Person A runs a small business importing farm machinery and selling it to New Zealand farmers. The machinery is complex so as part of the sale, the insured’s business also installs the machinery and sets it up to the farmers’ requirements. The setting-up of the machinery is commonly called ‘commissioning’, and it requires expert knowledge.
A step was missed by the insured’s employee during the commissioning of one particular piece of farm machinery. Because of the mistake, the machinery got damaged once the farmer started using it, and Person A’s business was responsible for repairing it.
The costs to repair the damaged machinery was over $20,000, so the insured made a claim under his two business insurance policies. The insurer considered his claim under both his general liability policy and his professional indemnity policy. After reviewing both policies and all of the claim information, the insurer declined the claim.
The insured was unhappy that his claim had been declined because he believed the repair costs should be covered under at least one of the policies. They asked the insurer to review their decision, but their decision didn’t change.
The insured then complained to FSCL.
Dispute
The insured did not agree with the insurer’s decision to decline his claim and he wanted the claim to be accepted.
The insured had asked his insurer to consider the claim under a few different clauses in the policies, and they declined cover under each clause.
By the time the insured brought the complaint to FSCL, the dispute was whether the commissioning of the machinery should be considered a ‘service or repair’.
The insured argued that it was a service or repair and so the claim should be covered, whereas his insurer argued that the commissioning was different to a service or repair – so the claim shouldn’t be covered.
Review
Whilst the insured had focused on the ‘service or repair’ issue, FSCL needed to look at the claim in its entirety in order to understand what had happened. It was quite complicated, because there were two policies and both of them had been altered from the standard wording.
When the insurer first looked at the claim under the general liability policy, they advised him that, while there could have ordinarily been some cover under the ‘defective workmanship’ clause, that clause had been deleted from the insured’s policy, so it didn’t apply. This deletion was clear in the policy schedule, and FSCL was satisfied that the insured had accepted this.
In relation to the professional indemnity policy, the insurer explained that there was an endorsement that had been added to the policy that amended the clause the insured was relying on.
The amendment removed cover for any product or good (the damaged machinery was a product). The costs claimed were for the damaged product only, so FSCL was satisfied that the insured understood the claim wouldn’t be covered under this policy because of the endorsement.
The insured’s main argument was that his claim should be accepted under the general liability policy because the commissioning of the machinery was a ‘service or repair’. In order to determine the meaning of the words ‘’service or repair’’, FSCL looked at the dictionary definitions of the words, the context of the clause in the policy as a whole and considered the purpose and timing of the commissioning work.
FSCL decided that the commissioning work was related to the installation of the machinery, so didn’t think it was correct to say the commissioning work was a service or a repair. In the context of the insured’s policy, FSCL thought service meant ‘routine maintenance’ (of a machine) and repair meant ‘fixing something that was broken’.
Resolution
FSCL issued a decision explaining to the insured that it didn’t think the commissioning of the farm machinery was a service or a repair, and so the insurer was correct to decline the claim. We recommended that the insured discontinue their complaint.
Insights for consumers
This case highlighted the importance of negotiating the correct terms when taking out an insurance policy for your business.
Both policies that the insured had for his business had amendments to them which limited the scope of cover.
It is important to consider the type of risk you want insured when you are negotiating with an insurer.
The insurer might want to limit cover or they could charge you higher premiums for a policy with the standard terms and conditions.
As a business consumer you really need to think about what possible things could go wrong when you’re doing business so you can make sure you have the right type and amount of cover. If in doubt about what to do, you may wish to seek advice from an insurance adviser.
