Homeowners have successfully challenged their insurer’s denial of a claim lodged after large cracks appeared in walls and ceilings when a broken pipe leaked under the property.

Insurer Youi accepted that the water leak occurred but said it was not the main cause of the damage. It instead pointed to excluded factors such as long-term earth movement, and said the pipe was damaged by tree roots, which was also excluded.

The homeowners took their case to the Australian Financial Complaints Authority, which backed their interpretation of events.

The complainants said they discovered the leaking pipe in January 2023 and had it repaired days later. They noticed “significant cracking” in the front dining room and foyer, and lodged a claim on February 17 2023.

The insurer’s builder said the cracking was caused by stump movement and not an escape of liquid. An engineer then attended and found the damage was due to poor drainage, drying caused by trees, inadequate footings and other factors.

Youi also noted that the complainant’s plumber said tree roots caused the water pipe leak.

The complainants commissioned their own geotechnical engineer, who found the worst cracking was in the area where the water would have pooled.

He said the foundations were “serviceable”, and trees would have had no influence on the most badly damaged area.

“The complainants say that they have experienced fine cracks which have been repaired over the last 40 years that they have resided at the property,” AFCA said.

“However, this cracking is markedly different. The complainants say the damage was sudden and occurred at the same time as the discovery of the leaking pipe.”

The insurer said the proximate cause of the damage was “differential settlement of the footings”, which was only exacerbated by the leak.

But AFCA says the onus is on the insurer to prove an exclusion applies, and it has failed to provide enough evidence. The ombudsman says the insurer’s engineer did not consider why the cracking was worse in some areas, and prefers the findings of the complainant’s expert. 

It says the insurer cannot rely on an earth movement exclusion, because the proximate cause was the escape of liquid.

AFCA has told Youi to settle the claim and cover temporary accommodation if required.

It also says the insurer must pay $1060 to cover the complainants’ professional costs, plus $4000 in non-financial loss compensation – partly because Youi unreasonably declined to renew the customers’ home and contents policies.

“[The insurer] says that it considered the extent of damage, maintenance issues required and based on its underwriting guidelines declined to offer renewals on both home and contents,” AFCA said.

“The complainants say these actions caused them considerable distress and inconvenience as they found it difficult to obtain cover elsewhere. Further, they had previously been loyal customers of the insurer for many years.

“The [AFCA] panel considers the insurer’s action of not offering to renew the policies unreasonable, particularly when the complainants’ claim was unresolved, they were pursuing their claim and had provided information from suitably qualified experts, which the insurer had failed to respond to. 

“Further, that the insurer’s reliance on the state of the property and its underwriting guidelines were related to the insured event which it had incorrectly declined.”

Click here to read the full ruling.