the complainant has made a misrepresentation about the storage method of his boat, the insurer has not established it would not have accepted the risk had it known about it. That is, it has not established that it has been prejudiced due to the misrepresentation. Therefore, the insurer is also not entitled to cancel the policy.
An insurer can rely on misrepresentation to reduce its liability under a contract of insurance. A misrepresentation is a statement about a present fact or past event, which is substantially untrue or incorrect.
A misrepresentation, in the context of a contract of insurance, occurs if:
the statement was made in connection with a proposed contract of insurance; and
the person, or a reasonable person in the insured’s circumstances, knew the statement was relevant to the insurer’s decision to accept the risk.
If the insurer can establish there has been a misrepresentation, it is entitled to be placed in the position it would have been in if the insured had not misrepresented the matter. That means that even in the case of innocent misrepresentation, the insurer may have the right to deny a claim in full, cancel the policy, or both. Misrepresentation does not require the insurer’s compliance with section 22 of the Insurance Contracts Act 1984 (Cth)(Act). The onus remains on the insurer, however, to establish that the complainant made a misrepresentation and that it has been prejudiced because of the misrepresentation.
The complainant’s policy incepted on 12 May 2021 for a 2008 Catamaran (boat).
In applying for cover, the complainant was asked what storage method was being used for the boat. Step 2 (of 5) of the application process required the complainant to confirm the following statement (anchor statement):
I confirm my boat will not be stored ‘at anchor’ as the principal method of storage at any time during the policy period.
Without doing so, a storage method for the boat could not be selected. By confirming the above, the complainant was then able to answer the question ‘Storage Method?’ by selecting from a drop-down menu. The complainant selected ‘Jetty’. He was then asked the question ‘Postcode?’. The complainant answered with the postcode ‘***3’, being for the town of R (town). These answers allowed him to proceed to the next step of the application.
In the summary document containing the information provided by the complainant and on which the policy is based, the above statement and the complainant’s confirmation are recorded, as is the reference to the town jetty.
The quote and product disclosure statement (PDS) were also provided to the complainant. Both set out the complainant’s obligations in relation to the duty of disclosure and misrepresentation. The quote says:
A misrepresentation includes a statement that is in any way false, misleading, dishonest or which does not fairly reflect the truth. e.g., a statement of fact that is not true, a statement of opinion that is not the subject of an honestly held belief or a statement of intent that never existed at the time provided.
Take reasonable care to make sure your representations are true, honest, up to date and complete in all respects. You may breach the duty if you answer without any care as to its truth or if you only guess or suspect the truth…
Both the quote and PDS say that if the complainant does not meet the duty, to the extent permitted by law, the insurer may reject or not fully pay your claim. It may also, or as an alternative, cancel the insurance or if the misrepresentation was fraudulent, treat it as if it never existed.
The PDS also says:
You should advise Your insurance broker to notify Us as soon as possible if You become aware of any changes to the facts or circumstances that change the nature of the risk We have insured. If You do not tell Us via Your insurance broker of these changes, in the event of a claim We may be entitled to reduce the amount We pay or refuse to pay a claim or cancel the Policy in which case You may not be adequately covered, or You may not have any cover under Your Policy.
In particular, please advise Us of any change or intended change to the:
(location question)
(storage method question)
The panel accepts the following chronology of events:
prior to the policy incepting, the complainant intended to moor the boat at a permanent jetty in the town. This came about through a friend of the complainant’s, SL, who introduced the complainant to another friend, MB, who also had a boat at the same location;
about March 2021, the complainant met MB to look at an abandoned jetty however, due to leasing issues involving a local marine not for profit association (association) and the local council (council), this fell through. It was hoped that once these issues were resolved, it would be possible to lease a jetty;
the boat was purchased on 25 April 2021. However, it is not clear if the permanent jetty fell through before or after the policy incepted;
in or about June 2021, MB decided to move his boat to a different location and offered his jetty to the complainant. However, the new location did not work out and MB moved his boat back to the town jetty, which meant it could not be used by the complainant;
as a result, the boat was anchored at C beach (beach). The complainant says that due to the location, it was protected by land and reef. The beach is also close to the complainant’s home and so he could check on it every day;
the complainant says he checked on the boat daily. He has provided a statement from a person whose house overlooks the beach and boat ramp, ML. ML confirms that the complainant would ‘check on the boat [daily and sometimes] he would work on the boat for a few hours or stay on it overnight’;
when the complainant could not moor the boat at a permanent jetty, he enquired with JL about slipping the boat to perform some repairs. The complainant was given an estimate of four weeks until the boat could be taken out of the water to carry out the repairs. On the day the maintenance works were due to commence, emergency repairs were being carried out on another boat and the complainant’s boat had to be delayed. During this period of delay, before the maintenance works could be carried out, the boat was grounded at the beach on 1 November 2021 at approximately 5.15pm (incident);
at the time of the incident, the water conditions were rough and the wind was strong (16-33 knots); and
the cause of the incident is believed to be the anchor chain breaking off.
