Diana Clement: What does your insurance cover?

Insurance companies settle many more claims than they decline.

The trouble is the small percentage that get turned down leave people seriously out of pocket or in some cases penniless.

If your house burns down or you end up in hospital overseas and the insurance company doesn't pay, it's likely to affect you financially for much of the rest of your life.

Many of those cases arise because the individual didn't read or didn't understand the policy.

Others who fall between the cracks of the wording end up being heard by independent dispute resolution services.

Insurance companies' clients often think insurance covers all things every time, says Insurance & Financial Services Ombudsman Karen Stevens.

They fail to understand common exclusions such as gradual damage, poor design, unoccupied houses, theft by people legally allowed on the property, items in storage, or driver licence breaches such as driving with excess breath alcohol.

A common exclusion from house insurance, as one landlord found, is gradual damage.

In that case heard by the ombudsman, water had leaked over time from a washing machine hose.

The rotted floor beneath wasn't covered by insurance, however.

The insurance company would have paid out for "hidden gradual damage" if the washing machine hose had been part of the permanent piping in the house.

It wasn't.

The landlord found she couldn't even claim for loss of rent, because that section of the policy only kicked in if there was a valid claim under the policy for the rot.

The lesson from that claim is that in most cases damage covered by insurance must be as a result of a sudden, not gradual cause.

Another home owner was left with no cover even though his was substantially damaged by fire.

The issue was he had failed to tell the insurer the home had been unoccupied for more than 60 days, the ombudsman heard.

Sadly, many Kiwis aren't aware of this obligation under their insurance policies until it's too late.

Another fish-hook that has tripped up many is personal possessions left in storage aren't automatically covered by contents polices.

One policyholder who complained to the ombudsman had her belongings destroyed by fire, but didn't have a valid claim because those possessions were in storage at her work while she was building a new house.

Her policy only covered her goods at "the insured address".

Insurance lawyer Andrew Hoooker of Shine Lawyers NZ says all too often health-related claims are declined and the policy "avoided" (cancelled from day one) due to events unrelated to the claim.

In a recent case handled by Hooker the client's policy was avoided for non-disclosure of historic depression. The claim was for unrelated physical illness unrelated to that depression.

The definition of unattended luggage is a big problem with travel claims. In one case heard by Financial Services Complaints Limited (FSCL) "Simon's" suitcase was being unloaded at his hotel when an opportunist thief grabbed it. Simon saw events unfold and chased the thief.

The insurance company initially declined the claim on the basis that his luggage was "unattended". FSCL disagreed because the suitcase wasn't out of Simon's sight.

Sometimes policy wordings can be ambiguous.

One insurance company initially declined a claim FSCL heard because a member of the insured's family was only travelling the Brisbane/Bali leg of the holiday and therefore didn't have a return ticket to New Zealand.

Travel policies almost always require return tickets but this requirement was ambiguous in that case.

The insurance company agreed to pay half the claim.

Narrow interpretations of wordings often results in claims being declined.

Policyholder "Darryl" had his claim for "fried" electrics on his boat declined thanks to an exclusion for "electrical breakdown or failure".

FSCL pointed out that this interpretation was too narrow. A power surge was the cause of the damage not a "breakdown or failure".

Sometimes policy wordings don't cater for new technology as one drone owner found after crashing his into a tree. The insurer declined the claim under an exclusion for "aircraft", but "Vince" argued his drone was a "remote controlled model" not an aircraft.

The case, which made its way to the ombudsman, was settled with an ex-gratia payment.

In January an insurance company declined a claim because the daughter of a policyholder crashed his car while she was driving in breach of her restricted licence.

She was not accompanied by a supervisor at the time of the accident.

The breach did not cause or contribute to the accident, but the insurance company was still entitled to decline the claim.

In recent years Hooker has noticed insurance companies rewording policies to make it more difficult for Kiwis to get claims over the line.

Hooker cites one policy reworded to say clients have to prove certain requirements to the company's "reasonable satisfaction".

"(This) effectively makes them the arbiter of what is covered under their own policy," says Hooker.

The Ombudsman encourages insurance companies to do their best to educate clients about these and other exclusions that could lead to their claims being declined.