Rai* owns three rental properties, and in 2014 he engaged an insurance adviser (broker) to help him get the right cover for his needs. Rai’s broker advised him to take out home insurance policies, with additional landlord’s cover, for each of his properties. The policies renewed each year, and Rai’s broker sent him his new policy schedule and policy wording annually.
Changes to methamphetamine cover
In 2016 Rai asked his broker if he was covered for methamphetamine contamination because he noticed that this kind of damage was becoming more common in New Zealand.
Rai’s broker advised him that there wasn’t specific cover for damage caused by methamphetamine contamination under his policies, but that this type of damage would be covered in line with his policy terms.
In 2018, Rai’s insurer made some changes to their home insurance policy, including introducing specific cover for methamphetamine damage. Then in 2019, the insurer updated the policy terms again and added a new testing level threshold for methamphetamine contamination cover. Rai’s broker didn’t speak to him about the changes to the methamphetamine cover, but he sent Rai a document that explained the changes alongside a copy of the new policy wording.
The claim
In 2020, Rai had a property tested for methamphetamine contamination after his tenants moved out. The testing showed methamphetamine contamination in a few different areas of the house. Rai arranged for the property to be decontaminated, and he re-carpeted and re-painted the entire house.
Rai contacted his broker to make a claim for the damage caused by the methamphetamine contamination. Rai submitted a number of invoices for the methamphetamine testing and decontamination work, as well as for other property maintenance/renovation work he had done. The total amount Rai wanted to claim was $20,000.
Rai’s broker advised him that the methamphetamine contamination level at his property didn’t meet the required testing level specified in his policy, so the claim for the testing and decontamination work would not be covered.
Rai was unhappy that his claim wasn’t covered. He thought his broker had been negligent in recommending a policy with a high methamphetamine contamination level threshold, so Rai complained to FSCL.
Dispute
Rai complained that his broker’s policy recommendation was inappropriate because there were other policies available in the market that had better methamphetamine cover (which would have covered his claim).
The broker didn’t think he’d done anything wrong. He said that Rai’s policy wording described the details of the methamphetamine cover, and he had sent Rai a document that explained the changes the insurer made to the methamphetamine cover in 2019.
Review
FSCL reviewed all the correspondence between Rai and his broker and saw Rai’s email from 2016 asking his broker about methamphetamine cover, and found that the broker’s advice at that time was correct – there was no specific ‘methamphetamine cover’ in Rai’s policy.
Rai’s insurer changed their policy requirements for methamphetamine-related claims in 2018 and again in 2019. In 2019 when Rai’s policy renewed, his broker sent him a policy schedule which referred to an out-of-date policy wording.
FSCL noted that Rai’s broker didn’t speak to Rai about the changes to his cover, but he did send him a ‘summary of changes’ document which explained the new methamphetamine testing level requirement.
FSCL thought that because Rai had raised concerns with his broker about methamphetamine damage in 2016, showing that he was particularly concerned to have cover for methamphetamine damage, and the broker had sent Rai a link to the incorrect policy wording in 2019, the broker should be responsible for covering some of Rai’s claim for methamphetamine damage.
FSCL didn’t think the broker should cover the full cost of the claim, because Rai had received a copy of the new policy wording and a separate document that described the new methamphetamine testing level requirements.
FSCL considered it was most likely that Rai would have chosen a different policy (which had a lower testing threshold for methamphetamine contamination) if his broker had discussed the insurer’s policy changes with him. Rai had a home insurance policy with a different insurer for one of his other properties, and FSCL considered he would likely have taken out a policy with that same insurer for his contaminated property.
FSCL assessed how Rai’s claim would have been treated under the terms of the alternative policy. It found that some of the costs Rai claimed wouldn’t have been covered under the alternative policy and explained this to Rai.
Once FSCL was satisfied with its assessment of the costs that Rai would have been covered for under the alternative policy, it decided that his broker should pay 50% – which came to $3,000. It felt that a 50/50 split reflected the contribution to the loss by both Rai and the broker.
Resolution
Rai rejected FSCL’s final recommendation, which means it is not binding on his broker. Rai is free to pursue his complaint via other channels, such as court action, if he wishes.
* name changed
Insights for consumers and participants
There are a variety of home insurance policies available in the market, so after considering the types of risks they are wanting to insure, a consumer could benefit from comparing cover between different insurers. Some consumers may wish to seek expert advice from an insurance adviser if they have complex needs or are finding the different policies difficult to understand.
For landlords in particular, damage caused by methamphetamine contamination may be something they want to be insured for. In New Zealand, there are two sources of information which have different views about what level of contamination creates a health risk – which means that insurers follow one of the two standards. When looking at taking out a policy, it is a good idea for a policyholder to check which contamination standard the insurer uses, so that they are aware of the level of coverage they will have.
This case also highlights the importance of an adviser’s record-keeping obligation and understanding of their clients’ needs. Rai’s broker ought to have known that Rai was concerned about methamphetamine cover because he had raised this in the past. When Rai’s insurer made changes to their methamphetamine cover, it would have been best practice for the broker to speak with Rai. Explaining the changes and giving alternative options would have allowed Rai the opportunity to decide whether he was still happy with his policy.