SL, MB and JL have provided statutory declarations explaining the circumstances surrounding the town jetty and slipping the boat.
The panel acknowledges that the complainant was endeavouring to find an alternate solution for the storage of the boat until a permanent jetty could be located. It also accepts the complainant checked on the boat daily while anchored at the beach. On the day of the incident the complainant says he checked the boat around 2.00pm and saw that the anchor was buried well with no chance of dragging.
However, the complainant has also admitted that the boat was not moored at the town jetty, or any other jetty, at any time between policy inception and the incident.
Further, the complainant arranged the policy through his broker. It is not in dispute that the complainant was informed of the consequences of misrepresentation prior to inception of the policy and that he had been asked to disclose the storage method for the boat.
Therefore, the statement that the boat was being moored at a jetty is untrue. Accordingly, the panel is satisfied that the complainant made a misrepresentation. The panel acknowledges the complainant intended to moor the boat on a jetty, however this was yet to occur. The panel is also satisfied (given the specific question asked) that the complainant knew, and a reasonable person in the circumstances ought to have known, that the statement was relevant to the insurer’s decision about whether to accept the risk.
Where an insured makes a misrepresentation which is not fraudulent, section 28(3) of the Act allows the insurer to reduce its liability for a claim to the extent it has been prejudiced by that misrepresentation. The insurer has the onus to show what it would have done and the extent of any prejudice it has suffered as a result. The standard the insurer must meet is the balance of probabilities.
In relation to the complainant, the insurer says that it would not have offered him cover if the he had not misrepresented where and how the boat was to be stored. In this regard, the insurer has:
included in an email a paragraph from the underwriting guidelines which contains a list of storage methods. The methods do not include being at anchor;
referred to exclusion 2.6 of the policy. It further says, ‘[a]ccordingly, reference to risks, circumstances or particulars which are otherwise excluded by the policy are not required to be addressed in the Underwriting Guidelines’;
stated its underwriters cannot apply discretion to the type of risk excluded in any underwriting guidelines or policy wordings; and
otherwise declined to provide a copy (or extract) of its underwriting guidelines.
The insurer has however provided a statement from its Senior Vice President and Head of Marine for the USA and Australasia (HM) who says:
if the complainant had answered correctly, the answer of ‘Mooring’ would not have been selected. If the complainant had instead selected ‘Other’ because none of the remaining answers matched the facts of how the vessel was stored, the online system would have triggered a referral to the insurer’s underwriting team;
if this occurred, the insurer would have asked the complainant for more information about exactly how he intended to store the boat. If it had been told that the boat was kept at anchor at the time, the insurer would have declined the application for insurance;
the insurer has issued 7,800 policies written on our pleasure craft portfolio, since it began in 2021. Not a single pleasure craft policy in this portfolio has been bound by the insurer through the New Wave online platform when a proposing insured has indicated through enquiries that they stored the relevant vessel on anchor;
the insurer has received 78 requests for cover on anchor and all 78 requests have been declined;
there are a number of reasons why the insurer would have declined the application for insurance for the complainant’s boat if it was known to be stored on anchor:
> watercraft kept permanently on anchor represent a much more onerous risk than those moored at berth or a dedicated mooring;
> anchoring a vessel is only a temporary method of securing the vessel and should only be done when the owner or a similarly experienced person is on board the vessel in order to ensure the vessel remains safe;
> vessels kept on anchor are particularly susceptible to changing currents, tidal movements and changes in wind direction. It is therefore particularly important that a person remain on board to move or manoeuvre the vessel to avoid any risk of damage to the vessel as well as third party property and injury/death to third parties. As well as changing weather/maritime conditions, there is also an increased risk of external factors when the vessel is kept on anchor in open water, for example movement of the seabed and subsequent damage to the anchor chain, collision between a third-party vessel and the anchor chain, etc which aren’t as prominent as when the vessel is kept moored at a berth or a dedicated mooring;
> in this particular instance the vessel was kept at anchor in a maritime park and the Australian Marine Parks website reinforces that ‘A vessel at anchor should not be left unattended at any time’;
the insurer’s decision has always been to remove its exposure to vessels that are permanently kept on anchor and, if prior to going on risk it is declared that this is the way that the owner proposes to permanently keep the vessel then it is customary for it to decline providing insurance;
the insurer’s decision not to insure vessels kept at anchor is so definitive that it has led to the following exclusion being included in the PDS:
