IAG must accept a claim for fire damage at a green waste facility after the ombudsman rejected the insurer’s defence that the risk fell outside its underwriting guidelines.

The insurer had issued a cover note on a customer’s rural plan insurance while it considered a request for policy changes. The policyholder wanted to raise the sum insured and add the waste facility to the list of risks covered. Its broker had conveyed the requests to IAG.

Correspondence between December 2022 and February 5 2023 showed IAG told the policyholder a cover note was in place while it reviewed the requests.

In one email exchange, on January 12 2023, IAG confirmed the sum insured had been increased, but it made no mention of the green waste facility.

On February 11 an insured loader caught fire and in turn damaged the building housing the green waste.

IAG said the complainant was aware it did not accept the latter risk because a previous request, made in 2021, had been rejected.

But, in its dispute ruling, the Australian Financial Complaints Authority says that earlier decision is irrelevant.

Evidence shows IAG “made several representations to the complainant that a cover note was in place until it determined the complainant’s request for increased cover”, the ombudsman says. “The complainant relied on these representations and did not arrange alternate cover for the property.”

The ombudsman says IAG cannot deny a payout under the Insurance Contracts Act.

“The effect of section 38 … is that if an insurer issues a cover note, the insurer will be liable on the cover note even though it is not prepared to enter into a final contract because it is not prepared to accept the risk until alternate insurance is obtained or the interim cover is cancelled.”

Click here for the ruling.