Lessons for insurers, brokers and insured

FDRS has recently seen several complex finance and insurance cases with similar themes. In this article, we share a sample case study based on these combined cases so that no party or case can be identified, followed by a discussion of the outcomes and themes.

Case study

Gary and Jo live in the Nelson region where Jo works as an engineer. Before moving to Nelson 20 years ago, Jo worked as a builder for a small building firm in Christchurch.

Five years ago, they purchased a block of land in the Nelson region. There were two small buildings on the land - a garage with a basic kitchen and toilet block, and a storage shed. The section had basic infrastructure and amenities like power, water tanks and sewerage systems but no family home. Other than a mower, an old van and some of Jo’s tools and plant machinery, the buildings were empty.

The land and buildings were initially insured through Standard Insurance. The couple found that it was difficult to find an insurance company to insure the land and buildings because 32 years ago, the land had flooded during a severe storm. Gary and Jo have never experienced any problems with flooding while they had owned the property.

Two years ago, they decided that it was time to begin building their “forever home”. Once the plans were drawn up and approved, the first thing the couple did was to change insurance brokers. They approached ABC Brokers, who advertised themselves as specialists in construction insurance. On the company’s website, the brokers promised that they could arrange tailored and customised solutions for all construction and commercial risks including vehicles, tools, plant, and equipment.

The first cover Jo and Gary sought through ABC Brokers was Contract Works Insurance for the construction of their family home. Since the couple were still negotiating with contractors, there was no reference in the proposal to any building contractor or subcontractors. As Jo and Gary intended to pull down the old garage and sheds, the couple made no mention in the proposal to any existing structures, plant, equipment, or vehicles stored on site. The land was referred to as “bare land”. They ticked both natural disaster and public liability cover on the proposal but made no reference to the previous issues with flooding. They signed the proposal which includes a declaration stating that all answers are true and correct, and they have not withheld any information.

Works Insurance was arranged by ABC Brokers with Reliable Insurance NZ. The initial cover was for 9 months – the estimated length of the building project. The insurance policy covered any accidental loss on the building site including the construction of the family home and retaining walls. The insurance policy offered specific extensions related to employee’s tools and temporary buildings – neither of which were covered without a specific request by the insured. If this cover was sought, these items were subject to specific limits. No cover for these items was requested by Jo and Gary. The insurance policy reminds the customers of their duty of disclosure.

About 3 months after Jo and Gary organise the works cover, they approach ABC Brokers to organise Contents cover for their personal property kept at the home they rented while their house was being built.  They value their personal effects and contents at $74,000. There is no reference to any trade tools in the itemised list of belongings and no reference to any items stored off site. Contents insurance is organised with Valiant Insurance. There is a specific limit on the trade tools covered in this policy of $2,000. Again, there is a reminder of the need to disclose any change in circumstances or any material information. 

Two months before the expiry of the Works Insurance, Jo and Gary approach ABC Brokers with a problem. They have been unable to find a builder who is willing to take on this project. They advise ABC’s team that Jo has decided to take 6 months’ sabbatical from work and start the job herself. Jo will organise the sub-contractors. The insurance with Reliable Insurance was adjusted accordingly. Again, no reference is made to the existing buildings or the tools or vehicle on the building site.

However, the insurance brokers also makes no effort to ask whether there are any further risks that needed to be covered given Jo’s new role in the construction project. There is no discussion about the usual construction risks like temporary buildings, vehicles, health and safety or tools and equipment. The only changes were to add Jo to the listed “contractors” and extend the cover for a further 12 months.

Jo begins the project straight away. She starts to get the site prepared, arranges for the foundations to be poured and the retaining walls were completed. Jo starts to purchase key items for the build such as tools and equipment and building materials. Jo borrows several items of plant from close friends. All these items are either stored in the van or on the floor in the garage or in the shed.

The project is well under way when 4 months later a storm hits the Nelson region. There is significant flooding across the couples’ property. Although the building site survives the flood, the garage is completely inundated. The van, and all the tools kept in the vehicle, are swept away in the flood waters. Most of the tools, plant and equipment and building materials in the garage and the shed are either lost or destroyed. The couple’s estimated loss was $92,000.

However, when Jo and Gary attempt to make a claim under both the Contents and Works insurance, both Reliable and Valiant refuse to cover the couple’s loss. Valiant states that the items in the garage are not covered by the Content insurance because the couple had not disclosed that there were any items stored anywhere other than at the couple’s leased home. Reliable refused to cover the construction works losses because the couple had not disclosed the presence of tools, equipment, and materials on the site. They had failed to notify the insurance company of the known risk of flooding and presence of temporary buildings on the site.

