A dispute panel says an insured should receive an extra $340,800 under a benefit triggered by catastrophe damage “in the vicinity”, even though their destroyed property was 960 kilometres from record Queensland and NSW flooding.

The policyholders, who held a farm insurance policy, made a claim after a vehicle caught fire on November 26 2021, causing extensive home and contents damage.

QBE declared a total loss and calculated a settlement of $1.47 million, including sum insured, temporary accommodation, an inflation adjustment and environmental upgrade.

The insurer obtained three quotes in August 2022 to reinstate the inland NSW building, which was of heritage significance. These ranged from $1.6 million to $1.88 million, exceeding the sum insured of $1.136 million.

The claimants argued an extra 30% of the sum insured – equating to $340,800 – should be paid under a policy safeguard special benefit given the record February and March flooding known as Cat 221 had driven up costs across Australia’s east.

The special benefit applies if increased repair costs are caused “directly by a catastrophic event”, defined as a natural disaster where damage to “property in the vicinity” of the insured home is so extensive and widespread that surging demand for materials and labour causes prices to jump.

QBE argued a general nationwide or statewide building costs increase due to a disaster beyond the insured’s vicinity did not trigger the benefit, and “in the vicinity” connoted “in the local area”. It referred to British case law on covid pandemic impacts in support of its submission.

The Australian Financial Complaints Authority (AFCA) says the policy does not define “in the vicinity” and it is fair in the circumstances to refer to the phrase’s ordinary and natural meaning and dictionary definitions, as well as the commercial context.

Its decision cites Macquarie Dictionary definitions for “vicinity” and “local” and says the latter is more restrictive in scope.

“The policy itself does not use the term ‘local’ in the context of the ‘catastrophic event’ provision,” it says. “The panel does not consider it fair or appropriate to rely on that term to restrict the operation of the provision in this particular complaint.”

The decision says elsewhere in the policy there is a reference to “in the immediate vicinity”, that context is relevant in assessing what “in the vicinity” means, and AFCA does not accept that the definition does not apply where a disaster causes a general increase in repair costs.

“The definition does not include that limitation. On the available evidence, the panel is satisfied the catastrophic event did have a specific and identifiable impact on the complainants, in any case.”

AFCA says it is fair to interpret “in the vicinity” broadly, and while the closest damaged property in the Cat221 floods may have been many kilometres from the insureds, the nature of the event and scale of the damage meant labour and materials shortages and pricing surges extended beyond the catastrophe zone.

“The panel considers the broad intention of the policy provision and the definition of ‘catastrophic event’ is to provide cover in situations where a natural disaster results in a surge in demand and then also in costs – and where (in the context of the particular catastrophic event) the damage occurred to property sufficiently close to the insured that the insured is impacted by those resultant cost increases,” it says.

AFCA says QBE should pay interest on any unpaid home sum insured portion and on the special benefit, calculated from September 7 2022, when the total loss cash settlement was first offered, until the date of settlement.

On other matters, AFCA says the insurer’s agent did not provide incorrect advice in the setting of the home sum insured, and the insurer was not required to pay additional demolition costs as the policy allowed it to deduct those from the total loss settlement.

QBE should pay temporary accommodation costs for an additional year from March 29 this year and $2500 compensation for non-financial loss, the decision says.

“The available evidence shows the insurer progressed the claim reasonably overall, with some of the delays outside its control,” AFCA says. “However, the insurer’s denial of the special benefit has meant finalisation of the claim has become unnecessarily protracted, leaving the complainants without the funds to progress the repair of their home in the meantime.”

The decision is available here.