DFP2 T1 v4

Topic 1: General insurance
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Insurance and Risk Protection
Contents
Overview ........................................................................................................... 1.3 1
Topic learning outcomes ............................................................................................ 1.4
Resources.................................................................................................................... 1.4
1 What is general insurance? ..................................................................... 1.6

1.1 General insurance products ........................................................................... 1.6
1.2 Insurance providers ........................................................................................ 1.7
1.3 Policy documentation .................................................................................... 1.8
1.4 How insurance works ................................................................................... 1.10
2 Risk and insurance ................................................................................ 1.11

2.1 What is risk? ................................................................................................. 1.11
2.2 Managing risk ............................................................................................... 1.12
2.3 Measurement of loss.................................................................................... 1.14
3 Domestic insurance products ................................................................ 1.16

3.1 Building (home) insurance ........................................................................... 1.17
3.2 Contents insurance ...................................................................................... 1.18
3.3 Personal valuables insurance ....................................................................... 1.24
3.4 Legal liability insurance ................................................................................ 1.25
3.5 Domestic workers compensation insurance ................................................ 1.25
3.6 Owner builder insurance .............................................................................. 1.26
3.7 Landlord insurance ....................................................................................... 1.26
3.8 Travel insurance ........................................................................................... 1.26
3.9 Boat and caravan insurance ......................................................................... 1.27
3.10 Motor vehicle insurance .............................................................................. 1.27
3.11 Consumer credit insurance .......................................................................... 1.32
© Kaplan Education Pty Ltd 1.1

4 Commercial (business) insurance products ............................................ 1.33

4.1 Levels of cover .............................................................................................. 1.33
4.2 Goods and services tax and insurance ......................................................... 1.34
4.3 Types of business insurance ......................................................................... 1.35
4.4 Workers compensation insurance ............................................................... 1.36
4.5 Professional indemnity insurance ................................................................ 1.36
5 Responsibilities of the insurer and the insured in general insurance ...... 1.36
5.1 The insurer’s responsibility .......................................................................... 1.36
5.2 What is the insured’s responsibility? ........................................................... 1.38
6 Dispute resolution process .................................................................... 1.40

6.1 Formal dispute resolution ............................................................................ 1.40
6.2 Internal complaints handling procedures .................................................... 1.42
6.3 External dispute resolution .......................................................................... 1.46
6.4 Financial Ombudsman Service (FOS)............................................................ 1.47
Key points........................................................................................................ 1.48
Review questions ............................................................................................. 1.49
References ....................................................................................................... 1.50
Suggested answers........................................................................................... 1.51
1.2 DFP2_T1_v4
Overview
Financial planning is the process that helps clients achieve their financial goals,
provided they follow their financial plan. However, there are some events outside the
client’s control that can have a devastating impact on the effectiveness of their plan.
Life is full of risk and uncertainty. It is possible to be involved in an accident when driving
to work, arrive at work to find the doors closed and the business sold, or return home to
find a winning lottery ticket. Naturally, some of these risks are greater than others and
some are more pleasant. Positive outcomes are generally defined in terms of ‘chance’
rather than ‘risk’, although the concept is the same. 1
There is also risk in owning a house or a car, as there is a possibility that it could be
damaged, destroyed or stolen. Insurance is a method of protecting against this loss or
damage. If a house burns down or a car is damaged beyond repair, those with insurance
contracts will normally receive money from their insurance company to buy
replacement items. Those without insurance will need to either pay for the replacement
themselves or do without the item they have lost. Few people can afford to replace a
costly possession, such as a house, so they take out insurance.
Insurance is a form of sharing risk, under contract, between the insured and the insurer.
The insured pays the insurer a sum of money, called a ‘premium’, and the insurer takes
on that risk. If someone pays a home insurance premium of $1,000 a year, it means that
they are prepared to pay that amount to be certain they will receive compensation in
the event of damage to the house. The contract is the policy. The insurance company
will issue the policy when they agree to accept the risk. Once the agreement is made,
and providing certain conditions are met, the insured will receive compensation if they
sustain a loss that is covered by the policy. However, the insurance is not meant to
provide the insured with a profit if they claim under their policy; it is intended to provide
fair compensation for what has been lost.
As well as insuring possessions, it is also possible to insure against making a payout for
responsibility of another person’s injury or loss. For example, if a visitor to a property
slips on a path and breaks their leg, the owner of the property could be sued and would
be required to compensate the person for their injury and any other related loss they
sustain. Legal liability insurance will cover the owner of the property in such
circumstances. Businesses insure their assets and activities for the same reasons and in a
similar way.
It is important that your client’s assets are protected and that the client can achieve
their financial objectives. Advisers need to ensure that an appropriate risk management
strategy is in place to cover the uncertainties that a client may face. This topic focuses
on risk and insurance, how insurance works and general insurance providers and
products. Also addressed are the responsibilities of the insurer and insured as well as
mechanisms available for handling customer complaints and resolving disputes.
While the general insurance market itself is extensive, in this topic the emphasis is on
those areas of most concern to a financial adviser and their clients. General insurance
contracts are discussed, as are four specific policies — domestic, motor vehicle,
liability and commercial.
Subsequent topics will concentrate on personal risks, the use of various life insurance
policies to mitigate the financial effect of those risks if they should occur, and important
considerations when providing personal risk advice.

Note: The description ‘financial adviser’ has included a variety of financial services
personnel who have the legal capacity to provide advice to retail clients on their insurance
requirements and insurance products. They include financial planners giving
comprehensive, holistic advice of which risk and insurance advice forms a part, specialist
risk advisers such as insurance brokers, and customer service personnel working within an
insurance company. Adviser conduct provisions when giving advice on insurance products is
covered in Topic 3.
From 1 January 2019, the terms ‘financial planner’ or ‘financial adviser’ will be enshrined in
law so that they can only be used by a person who meets the new professional standards to
be released by the Financial Adviser Standards and Ethics Authority (FASEA).
Resource 1: Government Legislation FASEA

For more information on FASEA, see ‘Government Legislation FASEA’ in
Kaplearn.
Topic learning outcomes

On completing this topic, students should be able to:
• identify and explain general insurance terms and key items in policy documentation
• identify different types of risk and discuss the various risk management strategies
available
• explain how a variety of domestic and business general insurance products can be
used to manage risk
• implement workplace processes to safeguard against either the responsibilities of the
insurer or insured not being met
• explain the purpose of a complaints handling system and follow effective processes
for handling customer complaints internally or referral to an external dispute
resolution service.
Resources
Some websites which may be useful for general reference or in answering topic
activities are:
• <http://www.insurancecouncil.com.au>
• <http://codeofpractice.com.au> for the General Insurance Code of Practice
• <http://www.qbe.com.au>
• <http://www.suncorp.com.au>
• <http://www.aami.com.au>
• <http://www.allianz.com.au>
• <https://www.fsc.org.au/policy/life-insurance/code-of-practice> for the
Life Insurance Code of Practice.
(viewed 21 November 2017)
1.4 DFP2_T1_v4
IMPORTANT: Download your written and oral assignment templates now.

Before you begin reading, you should download the written and oral
assignments from KapLearn. Go to: <http://www.kaplearn.edu.au>.
Read the assignment questions before you begin your self-study.
Your study plan is a useful resource. As you read your subject notes,
think about the assignment questions and the knowledge required to
answer them. Make notes as you read to help you to recall where to
go to find the answers to the assignment questions.

1 What is general insurance?

General insurance provides financial protection against loss or damage to property and
other assets. General insurance also encompasses liability insurance, consumer credit
protection, and personal sickness and accident insurance. Specific product offerings and
the names used for products can vary from company to company.
General insurance does not cover life insurance products such as term life insurance,
trauma, total and permanent disability insurance or income protection insurance.
Only Tier 1 advisers can provide advice on life insurance products and personal sickness
and accident insurance.
This topic provides coverage of Tier 2 adviser training in general insurance. You will
cover the skills and knowledge required to advise on both general domestic insurance
products such as home, contents, and motor vehicle insurance, and commercial general
insurance, including accidental damage, business interruption, general property and
liability insurances.
1.1 General insurance products

A variety of general insurance products are available to protect policyholders.
Domestic insurance products

Domestic insurance generally includes:
• building (home) • personal valuables
• contents • legal liability
• personal liability • domestic workers compensation
• landlord protection • private pleasure craft (boat)
• motor vehicle and motorcycle • caravan
• travel • consumer credit insurance (CCI).
• loan insurance, including lenders • mortgage insurance and mortgage
protection insurance
Commercial insurance products

Commercial insurance generally includes:
• fire and other damage • business interruption
• accidental damage • burglary
• loss of money • glass
• public and product liability • goods in transit
• fraud and dishonesty • general property
• damage to refrigerated stock • machinery failure
• tax audit • electronic equipment failure
1.6 DFP2_T1_v4
Mandated and health insurance

Legislation introduced by the government can also work like an insurance scheme by
protecting individuals from certain risks. In Australia, compulsory insurance falls into
three broad categories:
• workers compensation insurance
• compulsory third party (CTP) insurance
• public health insurance (Medicare).
Private health insurance is outside the scope of this subject.
1
1.2 Insurance providers

Within the insurance industry some insurers only offer general insurance, some offer life
products only and others offer a whole range of financial products, including financial
planning services and superannuation.
The main types of companies and individuals providing insurance are as follows:
• Direct insurers — sell their products directly to clients without the involvement of an
intermediary such as an adviser. Many direct insurers have internal advisers who are
authorised to provide either personal or general advice to clients on their products.
These products may include certain compulsory insurance such as workers
compensation or CTP insurance.
• Reinsurers — only deal with other insurance companies. They are important in the
insurance industry because they provide a means for insurance companies to spread
their risk. Reinsurers, in fact, provide insurance for insurance companies because no
one insurance company can afford to carry all of the risk from all their clients
themselves. Typically, an insurance company will use a number of reinsurers to
spread its risk. Insurance companies pay premiums to reinsurers, just as insurance
policyholders pay premiums to insurance companies.
• External insurers — are often used by organisations that want to offer a product to
their customers, but are not able to, or do not want to, carry that particular risk
themselves.
• General insurance brokers — although all financial advisers are required to match
products to the needs of the client, general insurance brokers are professional advisers
who advise specifically on general insurance, and work on behalf of their clients and
not insurers. The Australian Securities and Investments Commission (ASIC) is the
principal regulator of brokers’ activities under the Corporations Act 2001 (Cth).
General insurance brokers are required to hold an Australian financial services (AFS)
licence which includes licence conditions relating to general insurance broking activities.
The general insurance broking licensing condition is only available if the business will act
on behalf of the insured in relation to certain general insurance products.
General insurance brokers also assist individuals and businesses to identify their risks
and then make recommendations on how those risks can be reduced, which may include
the use of appropriate insurances. Insurance brokers have access to many different
insurance policies and so deal with a range of different insurance companies. A general
insurance broker may specialise in one specific type of insurance, for example
commercial, marine or motor bike.

