Consumers confused by 'gradual damage' exclusion on insurance policies

If you discover water has been leaking from your shower and destroying your bathroom floor, your ability to claim is ...
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If you discover water has been leaking from your shower and destroying your bathroom floor, your ability to claim is likely to be limited.

When is damage not damage for insurance purposes? The answer: When it's gradual.

Many homeowners are being left frustrated when they try to make a claim on a house insurance policy and find they are not covered because the damage is deemed to have occurred over time.

Most insurance policies rule out any deterioration that happens gradually, such as erosion by weather or rotting due to exposure to moisture. 

Jimmy Higgins, executive general manager of claims at Vero, said insurers had to limit what they could offer to cover, to keep insurance affordable.

"The first thing you need to remember is that insurance isn't a maintenance contract. It's there to help you recover from sudden, unexpected losses that you couldn't prevent," he said.

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"Insurers have to balance the need to provide cover for our customers, with keeping premiums affordable for as many people as possible. If insurers covered faulty installation or maintenance, insurance could become less affordable."

Homeowners are expected to pick up on gradual problems through their regular maintenance of the property.   But an AA Insurance survey found up to a third of homeowners were not aware of the maintenance obligations placed on them, or how that could affect their cover.

Terry Jordan, from the Insurance Council, said "gradual damage" was a common reason that claims were declined. "It's something they don't understand very well, people can't get their heads around it."

Insurance and Financial Services Ombudsman Karen Stevens agreed it was an area that was confusing for some customers. Her office receives frequent complaints from customers who have been turned down for a claim because the insurer ruled it was caused by gradual damage.

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"Consumers often misunderstand the cover, because policies do not define 'sudden' or 'gradual'," she said.

"To establish what gradual means is always difficult; depending on the specific factual circumstances...There is no definitive timeframe you can rely on.  The main issue for consumers is that they will usually discover the damage suddenly and think they have a valid claim.  However, the real issue is whether the cause of the damage was sudden or gradual. 

"Fire, earthquake, storm and flood are examples of events that can cause sudden damage.  Water leaks, on the other hand, are examples of gradual damage that cause damage over time as building materials get wetter and wetter, like a bathroom floor 'suddenly' developing a spongy area or a hole, due to long-term leaking waste water under the shower unit spreading under the floor."

A pipe that suddenly bursts would be covered by insurance but one that slowly leaks would not. Stevens said it would not matter if the damage had been done without the homeowner being aware. 

The only exception is hidden water damage. Many insurers cover water damage from a leaking internal water or waste disposal pipe that a homeowner could not have been expected to see, up to a limit such as $2000 or $3000.

"Say a pipe under your upstairs shower has been leaking for months, but you couldn't see it. Then one day, you notice water stains and bulging in the ceiling below, and you realise you've got a problem. We know even our most house-proud customers can't see through walls, so if you discover a hidden leak, we can help you cover the costs of the damage it caused," Higgins said.

But most policies do not provide cover for the cost of locating the leak. Stevens said insurers generally would regard such cost as part of the pipe repair, which is excluded from the policy cover.

Higgins said it was possible for customers to claim some of the cost of finding the leak in some cases, but they would need to discuss that first.

In one case dealt with by Stevens' office this year, a couple made a claim under their landlord insurance policy when their tenants discovered a leak that had caused damage to carpet and skirting boards. A loss adjuster advised that the leak would have been happening for at least four weeks and the claim was declined.

Their complaint against the insurer's decision was not upheld – Stevens' office ruled that while the discovery of the damage by might have been sudden, the policy wording referred to how it was caused, not how it was discovered.

 - Stuff

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