Travel insurance not covering cancelled flight?

Hi all,

Last week Air NZ cancelled our flights to Sydney a couple of days before we were due to fly out and the next alternative flight they offered was almost 48 hours later, which would mean we would miss the event we were going over for.

We had travel insurance so we booked flights on Qantas for the day we were supposed to fly, assuming that would be covered (it was Saturday this happened so we couldn't talk to anyone before we needed to book)

Response from AIG today is that they will not cover 'costs due to a service your public transport provider has delayed, rescheduled or cancelled'.

Then what the hell is travel insurance for??

The flights we had to book were over $2000 and I am shaking right now because we can't afford this, and circumstances like this are the whole reason we have travel insurance.

Advice please??