Many financial advisers are authorised to provide advice on general insurance products,
but most do not, with the exception of providing general advice such as highlighting a
client’s potential underinsurance in a particular area. Because of required specialist
knowledge of products and processes, financial advisers normally leave a client’s specific
general insurance requirements to the clients themselves or their brokers.
1.3 Policy documentation

There are usually two separate documents issued as part of an insurance agreement or
contract: the policy document, or terms and conditions; and the policy schedule or
certificate of insurance. The contents and importance of each document are explained
below.
Policy document or terms and conditions

This will often be a standard brochure or product disclosure statement (PDS) and
contains information on the policy and cover provided. It will explain the general terms
and conditions under the cover provided, and what is included and not included in the
cover offered. It will not contain specific information about the client or specifics on
what and how much is being insured.
The policy document or PDS is important to both the adviser and to the client.
The adviser and the client each need to have a clear understanding of the cover offered
by the insurer and the policy document contains that information.
As you work through this topic you will see examples of what is and what is not covered
by different types of insurance cover, as well as the terms and definitions used in
policies. The conditions set out in each company’s PDS will vary from insurer to insurer.
You should always refer to the insurer’s policy document to fully understand the
provisions, terms and conditions, and exclusions of the particular cover offered.
Definitions
Words such as ‘building’, ‘home’, ‘contents’, ‘injury’ and ‘the insured’ will be defined in
the policy.
As well as explaining what these words mean in the context of the policy, there will also
be an explanation of what the words do not mean. For example, a contents policy may
state that:
‘contents’ can mean ...
… a fixture or fitting, including carpet.
It may go on to say that:
‘contents’ does not mean ...
… software or data stored in a computer.
The policy document defines these words so there is a clear understanding between the
insured and the insurer of what is and what is not covered by the policy.
1.8 DFP2_T1_v4
Exclusions
An exclusion is an item or event that is not covered by the client’s policy. Exclusions are
specified in the policy documentation and should be indicated to the client.
Policy schedule or certificate of insurance

The policy schedule or certificate of insurance will set out details such as:
• the client’s name, address and other relevant information
• the amount of the cover provided 1
• the location/details of what is being insured (e.g. address of the home for building
insurance, or make, model and identifying numbers of the vehicle for motor vehicle
insurance)
• optional components of cover selected (e.g. contents as well as building insurance)
• any special restrictions on the cover being provided (e.g. if the policy is
motor vehicle, the nominated drivers of the vehicle)
• the excess applicable in the event of a claim
• the premium payable
• any discounts or no-claim bonuses applicable.
Key fact sheets

Insurers are required to provide one-page key fact sheets for home building and
contents insurance policies. The key fact sheet explains the most important features of
the policy (such as cover for events like flood, storm and fire) in clear and simple
language.
Cover notes
Traditionally, cover notes provided temporary insurance cover and were issued by an
insurance company while they assessed information supplied by the client or prepared
insurance documentation. The legal term for these documents is ‘interim contracts of
insurance’.
Because policies are now issued immediately, and the insured can cancel a policy within
14 days (and sometimes up to 21 days) of them being issued, organisations no longer
issue cover notes.
Cooling-off period
A cooling-off period, also referred to as a ‘free look’ period, is a requirement under both the
Corporations Act and the Insurance Council of Australia’s General Insurance Code of Practice.
If the client is not satisfied with the policy once they have had time to review it,
they may return it to the company and receive a full refund of the premium.
The client must notify the policy issuer:
• in writing
• electronically (e.g. email), or
• in a way permitted by the policy issuer. This should be detailed within the policy documents.

The right to return the policy can only be exercised during a 14-day period (or the period
stated by the company) starting on the earlier of:
• when the issuer confirms the client has acquired a product, either by notifying the
client or providing confirmation in a way that the client can access (e.g. via email or
on the issuer’s internet site), or
• the end of the fifth day after the day on which the policy was issued or sold to the client.
The ability to claim a refund is lost if a request to end the policy is not made within the
14-day period. Many insurance companies, however, have cooling-off periods in excess
of the minimum 14 days.
1.4 How insurance works

Insurers work on the ‘pool’ principle — that is, offering insurance to a large number of
people and putting together, or ‘pooling’, the premiums they pay. These pooled funds
are invested and used to pay the claims made by policyholders.
Premiums are set based on three main factors:
• rate of claims made, or the likelihood of claims being made
• expenses and costs associated with running the insurer’s business
• insurer’s profit margin.
Insurers employ professionals called ‘actuaries’ who use historical statistical data to
determine the likelihood of claims from people or businesses in certain categories or
groups. Generally, the premium reflects the likelihood of a claim occurring. The greater
the likelihood, the higher the premium and the lower the likelihood, the lower the premium.
For example, in the case of car insurance, younger drivers usually pay more for insurance
than older drivers. This is because statistics collected over many years show that younger
drivers, as a group, are more likely to be involved in accidents than older drivers.
In setting the premium for individual policies, the insurer relies on the client to provide
truthful and accurate information, and to keep it current from year to year.
Will technological advances lead to fairer premiums?

An insurance company’s modelling of insurance premiums is affected not only by the
availability of risk statistics and the quality of the data, but on how risk pools are
classified. Technology such as genetics and telematics is changing the way that risk
classes are formed and improving the reliability of data.
Genetic testing has the ability to identify lower and higher risk candidates for life
insurance. The industry is currently abiding by a genetic testing standard which requires
an insured to disclose the results of genetic testing undertaken, but insurance
companies cannot require applicants to take such a test.
On the other hand, some drivers may choose to have telematics installed in their car to
monitor and measure driver behaviours. Such onboard diagnostics could lead to cheaper
premiums for low risk drivers.
Source: Liew 2013 and Teale 2013.
1.10 DFP2_T1_v4
What is an excess and why have it?

Most insurance policies contain a requirement that the insured pay a specific amount of
any claim they make. This amount is known as the ‘excess’. The amount of excess is
stated in the policy schedule.
Having an excess means that the insured is sharing some of the risk. It also means that
the insured is unlikely to lodge claims for amounts less than or equal to the excess they
are required to pay. The effect of the excess is to allow premiums to be set at a level
lower than they might otherwise be.
Generally, though not always, the higher the excess, the lower the premium.
1
Exceptions to this guideline could be groups or categories of people more likely to make
claims. With motor vehicle insurance, drivers in the under 25-year-old group may pay
higher premiums and have higher excesses stipulated in their policies because they, as a
group, are more likely to make a claim. Reduced excesses can also be used to reward
clients who do not make claims over a period of time or have a lower likelihood of
making a claim.
Where the client has a choice as to the level of excess they accept, the client, in effect,
has a choice about the level of risk they are willing to retain. ‘Risk’, as it relates to
insurance, is explained in the next part of the topic.
2 Risk and insurance

As previously stated, we are all confronted with different risks every day. Some risks will
result in outcomes that could be viewed as unpleasant, such as those that may cause
injury, while others may be costly in terms of money.
We will now explore the concept of risk, risk management principles and general
insurance contracts in further detail.
2.1 What is risk?

With regard to general insurance, risk refers to the chance that a person might suffer
some financial loss. As noted earlier, everything you do or own involves a degree of risk.
You do not know if an event will occur that could cause a loss or, if it does, how serious
it will be. For example, if you drive your car every day, then every day there is the
possibility that you might be involved in a car accident. If you are involved in an
accident, you do not know how serious it will be. It could result in a small dent to the
car, easily repaired, or it might mean the whole car is ‘written off’ (i.e. the cost of repair
is greater than the amount the vehicle may be insured for).
Experts in risk management talk about two types of risk: speculative risk and pure risk.
Speculative risk is normally associated with investments. It is the risk that you might lose
the money you have invested or not receive the return that you expected. Speculative
risk is not relevant to general insurance.

Pure risks can be broken down into four categories:

• Personal risks: These are risks associated with the individual person and cover areas
such as death and disability.
• Property risks: These relate to the destruction or damage to property.
• Liability risks: These risks concern loss or damage to a third party. A third party is an
entity (such as a person, company etc.) other than the two parties who have entered
into the insurance contract (i.e. other than the insurer and the insured).
• Non-performance risks: This is where one party agrees to do something, but does
not do it, and, as a result, another party suffers a financial loss.
Pure risks are relevant because they can usually be covered by insurance.
2.2 Managing risk

How you manage risk to your property, other assets and legal liability is very important
to your financial security. In managing risks, you need to consider:
• what your potential pure risk is
• what events could trigger the risk and cause a loss
• what the likelihood is of the event occurring
• the extent of the financial loss you might suffer if the event does occur.
Once you have considered these issues you need to consider what you will do about the
potential risk. If possible, you should eliminate or reduce the risk. With any risk
remaining you need to decide if you should pay for any financial loss you might suffer
yourself, either partially or fully, or share the risk by taking out insurance.
This decision would normally depend on the financial consequences if the event occurs.
If the consequences are great, you should consider insurance. If the consequences are
small, you might be prepared to accept the loss.
Self-insurance
Self-insurance means that the client retains some or all of the risk and therefore bears
some or all of the loss. You might choose to self-insure if you think:
• the likelihood of a loss occurring is small
• the potential loss, if it does occur, would be small and not worth insuring
• you are financially able to bear the loss yourself.
Examples of strategies used to either fully or partially self-insure include:
• putting money aside to pay for potential losses. Some people do this to cover
unexpected medical bills rather than pay for health insurance
• choosing to take out third party property damage (TPPD) cover on a car rather than
comprehensive insurance. This means insuring other people’s property in case of an
accident, but not your own car. Motor vehicle cover including TPPD and
comprehensive are discussed later in this topic, or
• where possible, choosing to pay an excess on any claim made on a policy.
People should only self-insure if they understand the risks and costs, and can afford to
pay for the loss themselves.
1.12 DFP2_T1_v4
Example: Carrying the loss

Jim and Joan each purchase a digital camera from the local electronics shop
on the same day. Joan buys the latest top of the range model.
Its replacement value is over $1,000. Joan decides to take out insurance
on the camera in case it is lost or stolen. Jim buys a basic model with a
replacement value of less than $200. Jim decides not to take out insurance.
If he loses it or it is stolen, he believes that he can afford to buy another.
In this example, Jim has assessed his situation and has decided that he can afford to
carry the loss himself (i.e. he is fully self-insuring his digital camera). 1
Underinsurance
Some people might underinsure deliberately as a self-insurance strategy. Others might
unintentionally underinsure because they underestimate the value of their assets and
take out insufficient cover.
Underinsurance has its dangers for the client. Firstly, the maximum the insurance
company will pay in any claim is the sum insured. If this is insufficient to cover the cost of
replacement, the client must bear the additional cost. Secondly, it is common for
commercial insurance policies to contain an ‘averaging clause’ or co-insurance clause.
It means that for partial loss or damage, an underinsured client will not receive the full
amount of cover but must share in the loss proportional to the extent of underinsurance.
It is much less common for such a clause to be in a householder’s policy.
As an adviser, you should highlight the risks of self-insurance and underinsurance to your clients
to ensure that they are fully aware of the risk, and to help them make informed decisions.
Co-insurance
Many home insurance policies are written on a replacement basis (i.e. new for old).
Under this arrangement, the sum insured and premium are greater than for an
indemnity (i.e. market value) policy. The sum insured, however, must be for an
appropriate amount that reflects the value of the property.
Sometimes people may intentionally or inadvertently insure for amounts that are
significantly less than the full value of the items being insured. In such cases, the insured
is deemed to be retaining or self-insuring the risk for the underinsurance. This is called
‘co-insurance’.
Insurance companies allow a reasonable margin of underinsurance, but if the sum
insured is less than 80% of the value of the property insured, more commonly in the
case of commercial insurance contracts, co-insurance provisions apply. This sharing of
the risk(s) covered is reflected in a calculation that shares the costs of replacement.
See section 4 on commercial insurance for examples.

