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Insurer remedies for fraudulent claims

by Andrew Horne and Nick Frith

In its recent decision in Taylor v Asteron Life Ltd, the Court of Appeal discusses the fraudulent claims rule – the first time that this rule has been considered in any detail by an appellate court in New Zealand.

The court held that under this rule, a term is implied into every insurance contract, requiring the insured to act honestly when making a claim. If the insured fails to do so in any material respect, the whole of the fraudulent claim is disallowed – and the insurer may cancel the insurance policy prospectively pursuant to the Contract and Commercial Law Act 2017 (CCLA).

Background

This case concerns the conduct of a Mr Taylor, a self-employed insurance broker.

In 1994, Taylor purchased an income protection policy with Asteron. Taylor subsequently developed a medical condition and in July 2010, he made a claim under his policy on the basis that he was “totally disabled”. “Totally disabled” was defined in his policy to mean where the insured is “unable to work in your usual occupation for more than ten hours per week”.

Asteron accepted Taylor’s claim and made payments under the policy until September 2014, when Taylor failed to provide it with financial information it requested. Taylor issued proceedings, seeking a declaration that he was entitled to continuing benefits under the policy and to recover arrears of payments.

Through the discovery process, information came to light which indicated that Taylor had continued to work extensively at his broking business. Asteron accordingly denied that Taylor was entitled to further payments and counterclaimed for repayment of all sums previously paid under the policy. Its counterclaim was advanced on the basis that Taylor owed Asteron a duty of utmost good faith in connection with insurance claims, which had been breached by his false statements as to the hours he worked during the relevant period. Taylor denied this.

In the first instance, the High Court held that Taylor was not “totally disabled”, as defined in the policy. He was not even partially disabled, which was defined in his policy to mean that the insured is working but because of a qualifying illness is earning 75% or less of the insured’s monthly insured income. Taylor’s claims for a declaration and payment of arrears were dismissed.

The High Court further upheld Asteron’s counter-claim, finding that it could recover all sums previously paid under the policy as a result of Taylor’s misrepresentations.

Court of Appeal decision

The High Court’s findings in relation to Taylor’s claim were upheld on appeal. The Court of Appeal agreed with the High Court that Taylor was not "totally disabled" from July 23, 2010 onwards, relying on evidence that Taylor regularly worked more than 10 hours per week during the relevant period. The court agreed that even if Taylor was totally disabled, he was not entitled to be paid any benefits because his policy provided for the amount of any monthly total disability benefit to be reduced by monthly earned income.

In relation to Asteron’s counterclaim for a breach of the duty of good faith, the court noted the unusual positions taken by the parties. Asteron argued that to show a breach of this obligation, it needed to show that Taylor deliberately misled Asteron. For his part, Taylor argued that there was no dishonesty requirement; conduct falling short of dishonesty could breach an obligation of good faith. Taylor said that dishonesty had not been put in issue and that it was therefore wrong for the High Court to make a finding that he had been dishonest.

The Court of Appeal disagreed. It considered that Asteron’s pleading was sufficient to put Taylor’s honesty at issue.

The Court of Appeal further considered the nature and source of an insured’s obligations in relation to claims, to determine their consequences. If an implied term of the policy, then the insurer’s ability to cancel are governed by the CCLA. If, however, they are common law or equitable obligations, then the position is more complex. In exploring this point, the court discussed the UK authorities and the fraudulent claims rule in detail, ultimately finding that the rule should be seen as a term implied by law in all contracts of insurance (subject to the express terms of the contract) to the effect that: a. the insured must act honestly in connection with the making of a claim; and b. if the insured fails to do so, and dishonestly makes a claim that is false in some material respect, the whole of the fraudulent claim will be disallowed.

