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'Issues we can’t ignore’: wear and tear exclusions under fire

Too many insurers are relying on maintenance or wear and tear exclusions and poor-quality reports from builders, plumbers and electricians to deny claims, the General Insurance Code Governance Committee (CGC) says.

A recent CGC inquiry revealed 55% of denied home insurance claims were on the basis of maintenance or wear and tear exclusions. 

These refer to normal gradual deterioration that has not been caused by an unforeseen event, or when a property has been poorly maintained.

Overall, of 42,956 home insurance claims denied, there were 10,903 complaints – and 5108 were later resolved in favour of the consumer. CGC is now conducting six possible insurance code and Corporations Act breaches.

"Alarmingly, nearly half of [the complaints] were later overturned in favour of the consumer,” the Committee said. “We found issues that we cannot ignore.”

CGC Chair Veronique Ingram says there “may be underlying systemic issues in decision-making from insurers when wear and tear is a factor”.

“We expect insurers to carefully consider a range of factors in assessing a claim with the aim of coming to a reasonable, fair and sound decision,” she said.

Where an expert tradesperson was appointed to make a report, almost half offered a claim decision recommendation – yet often failed to provide a demonstrable link between the cause of damage and the loss.

“We did not always see sufficient evidence to justify the assessments,” CGC said. "While an expert may be technically proficient in a certain field, making a recommendation to accept or deny an insurance claim goes beyond that.

"Denying a claim involves more – there are other factors that we expect insurers to consider when weighing up a decision.”

Six insurers that collectively handled 53% of the industry’s home insurance claims in 2021-22 – more than 1.6 million retail claims – were part of the inquiry. Each provided 20 denied home insurance claims that were overturned in favour of the consumer following a dispute.

“We found a concerning trend in the number of claims denied because of maintenance or wear and tear exclusions,” the CGC said. "Alarmingly, nearly half of these were later overturned in favour of the consumer.

“This is a significant overturn rate and raises questions about the quality of the decision-making" by insurers. They must get on top of this.”

Insurers also apply the exclusions differently because acceptable maintenance is often poorly explained in the policy terms – leaving consumers “often unaware of what they should do to avoid an exclusion".

“Few consumers would be aware that this is subject to them maintaining their home to a standard that is rarely defined in Product Disclosure Statements (PDS),” CGC said. “Many consumers would regard a claim denial on the basis of unclear maintenance expectations as unfair.”

Insurers relied heavily on builders, plumbers, electricians and other tradespeople which raised a question about the extent to which initial claim decisions were influenced by those experts and their “quality and impartiality”.

Insurers should ensure claims staff question, challenge and critically evaluate an expert’s recommendation as a routine part of the decision-making process, the CGC says, adding expert inconsistencies were routinely missed by loss assessors and the insurer.

In 30% of decisions to deny a claim, there was an expert report that recommended the denial, but the CGC says the reports may be “insufficient and/or biased” in favour of the insurer.

Consumer Action CEO Stephanie Tonkin says the fact 47% of the claim denials were overturned is a "glaring statistic,” and incorrectly denying people’s claims "is wrong and causes incredible distress”.

“This report reveals that insurers are using poor quality expert reports to rely on exclusions to decline people’s home insurance claims,” she said.

See the report here.