Insurers forget “utmost good faith” at our peril

Insurers forget “utmost good faith” at our peril

I get so frustrated when I see dishonesty in any part of the insurance claims process. I fully support all efforts to stamp out genuine claims leakage and dishonesty on the part of the Insured and or repairers who milk the system. But equally if an Insurer is acting with scant disregard to the principle of utmost good faith I am equally appalled.

Before I outline a situation that prompts me to write this post, I want to explain what claims leakage actually is.

One definition is:

Claims leakage is defined as the difference between the actual claim payment made and the amount that should have been paid if all industry leading practices were applied. • Leakage is caused by deviations from established industry or company standards and leading practices. [Source Ernst and Young].

I do not like this one as it speaks of ‘established industry or company standards’ which in themselves may be stacked against the Insured. I have never liked the way that jewelry is insured as it is stacked against the Insured paying premiums on sums insured jewelers and insurers know the Insured will never get all of. You would be staggered at how many people think they have been ripped off by their insurer following a jewelry claim but many in the Industry justify it as it has always been done that way.

Another is:

Dollars lost through claims management inefficiencies that ultimately result from failures in existing processes (manual and automated). In other words, it’s the difference between what you did spend and what you should have spent on a claim. The cause can be procedural, such as from inefficient claim processing or improper/errant payments, or from human error, such as poor decision-making, customer service, or even fraud. Claims Leakage is often discovered through an audit of closed claim files. [Emphasis mine – Source: International Risk Management Institute, Inc]

My own definition is:

Claims leakage is the difference between the amount paid on a claim compared to the Insured’s genuine entitlement under the contract of insurance.

I am the first to appreciate that Insurers pay directly or indirectly, vasts amounts of money to builders, panel beaters and a raft of other suppliers and trades. As such they are in a good position to negotiate favourable terms on the basis of the quantity of work directed to them and also the fact in some industries that payment is guaranteed.

At the same time this cannot be an abuse of power and drive businesses into the red or creating a situation where the only way the supplier or trade can make a reasonable profit is by cheating the Insured. I.e quoting for 2 coats of paint and only applying one is a common example. Another is not replacing all the damaged building parts that are not normally visible, that is say wall or ceiling framing.

It appears that at least one insurer has done a deal with a flooring contractor to supply and lay carpet. This is fine.

An Insured suffered damage, lodged a claim and the supplier produced a quotation that was sent direct to the Insurer. The Insured was then offered a cash settlement and found that no other carpet company could do the work for the amount quoted. In desperation the Insured went back to the original company that provided the quote only to be told that they could not do the work for the amount quoted.

Finding that they could not get their damaged carpet replaced The Insured pushed and finally received a copy of the quotation. As it is the Insured’s home, they should be provided this to ensure it is the same quality as before, that what was quoted they receive etc but it was only when the Insured really pushed and would not take no for an answer did they finally get the quotation.  This is what was written at the top of the quotation:


Note: this is an image of the exact words and not my retyping the words but I have removed the name of the firm pending possible legal action.

You can image how the Insured feels about their insurer, the repairer and the insurance industry in general. It just adds to the stereotype image of our industry.

When we were appointed we contacted the repairer and they were very upset the client had their original quote. We asked for a quote from this repairer that they would honour and despite their promises, we have never received a quote.

Stepping away from this claim for a minute. If an Insured submitted a quotation like this in reverse, that is that it clearly did not fairly represent the true loss suffered by the Insured, i.e. in the case of an Insured knowingly submitting a quote higher than the true value, it would be regarded as a serious breach of the principle of utmost good faith.

Why is it any different for the Insurer? If it can be proved that, what you could be forgiven for thinking, that is the Insurer has entered into an arrangement that appears to be allowing them to low ball genuine losses, then to me it is a serious breach of the utmost good faith principle. How many other Insured’s have been short changed by this arrangement?

And we continue to wonder why insurance rates so poorly on the trust scale.  I keep coming back to the words of Lord Mansfield more than 250 years ago:

“Good faith forbids either party, by concealing what he privately knows, to draw the other into a bargain from his ignorance of that fact, and his believing the contrary.”

If any reader finds that they or one of their clients is in the same boat as here, please insist on a copy of the quotation and certainly do not accept any offer until it is received and or you are satisfied that you can have the work done properly for the amount offered. All of us in the industry have a duty to protect the insuring public and brand insurance.

For my part, I will meet with the Insurer and see if I can get this one sorted fairly.


4 responses to “Insurers forget “utmost good faith” at our peril”

  1. Janette says:

    Good blog post today,

    Reminds me of when we asked our assessor for the itemised builders quote and were told ‘no’, supposedly the building supplier told the assessor that it was his privileged information (i.e. reflecting his margins etc) and the assessor told me he agreed with the supplier on such.

    We had asked for the quote breakdown as we had kindly been told by one of the building suppliers (confidentially) what he had quoted for something of which he knew we were trying to organise a cash settlement.

    What they were quoting us was many thousands of dollars less than what the tradesman had even quoted the supplier. We got the reimbursement up a bit with some haggling, but obviously could not throw the tradie under the bus, due to it being privileged info.

    Ended up the assessor supplied us the ‘Report & Quote’, but with all the dollar values missing.

    By not being transparent, it creates the opportunity for bad faith /dishonesty. I think the Insurer got ripped off, as just looking at it even the 1st two items itemised, they were never done:
    Eg: Supply & install builders signage/safety signage
    Supply & install temporary fencing


  2. Allan says:

    I agree Janette. The question then arises is who benefits. The builder, the adjuster or both. Where does the corruption start and finish.

  3. Georg says:

    I have a matter from Cyclone Debbie that sounds like your post on a grander scale.

    Roof damaged by cyclone and all internal fittings and stock water damaged and contaminated by asbestos. Insurer [name withheld but same as yours] use a project manager [name withheld] for project management and engage their loss adjuster (not one of the big firms) and a panel builder.

    When we are engaged the project manager presented a scope of work that not they but that the builder had on the builders quote form so brief as to be of no use. On pushing to get something meaningful, we found that they have redesigned the roof pitch, truss and ceiling to make the rebuild cheaper, but not as it was, which the Insured specifically requested. Anyone who works in the tropics knows that flatter roofs are more prone to roof leaks as the wind can blow the water up the pitch in heavy storms. In line with your comments – concealing information to create a bargain for one party contrary to the contract of insurance, the Insured would never have known until it was too late that the design had been changed.

    Second time around – we finally get the scope of work and engineering agreed back as the building was originally designed with hardwood trusses.

    Notwithstanding this, softwood trusses and an inferior gauge roof metal are delivered. The project manager then say that is better and hardwood is not available. We of course know different, The Insured rings the supplier and they say, of course we could have made it out of hardwood. Two savings to the Insurer (or is it the builder and or project manager? by changing the supplier order contrary to the design and scope agreed with the Insured.

    The Insured could have demanded they remove the materials however that would cause more delay with all that that entails.

    The Project Manger has now been removed from the case and Insurer are doing everything they can to get this repair done properly now.

  4. Allan says:

    And my bet is that the same project manager will pop up on the next job and if an Insured tries to handle their own claim or does not have the training and skill of you they will get away with it. This problem is endemic and if it ever is examined by a royal commission will destroy some brands, create a raft of class actions against the directors and officers and further damage brand insurance. Practices like this need to stop immediately and those guilty of it need to be drummed out of the industry.

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