The consequences of breach are, therefore governed by the CCLA – which entitles insurers to cancel a policy if a term is breached and either that term is essential, or the consequences of the breach are substantial. In this case, an implied term requiring an insured to act honestly is clearly essential to an insurer. Accordingly, if an insured makes a dishonest claim, the insurer is entitled to cancel the contract under section 37 of the CCLA and claim damages. a. The court further clarified that where a fraudulent claim is made and the insurer cancels the policy under the CCLA: b. the policy is terminated with effect from the date of cancellation; c. the insurer is not obliged to pay the fraudulent claim; but the cancellation does not affect other claims made under the policy before the date of cancellation – meaning that earlier claims properly made and properly paid cannot be unravelled.

Applying these principles to the facts, the Court held that: a. Asteron’s pleading constituted sufficient notice of cancellation of the policy. b. It did not follow from the fact of cancellation that Asteron is ntitled to recover any payments made to Taylor. c. However, Asteron was entitled to advance a claim for damages for the period from 23 July 2010 onwards (when false statements were made). d. In relation to the period from January 2010 to July 23, 2010, Taylor was not entitled to any payment because of his earnings for that year. Asteron could, therefore, have recovered the payments it made during that period in restitution – however, in this case, Asteron had failed to plead that cause of action. Accordingly, Asteron’s award was reduced by $51,835.64 on the basis that it was not entitled to claw back the sums paid during that period.

Key points

This decision is a useful clarification of an insurer’s rights when it discovers that an insured has made a fraudulent claim. While payments made on a fraudulent claim by mistake may be recovered by an insurer, in practice there may be difficulties in recovering these sums. Insurers should, therefore, take care to fully investigate claims before making any payments. It will also be important for insurers to consider their legal claims for repayment carefully and plead the appropriate causes of action. Andrew Horne and Nick Frith are partners at Minter Ellison Rudd Watts.

SMALL BROKERS BULLISH ABOUT THE FUTURE

Mega-mergers have dominated the insurance broking industry in recent years, but what does consolidation mean for NZ’s smaller, independent businesses?

In the middle of October, global insurance broking giants Aon and Willis Towers Watson formally sought New Zealand approval for their US$30 billion merger, a deal that will reshape the international insurance advisory industry.

The combination of the two companies accelerates years of consolidation in the insurance broking sector, with the biggest companies across the globe looking to build size and scale in the new broking landscape.

The two international companies have a significant presence in New Zealand; both Aon and WTW operate regional offices across the North and South Islands. It is unclear how the merger will impact New Zealand’s network of smaller, independent brokers, but it is likely to ramp up pressure in the market.

The Aon-Willis deal follows a host of other mergers in the broking space over the past few years. Marsh acquired JLT for US$5.6 billion last year, while NZ broker Crombie Lockwood was acquired by New York-listed Gallagher in 2014, bringing a well-known Kiwi name under the umbrella of a US giant.

There are a dwindling number of large players in the NZ market. In light of the frenetic deal activity and consolidation, how will smaller businesses cope? Do they face a tough future in the era of the megabroker? And will small companies be able to operate effectively under the new financial advisers’ licensing regime?

Dr Michael Naylor, a senior lecturer in finance and insurance at Massey University, says he “can’t see consolidation having a major impact” on the smaller independent adviser businesses in New Zealand.

Naylor says the market remains “quite competitive”, but believes broader industry changes, such as the emergence of new technologies and artificial intelligence in the insurance market, will have a greater effect on the industry in the years to come.

In the near-term, Naylor says the new licensing regime will be a challenge for advisers.

“It will be more demanding, with emphasis on better customer outcomes and customer service. It can impose a cost. It does mean that brokers will have to start working on their internal systems.”

Mel Gorham, chief executive of IBANZ, says smaller broker businesses continue to take consolidation “in their stride”.

“There’s a marketplace for all brokers, and the industry is incredibly dynamic,” she said. Gorham believes smaller operators will continue to thrive, most are part of larger networks, which offer support, size, and scale, to compete.

The likes of NZbrokers, Steadfast, Insurance Advisernet, and PSC Connect provide backing to smaller businesses so they can compete with better-resourced larger brokers.