2.3 Measurement of loss

The insurance policy will state the amount that will be paid in settlement of a loss under
the policy, as set out in the policy.
Where there is a partial loss, the insured is paid the amount that is required to reinstate
the item, as long as the repairs do not increase the overall value of the property.
Where there is a total loss, the amount of the payment depends on the nature of the loss.
With home building insurance, there is normally the choice between a replacement
value policy, which is most common for this type of insurance, and an indemnity value
policy.
Indemnity value policy

An indemnity value policy, also known as ‘market value’ or ‘present value’, is a policy
that will compensate the insured to the extent of the loss suffered. That is, after
settlement, it leaves the policy owner no better off than they were before the loss or
damage occurred. In some cases, the amount of wear and tear on the property may be
deducted before a settlement is reached. It does not pay the full cost of repairs or
reinstatement if that amount is in excess of the pre-damage value.
Indemnity policies take into account the age and condition of the item being insured.
Therefore, if the insured wanted to rebuild under an indemnity value policy, there may
be insufficient funds to fully meet this cost.
Replacement value policy

A replacement value policy entitles the insured to have the damaged or lost property
replaced with new property that is equal in value to the previous existing property.
Most contents policy insurers will only provide replacement value for certain periods,
normally 10 to 15 years, after the item was new. After this period, claims for contents
are based on indemnity value.
However, if the reinstated property is more extensive than the one destroyed (e.g. the
owner decided to put in an ensuite which did not previously exist), the policy would not
cover the cost of this surplus value (i.e. the betterment). Naturally, all this assumes that
the actual sum insured is sufficient.
Insurers are at liberty to replace lost or damaged property in kind rather than with
money. This practice is often applied for items such as television sets.
Insurers often supervise reinstatement and repair of damaged and lost items as they are
paying the costs incurred.
Most replacement value policies will also provide the insured with some cover for ancillary
costs following a loss. These costs include rent for alternative accommodation, removal of
debris, and architects’ and engineers’ fees for reconstruction. All of these costs must be
taken into account when setting an appropriate sum insured and careful reference must be
made in the policy to ensure adequate cover is arranged.
1.14 DFP2_T1_v4
Hidden risks associated with insurance policies

Although a replacement policy will normally provide a higher level of coverage, it does
not mean that the insured can take out an insurance policy and become complacent
about risk. There are hidden risks even in replacement policies that consumers need to
understand. Commonly held policies like vehicle and home insurance are prime
examples.
The New South Wales government held an inquiry into the relationship between
insurance companies and smash repairers as the number of smash repairers owned by
1
Australian insurance companies grew. Ownership of smash repairers by insurance
companies is banned in North America due to concerns over the possibility of safety
compromises related to cost cutting.
Concerns have already been raised in Australia regarding the use of non-genuine parts
for the repair of vehicles. It is argued that cars are safety-tested using their original
specifications and that the substitution with heavier, cheaper parts can compromise the
standard of the vehicle. Additionally, the complexity of the onboard computer systems
may not be calibrated to allow for non-genuine parts.
Without a total replacement policy, homeowners with replacement policies stating a
sum insured can be left substantially out of pocket.
ASIC’s investigation into home insurance found that consumers often bear the burden of
estimating the rebuilding costs of their home. The availability of reliable calculators to
assist consumers is a problem, but even when accurate, they cannot deal with the large
increases in building costs following a disaster such as a major earthquake, cyclone or
fire. To make matters worse, such disasters often trigger changes in building codes
which leave consumers further out of pocket.
Source: ASIC 2007, Dowling 2014 & Jeremic 2014.
Example: Rebuilding after the fires

This video describes the challenges of rebuilding homes built in the
1990s after the New South Wales fires in 2013,
<http://media.smh.com.au/news/nsw-news/rebuilding-after-the-fires-
4908070.html>, viewed 21 November 2017.

Apply your knowledge 1: Insurance payments

Jim rents out a small unit he owns in Melbourne. One day a fire breaks out,
almost destroying the unit. The market value of the unit immediately prior
to the time of the fire was $310,000. The cost of repairing the unit in order
to bring it back to its pre-fire condition is $315,000. Jim decides to improve
the unit from its pre-fire condition by adding fitted wardrobes and the final
cost of repairs is $320,000.
Assuming the sum insured is adequate, what amount would be paid to Jim
under:
(a) an indemnity value policy basis?
(b) a replacement value policy basis?
Note: You can access ‘Suggested answers’ for this activity at the end of this topic.
3 Domestic insurance products

In this section, you will learn about the following types of domestic insurance products:
• building (home)
• contents
• personal valuables
• legal liability
• domestic workers compensation.
The way companies package, or bundle, their insurance products can vary.
Some companies might offer all or some of the products discussed in this section as
options under the one policy. Other companies might issue separate policies.
1.16 DFP2_T1_v4
Apply your knowledge 2: Types of domestic insurance products

(a) Research domestic insurance products offered by the company you have
your insurance with and other insurance companies. Which of the following
are most commonly offered?
 building (home)
 personal valuables
 contents
 legal liability
 personal liability 1
 domestic workers compensation
 landlord protection
 private pleasure craft (boat)
 motor vehicle
 caravan
 travel
 consumer credit insurance
 _________________________________ (other)
(b) Identify the types of cover offered by the company you have your
insurance with or other insurance companies that can be combined
in the one policy.
3.1 Building (home) insurance

Building insurance covers the residential home, including flats, units and townhouses.
It generally includes other structures on the property such as:
• garages
• carports
• sheds
• fences
• decks.
It generally excludes:
• any structure used for commercial or business purposes
• landscaping and outdoor decorations.

3.2 Contents insurance

Contents insurance covers domestic property, owned by, or the legal responsibility of,
the person insured. It typically includes items which:
• would normally be kept in a building or home
• belong to guests or visitors that are not otherwise insured
• are installed fixtures, such as carpet
• are designed for outdoor use, but are not fixtures, such as an above ground pool.
Portable electronic devices can be added to a contents insurance policy. Alternatively,
separate personal valuables insurance can be taken out for such devices.
Typically not included are:
• animals, plants and landscaping
• mini-bikes, motorised lawn mowers and golf buggies
• software, records or data stored in a computer.
Items that may appear to be ‘fixed’ to the building, such as carpets and curtains,
are generally insurable under a contents insurance policy and not a building policy.
This may be important when a client owns a residential property that they rent out
unfurnished. In these situations, clients need to be made aware of this and a contents
policy established to cover these items.
Combining home and contents insurance

Many people choose to take out their building and contents insurance with the same
insurer. This has a number of advantages for the client, including:
• dealing with only one insurer in the event of a claim for both building and contents
• only paying one excess in the event of a claim
• only needing to deal with the one renewal notice each year.
Depending on the company involved, an additional benefit might be a reduced
or discounted premium for holding both types of insurance with the company.
If a client chooses to take out building and contents insurance with different companies,
it is advisable to explain the benefits of combining the policies with one organisation,
and the potential complications that may otherwise arise at the time of claim.
Apply your knowledge 3: Combined building and contents policy

Research building and contents insurance policies offered by the company
you have your insurance with or other insurance companies. Do they offer
incentives to clients, such as discounted premiums, if they insure both their
home and contents? If so, what benefits will they receive?
1.18 DFP2_T1_v4
Types of cover
There are two types of cover available for building and contents insurance. These are:
• defined or insured event policies, or
• accidental loss or damage policies.
Defined event
Defined event policies cover loss or damage from a list of specified, or defined, events.
Defined events can vary from policy to policy. A general list of defined events may 1
include:
• fire • explosion
• lightning • earthquake
• malicious acts • hail, wind or snow
• rain and flood • electrical motor burnout.
Defined event policies are the most common type of home insurance. A full list
of defined items can be found in an insurer’s home and contents insurance policy/PDS.
During 2010 and 2011, there were a significant number of severe floods in New South
Wales, Queensland and Victoria. The federal government found that there were a
number of people adversely affected by inadequate insurance cover due to the
confusion in regard to the definition of ‘flood’ and many policyholders lacked insurance
cover against ‘riverine flooding’. Riverine flooding generally refers to inundation caused
by watercourses or catchments overflowing their banks due to long duration rainfall
over large areas.
As a result, the then Assistant Treasurer and Minister for Financial Services and
Superannuation, the Hon. Bill Shorten MP, introduced the Insurance Contracts Amendment
Bill 2011 (Cth) into Parliament on 23 November 2011. One of the main points of this Bill
includes a standard definition of ‘flood’. On 9 December 2011, Mr Shorten released an
exposure draft of the Insurance Contracts Amendment Regulations 2011 (Cth) for public
comment. On 18 June 2012, the law was enacted to provide a standard definition of flood
in insurance contracts.
The standard definition of ‘flood’ is:
• the covering of normally dry land by water that has escaped or been released from
the normal confines of:
– any lake, river, creek, or other natural watercourse, whether or not altered or
modified, or
– any reservoir, canal or dam.
However, problems arose even when consumers were insured with companies who
were already using a similar definition to the standard definition adopted across the
industry in 2012. Consumers are not required to hold flood cover and it is debatable in
such events as the 2011 Queensland floods whether the damage caused is from either a
flood or storm event.

Example: Flood versus storm

This case report and determination from the Financial Ombudsman Service
(FOS) provides insights into the complexity of the situation faced by both the
insured and insurer after the damage caused at Grantham, in Queensland,
in 2011: <http://www.fos.org.au>  Quick links  Search decisions
 Case number (search ‘241175’) (viewed 21 November 2017).
Accidental loss or damage policy

An accidental loss or damage policy differs from a defined event policy in that it covers
all losses, provided that they are accidental and not specifically excluded in the policy.
It may be available as an option in building and contents policies, at an additional fee.
Exclusions in a building policy might include loss or damage caused by:
• tree roots
• landslide or subsidence
• structural defects, or
• poor maintenance.
Exclusions in a contents policy might include:
• damage to sporting equipment while in use
• damage or loss of items stored in any storage facility or in transit, or
• any process of professional cleaning or repair that has resulted in damage or loss.
Levels of cover
As described earlier in this topic, there are two main ways of calculating the amount of a
payment if a claim is made on a building or contents policy, depending on the type of
policy taken out. The two ways are:
• indemnity (i.e. market value)
• replacement (i.e. new for old or reinstatement).
An indemnity policy deducts an amount due to depreciation of the building and/or
contents. This means there will be a shortfall between what is paid under the policy and
the true replacement cost of the home or item. Indemnity, also known as ‘market value’
or ‘present value’, policies are not common.
Replacement policies are more common, but frequent exceptions listed in the policy
document are carpets and clothing. Replacement policies usually also contain a clause to
the effect that if an insured fails to reinstate damaged property promptly after a loss,
then payment may be restricted to its indemnity value.
1.20 DFP2_T1_v4
Reducing or refusing claims

Building and contents policies may list circumstances that may lead to the refusal of a
claim or a reduced payment being made. Depending on exactly what is specified in the
policy, a claim may be refused if, for example, at the time of the event leading to the
claim, the building was unoccupied for more than 60 consecutive days, unless the
person insured had advised the insurer and the insurer had agreed, in writing,
to continue the cover. The insurer may also refuse or reduce a claim if, for example,
the insured has:
• failed to take reasonable care to protect and maintain the property insured
1
• submitted a claim that was found to be fraudulent or dishonest
• failed to take reasonable steps to avoid further loss or damage, or injury to others
• not co-operated with investigations into the claim
• not reasonably assisted with recovering the amount of the claim, or
• submitted a claim for any illegal property, including unlicensed computer or other software.
How claims are settled

The method of settling valid claims can differ between insurance companies, with each
respective policy document describing the conditions and options available, and the
documentation needing to be submitted by the insured to justify the claim.
For claims to damaged or stolen content items, this would include such things as
evidence of ownership, the type of item and evidence of its value.
For valid claims of damage to buildings, insurers would pay the reasonable cost of either
repairing, rebuilding or replacing the building to a condition when new or when it was
last renovated or restored.
Insurance is not designed to place the insured in a better position than they were before
a claim. Therefore, the maximum an insurer would normally pay is:
• the sum insured shown in the policy schedule, plus
• any other benefits that the insurer has agreed to pay (e.g. architectural fees for
damage to buildings), less
• the amount of the agreed excess.
For claims to items under contents policies, depending on the policy conditions,
similar options are open to an insurer, such as to pay for the reasonable cost of either
repairing or replacing the item.
However, another option could be for the insurer to pay the insured what it would have
cost to repair or replace the insured item.

