Insurance Advisernet Australia has been ordered to pay almost $38,000 to a marine business after the cover its broker arranged left the owner significantly underinsured, resulting in 42% being sliced from a claim payout.

The Australian Financial Complaints Authority (AFCA) ruled the broker failed in its duty of care and Insurance Advisernet should pay $37,832 to compensate the business owner for a shortfall in his business interruption claim settlement, which lacked separate payroll cover which had specifically been requested.

“The broker failure led to a reduced sum insured, thereby reducing the compensation paid,” AFCA said.

The marine business provides slipway and mooring services as well as maintenance and restoration for a variety of boats and yachts. It held a Lloyd’s Australia business pack insurance policy purchased through the broker under licence authority of Insurance Advisernet Australia.

Two years ago, an accident damaged a slip winch and cradle and the business initially ceased altogether and then had to operate at a reduced capacity for three months.

All parties agreed the incident triggered coverage for business interruption (BI), property damage and claim preparation fees.

Lloyd’s settled a $121,449 payout as follows: claim preparation $9870, winch remediation $14,308, cradle remediation $2500 and business interruption $95,021.

The BI component was settled under loss of gross profit.

The business owner went to AFCA saying he had requested a sum insured, for his combined loss of profits and payroll, of $550,000.

He requested gross profit cover with a limit for wages/payroll of $550,000 - and specifically $250,000 for payroll - and understood that this was the case, accepting the broker’s advice that the covers arranged were appropriate for his needs.

Instead, the Insurance Advisernet broker only included loss of profits in the gross profit sum insured category, with a separate notation that payroll was estimated at $250,000.

By so doing, “without appropriate advice and explanation to the complainant”, AFCA said an average clause was enlivened, lowering the BI compensation paid.

“The complainant intended to include both gross profits and payroll costs as part of a single sum insured. The policy issued by the broker does not provide such combined covers, however, the broker failed to advise the complainant of this,” AFCA said.

“Rather, the broker provided him with a recommendation and later an insurance schedule which a reasonable person in the complainant’s circumstances would believe to be the covers he requested.

“By not providing appropriate advice as to what cover was provided, how this would be triggered and how that would be applied, the complainant was denied the opportunity to seek alternative cover to better suit his needs or … provide payroll coverage for his staff.”

Even had separate payroll cover been included as requested, the marine business would still have been underinsured, AFCA said. Had the sum insured been set as instructed, BI compensation paid would have been $132,853 - $37,832 more than Lloyd’s paid.

The business owner told AFCA the broker sold him a policy that was not fit for purpose as it did not cover the demonstrated and proven financial impact of the BI event.

AFCA agreed the broker “failed to advise the complainant of the application of the covers arranged” and said Insurance Advisernet was required to compensate the business owner.

See the full ruling here.