While consolidation may be the talk of the industry at the moment, the biggest challenge for small and independent brokers is the threat of looming new regulation.

Changes under the Financial Services Legislation Amendment Act, due to come into force next March, will shake-up the industry, with a new licensing regime for advisers and greater regulatory compliance around customer disclosure and quality financial advice.

Gorham says she’s “concerned about the level of administration and requirements under the new regime”: “They are being passed to every Financial Advice Provider [license holder], so if you want to be a FAP under the new regime there will be a considerable impact.”

While some smaller businesses will choose to take on their own FAP license, many small brokers will be able to work underneath the license of their network, shifting some of the compliance and regulatory burden to their larger network partner, allowing them to focus on the customer.

Gorham believes smaller broker businesses have a bright future despite growing consolidation in the sector. She says New Zealanders often prefer a local broker relationship.

NEVER UNDERESTIMATE THE DESIRE TO WORK WITH LOCAL PEOPLE. ONE POSITIVE TAKE OUT OF COVID-19 IS THAT PEOPLE WANT TO BUY NZ AND KEEP LOCAL. A LOT OF CLIENTS WANT SOMEONE THEY KNOW WHETHER THAT PERSON WORKS FOR A LARGE INTERNATIONAL OR A SMALLER OR LOCALLY OWNED BROKERAGE.

"Never underestimate the desire to work with local people. One positive take out of Covid-19 is that people want to buy NZ and keep local. A lot of clients want someone they know whether that person works for a large international or a smaller or locally owned brokerage." Regulation, rather than consolidation, is likely to be the most pressing issue, she says: “I think there’s a concern around the regime and a lack of clarity about what is required of advisers.” How do independent brokers feel about the current landscape? William O’Brien, brokerage manager at Montage, based near Auckland, doesn’t expect the rampant consolidation to have a massive impact on the independent NZ broker market. “A lot of people prefer smaller firms they can pick up the phone and talk to,” he says. “I’ve managed to bring a few clients in from the larger firms because clients want a relationship.” O’Brien’s firm is part of the NZ Brokers network, and is weighing up its options under the new regime. The firm may take its own FAP license or merge with another company to build scale, he says. “A lot of people are deciding to do it [take a FAP] themselves,” he says. “But for many smaller players, there isn’t a lot left after all the bills have been paid, so they may be looking at the cost and time element [from the new regulation].”

Jo Mason, chief executive of NZ Brokers, a 49-member strong adviser network, says smaller businesses would feel “more threatened” if they weren’t part of a larger group or network.

“Joining a network allows us to act as a big boy on their behalf,” She says. “Advisers can maintain independence and get the benefits of a large business.”

Mason believes smaller and independent brokerages will maintain a competitive advantage over larger corporates in NZ, with SMEs more likely to seek a close personal relationship.

“Most businesses don’t want to deal with a branch manager of a large corporate; they want to speak to a fellow local business owner.”

She says small, independent advisers often have a wider range of insurer options, rather than being “locked into facilities” with one product provider.

Mason also argues that executives at merged companies can often “take their eye off the ball and become internally-focused”, creating business opportunities for smaller rivals.

Jason Smith, of P&C Insurance brokers in Feilding, which has about 2000 rural, domestic, and SME clients, believes regulation is the main focus for smaller businesses right now. “Consolidation has always been a thing, and it just continues,” he said. Smith, who is part of the Steadfast network, believes it’s vital for broker businesses to be part of a network for “backup” when the new regulatory regime comes around. P&C, founded in 1991, will take its own FAP license, but says many businesses will benefit from having the licensing support of their network and working under a network FAP. “Being part of a network will help companies meet their requirements. If you’re not part of one, it will be a struggle.” He expects NZ’s independent industry “will continue to thrive”, and predicts we may see more brokerages emerge from the embers of mega-mergers. “You may see someone who worked for a large corporate go out on their own,” he says. “With every change, there’s always an opportunity.” Smith is bullish about the future, and notes a trend to “buy NZ and buy local” since Covid, with local businesses choosing to support independent brokers rather than place their business through a large corporate. “It’s quite a movement, and people want to support local businesses,” Smith adds.

