A ski club has lost a dispute about underinsurance while successfully arguing reinstatement of a sprinkler system should be covered after it was disconnected during make-safe work.

The club’s insurer accepted a claim for water damage caused by a burst pipe in a roof cavity, but it reduced payment to $132,710 after applying an underinsurance clause. It also declined to replace the sprinkler because a builder said the system was non-compliant and needed redesign, quoting $326,640.

Lloyd’s Australia said the value at risk was $985,058, whereas the building was covered for only $525,000 and was underinsured after applying an 80% threshold.

The claimant said the value should be reduced to $658,418 due to the insurer’s refusal to reinstate and upgrade the decommissioned sprinkler system, and it was entitled to full repair costs.  

But the Australian Financial Complaints Authority says it is not persuaded by the club’s argument.

“It is conflating validating the adequacy of the sum insured at the commencement of the policy with the insurer’s decision to deny the cost of reinstating the sprinkler system,” AFCA says in a dispute ruling.

Using a value based on reinstating the property “as was”, with the legacy sprinkler system, is consistent with the policy coverage, it finds.

The insurer cash settled due to the non-compliance of the sprinkler system, which was not initially damaged but was disconnected during restoration.

The builder said it could not be reconnected because it would need redesign and full replacement to meet current codes.

The complainant said the system was installed in the 1960s and it was unaware of compliance issues. The sprinklers were maintained and inspected by staff and by the Country Fire Authority every six months.

AFCA says that while the sprinklers may not meet current standards, it is not satisfied that establishes non-compliance for policy purposes, and the insurer must reinstate the system.

There is no evidence the complainant was required to upgrade the system before the loss and no enforcement action or recertification notice was issued.

“It became non-operational only because it was disconnected during insurer-authorised make-safe works. This left the complainant in a worse position than before the loss, when the system was functioning. Any redesign or upgrade requirements arise solely because of that disconnection.”

The insurer acknowledged claim delays and has offered to waive the excess. AFCA says the ski club is not eligible for non-financial loss compensation.

The decision is here.

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