Underinsurance clause hits hotel fire claim payment

A hotel damaged by fire should have the claim payout for repairs reduced due to an underinsurance clause, the Australian Financial Complaints Authority (AFCA) has ruled, despite the complainant arguing the amount should be paid in full.

The business, which had insured the buildings for $1 million, argued the insurer, Lloyd’s Australia Ltd, should pay a repair cost of $467,823.20 and rejected an offer to settle the claim for $200,000.

The insurer’s quantity surveyor valued the buildings at $2,806,006 million and the cost of repairs after the fire at $175,570. Applying the policy underinsurance clause to the figures would mean the insurer only had to cover 44% of that cost, which totalled $77,250.

The policy says an underinsurance clause applies when the sum insured is less than 80% of the property value, taking effect in the hotel’s case if the building valuation is at least $1.25 million.

The complainant obtained a builder quote showing a $1,362,060 valuation for rebuilding the hotel and an annex, while figures from a quantity surveyor indicated an estimate of $1,569,870.

“All valuations showed the value of the buildings exceeded $1,250,000,” AFCA said. “This means the underinsurance clause will apply. The effect of the underinsurance clause will depend on which valuation is used.”

AFCA determined that the insured buildings value was $1,749,284, with an 80% adjustment giving a figure of $1,399,427.

Applying the underinsurance clause, the portion of the claim that the insurer was required to pay was calculated by dividing $1 million into $1,399,427, giving 71.46%.

AFCA rejected the insurer’s cost of repairs estimate, saying the $175,570 was “not an actionable quote” and it had not shown why part or all of the estimate provided by the complainant’s builder should be rejected.

The complainants repair cost estimate comprised $410,573.20, plus $57,250 for delays in completing repairs, but AFCA said the delays were not the insurer’s responsibility.

The building repairs totalled $340,909.90, with the underinsurance clause reducing that to $243,614.21, while professional fees, debris removal, stock, contents and inventory added up to $69,663.30, which wasn’t subject to the underinsurance adjustment.

As a result, AFCA determined the total required to be paid by the insurer was $313,277.51.

The insurer is entitled to deduct a $2500 excess and any amounts already paid, and must pay interest on the outstanding amount.

The complainant also argued that $80,000 should be paid for business interruption.

AFCA said it had received insufficient information to determine if costs were higher than the $24,567 paid by the insurer, and the panel couldn’t determine whether an increased sum was required.

The decision is available here.