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Brokers don’t have to explain ‘inherently obvious’ exclusions

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The Australian Financial Complaints Authority (AFCA) says it does not expect insurance brokers to explain “inherently obvious” exclusions to customers unless specific requests have been made to have the risks covered.

According to the AFCA Approach document to insurance broker complaints, it “would be impractical and unreasonable for brokers to go through all exclusions, conditions or limitations of a policy”. The document sets out the list of areas that would be examined before a determination is made.

AFCA says an example of an inherently obvious exclusion would be damage caused by wear and tear or gradual deterioration in a typical home policy.

“Therefore, the broker would not be required to draw attention to them unless the consumer specifically disclosed a need for this cover,” AFCA said.

“In general, the financial firm must satisfy AFCA that reasonable efforts were undertaken to ascertain the consumer’s needs and specifically inform the consumer of a relevant policy exclusion or exception.

“If an exclusion impacts consumers’ disclosed or ascertained needs or the sum insured is less than required, the broker is required to properly inform the client of this. This does not mean a broker must explain all exclusions.”

Other areas that AFCA will also consider include whether a broker has appropriate practices and processes in place to canvass and record clients’ insurance needs; has made reasonable efforts to arrange a policy that suits the client’s needs; has provided advice to ensure clients are able to make informed decisions; and has established the terms of agreement between the parties.

When it comes to establishing a loss, AFCA says compensation is not guaranteed even if a broker failed to inform a client of a relevant policy exclusion.

“AFCA must still consider whether the financial firm’s failure caused the consumer to suffer the loss being sought,” the mediator says. “This loss is assessed as the amount necessary to restore the consumer to the position they would have been in if the failure had not occurred.

“If the consumer is found to be no worse off than if the failure had not occurred, no compensation would be awarded.”

AFCA says most disputes lodged against brokers involve alleged failures to arrange for adequate coverage or to fully inform clients of the terms of policies.

Click here for the approach to insurance broker disputes.