Ross* bought a commercial property insurance policy through his broker. Ross owned a business that manufactured and leased small buildings to third parties. One of the buildings was stolen while located at a customer’s property. Ross made a claim under his policy for about $75,000.
Ross’s insurer investigated the claim. They discovered the buildings were being used for residential purposes. But the insurer did not insure residential property. The insurer argued that if Ross or his broker had told them that the building was residential, they would never have agreed to insure Ross in the first place. The insurer treated the policy as if it never existed, meaning they declined to pay the claim for the loss of the building.
Ross complained about the insurer’s decision. He said that the insurer had agreed to the policy and had the opportunity to ask for more detail about the use of the buildings earlier.
Importantly, the broker arranged the policy through an online platform. When information about a customer’s business was entered into the platform, the system automatically placed the insurance with a particular insurer if the information matched certain rules.
Unfortunately, in this case, the standard code used to describe the insured’s business to the insurer was a commercial property code. There was no other indication that the risk was a residential property risk, either by way of specific questions asked by the insurer, or specific information proactively provided to the insurer by the broker.
What was FSCL’s view?
As part of our investigation, we reviewed the circumstances surrounding placement of the policy, including the application via the trading platform, the insurer’s underwriting rules and training on the platform to the broker market, and all communications between the insurer and the broker.
We asked the insurer to consider whether section 10 of the Insurance Law Reform Act 1977 applied. That section deems knowledge of the broker to be knowledge of the insurer where the insurer pays the broker commission.
What was the outcome of the case?
The insurer confirmed that they had paid the broker commission, and there was evidence that the broker knew, before the policy began, that the buildings were being leased for residential use, although they had not passed that information on to the insurer.
The insurer offered to settle the complaint by paying Ross the full amount of the claim. Ross accepted that outcome.
This complaint highlights that disputes about non-disclosure are not always resolved by looking only at what was recorded on an application form. Where a broker knows material information about a risk, insurers and brokers should consider whether that knowledge may be attributed to the insurer under section 10 of the Insurance Law Reform Act 1977.
It may affect the insurer’s ability to later rely on non-disclosure or misrepresentation arguments.
*name changed