No cover in place

Awoman bought a new house in 2018. She asked her insurance read the Maxi-cover policy and queried the lack of contents cover with broker to arrange home and contents insurance for the property. them if she had wanted to progress it.

When she filled out the application form, she omitted a few details FSCL reviewed all the correspondence between the client and the about locks and the alarm system because she needed to be at the broker, along with the Maxi-cover policy. property to provide them. She noted on the form she would provide Insurance brokers have an obligation to act with reasonable care, these details once she had moved in. The broker told her everything in diligence and skill. the form “looked fine”. FSCL agreed with the client it was misleading for the broker to advise

The broker couldn’t progress her contents cover without the missing “everything looked fine” after she provided her application form. It details, and forwarded her the details of her home insurance policy which didn’t agree she should have known the missing details on the form was called a “Maxi-cover” policy. She paid the premiums due. were key to getting contents cover. Acting with reasonable skill, care and

A year later, a valuable bracelet worth about $4000 was stolen from diligence, the insurance broker should have highlighted to the client that her house. She asked her broker for a claim form. The broker told her her contents cover application had been unsuccessful and told her the she didn’t have contents insurance in place so she couldn’t make a claim. missing details were required to progress it further. FSCL also thought

She thought this was unfair because she had asked her broker to the word "Maxi-cover" could suggest there was more than one type of arrange contents insurance cover and didn’t know her application had cover in place. been unsuccessful. She complained to FSCL. However, FSCL also thought the client had contributed to her loss.

She assumed the Maxi-cover policy included both home and contents insurance, because the broker didn’t tell her she didn’t have contents insurance. Even though she missed details in the application form, she didn’t realise these were key to getting contents cover. In any case, the broker had assured her “everything looked fine” in the application form.

The broker said they thought the client should have known the missing details were key to getting contents cover and should have followed them up to progress her application. The broker also thought she should have $8500. The dealer, acting as a agent for the lender, arranged the loan and included both mechanical breakdown insurance and guaranteed asset protection insurance without discussing this with him. He assumed both were compulsory and did not query their inclusion with the dealer.

A short time later the car’s lights stopped working and the insured took the car to the dealer’s mechanic. The mechanic fixed the lights but said each light was a separate claim and fell beneath the $200 policy excess. Then there was a problem with car’s exhaust, and the mechanic said the policy excluded any problems relating to the exhaust.

The man started to wonder what the insurance did cover, googled the insurance and came across a Consumer NZ article which confirmed his She could have followed up the missing details once she was able to. FSCL also thought a reasonable person would have looked at their insurance policy to check they had the right cover in place. If she had looked at the Maxi-cover policy, she could have queried the lack of contents cover.

FSCL recommended the insurance broker compensate the client for two-thirds of her claim, taking into account one-third of contributory fault on her part. The parties agreed this was a fair outcome and the

Value for money?

The insured bought his first car from a motor vehicle dealer for

complaint was resolved. view that the insurance was unnecessary and not good value for money.

The man complained that he was: misled about what the policy covered and did not cover, misled about the cost of the insurance, not told that the excess would apply to each individual fault, given the impression the insurance was compulsory and not given a copy of the policy.

The dealer responded that it had given the man all the relevant information and he had signed the loan agreement accepting the insurance. He did not accept this response and complained to FSCL.

When FSCL advised the dealer that it had started an investigation, the dealer responded immediately offering to refund all the man’s premiums, a little over $2000.

He accepted the settlement and the complaint was resolved.

Pandemic problems

In March 2020, a couple were overseas in the United Kingdom when they heard the call from the New Zealand government to return home due to the Covid-19 pandemic. Although they were intending to travel home on April 6, 2020, they were able to bring their departure date forward to March 24, 2020. After checking with their insurer that they had cover, they abandoned their plans to fly home through Singapore, with a side trip to Bali, and purchased new, more expensive tickets, to fly straight home through Canada.