How much cover is enough?

Some insurance policies are total replacement policies and are not limited by a sum
insured. These are both hard to find and more expensive. A replacement policy with a sum
insured will pay up to a maximum of the sum insured in the event of a claim. For example,
if the sum insured for a home is, say, $320,000 and the real cost to rebuild is $390,000,
the insurer will only pay $320,000, leaving a shortfall of $70,000 to the insured.
Some policies will offer extended cover that provides up to 30% more than the sum insured
in the event of a total loss covered by the policy. The difficulty lies in determining what the
sum insured ought to be in order to be able to replace home and contents when an insured
event happens in the future.
Estimating building cover

Insurance companies can usually provide advice and an estimate of the replacement
cost of buildings based on factors such as the building’s floor space and the construction
material. Online calculators can be found on many insurers’ websites. If the building has
special or unique elements, such as expensive leadlight windows or architectural
features or fixtures, the cost of replacing these should be added to the base
replacement cost. Most insurance policies will also cover the reasonable costs
associated with:
• demolition and removal of debris, if required
• professional fees of architects, surveyors and building consultants
• the costs incurred to comply with state and local government requirements
associated with demolition and rebuilding.
Other supplementary cover may include:
• alternative accommodation while your house is being rebuilt
• gardening or landscaping costs.
Many policies will not, however, pay more than the total sum insured and where they do,
they may, for example, limit the cost of architects’ fees to 10% of the sum insured.
Clients should take these costs into consideration when determining the sum insured and
ask whether they are included in the sum insured or available over and above the sum
insured. If so, clients should ask to what percentage of the sum insured are the costs
limited.
Estimating contents cover

The best way to ensure that all items to be covered by the contents policy are included
in the sum insured is to go to every room in the house and make a list of items. This will
help to make sure nothing is left out. After the list is compiled, an estimate can be made
of the replacement cost.
Many insurance companies have contents insurance checklists and calculators,
usually on brochures or on websites, to help clients estimate the cover they need.
Clients who have difficulty arriving at a figure for their building and contents insurance may
choose to use the services of an independent valuer to help estimate the cover required.
1.22 DFP2_T1_v4
Limits payable on contents items

Contents policies usually list the limits payable on certain items covered by the policy.
The following are typical items that may be listed:
• property belonging to guests or visitors
• mobile phones and computers
• money.
A full list of the items, with limits attached, should be in an insurer’s contents policy document.
‘Special valuables’ are usually mentioned in policies and have limits on the amount 1
payable. Special valuables can include jewellery, watches, stamp and coin collections,
antiques, paintings and works of art. If the valuables are ‘unspecified’ (i.e. not specifically
mentioned in the policy schedule with a value attached), there will be a maximum amount
payable per item and/or per claim. Items that can be ‘specified’ usually include antiques,
pictures, paintings, rare rugs and works of art. Some unspecified items, such as jewellery,
watches, gold and silver objects, and collectables are covered for a maximum amount for
any one item or set, and a maximum amount in total for any one loss. If the client wishes
to insure such items for more than the limits stated, they should take out a personal
valuables policy.
Factors affecting premiums

Premiums for building and contents insurance can vary, depending on a number of
factors apart from the sum insured. Some of the factors include:
• Location of the property: Some areas are more prone to burglary, bushfire or severe
storms. The increased likelihood of these events occurring might be reflected in a
higher premium in these areas.
• Natural disasters: Very high levels of claims due to natural disasters such as floods,
fires and cyclones may result in higher premiums.
• Reinsurance: The cost to insurers for their insurance may result in higher premiums.
Insurers take out an insurance policy to cover them when significant events such as
floods, fires and cyclones affect a large number of customers.
• Security devices fitted: Properties with deadlocks, window locks, security grills and
other security devices installed may benefit from a reduction in the premium charged
for contents insurance.
• Construction of the building: Some building materials, such as brick, are more able to
withstand damage from storms or the risk of fire. Premiums will often reflect the
increased or reduced risk to a building because of the materials used in its
construction.
• Excess level selected: Selecting a higher excess level could result in a lower premium.
• Required investment returns: Insurers invest premiums to obtain returns to assist in
ensuring they have sufficient capital to pay future claims, and to make an acceptable
profit. An overall low investment return environment, or even poor returns in one
year, may require an increase in premiums.
Insurers ask for all relevant information from the client when deciding on the premium
to be charged.

3.3 Personal valuables insurance

Personal valuables insurance can be taken out to cover items such as:
• clothing and personal effects worn or carried, such as jewellery, watches and sunglasses
• photographic equipment, binoculars and sporting equipment
• portable computers, video cameras and other electronic equipment
• mobile phones.
The policy usually covers loss or damage occurring anywhere in the country and possibly
overseas.
Proof of purchase is usually required in order to support a claim. Proof might be a
receipt, valuation or other evidence of ownership such as a photo of the item.
Apply your knowledge 4: Policy critique

Kim, age 25, has several pieces of jewellery she inherited from her
grandmother that are of considerable value. Kim decides she will wear
some of the jewellery regularly, and one ring in particular on a daily basis.
The rest she will store in her home.
Use the relevant insurance products at <http://www.bendigobank.com.au>
 Personal  Insurance  Home and contents (viewed 21 November 2017) to
determine the insurance cover options available to Kim to protect her jewellery.
1.24 DFP2_T1_v4
3.4 Legal liability insurance

Legal liability refers to the insured’s responsibility to pay compensation for causing:
• injury, illness or death to another person, or
• loss or damage to property owned or controlled by another person.
Legal liability insurance usually forms part of building and contents insurance policies
and can be divided into two areas: property owner liability and personal liability.
Property owner liability 1

Property owner liability or occupier’s liability arises from the ownership or occupation of
property and covers the insured in the event that another person suffers a loss while
they are on the insured’s property. A common example used is that of a visitor tripping
on a broken step while entering the insured property and suing the owner for damages
resulting from the injury.
Personal liability
Personal liability insurance is usually covered under home contents insurance, but may
be purchased separately in some cases. This form of insurance covers the insured in the
event that they are responsible for another person suffering a loss. For example, if a dog
owned by the insured bites a person while being walked in the street or in a park,
the person who is bitten could sue the dog’s owner, the insured. They would be covered
by personal liability insurance, but not by property owner’s liability since this insurance
is not connected with incidents arising out of ownership or occupation of property.
As with other forms of insurance, there are inclusions and exclusions. There may be
options available according to the level of cover selected. For more information on
property owner and personal liability insurance, refer to an insurer’s home and contents
policy documents.
3.5 Domestic workers compensation insurance

Domestic workers compensation might be included in building and contents insurance,
or might need to be taken out as a separate policy. It covers injury to domestic workers
such as babysitters, cleaners and gardeners.
Requirements and provisions for domestic workers compensation vary in accordance
with the different state government legislation, and policy documents will reflect this.
They cover those who are employed in and about, or in connection with, a private
dwelling or its grounds, including holiday homes, unless these homes are also hired out
for rent. It does not cover people who are employees of the insured who work on other
premises or any member of the insured’s family. Employees, by law, must be covered by
a workers compensation policy issued by an authorised insurer.
In New South Wales, no workers compensation policy is required if the employer pays
$7,500 or less in annual wages, they do not employ an apprentice or trainee and are not a
member of a group for premium purposes. In this case, workers will be automatically
covered by WorkCover Authority. If more than $7,500 is paid in wages to domestic workers,
then a workers compensation policy will be required. This has resulted in the industry
removing domestic workers compensation cover from their home insurance policies.

Workers compensation insurance is discussed further in section 4 ‘Commercial

(business) insurance products’.
3.6 Owner builder insurance

If a client is in the process of building their own home as an owner builder, they can take
out building cover to protect from losses while the building is under construction.
This cover will usually need to be taken out as a separate construction policy.
If an existing home is undergoing renovation, then it is common for building policies to
provide ongoing cover, provided the value of works undertaken is below a stated limit.
As with other policies, there will be inclusions, exclusions and general conditions
explained in the policy document.
3.7 Landlord insurance

Landlord insurance may be available as an option in a standard building policy or it may
need to be taken out as a separate policy. It is designed to provide extra protection,
in addition to that available in a standard building insurance policy, to owners of
tenanted residential property. The additional protection usually relates to:
• malicious acts and theft caused by the tenants
• loss of rent if the tenants fail to pay their rent, or
• loss of rent if any event occurs, covered by the standard building policy, that prevents
the property from being rented. Fire would be an example of such an event.
Legal expenses incurred in trying to minimise any loss, up to a certain amount, is also
normally included in the cover. Full details of what is and is not covered will be included
in the policy document.
3.8 Travel insurance

Travel insurance policies can cover a wide range of possible events, including:
• overseas medical expenses
• repatriation expenses (i.e. the cost of getting the client home if they are ill or injured)
• lost luggage
• trip cancellation.
Due to the number of possible events that could occur to disrupt a person’s travel,
clients should be clear about what they want to cover and ensure that the policy they
are considering does, in fact, cover those events.
Even when travel insurance is taken out, it will exclude such things as terrorist attacks
and events related to political uprising. Travellers should be vigilant about government
travel warnings. Clients should be advised to read the applicable travel warnings and to
register their travel plans at <http://www.smartraveller.gov.au>
(viewed 21 November 2017).
1.26 DFP2_T1_v4
3.9 Boat and caravan insurance

Many insurers offer cover on pleasure craft such as boats and caravans. These are
offered as separate policies. Boat insurance can cover:
• the craft itself
• the craft’s motors or sails
• boat trailers
• contents such as boat accessories.
Caravan insurance can cover: 1
• the caravan and fixed contents
• the annexes.
Both types of policies usually cover the owner for property and personal liability.
3.10 Motor vehicle insurance

An understanding of the different types of cover available, and what is and is not
covered in the policies, will help you to advise your clients on the most appropriate
cover for their needs.
Types of motor vehicle cover

There are four different types of motor vehicle insurance cover available. They are:
• compulsory third party (CTP) insurance
• third party property damage (TPPD)
• third party property damage and fire and theft (TPPD F&T)
• comprehensive cover.
CTP insurance
CTP insurance is, as the name suggests, compulsory in all states and is required before a
motor vehicle can be registered. It covers the insured against claims by a third party for
personal injury. Third parties can be passengers in the insured’s vehicle or other
vehicles, pedestrians and cyclists. CTP is regulated by each state and territory and can
only be obtained from licensed CTP insurers.
TPPD insurance
TPPD insurance covers damage caused to other people’s property by the insured’s car if
it is involved in an accident. People might take out this type of insurance if their own
vehicle is of low value and not worth insuring under full comprehensive cover.