2.6 Your Boat is left unattended at anchor for more than 24 consecutive hours at the time of the Occurrence.
these risks are not considered on a case by case basis, nor does it allow any flexibility in their decision making on this issue. We do not insure these risks for pleasure craft and so a general exclusion is in the policy to categorically exclude any vessels permanently kept at anchor; and
the insurer has suffered prejudice as a result of the complainant’s boat being damaged because of the anchor dragging or not holding. That prejudice amounts to 100% of the claim as, but for the complainant’s misrepresentation, the insurer would not have insured the vessel at all and would not have been liable for the claim.
The panel has carefully reviewed all the exchanged information.
AFCA’s letter of 2 November 2023, requested a ‘copy of the underwriting guidelines (at least of the relevant extracts) and a statutory declaration from the underwriter’. This is to confirm how the insurer would have assessed the complainant’s risk if accurate information had been was provided and to ask the insurer if any discretion applies to the underwriting decision. This is in accordance with AFCA’s approach to non-disclosure and misrepresentation. AFCA again wrote to the insurer on 27 November 2023 advising that the information requested had not been provided and reiterated its request for the above information. By way of response, the statement from HM was provided.
In the absence of the underwriting guidelines and statutory declaration, the panel is not persuaded about the prejudice (if any) which the insurer has suffered. The panel acknowledges the statement of HM. However, the panel notes that:
even if the complainant had selected ‘Other’, this would not have meant an automatic refusal of cover. Rather, it would have been referred to the underwriting team for assessment. This only emphasises the importance of seeing the underwriting guidelines in order to establish how the underwriter would have assessed the complainant’s application;
the evidence provided by the complainant clearly shows that his intention was to find a permanent jetty to moor the boat however that this had not eventuated at the time the policy incepted;
there is no evidence whatsoever that, at the time of inception, the complainant intended to permanently and indefinitely anchor the boat;
the anchor statement requires the complainant to confirm that the boat will not be stored at anchor ‘as the principal method of storage at any time during the policy period’. The Macquarie dictionary relevantly defines ‘principal’ as ‘chief, foremost’. This implies that the boat may be stored at anchor, so long as it is not the principal method of storage, and that this would not be an impediment to cover;
the storage method question also asked the complainant to advise the insurer if the complainant ‘expect[ed] the Boat not to be on the mooring type stated on the Policy Schedule for a period exceeding 3 months during the Period of Insurance’. The panel is satisfied that this was not what the complainant expected. Therefore, on balance, he was not required to advise the insurer of any change as he believed the boat being stored at anchor was temporary;
in relation to HM’s comments on the complainant’s boat, they are predicated on the boat being permanently at anchor. This was not the case here;
the statement from ML confirms that the complainant checked on the boat regularly and that he sometimes stayed on the boat overnight;
HM’s statement repeatedly refers to vessels that are ‘permanently’ at anchor. This was not to be the case with the complainant’s boat, which had been at anchor for a period of less than six months at the time of the incident;
HM’s statement does not address a situation where a boat may, for a certain period, be at anchor. As the underwriting guidelines have not been provided, it is not possible to say how the insurer would have dealt with such a situation;
the statistics of policies issued and declinatures to insure appear to refer to scenarios where boats were to permanently to be stored at anchor. HM’s statement does not provide any information regarding whether boats are permitted to be at anchor for certain periods of time and, if so, how long those periods are;
HM’s statement also does not say that all the boats it insures are never at anchor without a person being present all of the time to monitor them. If it did, this may go some way to proving prejudice;
exclusion 2.6 is not relevant to the question of whether the insurer has been prejudiced by the complainant’s misrepresentation in the application for insurance. It would only warrant consideration if the policy was valid and the complainant established a claimable loss; and
even if asked at the time of application, the complainant would still have answered that he intended to moor the boat at a permanent jetty. This was an honest and reasonable belief at the time. This option only fell through 1-2 months after the policy incepted. After the maintenance works, the complainant says he was going to dry dock the boat until a jetty could be found. Therefore, there is insufficient evidence to establish that even if the complainant advised the insurer of the full circumstances that the insurer would, nevertheless, have refused to insure the complainant altogether.
