There’s momentum building on an insurance issue that could theoretically invalidate thousands of home and contents policies, and has consumer groups throwing around accusations of “junk” cover.
When customers take out home and contents policies they are invariably asked if any business activity takes place at the home. If the answer is no, and that’s not accurate, or it later becomes inaccurate, there’s a serious risk of claims being denied.
At first glance it doesn’t seem that different to any other non-disclosure issue, and if consumers are dishonest, or careless with the truth, or fail to tell their insurer about changed circumstances, then the consequences are on them.
There are also very good reasons why business activity increases risk – even extra visitors to the home adds to liability concerns – and if insurers don’t want to take that on, well, that’s up to them.
But is it quite that simple?
There are estimated to be hundreds of thousands of Australians carrying out some form of business activity from home, especially since covid. And business activity can be quite difficult to define.
Recent examples highlighted by ABC News where claims have reportedly been denied or cover withdrawn include eggs being sold from an honesty box, bike repairs taking place in a garage, and a food truck parked at – but not trading from – a home address.
One broker told insuranceNEWS.com.au that a pensioner client of his was informed that continuing to sell $5 worth of eggs to his carer every month would force the cancellation of their home and contents policy.
While we may not have all sides of every story, and insurers are entitled to decide which risks they want to pass on, these articles don’t pass the all-important “pub test”. And the more stories that are told, the more this threatens the industry’s reputation.
Consumer Action Law Centre CEO Gerard Brody told the ABC that if a consumer has a policy that was never going to provide coverage, it’s “effectively junk” and insurers need to “look at the fairness of what they’re doing and come up with a better solution for their customers”.
Politicians are getting in on the act too, with ACT Independent Senator David Pocock writing to the Insurance Council of Australia, Financial Services Minister Stephen Jones and others.
“There is a real issue here,” one industry source told insuranceNEWS.com.au.
“Lots of people will be doing little business activities for modest amounts of income. I wouldn’t be surprised if ASIC turned around and wrote a letter saying ‘review your home book and let us know the extent of this issue’.
“It’s something that the industry needs to think through just to satisfy ourselves that there isn’t some great big latent systemic issue out there.”
Bringing us back down to earth is that fact that we haven’t heard about many claims being denied on this basis.
Insurers are paying out hundreds of thousands of home claims in the wake of a spate of natural catastrophes – and if flood claims were being denied en masse on the basis of undisclosed garage sales or fresh produce honesty boxes, we would surely have heard about it.
Insurers don’t appear to be actively investigating such activity, and in most cases, how would they even know about it?
The Australian Financial Complaints Authority (AFCA) says complaints about the issue are not common, pointing to only one relevant determination in recent years.
That case related to a fire caused by undisclosed jewellery manufacturing taking place in a garage.
The complainants thought it was more a hobby than a business, but AFCA pointed out that income was generated, there was a business bank account and an ABN.
Some have flagged the fact that the duty of disclosure changed on October 5 last year to a duty to take reasonable care not to make a misrepresentation.
This swings the balance slightly in favour of consumers, and means the insurer needs to ask questions clearly and specifically, and communicate to the insured the importance of answering correctly, and the possible consequences of failing to do so.
However, it may not have much impact on this issue. Answering a question about business activity inaccurately is probably going to fall foul of either duty. And the same applies to not updating a previous answer on renewal, so long as the insurer has issued the renewal notice correctly.
Contrary to popular belief, the claim would not have to be directly related to the business activity for the insurer to deny it.
But under the new duty the insurer would need to prove that a misrepresentation had occurred, that reasonable care was not taken, and that, had it known about the undisclosed matter, it would not have offered cover in the first place.
“It comes down to the basis of the insurer’s denial,” AFCA’s Senior Ombudsman General Insurance Chris Liamos tells insuranceNEWS.com.au.
“If it’s a non-disclosure or a failure to take reasonable care not to make a misrepresentation, they don’t necessarily have to prove a link between the claim and the non-disclosure.
“What we are looking at, because it’s a precontractual issue, is what would the insurer have done differently, and what’s the prejudice that they’ve suffered.
“The insurer will still need to step through how it would have affected them. If they still would have issued the policy on the same terms then they can’t deny a claim on that basis.
“If they would have charged an additional premium they can deduct that from the claim, or if they would have applied an exclusion that wasn’t applicable to the claim then there is no prejudice.”
As to how business activity is defined, AFCA would first look for definitions within the policy. If there were none, it would move to the ordinary meaning of those words.
Mr Liamos admits “it’s a difficult one” and there are some “grey areas”.
“If your kid is selling lemonade at the front door, that would be a big stretch to say that’s somehow a business.
“On the flip side, if you’ve got a situation where someone has got an ABN and a fairly large turnover they are generating from their home, that might be less controversial.
“We would be looking at what would be the ordinary consumer’s understanding of that term in the context of the policy wording. Then we would look at the specific activities of the insured that the insurer is saying falls foul of the language.”
Does simply working from home as a paid employee cause a problem? You’d think not, but can anyone afford to make assumptions?
One industry source suggests that policies may need to introduce greater clarity – and refer to specific income thresholds or activities.
And however daft some might think it is, insurers have every right to decline to cover home and contents customers due to low-level business activities, if that’s what they want to do.
“They have a commercial discretion as to what they’ll insure and under what circumstances,” Mr Liamos says.
“If they want to be strict about certain types of business they don’t want to insure then generally they are entitled to do that.”
The advice to consumers is, as ever, read the Product Disclosure Statement. If a customer is unsure about anything, they should give the insurer a call.
Don’t assume something relatively minor doesn’t matter – it might. And if something changes, they should tell their insurer immediately, and pay attention at renewal time, making sure to check that the answers previously given are still accurate.
A little extra cash can go a long way in easing the pressure as the cost-of-living rises. But it’s not worth invalidating insurance on your biggest asset.
And as far as the industry goes, prepare for more scrutiny on this issue – especially if more people decide to tell their story to the ABC.