Fortunately, they received their money back from the cancelled tickets, but the new tickets cost $7300.

The pair’s insurer accepted their claim but, from the couple’s perspective, did not pay the full amount of their loss. They complained to FSCL.

They calculated that the insurer owed them $4900. They reached this figure by subtracting the original cost of their tickets home ($2400) from the cost of the new tickets flying through Canada ($7300).

The insurer calculated that it owed the couple $3700. The insurer deducted the full cost of the refunded tickets, $3600, which included the cost of the tickets to and from Bali from the new tickets flying through Canada ($7300).

The insurer referred to the policy wording which stated “…we will pay up to the policy’s maximum benefit for reasonable additional travel and accommodation expenses ... The amount claimable will be less any amounts refundable on unused tickets.”

The pair did not accept the insurer’s explanation, saying that no one would fly via Bali to return to New Zealand. The trip to Bali was a side trip, requiring a return flight to Singapore. They said the insurer should only deduct the cost of the direct flight from the United Kingdom to New Zealand from the cost of the replacement tickets.

Under the policy the insurer agreed that if the couple were unable to complete their journey due to circumstances beyond their control, the insurer would pay the reasonable additional travel and accommodation expenses, less any refunds from unused tickets. The literal interpretation suggested the insurer’scalculation was correct. However, when this clause was read in the context of the section as a whole, it was our view that insurer was only entitled to deduct the cost of refunded tickets for the same or similar services from the additional travel expenses.

When comparing their planned trip home with their actual trip home, it was FSCL’s view that the flight from the United Kingdom to New Zealand, through Singapore, was similar to their actual flight through Canada. As there was no diversion on the Canada trip that could be compared to the diversion to Bali, FSCL found that the insurer could not deduct the refunded tickets to Bali from the amount payable under the claim.

FSCL suggested that the insurer reconsider its position and pay the claim as calculated the insured. The insurer agreed, and paid the couple $1200, being the difference between the amount the insurer had already paid ($3700) and the true cost of the claim ($4900).

Caught out by carpet excess

The insured held insurance on her house.

In April 2019, she made a claim to the insurer, because her dog had vomited and had diarrhoea, damaging the carpet at the house over the course of a day.

The insurer accepted the claim.

There were multiple areas of damage in many areas of the house.

The insurer assessed the claim by dividing it into four areas: the lounge/dining area including the stairs and upstairs landing; the hallway; the bathroom/toilet area and the upstairs bedroom. The insurer paid $5874.40, which was the cost to replace the carpet in all areas, except for the bathroom/toilet area as the damage there did not exceed the excess. Three policy excesses were deducted from this amount, a total of $1200.

The woman disputed the insurer’s decision to apply three excesses to the claim. She said the insurer paid her the cost of synthetic carpet, not the cost to replace her wool carpet, and she also wanted the insurer to pay her compensation for stress.

IFSO said the policy allowed the insurer to deduct an excess of $400 from the claim for each incident. The policy defined incident as “something that happens at a particular point in time, at a particular place and in a particular way”.

Where there were a number of individual losses (as in this case, each area of damage to the carpet), for them to be regarded as resulting from a single incident, there must be a close connection between the losses, in terms of time, location, cause and motive.

The insured said all the vomiting/diarrhoea occurred over the course of one day. However, it happened at different times during the day and, therefore, the IFSO case manager did not believe all the damage could be regarded as the same incident.

An incident is what happened, as opposed to the underlying cause for what happened.

The dog’s vomiting/diarrhoea was the underlying cause; each time the carpet was damaged was a separate incident. It was reasonable for the insurer to apply three excesses, rather than a single excess.

