Underinsurance is a big issue in New Zealand. A 2016 Treasury report stated up to 85% of homes could be underinsured by an average of 28%. Across New Zealand, underinsurance of homes is worth an estimated $84 billion.
While it is difficult to help resolve underinsurance retrospectively, we can look to the future. The following IFSO Scheme complaints help shed light on the issues, the lessons, and the messages you can provide to clients. In doing so, you can help to prevent nasty surprises for clients.
Sum insured - common questions consumers ask the IFSO Scheme:
a) What does sum insured mean?
b) What is the m of a house?
c) Why is the sum insured higher than the valuation?
d) Whose responsibility it is to work out sum insured?
e) What features and costs are included in sum insured?
What you should say to clients:
• It is your responsibility to ensure the sum insured is correct.
• The sum insured may apply to repairs as well as total losses.
• Sum-insured calculators are a rough tool to help give you an estimate.
• To be sure about the sum insured to cover a rebuild or substantial repair, you should get a sum insured valuation from an appropriate specialist.
IFSO Scheme case study (2015)
When the insured’s house insurance changed from replacement cover to sum insured, he asked his insurer to increase the sum insured figure from the default figure of $219,000 to $260,000. The insurer didn’t make the change, and when the customer rang later to check, he was informed the insurer wasn’t increasing any sum insured figures, because of a recent large earthquake in Wellington.
A few months later, the house was damaged by fire. The repair estimate was $300,000. Initially, the insurer only agreed to pay $219,000, but later it acknowledged the insured’s earlier request and agreed to retrospectively increase the sum insured to $260,000.
The client wanted the insurer to pay the full repair cost. He said if the insurer had been more helpful and followed up his initial requests, he would have had the chance to discuss the sum insured or get a professional valuation. He said the insurer’s sum insured calculator estimate was inaccurate.
IFSO Scheme
The insurer’s poor customer service did not cause the insured to be underinsured. He told the insurer he wanted to increase the sum insured to $260,000; not that he had further inquiries or wanted to consult a professional.
When he insured his house and requested the change to the sum insured, the insurer didn’t know how much it would cost to rebuild the house. Legally, the insurer is not required to provide any assistance to estimate the sum insured. It is up to the customer to determine how much cover he needs.
The sum insured calculator stated that the figure provided was an estimate and that the insurer was not liable for its accuracy. It recommended consulting a qualified professional for an accurate estimate. The calculator asked very broad questions and the figure depended on the answers provided by the customer. The figure provided was a rough estimate.
The nature of sum insured insurance is that the customer bears the consequence of over or under-insuring. The insurer was not liable to pay the full repair cost.
The role of the adviser
Advisers have a statutory duty to carry out their role with “reasonable care and skill”. That means, you must:
• keep clear records of all dealings with clients and copies of all documentation you provide
• if your client has an existing policy, ensure you understand the cover they currently have so you can advise them of any differences in cover
• make sure you ask clients about any information required on the application
• not give advice about what the sum insured should be for your clients.
IFSO Scheme case study (2014)
In August 2009, the insured arranged house insurance with an adviser who worked for a bank. The insurance was underwritten by an insurer. After the February 2011 earthquake, he made a claim to the insurer for substantial damage to his house and decks. The insurer advised that the rebuild was only based on the floor area, and this didn’t include the decks as they weren’t specified on the schedule. The claim for decks ($28,024) was declined.
The insured said he wasn’t asked about the area of his house, garage or decking when he arranged the policy. He said his adviser determined the area of the house, but the adviser said his client provided the information.
The insured complained about his adviser.
In August 2009, he provided the adviser with a copy of the renewal document (including the floor area of the house). Decks were covered by the old policy, but the adviser didn’t ask the insured about decks or outbuildings. The quote system used by the adviser contained fields for “Living area” and “Other area” (including a prompt for decks). The training material for advisers, containing reminders to check the m², included decks. However, the policy only covered decks if specified. The schedule issued to the client referred to “160m2 living area” and “0 sqm other area”. The actual floor area of house was 146.5m² with 55m² of decking. The adviser said this should have alerted the client to the fact that he should have specified the deck area.
The adviser had very limited records from the sales process and could not confirm he had asked the client about the area of the decks. He said he had provided a schedule which included a reference to “Living area” and “Other area” m², with the prompt, but the adviser did not retain a copy of this schedule.
IFSO Scheme
The adviser helped arrange the policy before the Financial Advisers Act 2008 came into force, so the case manager considered section 28 of the Consumer Guarantees Act, which requires that “services ...[be] carried out with reasonable care and skill”. The adviser provided the “service” of arranging insurance on the house.
The case manager believed the adviser had an obligation to tell the client he needed to specify the decks, or include them in the overall size of the house. The adviser failed to show he had met his statutory obligation in arranging the insurance on the house with reasonable care and skill, particularly as decks were covered under his old policy and the client was not aware that the new policy had less cover.
On this basis, the IFSO Scheme found in the client’s favour that the bank, as the adviser’s employer, was liable to pay the amount of underinsurance in respect of the decks. Given that the adviser had solicited the client’s insurance business when he changed banks, he should not have been in a worse position with less cover, than he would have been under his old policy.