Should the Client Include GST in Their Sum Insured on Business Insurance?
The more likely option is they will advise the Insured that they have no objection to the Insured authorising repairs to a particular builder. The Insured authorises the repairs and the Tax Invoice is made out to the Insured. He, in turn, lodges the invoice to their insurer and the insurer issues a cheque for $1,000,000 (the net of GST amount) and forwards it to the Insured. The Insured then claims the $100,000 GST in their BAS as an Input Tax Credit and with this amount, they are fully indemnified.
Turning to the policy wordings, most policies on the Australian market do not require the Insured to include GST as part of the property or business interruption insurance sums insured/declared values. This is certainly the case with the vast majority of cluster group and international broker policies negotiated with their various partner insurers.
However, some policies, particularly those issued by some direct insurers (those that do not distrubute through an insurance broker) require the Insured to insure inclusive of GST. These Insurers will never pay out the Sum Insured but rather will deduct 1/11 from the sum insured to take into account the GST. Worse still, they will carry out the test for average on the GST inclusive amount. Worse again, some of these policies deduct the GST from a Policy Sub-Limit.
As the Insurer will never met the GST amount, my position is that this is unfair. I appreciate that the underwriter will argue that they apply a cheaper rate to compensate for the 1/11 never paid, but I think the issue is much more than price.
The concern I have is that so many clients ‘copy quote’. This is a term I use when a client takes their existing insurance coverage and has it quoted by another insurer or broker. So let us take the client that had the $1,100,000 building mentioned at the start of this blog entry. They have had their building rebuilt but fear that as they have had a claim they may be slugged with a higher premium, so they obtain quotes. Their old policy had a sum insured of $1,000,000 and, finding they were fully insured, simply have all insurers quote on this sum insured.
The insurer(s) that require their clients to include GST a quote on the $1,000,000 sum insured and are, of course by their own admission, cheaper. They win the business and in the cases I have seen, because they do not bring the need to insure the property inclusive to GST, the sum insured remains at $1,000,000. Should the same building be destroyed a second time, the new insurer will only pay $909,090.90. The client naturally feels aggrieved and cheated.
Even with a few small claims of which I have been asked to provide an opinion, I see this sort of thing go on. Say an Insured loses say $5,500 worth of goods due to theft where their policy has a $5,000 theft Sub-Limit. In this case, under the GST inclusive style policies, the client feels cheated when even after the Insured has deducted the GST component from their loss and claim, only $5,000, the Policy Sub-Limit, they find that insurer deducts the GST from the Sub-Limit and only pays the client $4,545,46.
“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.”
I am sure that some underwriters will not agree with me. The question then falls on to the level of warning the Insured is provided. I believe a court should impose Lord Denning’s famous red hand test to the requirement for an Insured to be required to include the GST when it is never going to be paid. For those not familiar with the rule, Lord Denning in the case of J Spurling Ltd v Bradshaw  EWCA Civ 3 said:
“I quite agree that the more unreasonable a clause is, the greater the notice which must be given to it. Some clauses which I have seen would need to be printed in red ink on the face of the document with a red hand pointing to it before the notice could be held to be sufficient. “
For the brokers reading this entry, if you lose a client to a direct insurer on the basis of a cheaper price, it may not be cheaper at all and you may wish to offer the appropriate advice to your client.
Anyone with access to LMI PolicyComparison is encouraged to ensure that the policy they are using, are quoting against or being quoted against, is on a GST inclusive or exclusive basis.
If anyone has a different view to me on this, I would be happy to discuss the subject further.