The Australian Financial Complaints Authority (AFCA) says having records that show consumers were informed of relevant exclusions is among critical issues in disputes it adjudicates.

An AFCA approach document on insurance broker disputes says they often involve allegations that adequate insurance wasn’t arranged or that the consumer was not fully informed of the terms of cover.

“The broker should ensure that the cover is sufficient to meet the complainant’s needs,” it says. “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.”

AFCA says it would be impractical to explain all exclusions, conditions or limitations, and some are obvious or almost always imposed, such as wear and tear in home insurance, but reasonable efforts should be made to specifically inform a client of those issues relevant to their needs.

Simply sending a policy containing an exclusion without pointing it out is unlikely to be enough, while setting out the exclusion on a first page summary could be acceptable, but not if it’s sent to the wrong address or the firm ought to have known the consumer was unlikely to read anything sent in writing, AFCA says.

If the broker informed the consumer verbally and in writing of the relevant exclusion, and could provide documentation, such as file notes or proof of correspondence sent, that would be sufficient in most cases.

Where a consumer is not properly informed of an exclusion, AFCA will consider whether this resulted in a loss, before deciding on compensation.

In an example given, if a broker failed to explain that a policy excluded flood, in a situation where it was relevant, and another insurer would have provided cover, then financial loss would be awarded.

Compensation would be based on what was payable on the policy the consumer would have purchased, after deducting any excesses and additional premiums.

On the other hand, another example is given where a broker fails to inform the consumer that the policy doesn’t cover burglary, but the cost is prohibitively high due to numerous burglaries in the past, and price is a significant factor for the consumer who has instructed the firm to arrange cover at minimal cost.

AFCA in that case wouldn’t be satisfied the consumer would have paid the additional premium necessary to arrange the cover, and therefore the consumer didn’t suffer any loss despite the financial firm’s breach.

The approach for disputes around whether cover was available for a relevant risk is also outlined.

Where the cover is relatively uncontroversial AFCA will infer it was available, but in circumstances where it’s normally not on offer, such as wear and tear in a home policy it would not accept such cover was available unless evidence was led to the contrary.

If cover could conceivably have been available, such as flood cover for a small business, AFCA will accept such cover was available, if the financial firm breached its duty and provided no evidence to support the fact that the cover was not available.

“The financial firm ought to submit such information when a defence that the cover was not available is argued or should have been argued,” it says.

AFCA says brokers should ensure that clear and precise records are kept of their dealings so that the information can be supplied if requested.

Relevant information could include the terms of engagement, financial services guides, any fact find/needs analysis form, correspondence, file notes, phone conversations, instructions, emails, details of discussions with insurers, research undertaken on cover availability, policy schedules/certificates of insurance, policy summaries, product disclosure statements, and claim particulars.

Legal principles require insurance brokers to exercise reasonable care and skill in the performance of their duties, AFCA says.

“The relevant standard is that expected of a competent and experienced insurance broker,” it says. “Brokers are held up to the same standard as any professional person.”

The Insurance Broker Disputes approach document is available here.