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'Applied incorrectly': insurer loses dispute over submerged boat exclusion

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The owners of a boat worth almost half a million dollars have won a $70,000 payout, compensation and reimbursement of legal fees in a claim dispute after the vessel’s engine compartment and sleeping cabin flooded.

The Club Marine customers held a pleasure craft policy covering a 9.4 metre Four Winns GK935 boat with a sum insured of $495,000. A claim was lodged for damage to the vessel when it was discovered to be submerged in January last year.

While everyone agreed a valid claim had been established under the policy, Club Marine said that a manufacturing fault was to blame for the incident and declined the claim, applying an exclusion for “the cost of rectifying a latent defect, fault or error in design or construction”.

The Australian Financial Complaints Authority (AFCA) said that exclusion had been incorrectly applied.

AFCA ruled the insurer pay $68,638 for repairs, plus more than 10% to allow for contingencies, and also reimburse the cost of hard stand costs for the vessel from August 27, pay $2000 in non-financial loss compensation and $5000 towards the complainants’ legal fees - the maximum AFCA can award.

“The exclusion does not extend to the resultant damage but is limited to costs to repair the error in manufacture of the vessel only,” AFCA said.

“It may well be that the insurer intends to exclude such loss or damage from cover. However, as the party responsible for the drafting of the policy provisions, the insurer has the obligation to ensure the wording of the exclusion is sufficiently clear and informs the reader of what is to be excluded from cover.”

The club at which the boat was moored telephoned the owner on January 11 2021 to report the boat swim platform was under water. Apon arrival, the owner found the sleeping cabin and engine compartment were flooded, with water over the batteries and motors and the level reaching up to a TV.

The bilge pump would not switch on and an emergency one was sourced and used in the engine room to drain as much water as possible. The boat was then towed to the boat lift by the club.

A Club Marine consultant appointed to determine the cause of submergence reported failure of a plastic transducer, caused by inner and outer hull skins moving independently of each other due to the skins not being sufficiently bonded at the time of manufacture - by both an insufficient amount of adhesive and by that glue not bonding well from insufficient preparation of the skins.

AFCA said relying on this to deny the payout “incorrectly interpreted” the relevant Club Marine exclusion to decline indemnity as it “simply says the insurer will not cover the cost to rectify a fault in design or construction”.

“The fault or error in design or construction is limited to the issue with how the vessel’s manufacturer has failed to adequately bond the inner and outer hull skins in the area of the transducer. The complainants are not seeking cover to address this defect. The complainants are seeking cover for the resultant damage caused by the water ingress into the vessel,” AFCA said.

“Given, the wording of the exclusion, the panel does not accept the insurer’s interpretation of the provision and therefore is not satisfied it extends to the resultant damage claimed.

“The insurer has assessed this to be an error in manufacture and is of the view the policy exclusion entitles it to decline the claim. The panel does not agree and is not satisfied the wording of the policy exclusion extends to loss or damage that may arise from or is related to a fault or error in design or construction of the vessel.”

Club Marine suggested the boat owners approach the manufacturer for their loss as the craft was under a manufacturer warranty, but AFCA said there was no requirement under the policy to do so and given a valid claim existed under the policy, they were entitled to seek indemnity for their loss under the insurance claim.

AFCA said it decided to award compensation as the insurer incorrectly applied the policy provisions and did not have grounds to deny the claim, and the denial had caused undue delay in the vessel being repaired and had caused undue stress and inconvenience over an extended period.

It said it also awarded legal costs as the issue in dispute “turns on a legal question” relating to the interpretation of a provision of the contract of insurance, and it was through legal representation that the boat owners were successful in establishing their position and success under the claim.

“AFCA does not usually require an insurer to reimburse a complainant’s representative’s costs. However, in these circumstances the panel is of the view it is fair,” AFCA said.

See the full ruling here