The insured said she had good wool carpet which cost $239 per metre. She said the carpet supplier told her that it could only provide a quote for synthetic carpet at $149 per metre. She said that the insurer paid the settlement based on the cost of a synthetic carpet, which she said was “not nice at all”. The carpet supplier said the client had a fleck wool Berber, and the equivalent synthetic carpet was priced at $149 per metre. The supplier also stated that he had said to her she might want to go to a synthetic carpet as it would wear better and clean up more easily.

IFSO said the insurer paid the cost of replacing the carpet and was not responsible for the fact that the client did not like the carpet.

Stolen watch disappointment

Acouple arranged for contents insurance through their bank.

Two years later, a bank employee telephoned the insurer on behalf of the woman, inquiring about specifying a lady’s watch. During this telephone discussion, the employee advised the insurer that the watch was worth $2900. As the policy limit was $3000 for a single item of jewellery or watch, the insurer advised that the watch did not need to be specified on the policy.

A few months later, the bank employee again telephoned the insurer, and inquired about specifying a diamond ring. The insurer advised the bank employee to tell the client that, in order to specify the ring, she would need to provide a valuation. The bank employee told the insurer that he had referred her to a jewellery valuer.

The next year, the bank employee telephoned the insurer regarding the ring. A valuation was faxed to the insurer. The watch was raised in this telephone discussion; however, as it still had an estimated value under the policy sub-limit of $3000, the insurer advised that it did not need to be specified. The insurer said that it could be a good idea to get a valuation for the watch, given its value was close to the $3000 policy limit.

Subsequently, the couple's house was burgled and items of contents were stolen, including the watch.

The woman made a claim under the policy.

A jeweller valued the watch, noting that the particular model was unavailable and that the closest equivalent had a replacement value of $6375.

The insurer accepted the claim, but advised that the policy limit of $3000 would apply to the watch, because it was not a specified item on the policy.

IFSO investigated and found the watch was never specified on the policy schedule. In determining whether the insurer or its agent, the bank, should have listed the watch as a specified item on the policy, the case manager reviewed the recordings of the relevant telephone discussions in which the watch was mentioned.

From the recordings, the case manager believed the woman had informed the bank employee that the watch was either worth $2900, or that she bought it for $2900. She said she told him she bought it in Singapore and paid SGD $2900 for it. The insurer said it was not necessary to specify items that were valued below $3000. However, it also said that it would be good to get a valuation if she felt it might be worth more than that.

The woman stated that the bank employee did not advise her to obtain a valuation for the watch.

Unlike a court of law, the IFSO Scheme cannot assess oral credibility, but must consider the documentary evidence available. The case manager was unable to make a decision about whether the bank employee advised the woman to get a valuation for the watch; there was no documentary evidence nor recorded conversations about this issue. However, it was clear that the insurer advised the bank employee to tell her to get a valuation for the watch.

Having gone through the process of valuing and specifying the ring, the case manager believed the woman was aware, or ought reasonably to have been aware, that the watch needed to be valued to determine its sum insured, before it could be specified. The insurer was only informed that she bought the watch for $2900.

The case manager believed the insurer correctly advised that, if this indeed was the value of the watch, it did not need to be specified, because it was below the policy limit. Moreover, the insurer suggested she get a valuation for the watch, given it was believed to be valued so close to the policy limit.

She could have obtained a valuation for the watch, just as she had done with the ring, so that it could be specified for a sum insured of more than $3000. However, she did not specify the watch and the insurer was entitled to rely on the policy terms to limit its liability to the policy limit of $3000 for the watch. The complaint was not upheld.