TPPD F&T insurance

TPPD F&T covers damage caused by the insured’s car if it is involved in an accident as
with TPPD. It also provides cover for loss or damage to the insured’s vehicle caused by
fire or theft. As with TPPD, people might take out this type of insurance if their own
vehicle is of low value and not worth insuring under full comprehensive cover.
Comprehensive cover
Comprehensive insurance covers damage to the insured’s car, and to other people’s
property, if the car is involved in an accident and the driver of the insured’s car is
covered by the policy. It also covers damage to the insured’s vehicle caused by fire and
theft. It may include a range of optional or additional benefits such as windscreen cover
and insurance of valuables in the vehicle. It is not meant to cover the cost of replacing
parts that have failed because of their age or some inherent fault.
A ‘no-claim bonus’ (i.e. a discount on the premium) is usually provided in these policies
in recognition of long periods without a claim. The longer the period without a claim,
the greater the no-claim bonus. There is usually a maximum no-claim bonus of 60–70%
of the full premium.
Excesses
It is common for excesses to apply with motor vehicle insurances as they apply to house
and contents policies. On the making of a claim, a basic excess may be required to be
paid. Additional excesses may also apply. These excesses are required to be clearly
shown on the policy document.
Examples of the types of excesses that apply are shown below.
Basic or standard excess

This excess is an amount that the insured may be required to contribute towards the
claim, if found at fault.
Age or young driver excess

This excess applies in addition to the basic excess and is required to been paid if the
driver of the vehicle at the time of the loss or damage is under a certain age, normally
25. The young driver excess will differ depending on whether the driver is listed in the
policy document. Young driver excesses normally do not apply in cases such as damage
caused by hail, storm or bushfire damage, and in cases where a learner driver is driving
the vehicle accompanied by a fully licensed driver who is aged over the young driver age
threshold contained in the policy.
Undeclared driver excess

This is a higher excess that applies to claims involving drivers not listed on an insurance
policy.
1.28 DFP2_T1_v4
Differences between types of cover

Table 1 summarises the main differences between the types of insurance cover
discussed in this section.
Table 1 Types of insurance cover

Cover CTP TPPD TPPD F&T Comprehensive
Compulsory Yes No No No
Third party personal injury Yes No No No
At-fault damage to other vehicles No Yes Yes Yes
1
Fire No No Yes Yes
Theft No No Yes Yes
At-fault damage to own vehicle No No No Yes
Not at-fault damage to own vehicle No Limited Limited Yes
Agreed value cover No No No Yes*
Windscreen cover No No No Yes*
No-claim bonus protection No No No Yes*
Valuables protection No No No Yes*
* Optional/additional benefits may vary between insurers.
Apply your knowledge 5: Type of cover

Raj has recently started his first full-time job. He has contacted you because
he is thinking of buying a second-hand car from a friend. He will not be
paying much for the car and does not want to take out comprehensive
insurance. He wants to know what his insurance options are if he decides to
buy the car.
(a) What questions would you ask Raj to determine his needs?
(b) Depending on the answers to your questions, what type of cover

would you recommend and why?

How does the driver affect the policy?

Who drives the vehicle and their driving history can affect the policy by:
• the amount of the premium paid for the insurance
• whether or not the insurer will pay a claim.
Driver history
Insurers usually rate drivers from 1 to 6 according to their driving history. One is the
highest score. This rating system is called a ‘no claims discount’ (NCD) rating and is
based on how long a person has been driving as well as their claims record. As a person
accumulates more years of driving without making a claim, they are eligible to receive a
discount on the full-priced premium. The maximum discount rating is ‘rating 1’.
The driver’s history, therefore, is taken into consideration when determining the
premium. Most insurers assume that the vehicle they insure will be driven under normal
driving conditions unless they are told otherwise. Insurers will not cover vehicles that are:
• driven in a race or competition, or
• intentionally damaged by the owner.
Other drivers
There are normally restrictions on the cover offered if someone else is driving the
insured’s vehicle. Insurance companies will usually not cover damage if the insured
person lets someone drive the vehicle who is:
• not authorised to drive the vehicle under the terms of the policy
• intoxicated or under the influence of drugs, or
• an unlicensed driver.
Most insurers will also not cover loss or damage if a vehicle is driven while in
an unroadworthy or unsafe condition, which contributed to an accident, and which the
insured knew or should have known about. An example is driving a car with bald tyres or
faulty brakes that contribute to an accident.
Other factors affecting the premium

As well as the driver’s history, other factors that might affect the premium paid
for motor vehicle insurance include the following:
• Insurance history: As mentioned earlier, ‘no-claim bonuses’ are often provided
in recognition of claim-free periods.
• Age of the driver: Driving skills often increase with experience and age. This is usually
reflected in the premiums applied.
• Type of vehicle: Some vehicles have a higher value than others and so are insured for
higher amounts. Some vehicles are easier and less expensive to repair than others.
These situations, too, are reflected in the premium paid.
• Location: Where and how the vehicle is garaged can affect the premium because
certain areas have higher rates of vehicle theft than others.
• Encumbrances: If the vehicle is encumbered (e.g. under a hire purchase agreement),
the premium could be higher.
1.30 DFP2_T1_v4
Levels of cover
Under a comprehensive policy, a vehicle will either be insured for:
• agreed value, shown in the policy schedule, or
• market value, based on the going rate for that type of car and its particular condition.
The policy schedule will clearly show which method is used.
Factors affecting the payment of a claim

1
There are a number of circumstances that may affect the payment of a claim under a motor
vehicle insurance policy. These will be detailed in the policy document and may include:
• the client not being truthful or failing to give full and complete information in their application
• the vehicle being converted or modified by someone other than the manufacturer,
and these details not being shown in the policy schedule (e.g. high-powered engine
or oversized wheels and tyres being fitted)
• the vehicle being driven by a person under the influence of alcohol or drugs, or an
unlicensed driver, with the consent of the insured, or
• the vehicle being unregistered.
Apply your knowledge 6: Motor vehicle policy

Refer to your own motor vehicle policy document or search for one on the
internet. Find the section that sets out the circumstances where a claim
may be refused. Apart from those mentioned above, list three other
circumstances where a claim might be refused.
Apply your knowledge 7: Motor vehicle insurance

Are the following statements true or false?
Statement True/False
CTP insurance will cover property damage claims from third parties.
Who drives the insured vehicle can affect the premium paid and whether or
not a claim will be paid.
As well as CTP insurance, it is also compulsory to have TPPD, TPPD F&T or
comprehensive insurance.
Comprehensive insurance will cover the cost of vehicle parts that fail
because they are faulty.
Modifications made to the vehicle, other than by the manufacturer,
must be detailed on the insurance schedule. Otherwise, any claim might be
jeopardised.
Where the vehicle is garaged has no impact on the premium charged.

3.11 Consumer credit insurance

Consumer credit insurance (CCI) provides protection for people with personal loans,
mortgages, credit card debt and other forms of loan contracts. It is a way for the
borrower to ensure that loan repayments are met in case an event occurs such as
illness, disability or injury that prevents them from working. CCI also covers the client in
the case of job loss, usually excluding resignation from their job. In the case of death,
the entire loan balance is usually paid out.
If two or more people are liable for the debt, CCI will only cover the person insured.
To ensure complete cover, all people responsible for the debt should be insured.
CCI cover, as with other types of insurance, has specific provisions that may vary from
insurer to insurer. There may be waiting periods and exclusions such as pre-existing
conditions. Familiarise yourself with the policy document so that you can properly
advise your client.
CCI under the spotlight

There are concerns over CCI and other forms of ‘add-on’ insurances where the credit
provider/lender goes out with the purpose of making a consumer purchase or take out a
loan or credit card and ends up with an insurance policy at the same time.
The simultaneous selling of insurances alongside other products has been banned in the
United Kingdom following concerns about mis-selling.
Although financial services organisations believe Australia’s problems are on a much
smaller scale than the United Kingdom, Australian CCI has been shown to be
disproportionately expensive compared with life insurance. With much lower claim rates
and higher rejection rates for the claims that are made, consumer advocacy groups and
ASIC are warning consumers to be wary.
More recently, ASIC has had a particular focus on add-on insurance in the car dealership
channel.
Source: Mihm 2009 & Parker 2012.
1.32 DFP2_T1_v4
4 Commercial (business) insurance products

Businesses generally have more risks to consider than individuals. Some events can
severely hinder or even stop a business from operating. This can affect not only the
business owner, but also employees and customers. Depending on the type of business
and what they produce or do, a business might also be liable if their products or services
are defective and cause someone else an injury or loss. There are many different types
of insurance available to businesses. Each business must make its own decisions about
the type and level of protection they require.
1
4.1 Levels of cover

Businesses are exposed to the same risk as domestic clients in terms of assessing the
value of cover. However, businesses are more likely to be able to afford a registered
valuer to come in and value the property and plant of the business.
In the event of a total loss, the insurer will only pay the amount that the property was
insured for. If a partial loss occurs, the insurer will enact an average, or co-insurance,
clause, which involves calculating the ratio of the sum insured to 80% of the full value of
the property, and then multiplying it by the amount of the loss. The insured is then liable
for bearing the remainder of the loss on their own.
Section 44 of the Insurance Contracts Act 1984 sets down the requirements on insurers
relating to the use of underinsurance clauses.
Example: Averaging clauses and payouts

Ted and Dianne have their small business assets insured for $35,000.
The real cost of replacing the items is about $60,000. They are burgled and
items are stolen that would cost $10,000 to replace. Will they get $10,000
from their insurance company?
If the policy has an averaging clause, they will not receive the full $10,000.
The company would apply a calculation that results in a significantly lesser
payout. The insurer would divide the amount the contents are insured for
($35,000) by 80% of the full replacement cost of the contents ($60,000),
then multiply that figure by the value of the claim ($10,000). Applying this
calculation would mean that Ted and Dianne would receive $7,292
(rounded to the nearest dollar), not $10,000.
The calculation is as follows:
Insured value
× Claim value
80% of market value
or, using the above example:
$35,000
× $10,000
80% × $60,000
Note: The 80% factor may increase to 85% or 90% of the full value of the property.

Apply your knowledge 8: 80% average clause

A commercial property is insured for $750,000 and has an 80% co-insurance
clause. In a fire, the property sustains damage to the extent of $200,000.
The actual value of the property is determined to be $1 million.
What is the amount payable by the insurance company?
4.2 Goods and services tax and insurance

Goods and services tax (GST) applies to all insurance premiums. All payments by an insurer
following a claim are inclusive of GST, up to the maximum amount shown on the policy.
Some clients, however, may be entitled to claim input tax credits for GST purposes on
the premium paid for their policy. If the client is purchasing the policy solely for private
or domestic purposes, it is unlikely that they will be able to claim any input tax credits.
If, on the other hand, the policy relates totally or partially to a business activity, and the
client is registered for GST, the credits may be claimable.
GST legislation requires that the client advise the insurer of the extent to which they are
entitled to claim input tax credits. An example of a situation where a client may be
entitled to claim a partial GST input tax credit is on a motor vehicle policy. If the vehicle
is used for business purposes 75% of the time and for private purpose 25% of the time,
the insured may be able to claim a 75% input tax credit on the GST of the premium.
If the same vehicle was used for business 100% of the time, they would probably be able
to claim the full GST component as an input tax credit.
If the client fails to correctly notify the insurer of their input tax credit entitlement on
the policy premium, they may become liable to pay GST on any claim proceeds that they
receive under the policy.
Clients should be advised to contact their tax agent, accountant or the Australian Taxation Office
for clarification of their entitlement to claim input tax credits.
1.34 DFP2_T1_v4
4.3 Types of business insurance

Table 2 lists the main types of business insurance together with a brief description of the
risks covered.
Table 2 Types of business insurance

Type of insurance Risk covered
Fire and other damage Covers loss or damage to buildings, business contents and stock against fire,
(fire and perils) and other events such as:
• lightning 1
• explosion
• storm and wind
• water damage
• vandalism
Business interruption Covers:
• loss of profit
• loss of gross rental
as a result of damage that interrupts or interferes with the business.
Accidental damage Covers the business premises, and stock and contents of the business against
accidental loss or damage.
Burglary Covers theft of stock or contents resulting from forced entry to the business
premises. Damage caused by the forced entry is also covered.
Money Covers loss of money from the business premises or when in transit between
the business premises and either a bank or the client’s home.
Glass Covers repair or replacement of:
• fixed glass on the exterior of the building, including fixed glass signs
• fixed glass on the interior of the building including showcases,
shelving mirrors, washbasins and toilets.
Public liability Covers legal liability to pay compensation for personal injury or death of
another person, or damage to their property, arising out of the business and
occurring within the territorial limits specified.
Product liability Covers legal liability to pay compensation for personal injury to another
person, or damage to their property, as a result of defective product
produced or sold by the business.
Goods in transit Covers loss or damage to goods in transit caused by, for example:
• collision, overturning or derailment of the transport vehicle
• fire, lightning, explosion or flood, or
• theft following forced entry to a vehicle.
Machinery or electronics Covers sudden and unforeseen breakdown of business machinery or
breakdown electronic equipment that calls for immediate repair or replacement.
Damage to refrigerated Covers loss or damage to refrigerated stock caused by breakdown of the
stock refrigeration equipment.
General property Covers loss or damage to the property insured anywhere in Australia, or the
world, if applicable.
Taxation investigation Covers professional fees reasonably incurred and necessary to comply with a
(tax audit) tax audit notification.
The types of business insurance cover discussed so far can often be taken out in
one policy. Other types of cover often required by businesses are discussed below.

