A hairdressing salon has failed to have a covid-related business interruption payment increased after the ombudsman found it was underinsured and was not misled when it reduced its cover during the pandemic.

The Sydney salon lodged a BI claim for loss of gross profit during several periods of covid restrictions in 2020 and 2021.

Its $350,000 sum insured had been reduced to $150,000 during a phone call in July 2020 after the business was split and a second online and shopfront retail company generated.

Insurer IAG accepted the claim but limited the settlement to $143,512 on the basis an underinsurance clause applied.

The business sought an increase to either $500,000 – $350,000 for the first two lockdown periods and $150,000 for the latter two – or $672,769 based on the total loss assessed by the insurer.

The owners argued they had reduced cover due to misleading information on the gross profit definition and would not knowingly underinsure their business of 26 years. They said that over a 20-year period, they had been told many times that gross profit is “turnover less all expenses” or “after all expenses are paid”.

The insurer said there was no discussion about the gross profit definition during the July 2020 phone call when the owners gave the instruction to reduce the sum insured, and that the policy documents were clear. 

The Australian Financial Complaints Authority says a recording shows no evidence the salon owners were misled in the July 2020 phone conversation. 

An instance was found in a November 2023 call when a consultant stated gross profit was “the profit you make after you’ve paid for everything”, but the product disclosure statement defined it as the difference between “the sum of turnover and closing stock” and “the sum of opening stock”.

The November 2023 call did not cause the salon owners to suffer a loss and was after the 2020 and 2021 issues, AFCA says. In addition, the owners increased their gross profit sum insured from $150,000 to $1.4 million during the call, to more accurately reflect the business’ profit.

AFCA says the underinsurance clause applies because the declared value of gross profit ($350,000 and later $150,000) was less than 80% of the correct insurable value of more than $1.15 million.

“The complainants underinsured the business for loss of gross profit to the extent the insurer was entitled to apply the policy underinsurance calculations to the claim settlement.

“The policy terms and conditions are clear and unambiguous, in that the onus is on the complainants to ensure the sums insured are accurate and appropriate in case of a loss. The relevant policy definitions are also clear and unambiguous.”

AFCA says it was “unfortunate timing when the complainants reduced their gross profit sum insured for the business”, but the insurer is not required to take further action.

The ombudsman acknowledges the resolution was “significantly delayed” due to Federal Court business interruption test cases to clarify issues associated with various policies, but the insurer settled the claim with interest to compensate for the delay.

The decision is available here.

For in-depth analysis, features and opinion, read the latest Insurance News magazine