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Broker who misunderstood client must pay to cover claim

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Australian Broker Network was found to have breached its duty of care when it reduced the sum insured of a client’s business truck from $50,000 to $20,000 and must compensate the client who could not claim fully for the vehicle’s repair bill of $26,501.45.

The 2004 Hino GH truck was damaged in October last year when the wrong oil was accidentally used, damaging its engine. The client only found out the sum insured had been reduced when they made a claim to recover the repair cost.

The Australian Financial Complaints Authority (AFCA) ruled the broker did not use proper care and skill when changes were made to the policy when it was up for renewal in December 2018.

An insurance broker must take reasonable steps to determine their client’s needs, arrange an insurance policy that meets those needs and inform their client of the new terms, AFCA says in its determination of the dispute.

But in this case Australian Broker Network not only failed the client when it misunderstood the instructions given before the policy was renewed, the broker also did not reasonably determine if the reduced coverage was suitable for the client’s needs and did not immediately inform the client after the policy was changed.

AFCA says it was unlikely the client would have asked the broker to lower the sum insured to $20,000 when the truck had a market value of closer to $50,000.

The broker insisted the client had in two phone calls given instructions for the sum insured to be reduced but since there were no recordings of the exchanges, AFCA says it had to consider what is most likely based on the circumstances.

The client told AFCA it had asked whether the truck’s chassis and tray could be insured in separate amounts. They say they did not ask the broker to lower the sum insured.

“It is more likely that the broker misunderstood the complainants’ instructions,” AFCA ruled. “The evidence shows the truck’s market value was much closer to $50,000 than $20,000, and the complainants knew this.

“Therefore, it is unlikely that they would have asked for the truck’s sum insured to be reduced from $50,000 to $20,000.”

AFCA also determined the broker failed the client in other ways in its review of the evidence and submissions.

A competent and experienced broker would have realised reducing the sum insured by $30,000 was an “unusual request” and reached out to explain the changes may be a risky move.

But Australian Broker Network did not engage with the client and in May 2019, gave a refund of $598.23 without explaining the money was for the reduction in the truck’s insured value.

The client had assumed the truck was insured for $50,000 when the policy was renewed in December 2018. The client made a payment of $2394.35, which was the amount quoted for the previous year’s policy for a sum insured of $50,000.

There was no evidence from the broker to show that it had emailed the client in December 2018 to confirm the sum insured had been reduced to $20,000.

“Before making the change, the broker should have asked the complainants why they wanted to reduce the sum insured so drastically and explained the risks of underinsurance,” AFCA said. “After making the change, the broker should have clearly informed the complainants that the change had been made.

“The broker did not take reasonable steps to determine whether lowering the sum insured was suitable for the complainants’ needs, to confirm that they wanted to lower the sum insured, or to inform them that the sum insured had been lowered. By failing to take these steps, the broker breached its duty of care to the complainants."

AFCA ruled the broker must pay the client $5903.22 excluding GST with interest calculated from March 16 this year - the date the broker responded to the complaint - until the date of the payment. AFCA says the compensation amount is derived from deducting the sum insured of $20,000 and premium refund of $598.23 from the cost of repairs.

Click here for the determination.