FSCL Case Study

A business owner runs an aviation engineering business and needed a rare engine part for a helicopter he was working on. He found and purchased the part from a USA supplier. The person transferred $28,000 into the supplier’s bank account, believing that the part would be shipped to New Zealand. Two weeks passed and, as there was no sign of the part, the person emailed the supplier.

The supplier assured the person that the issue was being investigated and they were testing the part to make sure it was satisfactory before shipping it. As time passed it became apparent that this was not the case. Eventually the communication broke down and it became clear that the person had been defrauded by the supplier company.

The business owner made an insurance claim under the crime section of his business insurance policy. Even though the insurance company accepted that the customer was a victim of fraud, they declined the claim on the basis that the customer had received an invoice, with the part to be shipped when the invoice was paid.

The insurance company concluded this meant a ‘credit arrangement’ was entered into. Within the terms of the insurance policy, an exclusion clause stipulated that if the loss arose because of a default under a credit arrangement, the claim would not be paid.

The insured did not accept this offer and he complained to FSCL.


The insurer said that the supplier company rendered an invoice for the engine part which was to be shipped in return for payment, and this was a ‘credit arrangement’ for the purposes of the exclusion clause. The supplier company defaulted under this credit arrangement in that the part did not arrive.

The insurance company also said that the policy exclusion was intended to exclude cover for such a default, whether or not an invoice is genuine.

The customer said that there was no genuine ‘credit arrangement’, as the supplier company never intended to supply the part.

The business owner considered the supplier company’s invoice was fake or dishonest and was not a normal business credit arrangement. He had suffered a loss as a result of a crime, which he was insured for.

The customer felt that, if the claim was covered under the policy, it should be paid in its entirety.


The invoice was only one element of the deception. In this case, the fraud also involved email exchanges, fake websites, social engineering and phone calls.

The key issue for FSCL to determine was whether the person entered into a credit arrangement and, if a credit arrangement was entered into, whether a default occurred.

FSCL agreed that a credit arrangement for the purposes of the exclusion clause never existed. To start with, the ordinary meaning of a credit arrangement suggests that goods or services will be supplied before payment, based on the trust that payment will be made in the future. In this case the business owner had paid for the part in full before it was supplied.

FSCL considered that the policy definition of Credit Arrangement, which used terms such as ‘’extension of credit or hire purchase, loan, lease or rental agreement… otherwise evidence of debt…’, was consistent with the ordinary meaning of ‘’credit arrangement”.

In this case, the fraudster sent their invoice for payment and the scam company told the business owner that they required payment before the part would be supplied. Therefore, no Credit Arrangement had been entered into.

FSCL found that the claim should be paid in full, minus any excess.


The insurer accepted FSCL view and agreed to pay the claim. The client was very happy with this outcome and used the money from the claim to buy the part from a legitimate company and finish his work on the helicopter.

Insights for consumers

Transactions made internationally are inherently risky because the seller and the buyer are geographically separated. This can cause challenges for the buyer in assessing the sellers’ ability and willingness to fulfil the order, and their trustworthiness.

If clients have fallen victim of fraud, report the scam to Netsafe, who can advise you on what to do next.

This complaint is a good reminder for insurers to ensure they carefully consider exclusion clause wording before declining claims and make sure they are applying the exclusion correctly. Although there are often subtle differences in the way exclusion clauses are worded, those subtleties can be the difference between a claim being paid or not.

March 2022

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