4.4 Workers compensation insurance

Employers are legally responsible for ensuring a safe workplace. The law also requires
employers to insure against any financial liability that might arise as a result of an
employee suffering illness, injury or death in the workplace, or while engaged in work
activities. Compulsory workers compensation is the means of providing this cover.
Only specially licensed insurers can offer workers compensation insurance, the operation
and pricing of which is strongly influenced by state government policy and laws.
Safe Work Australia provides leadership and coordination for national efforts to prevent
workplace death, injury and disease. The Safe Work Australia website provides a wealth of
resources, including documents such as the National Workers’ Compensation Action Plan
2010–2013, links to each of the state and territory regulators, statistics by industry on
workplace accidents and deaths, and much more:
<http://www.safeworkaustralia.gov.au/sites/swa/pages/default> (viewed 21 November 2017).
4.5 Professional indemnity insurance

The term ‘professional’ can be applied to a number of occupations. Doctors, lawyers,
accountants, dentists, financial advisers and many others can be classified as
professionals when discussing professional indemnity insurance.
Professional indemnity insurance provides financial protection for the insured in the
event of any negligent act, error or omission that they commit in the course of their
normal business. The insurance does not relieve the insured of their duty of care.
The insurance only transfers a limited amount of financial liability to the insurer.
Professional indemnity policies can vary widely in what they offer and the premiums
charged. Extensions to cover can include defamation, loss of documents and fraud.
5 Responsibilities of the insurer and the

insured in general insurance
An insurance policy is a contract between the insured and the insurer. As with any
contract, both parties have responsibilities. The policy document and schedule provide
details of what those responsibilities are. This section of the topic is intended as a
summary of the main responsibilities of the insured and the insurer. It also looks at
general guidelines for the client when making a claim. Complaints and resolution
provisions are covered in section 6 of this topic.
5.1 The insurer’s responsibility

The insurance industry is regulated by various legislation such as the Insurance Contracts
Act 1984 (Cth), the Corporations Act, the Competition and Consumer Act 2010 (Cth),
and state and territory legislation, which sets out, among other things, the insurer’s
responsibilities to their clients.
1.36 DFP2_T1_v4
The General Insurance Code of Practice, discussed below, complements legislative

requirements and sets minimum standards of service that clients can expect from their
insurer and the insurer’s representatives.
The General Insurance Code of Practice, together with other industry codes of practice,
is registered with ASIC. ASIC cannot mandate industry codes of practice nor can it take
direct action if a member is found in breach, unless a breach of the law is also involved.
Breaches of codes of practice may be taken into account in determining enforcement
actions in an external dispute resolution (EDR) scheme action.
The principal EDR scheme general insurers belong to is the FOS. FOS is responsible for
monitoring and compliance with the General Insurance Code of Practice.
1
Note that a code of practice exists for general insurance brokers through their peak
industry association, the National Insurance Brokers Association (NIBA). For more
details, go to <https://www.niba.com.au/html/code-of-practice.cfm>
General Insurance Code of Practice

The General Insurance Code of Practice 2014 (GI Code) sets out insurers’ responsibilities
to their clients. The principles that underpin the code are that insurers should be open,
fair and honest in the way they deal with their clients. All members of the Insurance
Council of Australia, the peak insurance body in Australia, have adopted the code. A list
of all members of the council can be found at <http://www.insurancecouncil.com.au>.
The General Insurance Code of Practice is currently under review.
Most types of general insurance are covered by the code. Excluded from the code is
insurance that is controlled by government statutes such as CTP insurance, workers
compensation, marine insurance and medical indemnity insurance. Personal sickness
and accident insurance is covered, but life insurance and health insurance are excluded
from the code as they have different regulations. Reinsurance is also excluded.
The full code can be viewed at <http://www.codeofpractice.com.au>
(viewed 21 November 2017), and it is recommended that you take some time to
familiarise yourself with its contents. Below is a summary of some of the key points of
the code.
When selling insurance

Some of the key responsibilities the code imposes on the insurer and their
representatives when selling insurance are that they must:
• conduct business in an honest, efficient, fair and transparent manner
• inform the client of the service they have been asked to provide and the identity of
the insurer for whom they are acting
• take reasonable steps to ensure that communications are in plain language
• not perform functions which do not match their expertise or competency.
The code performs with other laws applicable to the general insurance industry and
insurers are therefore also required to:
• clearly inform the client about what is covered, what is not covered, and any
restrictions contained in the policy before the client enters into the contract
• give the client a copy of the policy and other required documents
• refund any moneys owing when policies are cancelled within 15 business days.

When dealing with claims

The code sets time frames and standards to apply when dealing with claims. Following is
a summary of some of those standards:
• Claims must be handled in a fair, transparent and timely manner.
• If a claim is made and no further information, assessment or investigation is
required, a decision to accept or deny the claim and notification of the decision must
be made within 10 business days of receiving the claim.
• Only relevant information will be requested and taken into account when dealing
with claims.
• Clients will have access to information about them which the insurer has relied on in
assessing their claim, and be given the opportunity to correct any mistakes or
inaccuracies.
• If the insurer declines to release information, they must provide the reasons.
The client will have the right to request a review of that decision through the
complaints handling procedures.
• Where an error or mistake in dealing with a claim is identified, the insurer will
immediately initiate action to correct it.
• If a claim is denied, the insurer will provide written reasons for the decision,
information about the complaints handling procedures, and, on request, copies of
reports used in assessing the claim, unless it is unreasonable to do so.
5.2 What is the insured’s responsibility?
Insurance policies impose certain duties on the insured, as discussed below.
Duty of disclosure
The key responsibility of the client is to truthfully answer all the questions asked by
the insurer. This is a requirement under the Insurance Contracts Act and is known as
‘duty of disclosure’. Under the duty of disclosure, the client has a responsibility to
disclose to the insurer everything they know that is relevant to the decision the insurer
makes about accepting the risk.
Insurers do not usually check the accuracy of information supplied by the client before
they issue the policy. They rely on the client to be truthful. The accuracy of information
provided may only be checked when a claim is made.
If the client has not complied with their duty of disclosure and information is found to
be incorrect or incomplete, the insurer may be entitled to reduce their liability under the
policy, or even cancel the policy.
Know what the policy covers

Often people only read their insurance policies when they are making a claim. By this
time, it is usually too late to clarify terms in the policy. Most disputes about insurance
claims arise because people are not covered for what they think they are. Just as the
insurer has an obligation to clearly explain what the policy covers, the client also has a
responsibility to make sure they understand what they are being covered for.
1.38 DFP2_T1_v4
Substantiate the claim

Clients should keep in mind that it is their responsibility to prove that they have suffered
a loss, not the insurance company’s responsibility to prove that they have not. For this
reason, clients are advised to keep proof of purchase or other verification of items
covered by their policy. Receipts, operating manuals, photographs and video recordings
can all help to verify a claim, particularly if valuable items are involved.
Making a claim
Instructions to the client on making claims are usually included in the policy document.
1
These instructions will vary depending on the type of policy.
This section of the policy may also include instructions to the client on steps to take if
the occurrence of an event leads to a claim. Examples are shown below.
Building and contents insurance

The client must:
• do everything possible after the event to prevent further loss, damage or injury
• contact the insurer as soon as possible after the event
• notify the police if the damage is malicious or property has been stolen
• provide the insurer with evidence of the value of the property lost or damaged,
if requested
• provide the insurer with reasonable access to inspect the loss or damage before it is
replaced or fixed.
Motor vehicle insurance

The client must:
• report to the police any accident involving their vehicle, or any malicious damage to,
or theft of, their vehicle
• contact the insurer as soon as possible and advise them of the event
• if another vehicle is involved in the accident, obtain details of:
– the name, address and licence number of the driver of the other vehicle
– the registration number of the other vehicle and any damage done to the vehicle
– the name and contact details of any witness.
Other types of policies will have other requirements for clients making claims. Always advise
clients to check their policy documents carefully to ensure that they are aware of the
particular provisions of their policies so that the claims process, if it occurs, runs smoothly.

6 Dispute resolution process

The large number of general insurance claims filed in Australia due to major floods and
fires has highlighted tensions between the insured and insurer. During these
catastrophic events, complaints and disputes have arisen over policy definitions,
underinsurance, advertising, a lack of disclosure and the processing of claims.
Organisations providing financial services to retail clients must have a dispute resolution
system in place to deal with client complaints. This is an obligation under both the
Corporations Act and the GI Code. The central idea of the complaints handling system is
to give clients cost-free and efficient access to complaints and dispute resolution
procedures. This is an important component in supporting a process of regular review
and improvement.
In 2009, ASIC reviewed Regulatory Guide RG 139 ‘Approval of external dispute resolution
schemes’ and Regulatory Guide RG 165 ‘Licensing: internal and external dispute resolution’.
There has been further scrutiny of the general insurance industry, including complaints
handling, in the Financial System Inquiry completed in 2014. During 2014, the insurance
industry also committed to a higher standard of service with a revision of the GI Code.
6.1 Formal dispute resolution

Complaints, problems and misunderstandings arise even in the best client–adviser
relationships. Dealing with complaints is one of the most important tasks for any business.
It requires good interpersonal skills, a determination to unravel the facts and generally a
good deal of patience.
Complaints should be seen as a golden opportunity to re-establish and strengthen
relationships with clients and adapt products and services to meet the ever-changing
needs and expectations of clients. It is a good idea to give the highest priority to
satisfactorily resolving client complaints.
Recommended reading: RG 165 ‘Licensing: Internal and external

dispute resolution’
RG 165 sets out ASIC’s requirements for disputes resolution systems.
The July 2015 version is the most recent:
<http://asic.gov.au>  Regulatory resources  Find a document 
Regulatory guides  RG 165 (viewed 21 November 2017).
Under the Corporations Act (s 912A), all financial services organisations such as banks,
credit unions, building societies, insurers and licensed financial advisory firms who
provide advice to retail clients must:
• have internal dispute resolution (IDR) procedures to deal with complaints
• belong to an ASIC-approved EDR service such as the FOS.
A financial institution’s formal dispute resolution process is required to be explained in
its financial services guide (FSG) and must include:
• the contact name and details to refer the complaint
• a time frame for resolving complaints
• the company’s approach to solving complaints
• details of the EDR scheme for referral of unresolved complaints.
1.40 DFP2_T1_v4
Example: Greengage’s IDR process
Greengage’s internal dispute resolution process
Our commitment to you

This document contains information about Greengage’s dispute resolution processes.
Greengage Limited ABN 32 099 044 937 AFS licence 269900.
Making a complaint 1
When you make a complaint, we will:
• acknowledge your complaint
• fix the problem, if possible
• inform you of progress
• keep a record of your complaint
• give you our name, a reference number and contact details
• provide a final response within 45 days.
If we are unable to provide a final response to your complaint within 45 days, we will:
• explain the reasons for the delay
• provide you with details of the relevant external dispute resolution scheme.
To make a complaint:
STEP 1: Talk to us
We aim to resolve your complaint at your first point of contact with us.
STEP 2: Contact client relations

If you are not satisfied with the outcome of our attempts to resolve your dispute, you may also contact our
client relations team directly.
For information about resolving problems or disputes, contact Greengage Client Relations. You can also
email complaints@greengage.com.au. Greengage has — available on request — information about the
procedures for lodging a complaint. For more details about our internal dispute resolution procedures,
please ask for our complaints resolution brochure.
STEP 3: External review

If you are not happy with the response our client relations team provide, you may refer your complaint to
external dispute resolution.
External dispute resolution is a free service established to provide you with an independent mechanism to
resolve specific complaints.
Greengage is a member of the following external dispute resolution schemes:
Financial Ombudsman Service
The Financial Ombudsman Service (FOS) offers a free, independent dispute resolution service for the
Australian banking, insurance and investment industries. You can contact FOS on 1300 780 808, or by
writing to:
Financial Ombudsman Service

GPO Box 3
Melbourne Vic 3001
or online at <http://www.fos.org.au>.