Backtracking on settlement

QUESTION… We have a claim ongoing at the moment where an insurer has backtracked on their settlement offer and refusing to honour what they originally offered. A client’s TV was damaged and a claim was lodged and accepted, with the purchase order being offered through Noel Leeming. We sent this confirmation through to our client, who replied with additional questions, being: - Has the quote I sent through ($7000) been accepted - What is involved with a purchase order We then forwarded these queries to the claims handler, and this was their exact response (copied from the email) "Yes the claim is been accepted for $6999.00 less excess $400.00. Means Noel Leeming will contact the insured directly and they can replace the TV like for like." We then sent this offer through to the client, and they have responded with acceptance and requested the purchase order be sent. When the client has gone to Noel Leeming to pick up their new TV, they have been informed that the TV offered for replacement is a different model, worth $2399, and that they can't get the TV they thought they were approved for. They have also been forced by Noel Leeming to pay their excess before they would deal with the client, and our client is now $400 out of pocket and still doesn't have a TV. We have then gone back to NZI who are stating that this is the correct replacement model, and that the claims handler made a "human error" and they would not be honouring the $6999 TV as replacement. We have taken this up through the claims managers and they are all refusing to provide anything over and above the $2399 TV. I'm just wondering whether there is an consumer law that may apply to this, and where the insurer stands, with the offer and acceptance nature of the claim progression - The insurer offered and confirmed this offer was correct, after it was queried (being a purchase order to Noel Leeming for the quoted figure of $6999) and our client has accepted the settlement via purchase order based on this offer?

REPLY… CROSSLEY GATES

If there has been a specific offer by the insurer to settle the claim by paying $X, or the equivalent thereof, to the insured (effectively), and the insured has accepted that offer, there may be a binding contract of settlement of the claim that the insurer is bound by.

I add that if the insurer has made a genuine mistake, and $X is clearly wrong, your client may win the battle but lose the war by relying on his or her strict legal rights to force payment. I doubt the insurer will be offering renewal.

Insurers changing position

QUESTION… We have had several instances recently where insurers have advised that a claim has been accepted, and we have notified our client, and then a little way down the track, they have reversed that decision, having received a loss adjuster's report. In the most recent case, the claim was for water damage, and, having confirmed acceptance, the insurer themselves engaged a cleaning company to clean and dry the area. This had already been done when they advised that they were not going to accept the claim after all. Our client is now being charged those cleaning costs, which, if the claim had been accepted, would have been included as part of the excess (costs were actually less than the excess). I've been told that legally, if the client hasn't suffered any loss as a result of the initial acceptance, then the insurer does not have to honour the acceptance....could you clarify this for me please. The issue in this case is that if the client had been told at the outset that this was not a valid claim, she likely would not have incurred the cost of a cleaning company herself, and therefore we believe that the insurer should pay this cost. What are your thoughts?

REPLY… CROSSLEY GATES

I will assume the initial acceptance of the claim was an innocent error based on the limited information available and the subsequent declinature is legally correct - the claim never was covered.

Working backwards, if the claim never was covered the subsequent declinature of it is not a breach of contract. It is in accordance with the contract. Does the initial acceptance of the claim give the insured any legal rights?

The insurer made a representation to the insured that the claim was covered. Ultimately, this representation was incorrect. If the insured changed her position in reliance on this to her detriment, (perhaps made some financial commitment) then the insurer ie: stopped from denying its representation and must recompense the insured. It sounds like this didn't happen here.The insurer went ahead and contracted a company to clean the premises. That contract is probably between the insurer and the contractor. I don't see how the insurer can now “assign” that contract to the insured. The insurer will have to meet it. Unless there was some element of lack of good faith by the insured that led to the initial incorrect position, the insurer is simply stuck with that position. At least it doesn't have to pay the balance of the claim.

Dog on driveway

QUESTION… Our insured was contracted to perform some plumbing work on a property. An employee of the insured elected to take their dog to work. The dog escaped and ran over a neighbour's property that was under construction. The dog ran across the wet concrete driveway causing $15,000 worth of damage. The insurer of the contract works policy has accepted the claim but is seeking recovery. A public liability claim was made to the plumbing companies insurer on the basis that the employee who by definition is an insured was vicariously liable for the damage as the owner of the dog. The insurer has said that the policy will not respond as the “incident has nothing to do with the insured's business activities”. Is the insurer correct in their response? Are they bound to help our client deny liability if they don't believe they are negligent?