HM’s statement focusses on boats that are permanently at anchor, Therefore, based on the statement alone, the insurer has not established that if the complainant had not made the misrepresentation it would have declined the risk. HM’s statement also does not address the situation where the complainant had put steps in place and was intending to moor the boat at a permanent jetty in the future. That is, it only accounts for the scenario where an insured intends and does permanently anchor a vessel from inception. This is contrary to the anchor statement (and storage method question). Further, the insurer says there is no flexibility or discretion in the application of its underwriting guidelines. However, without citing this information, it is difficult to say how the underwriting guidelines would apply in circumstances where the boat was not permanently intended to be at anchor.
On balance, the panel does not consider the insurer has established that it has been prejudiced because of the complainant’s misrepresentation. Accordingly, the insurer is not entitled to decline the claim based on misrepresentation and reduce its liability to nil. The insurer must assess the claim in accordance with the policy terms and conditions.
For the policy cancellation to be valid, the insurer must have a right to cancel the contract of insurance pursuant to one of the grounds set out in section 60 of the Act.
The insurer has cancelled the policy from inception. The reason provided was because of the misrepresentation regarding the storage method of the boat.
The Panel notes the underwriting guidelines are not one of the circumstances outlined by section 60. Whilst misrepresentation can be grounds to cancel the policy, the panel does not accept this is substantiated in the circumstances.
Therefore, the insurer is not entitled to cancel the policy. Further, an insurer cannot avoid a policy for misrepresentation unless it is fraudulent and no such allegation has been made.
Given this, the insurer’s purported cancellation of the policy is ineffective.
Therefore, the insurer is to remove from its records, and the records of any organisation with whom it has communicated, any reference to the cancellation and avoidance.
Yes. The insurer must cover the claim and pay the policy limit of $120,000. This is in addition to the salvage cost which the insurer agreed to bear and which does not erode the limit.
The complainant is required to show, on the balance of probabilities (that it is more likely than not), that there is a claimable loss under the policy. This means the complainant must prove the loss or damage was caused by a risk that is covered under the policy.
Once the complainant proves there is a claimable loss, the insurer is liable for the loss unless it shows an exclusion or limiting condition applies. The insurer has the onus of proving, on the balance of probabilities, that the exclusion or condition applies.
The policy covers accidental loss or damage. The product disclosure statement (PDS) defines ‘accident’ as ‘a sudden and unforeseen Occurrence being a fortuity causing physical loss or Damage…that is not intended or expected’.
There is no dispute that the anchor chain broke causing the boat to wash onto shore at 5.15pm on 1 November 2021. The panel is satisfied that these events were sudden and unforeseen and has caused damage to the boat. Therefore, the complainant has established a claimable loss. The onus therefore shifts to the insurer to show it is entitled to decline the claim.
The insurer refers to exclusion 2.6 in the policy. This excludes loss or damage where the boat is ‘left unattended at anchor for more than 24 consecutive hours at the time of the Occurrence’.
The policy does not define ‘unattended’. The Macquarie dictionary defines the term as ‘unaccompanied…alone…with no one in charge…not taken care of…not heeded or paid attention to’. The term ‘unattended’ has also been judicially considered in the leading case of Starfire Diamond Rings Ltd v Angel (the Starfire test). The Starfire test requires a person to:
be capable of keeping items under observation; or
be in a position to observe any attempt by anyone to interfere with the object and have every prospect of preventing unauthorised interference.
The panel accepts this test does not require continual or actual observation. It requires a capacity to keep the item under observation and a proximity such that you could attempt to prevent unauthorised interference. Further, the exclusion says the boat may be left unattended but not ‘for more than 24 consecutive hours at the time of the Occurrence’.
The complainant attended the beach and inspected the boat at approximately 2.00pm. The incident occurred approximately three hours after that. The panel accepts the complainant’s submissions regarding checking on the boat and the statement from ML, which is not disputed by the insurer.
Therefore, on balance, the panel does not consider the boat was left unattended for more than 24 consecutive hours before the incident. In the absence of any other evidence to the contrary, the panel cannot be satisfied that the complainant left the boat unattended for 24 hours before the incident. Therefore, the insurer has not established that the exclusion applies.
Further, the insurer did not test the anchor chain and/or obtain a report from a metallurgist. Therefore, the cause of the anchor link failure is unknown. In the absence of this information, the panel considers it would not be possible to establish if any other policy exclusion applies.
Accordingly, the insurer is required to cover the claim.
