This is a collection of case studies that have appeared elsewhere in this edition of The FOS Circular. It includes some of the case studies from the FOS Approach documents in this edition – covering insurance broker disputes, and the cancellation of instalment contracts. You can read more about our approach to these and other issues by visiting www.fos.org.au/approach. More case studies are available on our website at www.fos.org.au/casestudies.
Insurance broker disputes: Flood cover for a medical practitioner
The applicant is a medical practitioner providing business services through a company and is a long-standing client of the FSP.
In January 2008, the applicant’s business was relocating to a new address. As a result, the applicant contacted the FSP to ensure appropriate insurance cover was arranged. In addition, the applicant requested flood cover “if not too expensive”.
The FSP arranged insurance cover for the new address. Although it appeared the FSP made some inquiries about flood cover with insurer X, this was not arranged.
During the renewal period of 2010-11, the applicant’s business premises sustained damage as a result of water inundation. X denied the claim due to “flood”. Neither party has disputed X’s decision.
FOS found that because the FSP was specifically instructed to arrange flood cover, the FSP was obliged to give effect to those instructions and if it could not do so, to inform the applicant.
The fact that the FSP supplied a copy of the policy was insufficient because the flood exclusion was a relevant policy exception and the method of communication was not appropriate in the circumstances.
Further, FOS was satisfied flood cover could have been arranged for a reasonable price if the FSP had undertaken reasonable inquiries. Therefore, the FSP was liable for the applicant’s losses, subject to any deductions for additional premiums and excesses that would have been applicable in the alternative policy.
Insurance broker disputes: Agreed value v market value
An applicant insured a pleasure craft with the help of a broker (the FSP). The policy was effective from 5 January 2005. The applicant alleged that they instructed the FSP to arrange an agreed value policy of $170,000 which they sought to be amended to $200,000 in December 2006.
The FSP disputed it received these instructions.
The policy that was arranged insured the vessel for market value. This policy was continually renewed up to 2009-10. Following the 2009-10 renewal, the vessel was involved in an accident. It was assessed as a total loss.
The insurer settled the claim for $140,000 based on the vessel’s pre-accident value. The applicant accepted this offer and then pursued a dispute against the FSP for $60,000. The dispute was based on the FSP’s failure to arrange an agreed value policy of $200,000.
Based on the available information, it was accepted that:
- the applicant’s insurer and another insurer had a fairly substantial share of the pleasure craft insurance market
- both insurers would have insured the vessel for an agreed value only if a written valuation was provided in support.
After reviewing all the material, FOS found that even if the FSP failed to notify the applicant that the policy did not insure the vessel for an agreed value, the applicant did not suffer loss as a result.
This was because the applicant could not satisfy FOS that they would have been in a position to arrange an agreed value policy of $200,000 at the relevant time given that:
- the market value of the vessel at the time was only $140,000
- there was no evidence that the applicant would have been able to source a valuation for $200,000 at the 2007 renewal, or that this agreed value would have been maintained at the relevant renewal. In particular, given the market value of the vessel, it was improbable that a written valuation of $200,000 could have been sourced
- without a written valuation, the insurers the applicant would have used would have been prepared to offer only a market value policy, which is the policy available at the time.
Cancellation of instalment contracts: Unclear intention expressed
The consumer arranged a policy with the FSP on 1 February 2014. The term was for one year and the parties agreed that the premium would be payable in monthly instalments.
The consumer failed to pay a premium instalment on 1 July 2014.
The FSP sent a letter on 17 July 2014 stating the following:
“As your instalment has not been paid by its due date, under the terms and conditions of your policy, it will be cancelled effective from 1 August 2014.
However, you can still make a payment up until 1 August 2014 to continue this policy cover.”
The FSP relied upon this letter, particularly the first paragraph, as evidence of it exercising its right to cancel the policy.
However, when reviewing the contents of the entire letter, FOS did not accept it contained a clear and unequivocal intention to cancel the contract. This is because the second paragraph contradicted the first paragraph because it stated that the policy would not be cancelled if the premium was paid before 1 August 2014.
FOS’s view was that the contents of the whole letter expressed an intention by the FSP to refrain from exercising any right under the policy until 1 August 2014 passed.
Therefore, the FSP could not rely upon this letter as evidence of an effective cancellation notice.
Cancellation of instalment contracts: Letter clear and unequivocal
This case is similar to the first except for one difference.
In this case, the FSP sent a letter on 17 July 2014 that contained the following:
“Under the terms of your policy, as your payment has not been paid by its due date, your policy will be cancelled effective from 1 August 2014.
If you would like your insurance cover to continue, please call us on [number] …”
FOS accepted this was a valid cancellation notice because the first paragraph clearly and unequivocally expressed the FSP’s intention to exercise its right to cancel the policy.
Further, the second paragraph did not contradict that first statement. It simply said that if the consumer seeks to have insurance cover, it must contact the FSP.
This could result in the FSP choosing to offer a replacement policy. This is separate to the decision to cancel the existing policy.
In particular, there was no suggestion in the letter that on contacting the FSP, the decision to cancel the policy would be withdrawn.
As a result, the FSP was able to rely on this letter as evidence of exercising its right to cancel the policy. The cancellation took effect on 1 August 2014.
Fixed interest investment
FOS considered a dispute about advice to invest in a particular managed fund which was marketed as a fixed interest product.
The fund had the following features which made it different from a straightforward fixed interest product:
- whilst it provided regular payments to investors, the rate of this return was variable
- the fund manager was investing in Australian and International Equities, as well as having exposure to the US sub-prime market, and could invest in below investment grade assets
- the fund was neither income nor capital guaranteed
- the fund had a high gearing ability, as high as 300%, and
- the fund was governed by Cayman Islands regulations rather than Australian regulations.
The Panel said that the FSP’s recommended asset allocation was made on a generic basis without any real understanding of the product, the product manager’s discretions or the influence of those discretions on the possible outcome of the performance of the product.
The product was classified as a defensive asset when a review of its underlying investments would have shown:
- it was not a defensive asset
- the adviser failed to exercise any degree of care with respect to monitoring or understanding the effects of the internal gearing of this product, especially as it related to its overall risk and performance, and
the fund had a mandate which, if exercised, would make it inappropriate for the investor. It may only have been appropriate for an investor under the most favourable conditions, for example, low/no gearing and holding only investment grade assets or the like.