Last updated 30 November 2016

Some will purchase insurance just on price, and while most policies have a similar theme, each personal and small business policy is a contract worded differently.

Once a claim is established (as described in Elements of an Insurance Claim), one must then look at limiting factors.

Prescribed minimum cover

For some personal insurances, the Commonwealth Government has prescribed a statutory minimum policy cover (and exclusions) in the Insurance Contracts Regulations 1985 (Cth) (Insurance Contracts Regulations) as a ‘safety net’. These policy types are:

  • personal motor vehicle
  • home building
  • home contents
  • sickness and accident
  • consumer credit.

If the insured has less cover than that prescribed by government because, for example, the insurance contract places sub-limits on payments for certain types of claims, then pursuant to s 35 of the Insurance Contracts Act 1984 (Cth) (Insurance Contracts Act), the insurer must still pay an amount equal to the minimum prescribed cover in the Insurance Contracts Regulations unless the insured:

  • knew or could reasonably be expected to know that the cover was less than the minimum statutory prescribed cover
  • was clearly informed in writing prior to taking out the insurance, that the contracted cover was less than the minimum statutory prescribed cover.

This information notice is often in the Product Disclosure Statement (PDS) supplied by an insurer with the blank proposal form. However, if the insurer representative did not actually supply the PDS, the insured may be entitled to government minimum cover.

Sub-limits

Insurers often apply policy sub-limits to certain risks, for example to:

  • jewellery and watches
  • any item containing a precious metal or gemstone
  • antiques, manuscripts and curios
  • collections of stamps, coins, medals
  • art works, tapestries and handmade rugs
  • cash, bullion and bonds
  • computers and computer equipment
  • mobile phones
  • items used in business or trade
  • contents in the open air.

Such sub-limits are usually less than the government-prescribed minimum cover and therefore must be explained to the insured prior to taking out the policy. If this has not been done, the insured is entitled to the minimum cover determined by government.

Co-insurance and average clauses

Underinsurance is seen by the industry as a big problem. That is, the insured are often taking out policies where the sums insured are significantly less than proper value.

Where an insured has insured an item for less than its actual value, some insurers will reduce any claim in proportion to what the correct sum insured should have been. For example, if the insured owned a car valued at $50 000 but only had it insured for $25 000, the insurance company might then say it is only responsible for half of any claim. If the car owner then claimed $10 000 in repairs for a car accident, the insurance company could average out its liability and say it was only responsible for half of the insurance value and need only pay half of the claim, in this case $5000.

Under s 44 of the Insurance Contracts Act, an insurance company can only rely upon averaging where there is an averaging clause in the contract, and it has clearly notified the insured person of the effect of that clause.

Moreover, the s 44 of the Insurance Contracts Act operates:

  • to provide an underinsured buffer of 20%. This means that an insurer cannot rely upon an averaging clause where the value insured is 80% or more of the actual value. In the above example, if the car owner had insured the car for $45 000 (or 90% of its real value), the insurance company could not limit its liability to 90% of the total claim but would have to pay the whole claim
  • where an item is more than 20% underinsured, the insurance company cannot average out to more than 80% of the insured value. In the above example, if the car owner insured the $50 000 car for $25 000 and then claims $10 000 in repairs, the insurance company would have to pay $6250.

Exclusions

In contrast to the subject matter simply not being insured or underinsured, a number of exclusions are typically applied to any one insurance policy. These may come in many forms, but some examples include:

  • flood
  • wear and tear, rust or corrosion
  • depreciation
  • storm or tempest loss, damage to fences, gates or retaining walls
  • theft by a person ordinarily residing with the insured person(s)
  • intentional damage
  • damage in connection with an unlawful purpose
  • government seizure
  • insects or vermin damage
  • racing, pace-making, reliability trial, speed or hill-climbing test
  • some types of loss or damage where the building remains unoccupied for more than 60 continuous days, even when on holiday.

The insurers are obliged to clearly inform the insured in writing whether the policy covers flood, which now carries a standard definition. Depending on the circumstances, the issue may be a matter of fact, expert opinion or a matter of law. If it is a matter of policy interpretation on whether the loss or damage was, for example, caused by flood as defined in the PDS, compared with rainwater runoff, then the insured should seek legal advice.