The industry ombudsman says a reference to “business property” in a co-insurance clause did not require QBE to combine building and contents sums insured when calculating a claim payment.

When a company suffered cyclone damage at its property in April 2021, QBE accepted its claim and settled the contents component, but the parties disagreed over how the insurer should calculate its liability for the buildings.

The policy contained a co-insurance clause requiring the insurer to pay a proportion of a loss based on the relationship between the sum insured and 80% of the reinstatement or replacement value of the “business property”.

The policy defined business property as including “buildings, contents, stock and items shown in your policy schedule”.

The company’s buildings were insured for $1.462 million and the contents for $2.75 million.

QBE calculated the co-insurance adjustment using only the building sum insured against the value at risk for the buildings, resulting in a payment factor of 35.47%.

But the policyholder said the definition of business property meant the calculation should include the combined building and contents sums insured and their combined value at risk.

Doing this would mean the co-insurance clause did not apply and, on that basis, it sought a further $93,492 plus interest.

The company argued that “to the extent the co-insurance clause is unclear, the contra proferentem rule should be applied so the clause is interpreted in a manner least favourable to the insurer”.

But AFCA has backed QBE’s interpretation, noting the policy schedule clearly separated the sums insured for buildings and contents, while the co-insurance clause referred to “the sum insured” rather than “sums insured”.

The ombudsman said: “It is well accepted in Australian law that an insurance policy is a commercial contract and should be given a businesslike interpretation.

“Clauses are to be interpreted based on the natural and ordinary meaning of the words used, read in light of the contract as a whole.”

AFCA acknowledges the clause “could have been worded in a clearer manner”, but this did not make it ambiguous.

It finds QBE’s interpretation was “logical and businesslike”, while using contents insurance to offset underinsurance on a building claim would produce an illogical result.

See the ruling here.