Threshold for an interruption claim

QUESTION… A motor vehicle dealership holds a BI policy and insures their full gross profit. The operative clause reads: ".....the insurer agrees to indemnify the insured for loss resulting from interruption to or interference with the insured's business in connection with damage during the period of insurance to any buildings or other property owned, used or leased by the insured, in accordance with the terms of the policy." Given the business activity, the insured's stock in trade is insured under a CMV policy. It's conceivable that an insurable event gives rise to a claim under the motor policy but not the material damage policy (which insures plant and incidentals kept within the building). In this scenario, would a claim for property damage to the vehicles only (which prevents the insured from selling them) be sufficient trigger for them to have a BI claim?

REPLY… CROSSLEY GATES

Under section 63 of the Dog Control Act 1996 an owner of a dog is liable for any damage done by the dog. Therefore, the employee is probably liable for the damage to the wet concrete.

It is unlikely that vicarious liability applies to a purely statutory remedy like this. This means the employer may not be liable, but the employee is an insured in his own right and can claim directly as such.

The public liability policy will limit cover to liability in connection with the plumbing business. This requirement is interpreted broadly by the courts. There only needs to be some link between the business and the alleged liability for it to be satisfied. Here the employee was, presumably, working for the business when the dog escaped. I believe that is probably a sufficient link with the business for the policy requirement to be satisfied. REPLY… CROSSLEY GATES

There is usually only meant to be cover under the BI Policy if the property damaged is: 1. Insured under the MD policy, or 2. Would be if the insured owned it.

MD policies don't usually insure vehicles, although that policy does cover stock in trade, so are they covered this way? If not, I suggest you need an endorsement to specifically bring the vehicles within the BI Policy insuring clause.

Do you have a question for our experts?

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Market for D&O insurance hardest in living memory

Directors in New Zealand and Australia are facing the most volatile and restrictive liability insurance market in living memory, according to a report released by the Institute of Directors (IoD) with Marsh and MinterEllisonRuddWatts. And there are no signs of it improving anytime soon. “Regionally, D&O claims payments have dwarfed the total insurance premium pool as litigation funders become more commonplace and as New Zealand’s regulatory environment, particularly our class action regime, evolves,” said MinterEllisonRuddWatts partner Andrew Horne. As a result, Marsh chief client officer Steve Walsh said: “insurers are increasingly cautious when considering renewals or applications, often requiring greater access to organisations and their boards. Premiums and excesses are climbing and some insurers are exiting the market altogether “Directors should be ready to play an active role in securing the appropriate liability coverage for themselves and the organisations they represent. This could include meeting with insurers to provide insights into the company and board structure, as well as their own competency and qualifications.” As directors and entities come under economic and structural pressure amid a more litigious backdrop, D&O insurance was more crucial than ever, said IoD governance leadership centre and membership general manager Felicity Caird. “Good governance is integral to successful, sustainable organisations. Strong directors leverage their experience and professional instincts to move an organisation forward; it requires focus and often courage. This is difficult if they’re constantly looking over their shoulder, worrying about personal liability,” Caird said.

“And it’s not just an issue for listed or private companies. Not-for-profits (NFPs) are particularly vulnerable, with many already facing financial challenges as fund-raising opportunities shrink amid Covid-19 restrictions.”

Walsh said New Zealand insurers had so far been relatively sympathetic to the NFP sector when it came to renewals and premiums. “But it’s certainly been tougher in other jurisdictions, so the local industry could well change tack. It’s important that all organisations strike the right balance between the rising costs of insurance and the appropriate level and mix of protection,” he asid.

Horne confirms that liability risks differ across industries and organisational complexity, so entities need to understand exactly what a specific D&O insurance policy offers. “Some key issues directors should be looking for are; whether coverage includes investigation costs, separate defence costs, and adequate cover for individual representation, as well as whether it excludes insolvency-related claims or cover for capital raising or claims by majority shareholders. “Not all D&O policies are equal.”