It is not in dispute that the boat is a total loss. Therefore, the insurer is required to pay the complainant the full policy limit.
The policy definition for ‘excess’ states that the $2,000 excess ‘shall not apply to a claim for Total Loss or Constructive Total Loss’.
Therefore, within 14 days, the complainant is required to pay the complainant $120,000.
The panel notes for completeness that, following the incident, significant damage was caused to the boat during the salvage process. The costs incurred in attempting to salvage the boat amounted to $85,800 (cost). The insurer has previously confirmed that, as a gesture of good faith, it will bear this cost. Leaving aside the question of whether the salvage agent’s actions were negligent, the panel notes that the cost is the insurer’s liability. This is because the insurer engaged the salvage agents and the significant damage was incurred during the attempts to salvage/after the boat was returned to the water. Therefore, the insurer is required to bear this cost. The panel also considers the cost does not erode the policy limit. The insurer does, however, retain the salvaged boat.
Yes. The insurer’s claim handling resulted in the boat being a total loss. This has caused the complainant to suffer unusual stress and inconvenience. The insurer is required to pay $2,500 in non-financial loss compensation.
Under our Rules, AFCA can award up to $5,400 compensation for non-financial loss. This must relate to poor claims handling or other actions of the insurer which cause an unusual degree of stress, delay, or inconvenience.
We expect complainants to be moderately robust, and we will not award compensation for the ordinary degree of inconvenience involved in making a claim.
The complainant says despite his requests for the insurer to contact the broker, the insurer did not do so and consistently contacted the complainant. He also says the insurer took some time to make the claim decision. And, most importantly, the boat was destroyed because of the insurer’s salvage agent’s negligence.
The complainant provided the pre-purchase inspection report of the boat before the loss. It says the boat was in good condition. The insurer says it engaged an independent expert to review the salvage techniques used by its salvage agent. The expert confirmed that the techniques used by the salvage agent are accepted practice during recovery operations when hulls are breached. Therefore, the insurer says its salvage agent has not been negligent.
The complainant obtained his own report on the salvage process from C. C says:
the salvage agent mobilised and commenced salvage without notification to the relevant marine authority, which is a criminal offence;
numerous attempts to tow the vessel off the beach were undertaken over three days. However, multiple failures of salvage equipment resulted in the vessel drifting back onto the beach, which in turn caused further damage to the vessel and included issues with lift bags, tow rope failures
subsequently, and without the complainant’s authorisation, the insurer authorised the salvage agent to dispose of the vessel;
the salvage agent did not have the suitable equipment or were not adequately equipped to complete a successful salvage;
certain salvage conditions and damage descriptions are exaggerated by the salvage agent;
no attempt was made to contact a larger salvage company with greater capability or to even seek their advice;
it obtained comments from a larger salvage company, PT, who consider the insurer’s engagement of the salvage agent has resulted in the total loss and there is a potential claim against the agent’s professional indemnity policy;
PT would have taken a different approach and avoided towing the vessel as the risk of sinking due to the precarious flotation would be high; and
the failures during salvage, the numerous groundings thereafter and the tow of an almost submersed vessel has exacerbated to the damage to a point where the structural integrity of the hull was weakened, collapsed and became uneconomical to repair.
The panel is most persuaded by C’s report. On the information available, the panel considers the boat would not have been a total loss but for the actions of the insurer’s salvage agent. Therefore, the panel accepts the complainant has experienced unusual degree of stress and inconvenience due to the loss of his boat.
On balance, the panel considers the insurer’s handling of the matter was poor and this greatly impacted the complainant. The panel is satisfied an award of compensation for non-financial loss is warranted. Therefore, the insurer is required to pay $2,500 to the complainant.
On balance, the insurer has not established prejudice. Therefore, it should not be allowed to decline the claim or cancel the policy. Further, as the insurer has not established an exclusion applies, it is fair that it covers the claim. It is also fair it pays the salvage costs incurred due to its agent’s actions and compensation.
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. We have reviewed and considered all of the information the parties have provided.
While the parties have raised a number of issues in their submissions, we have restricted this determination to the issues that are relevant to the outcome.
Due to the nature of this complaint, we referred it to a panel for determination. The panel includes:
AFCA is not a court of law. We do not have the power to take or test evidence on oath, or to require third parties to give evidence.
When we assess complaints, we consider:
We give more weight to documents created at the time the events occurred. If there are no relevant documents, we will decide what most likely occurred based on the available information.
If there are conflicting recollections and these are evenly weighted, we may find that a claim cannot be established.
