Thereâs momentum building on an insurance issue that could theoretically invalidate thousands of home and contents policies, and has consumer groups throwing around accusations of âjunkâ 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 thatâs not accurate, or it later becomes inaccurate, thereâs a serious risk of claims being denied.
At first glance it doesnât 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 â even extra visitors to the home adds to liability concerns â and if insurers donât want to take that on, well, thatâs 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Recent examples highlighted by ABC News where claims have reportedly been denied or cover withdrawn include eggs being sold from an honesty box, bike repairs taking place in a garage, and a food truck parked at â but not trading from â a home address.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 donât pass the all-important âpub testâ. And the more stories that are told, the more this threatens the industryâs 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, itâs âeffectively junkâ and insurers need to âlook at the fairness of what they’re doing and come up with a better solution for their customersâ.
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.
âThere is a real issue here,â one industry source told insuranceNEWS.com.au.
âLots of people will be doing little business activities for modest amounts of income. I wouldnât be surprised if ASIC turned around and wrote a letter saying âreview your home book and let us know the extent of this issueâ.
âItâs something that the industry needs to think through just to satisfy ourselves that there isnât some great big latent systemic issue out there.â
Bringing us back down to earth is that fact that we havenât 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 â 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 donât 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.
âIt comes down to the basis of the insurerâs denial,â AFCAâs Senior Ombudsman General Insurance Chris Liamos tells insuranceNEWS.com.au.
âIf itâs a non-disclosure or a failure to take reasonable care not to make a misrepresentation, they donât necessarily have to prove a link between the claim and the non-disclosure.
âWhat we are looking at, because itâs a precontractual issue, is what would the insurer have done differently, and whatâs the prejudice that theyâve suffered.
âThe 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 canât deny a claim on that basis.
âIf they would have charged an additional premium they can deduct that from the claim, or if they would have applied an exclusion that wasnât applicable to the claim then there is no prejudice.â
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 âitâs a difficult oneâ and there are some âgrey areasâ.
âIf your kid is selling lemonade at the front door, that would be a big stretch to say thatâs somehow a business.
âOn the flip side, if youâve 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.
âWe would be looking at what would be the ordinary consumerâs 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.â
Does simply working from home as a paid employee cause a problem? Youâd think not, but can anyone afford to make assumptions?
One industry source suggests that policies may need to introduce greater clarity â 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 thatâs what they want to do.
âThey have a commercial discretion as to what theyâll insure and under what circumstances,â Mr Liamos says.
âIf they want to be strict about certain types of business they donât want to insure then generally they are entitled to do that.â
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.
Donât assume something relatively minor doesnât matter â 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 itâs not worth invalidating insurance on your biggest asset.
And as far as the industry goes, prepare for more scrutiny on this issue â especially if more people decide to tell their story to the ABC.