6.2 Internal complaints handling procedures

Internal complaints handling procedures vary from company to company due to the:
• size of the business
• range of financial services the business offers
• nature of the business’s client base
• likely amount and complexity of client complaints.
The IDR procedures must be capable of dealing with all possible complaints against the
company.
The basic concept, however, is that they are the first step in resolving any grievances
that a customer may have about a product or service and that the quicker a complaint
can be resolved, the better it is for all parties. Complainants cannot be charged for using
the complaints handling procedures and anyone who has an interest in an insurance
policy must be allowed to use them.
ASIC requires that IDR procedures are documented and copies must be provided to
staff. The procedures must cover:
• receiving complaints
• investigating complaints
• responding to complaints within appropriate time limits
• referring unresolved complaints to an EDR scheme
• recording information about complaints
• identifying and recording systemic issues
• the types of remedies available for resolving complaints
• the internal structures and reporting requirements for complaints handling.
Apply your knowledge 9: Internal complaints handling process

Briefly describe the IDR process used in your organisation.
Note: This response will be specific to your personal circumstances.
1.42 DFP2_T1_v4
Practical steps to follow include the following:

1. Complaint or enquiry?
RG 165 adopts the definition from AS ISO 10002–2006:
An expression of dissatisfaction, made to an organisation, related to its
products or services, or the complaints handling process itself, where a
response or resolution is explicitly or implicitly expected.
The GI Code definition of a ‘complaint’ is almost the same as the RG 165 definition.
If a complaint, ensure the complainant has access to the information on your
dispute resolution process. Explain the complainant’s rights and provide
assistance where literacy skills are limited. Advise the complainant when they 1
can expect a response, who will be handling their case and provide contact
details for that person. Make a file note and pass on the complaint to the
complaints person.
2. The complaints person
The person appointed to deal with complaints must be someone who has the power
and authority to solve most of the complaints without referring them on to anyone
else.
If possible, the complaints person should resolve the complaint before the end of the
fifth business day. If the complaint has been resolved to the complainant’s
satisfaction, then all that is required is to make a note on the complainant’s file
(except for a complaint relating to hardship, a declined insurance claim or the value
of an insurance claim). However, ASIC encourages the use of the full IDR process
where possible.
3. If the complaint is not able to be resolved by the end of the fifth business day
If the complaint is not able to be resolved by the end of the fifth business day after
receipt of the complaint, or is a claim relating to hardship, a declined insurance claim,
or the value of an insurance claim, follow your organisation’s full IDR procedure.
4. Making a decision and communicating with the complainant
All decisions made about complaints must be recorded, as well as the reasons for
those decisions. Also, appropriate statistics must be kept.
Once a decision has been reached on a complaint, the complainant must be advised
in writing of reasons for the decision. Reasons for the decision should be adequate to
address the issues raised by the complaint. Ideally, this advice will refer to the
relevant legislation, codes, standards or procedures.
Generally, all complaints should be resolved within 45 days by using the
IDR procedures. If the complaint is not resolved within 45 days, inform the
complainant of the complaint’s status, reasons for the delay and option to take the
complaint to an EDR service. Provide contact details for this service.
5. EDR process
Follow the decision of the EDR, which is binding on the adviser (authorised representative)
and the principal (AFS licensee) for whom they are acting.
If the claim is outside the EDR’s jurisdiction, the complainant may take the case to court.
6. Court action
Seek legal advice before taking any action.
7. Post-complaint analysis and reporting
ASIC may require licensees to produce complaints data. Classify and analyse
complaints by type, outcome and timeliness of response to identify one-off incidents,
trends and systemic problems.
The system should specify the steps required to identify, gather, maintain, store and
dispose of records while protecting personal information and privacy.

8. Continual improvement
Conduct a regular review of IDR procedures to determine areas for improvement.
The frequency of reviews should be at least every two to three years, but will vary by
volume of complaints and the size of the organisation. Large firms should consider an
independent review. See Appendix 2 of RG 165 as a guide.
There is currently legislation before Parliament, Treasury Laws Amendment
(Putting Consumers First – Establishment of the Australian Financial Complaints
Authority) Bill 2017, that will, among other areas, seek to improve transparency and
accountability of the financial system’s IDR practices. The legislation requires financial
firms to report on their IDR activities and provides for ASIC to publish IDR data, including
data that identifies financial firms. This has not been legislated at the time of writing
(October 2017).
Hints and tips

Always try and resolve a client complaint quickly and to the satisfaction of the client.
If you find you cannot help the client, or if what is required to solve the problem exceeds
your level of authority, then pass it over to the appropriate person such as your
supervisor. Do not just ignore it and hope it will go away — it will not! In fact, it is likely
to escalate.
Here are a few simple guidelines to keep in mind when dealing with these situations:
• Listen and show that you are listening.
• Do not take things personally.
• Remain calm.
• Involve the client in defining the problem.
• Deal with the client’s feelings and emotions first.
• Uncover the facts.
• Take notes and summarise. Also, write possible actions for you and the client to take.
• Show that you have not only heard, but understood by summarising both the facts
and the feelings.
• Recommend and present solutions, then tell the client what will happen, set time
frames, follow up, take action, and let the client know what is happening.
1.44 DFP2_T1_v4
Apply your knowledge 10: Internal complaints handling

application
How would you manage the following complaint? What recourse does
Ms Lee have if she is not satisfied with the insurance agent’s response?
Ms L Lee
20 My Street
My Suburb 1000
1
2 October 2017
Mr Insurance Agent
12 Risk Avenue
My Suburb 1000
Dear Mr Agent,
I am writing to complain about my car insurance claim being rejected. On 22 November 2011,
I arranged car insurance with your company by phone and took out Policy No: 012345678.
On 25 November 2011, I telephoned to extend the insurance so that it also covered my
21-year-old son, as he would also be using my car.
I am very concerned that when I telephoned on 26 September this year to make a claim for a
minor accident that my son was involved in, I was told my claim was rejected because the policy
did not cover my son. I was told that there was no record of my policy ever being extended to
cover my son.
I distinctly remember calling to extend the insurance and I enclose a copy of a telephone bill
which shows that the call was made. I spoke to a member of staff called Kim Green. I made a
note of it at the time. I am sure that you made a mistake in not changing the insurance policy.
I would like you to investigate this matter and pay the claim.
I look forward to hearing from you as soon as possible.
Yours sincerely,
L Lee

6.3 External dispute resolution

EDR schemes are approved by ASIC and, according to RG 139, must be seen to be:
• accessible
• independent
• fair
• accountable
• efficient
• effective.
Remedies may involve correction of errors in interest rate payments, cancelling a loan or
paying an insurance claim in part or in full. ASIC oversees EDR schemes to ensure their
effective and efficient handling of complaints. ASIC cannot review decisions of EDRs nor
order the EDR to take specific action. If customers are seeking compensation or wish to
have their complaint reconsidered after having it reviewed by the EDR, they retain the
option to take the dispute to court.
In 2009, ASIC announced changes to EDR schemes. By increasing the maximum claim to
$500,000 in 2010 and raising the limits on the amount of compensation payable to
$280,000 in 2012, this has improved consumer access and reduced the costs and risks of
litigation for clients previously having to take legal action for their claims.
The GI Code also specifies the dispute resolution requirements, including the option of
the client taking the matter to the ASIC-approved FOS if they are not satisfied with the
internal handling of the complaint.
In terms of disputes handling, the GI Code requires insurers to do the following:
• respond to a complaint within 15 business days, provided they have all the
information and have completed any investigation
• where more information is required or an investigation is underway, agree to a
reasonable alternative time frame with clients
• appoint an employee who has appropriate knowledge, experience and authority to
deal with the complaint within 15 business days
• keep the client informed about the progress of a complaint
• notify the client of their response
• notify the FOS or a similar EDR scheme if the review fails
• respond to the client in writing, stating reasons for the decision, information about
how to access an EDR scheme, and the time frame in which a client must register a
dispute with the EDR scheme.
There is currently legislation before Parliament, the Treasury Laws Amendment
(Putting Consumers First – Establishment of the Australian Financial Complaints
Authority) Bill 2017, to introduce a new EDR framework and an enhanced IDR
framework for the financial system. Consumers will have easy access to a single EDR
scheme, known as the Australian Financial Complaints Authority (AFCA), which will
resolve disputes about products and services provided by financial firms. The AFCA
scheme will replace EDR schemes including FOS. At the time of writing (October 2017),
this has not been legislated.
1.46 DFP2_T1_v4
6.4 Financial Ombudsman Service (FOS)

The FOS is an independent body that receives complaints on a wide range of financial
services and provides a national service for banking, insurance and investment disputes in
Australia. Decisions made by the FOS are binding on the insurance provider but not on the
client.
The services provided by the FOS are free to consumers and are an alternative to going
to court. However, a person should always try to resolve the complaint with their
adviser or the insurer in the first instance.
1
When deciding disputes, the FOS has the discretion to award remedies which are not
provided for in the GI Code. Many of its decisions are based in general law rather than
requirements contained in the code, such as breaches of provisions contained in the
Corporations Act and Insurance Contracts Act.
The FOS reports to ASIC on such matters as the type of complaints received, systemic
issues and serious misconduct.
In 2017, the federal government has announced the formation of the Australian
Financial Complaints Authority (AFCA) which will be a central dispute resolution service
combining the operations of FOS, the Superannuation Complaints Tribunal (SCT) and the
Credit and Investments Ombudsman (CIO). The AFCA should commence operation on
1 July 2018.
Recommended reading: The FOS

The FOS website <http://www.fos.org.au> (viewed 21 November 2017)
provides information on the FOS’s services and how disputes are managed.
Recommended reading: General insurance case studies and the

45-day window
The FOS website also provides a number of case studies that provide
examples of complaints they have received and their outcome.
<http://www.fos.org.au>  Resolving Disputes  Case studies 
General Insurance (viewed 21 November 2017).
For an illustration of the application of the 45-day period, see:
<http://www.fos.org.au/circular3/45days-for-IDR.html>