Jo and Gary launch a claim with FDRS against ABC Brokers (as experts in construction insurance) for failing to advise them of the “usual construction risks” and failing to arrange appropriate cover for motor vehicles, tools, equipment, plant, and materials.

Next steps

Each of the cases this story is based on followed a very similar trajectory. While attempts were made by the parties to resolve these issues for themselves, it is evident almost immediately that the parties had very divergent expectations for settlement. They cannot agree on a pathway forward, so they seek the support of an independent dispute resolution scheme.  

In each case, the customer was making a significant claim through FDRS. They each alleged that the scheme member had breached their contractual obligations and duty of care. They claimed that the companies had failed to exercise reasonable skill and care in providing advice to them as their clients. However, the financial and insurance advisors and brokers counter-claimed alleging that the client had failed to disclose material information that would impact the risk. This gap between the parties’ various positions meant that the only way these disputes could be resolved was through adjudication, where someone independent is appointed to look into their cases and make a decision on the matters.

It was interesting that in each of the cases, the scheme members claimed either that there was no prospect of success, or the claim was frivolous and vexatious, and so should fall outside the jurisdiction of the scheme. It is important for scheme members to remember that we often only have a very limited amount of information when we make the determination on jurisdiction. In addition, for us to decide that these exceptions (under rule 12 of the Scheme Rules) apply, we need to be convinced from the initial evidence that there are no “red flags” or risks for the scheme member.

In cases as complex as Jo and Gary’s case, it is highly unlikely that FDRS will reject a case before all parties have had the chance to offer full legal submissions on all aspects of the case and without FDRS taking time to contemplate the parties’ competing duties. It is important to remember even if the scheme member is likely to have a significant defence to the claim (e.g., non-disclosure), this does not mean there is no “prospect of success” or no case to answer.


The complexity of these cases is evident from the different outcomes. In two of the cases recently seen, FDRS determined that there was a breach of the broker’s obligations to provide appropriate advice on the identified risk and offer a range of suitable products to meet those risks. In Gary and Jo’s example, the fact that Jo disclosed that she would undertake the new role as the main contractor potentially created an obligation on ABC Brokers to enquire further. What new risks would Jo face as the main contractor on the building site? Did the duty owed by the advisors or brokers increase once they became aware of this change? Should Jo and Gary be advised to re-consider their possible risks of professional and public liability, or the risk to vehicles, worksite tools and storage areas?

In another case, the broker had advised the Customer not to carry out the normal due diligence processes and enquiries (building inspection, LIM and council reports) to avoid losing the property “deal”. This failure to carry out the checks proved to be significant when it was later discovered that the property was known to be a flood risk or where buildings had a series of significant and easily detectable defects. This advice to the customer to “cut corners” on due diligence processes and limit their review of the building, and the failure of the broker to make further enquiries when new risks emerged, were factors that FDRS considered in determining that the brokers had contributed to their customers’ losses.

In two other cases, FDRS determined that the customer had failed to disclose sufficient information to trigger the finance or insurance brokers’ duty of care. In our above case study, it could be argued that since Jo and Gary failed to disclose a known risk of flooding, they had breached their obligations of disclosure.

However, where material information was disclosed to the broker, but it was not passed on to the insurance company, this again changed the landscape dramatically. This additional piece of information left the brokers liable as agents for the non-disclosure of relevant details to the insurer.

What this demonstrates is that cases in these areas, where there are competing duties, can be very complex. What appear to be very similar circumstances, can still produce very different results.

The final theme for these cases has been the issue of contribution and the problems of quantification of loss.

Even if it is proven that the broker’s contributed to the customer’s losses, in each case we have had to consider what losses can be proven by the customer and what level of contribution the customer had to their own problems.

In one case, the repeated failure of the customer to disclose information when the opportunity arose, and their failure to take the usual steps to protect their own interests, meant they were found to have contributed to over half of their own losses.

The other complexity is customers can only recover their actual losses. How do we deal with borrowed items or account for the age of the tools? Unless the tools can be verified as present in the shed and unless the customer can produce receipts and invoices, it is difficult to determine the value of the items that have been lost or quantify the customer’s claim.

In this case study, since hand and power tools have a 3-year life expectancy for depreciation purposes, other than the items that were recently purchased, Jo and Gary’s right to recover the cost of old tools stored in the shed would be significantly reduced.