Key points
• Risk refers to the chance that a person might suffer some financial loss.
General insurance provides financial protection against loss or damage to property
and other assets, as well as liability protection, personal sickness and accident
insurance and consumer credit insurance (CCI).
• Insurance may be sold by direct insurers, reinsurers, external insurers and authorised
representatives.
• Insurance policy documentation generally consists of a product disclosure statement
(PDS) outlining the terms and conditions, and a policy schedule or certificate of
insurance.
• A cooling-off period, also referred to as a ‘free look’ period, is a requirement under
the General Insurance Code of Practice and the Corporations Act 2001 (Cth).
• Insurance premiums are set with reference to three factors:
– rate, or likelihood, of claims made
– the insurer’s business expenses and costs
– the insurer’s profit margin.
• In managing risks, you need to consider:
– what your potential pure risks are
– what events could trigger the risk and cause a loss
– what the likelihood is of the event occurring
– the extent of the financial loss you might suffer if the event does occur.
• Self-insurance means that the client retains some or all of the risk and therefore
bears some or all of the loss. Some people might underinsure deliberately as a
self-insurance strategy. Others might unintentionally underinsure because they
underestimate the value of their assets and take out insufficient cover.
• An indemnity value policy is a policy that will compensate the insured to the extent
of the loss suffered. A replacement value policy entitles the insured to have the
damaged or lost property replaced with new property that is equal in value to the
previous existing property, up to a sum insured or uncapped in the case of a total
replacement policy.
• Domestic insurance products include:
– building (home)
– contents
– personal valuables
– legal liability
– domestic workers compensation
– owner builder
– travel
– boat and caravan
– motor vehicle
– CCI.
• The maximum an insurer will pay under a claim is the sum insured shown in the
policy plus any other benefits agreed to be paid, less the amount of the agreed
excess.
1.48 DFP2_T1_v4
• Premiums for building and contents insurance can vary based on the location of the
property, security devices fitted, construction of the building and excess level
selected.
• Factors that can affect premiums for motor vehicle insurances are the type of policy
(e.g. comprehensive or TPPT), driver history and ‘no claims discount’ (NCD) rating,
driver’s age, vehicle type, location of where the vehicle is kept and whether there are
any encumbrances.
• Commercial (business) insurance covers such events as fire and other damage,
product liability, accidental damage and general property. Employers are legally
required to take out workers compensation insurance. Professional indemnity 1
insurance provides financial protection for the insured in the event of any negligent
act, error or omission that they commit in the course of their normal business.
Some clients may be entitled to claim input tax credits for GST purposes on the
premium paid for their policy.
• The insurance industry is regulated by various legislation such as the Insurance
Contracts Act 1984 (Cth), the Corporations Act, the Competition and Consumer Act
2010 (Cth), and state and territory legislation, which sets out, among other things,
the insurer’s responsibilities to their clients.
• An insurance policy is a contract between the insured and the insurer. The PDS and
policy schedule detail the responsibilities of both parties.
• All clients of financial services have access to both internal and external complaints
resolution schemes. A financial institution’s formal dispute resolution process is
detailed in its financial services guide (FSG). Under normal conditions, the General
Insurance Code of Practice states that complaints should be resolved within
15 business days. ASIC requires complaints to be resolved within 45 days through an
organisation’s internal dispute resolution (IDR) process. If unresolved within 45 days,
the complainant should be informed of their rights and provided with contact details
for the relevant external dispute resolution (EDR) service.
Review questions
You can access the ‘Review questions’ for this topic at KapLearn.

References
ASIC (Australian Securities and Investments Commission) 2007, Report REP 89
‘Making home insurance better’, ASIC, January, viewed 21 November 2017,
<http://asic.gov.au/regulatory-resources/find-a-document/reports/rep-89-making-
home-insurance-better>.
Dowling, J 2014, ‘NSW Government launching a parliamentary inquiry into the
relationship between insurance companies and smash repairers’, news.com.au,
17 March, viewed 21 November 2017,
<http://www.news.com.au/finance/business/nsw-government-launching-a-
parliamentary-inquiry-into-the-relationship-between-insurance-companies-and-smash-
repairers/story-fnkgdhrc-1226856256372>.
Jeremic, S 2014, ‘If it fits it may not be genuine’, The West Australian, 3 May,
viewed 21 November 2017,
<https://au.news.yahoo.com/thewest/motoring/a/23160410/if-it-fits-it-may-not-be-
genuine>.
Mihm, U 2016, ‘Credit protection insurance rip-off’, Choice, 13 May,
viewed 21 November 2017, <https://www.choice.com.au/money/insurance/insurance-
advice/articles/credit-protection-insurance-rip-off>.
Parker, L 2012, ‘Credit insurance risks uncovered’, The Sydney Morning Herald,
28 November, viewed 21 November 2017,
<http://www.smh.com.au/money/planning/credit-insurance-risks-uncovered-
20121127-2a4vm.html>.
Teale, J 2013, Insurance and risk management, 2nd edn, CCH Australia Limited, Sydney.
1.50 DFP2_T1_v4
Suggested answers
Apply your knowledge 1: Insurance payments

(a) Indemnity cover provides ‘market value’; therefore, under this cover the
insurance company would pay $310,000.
(b) Assuming the sum insured is adequate and within the time frame stipulated in the
policy, the insurance company would pay $315,000 under a replacement value policy.
1
Apply your knowledge 2: Types of domestic insurance products
(a) This answer is dependent on the type of cover offered by the selected insurance
company. However, home, contents and motor vehicle insurance are the primary
offerings by most insurance companies.
(b) This answer is also dependent on the insurance company selected. The most common
combination is home and contents.
Apply your knowledge 3: Combined building and contents policy

This answer is dependent on the insurance company chosen. However, most insurers
will provide a discount if the insured has their home contents on the same policy.
In addition, further discounts may be offered if other insurance is added (such as motor
vehicle, boat etc.). Other benefits may include one renewal notice, one payment and
one excess.
Apply your knowledge 4: Policy critique

Kim would be advised to choose a home and contents insurance policy. Bendigo Bank
offer Bronze, Silver and Gold cover which will provide varying levels of cover. Under the
Gold and Silver cover, personal valuables can also be insured against accidental loss or
damage outside of the home, anywhere in Australia and New Zealand and anywhere in
the world for up to 90 days from the time of leaving Australia, without listing the items
individually.
As Kim has specific items she may wish to insure, she may be able to nominate an
individual amount payable for the accidental loss or damage to any one item, pair or set
anywhere in Australia and New Zealand and anywhere in the world for up to 90 days
from the time of leaving Australia.

Apply your knowledge 5: Type of cover

(a) Questions to be asked include:
• What type of vehicle are you insuring?
• How old is the primary driver?
• Who else will be driving the car?
• What is your driving history (accidents etc.)?
• Where will the vehicle be garaged?
(b) He must have CTP and, if not wanting comprehensive insurance, he should at
least have TPPD.
Apply your knowledge 6: Motor vehicle policy

Circumstances where a claim might be refused include:
• damage or liability that occurs outside Australia
• damage or liability as a result of war or warlike activity, whether or not war has been
declared
• damage or liability that does not occur within the period of insurance
• damage or liability deliberately caused by the insured, a member of the insured’s
family, a nominated driver or an authorised driver.
There are many other circumstances, depending on the product disclosure document(s)
investigated.
Apply your knowledge 7: Motor vehicle insurance

Are the following statements true or false?
Statement True/False
CTP insurance will cover property damage claims from third parties. False
Who drives the insured vehicle can affect the premium paid and whether or not a True
claim will be paid.
As well as CTP insurance it is also compulsory to have TPPD, TPPD F&T or False
comprehensive insurance.
Comprehensive insurance will cover the cost of vehicle parts that fail because they are False
faulty.
Modifications made to the vehicle, other than by the manufacturer, must be detailed True
on the insurance schedule. Otherwise, any claim might be jeopardised.
Where the vehicle is garaged has no impact on the premium charged. False
1.52 DFP2_T1_v4
Apply your knowledge 8: 80% average clause

The calculation is as follows:
Insured value n!
× Claim value
80% of market value r ! ( n − r )!
The amount payable by the insurance company for damages to the property
is therefore:
($750,000 ÷ (80% × $1,000,000)) × $200,000 1
= $187,500
Apply your knowledge 9: Internal complaints handling process

Please refer to your organisation’s relevant policy for the answer to this activity.
Apply your knowledge 10: Internal complaints handling

application
The person appointed to deal with Ms Lee’s complaints must be someone who has the
power and authority to solve the complaint without referring them on to anyone else.
Once a decision has been reached on Ms Lee’s complaint, Ms Lee must be advised in
writing with reasons for the decision referring to appropriate legislation, regulation or
codes where relevant.
All decisions made about Ms Lee’s complaints must be recorded, as must reasons for
those decisions. Also, appropriate statistics must be kept. Once Ms Lee has made a
complaint, she must be informed that there is an external complaints handling
organisation available.
If Ms Lee’s complaint is not resolved internally, the company must have arrangements in
place for Ms Lee to be referred to an external dispute handling organisation (i.e. FOS).
If the company wholly or partly rejects a claim, it must remind Ms Lee in writing of the
availability of the external complaints handling organisation.
Generally, all complaints should be resolved within 45 days by using the internal
complaints handling procedures, although the General Insurance Code of Practice states
that complaints should be resolved within 15 business days under normal
circumstances. If Ms Lee’s complaint is not resolved using the internal complaints
handling procedures within 45 days, the insurance company must inform Ms Lee:
• of the reasons for the delay
• that Ms Lee may take the complaint to an EDR organisation.

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Topic 1: General insurance

© 2018 Kaplan Education Pty Ltd. All Rights Reserved.

Insurance and Risk Protection

1 What is general insurance? ..................................................................... 1.6

2 Risk and insurance ................................................................................ 1.11

3 Domestic insurance products ................................................................ 1.16

© Kaplan Education Pty Ltd 1.1

4 Commercial (business) insurance products ............................................ 1.33

6 Dispute resolution process .................................................................... 1.40

Key points........................................................................................................ 1.48

Review questions ............................................................................................. 1.49

References ....................................................................................................... 1.50

Suggested answers........................................................................................... 1.51

© Kaplan Education Pty Ltd 1.3

Resource 1: Government Legislation FASEA

Topic learning outcomes

IMPORTANT: Download your written and oral assignment templates now.

© Kaplan Education Pty Ltd 1.5

1 What is general insurance?

1.1 General insurance products

Domestic insurance products

Commercial insurance products

Mandated and health insurance

1.2 Insurance providers

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1.3 Policy documentation

Policy document or terms and conditions

Policy schedule or certificate of insurance

Key fact sheets

© Kaplan Education Pty Ltd 1.9

1.4 How insurance works

Will technological advances lead to fairer premiums?

What is an excess and why have it?

2 Risk and insurance

2.1 What is risk?

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Pure risks can be broken down into four categories:

2.2 Managing risk

Example: Carrying the loss

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2.3 Measurement of loss

Indemnity value policy

Replacement value policy

Hidden risks associated with insurance policies

Example: Rebuilding after the fires

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Apply your knowledge 1: Insurance payments

(b) a replacement value policy basis?

3 Domestic insurance products

Apply your knowledge 2: Types of domestic insurance products

3.1 Building (home) insurance

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3.2 Contents insurance

Combining home and contents insurance

Apply your knowledge 3: Combined building and contents policy

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Example: Flood versus storm

Accidental loss or damage policy

Reducing or refusing claims

How claims are settled

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How much cover is enough?

Estimating building cover