Publications / Dispute Resolution
The recent flood events throughout Queensland have left many householders in an uncertain position in terms of their insurance coverage for the disaster.
It has been widely reported that many Insureds are now facing the unenviable reality that their policies contain either a specific exclusion for flood or provide only limited coverage for a particular type of flood event defined in the policy.
Faced with an Insurer who declines to extend cover for a flood claim, it is important for Insureds to understand that they may still have some prospect of progressing their claim if their Insurer did not properly advise them that the policy contained a flood exclusion.
The potential answer for these people lies in the fact that Australia has what may be considered a comparatively consumer-friendly insurance regulatory regime.
The Insurance Contracts Act 1984 (Cth) (Act) applies to contracts of general insurance, including the home and contents type policies on which people will usually claim for flood. The Act operates with the stated purpose of striking a fair balance between the interests of Insurers and Insureds and to ensure that the policies and practices of Insurers operate fairly.
Helpfully for flood victims, the Act provides for a default level of cover in respect of home and contents policies which will include indemnity for damage caused by flooding.
While it is essential to note that Insurers are still permitted to specifically exclude cover for flood in certain circumstances, the Act imposes significant notification obligations on the Insurer in that case and places the onus squarely on the Insurer to prove that those obligations have been complied with in order to uphold the exclusion.
‘Standard cover’ insurance contracts
The Insurance Contacts Regulations 1985 (Cth) (Regulations) provide that, where the Insured is a natural person (i.e. not a corporate entity), a policy of insurance in respect of destruction of or damage to a home building will be deemed to be a prescribed ‘standard cover’ contract for the purposes of the Act.
Importantly, the Regulations also provide that damage or destruction to a home building caused by or resulting from ‘storm, tempest, flood, the action of the sea, high water, tsunami, erosion or land slide or subsidence’ is a prescribed event for the purposes of such standard cover contracts.
The amount of cover provided in that circumstance will include the total cost (to a maximum of $2 million) of repairing the damage to the home, as well as the reasonable cost of demolition and removal of debris, and emergency accommodation. Where a contents policy was in place, indemnity is also to be provided for the household contents items.
Flood exclusion clauses
As noted above, Insurers are entitled to exclude ‘standard cover’ provided certain conditions are met.
In order to displace the ‘standard cover’ deeming provisions and avoid liability for a claim resulting from flood, section 35 of the Act requires that the Insurer must prove:
- that the insurance policy expressly excluded cover for such an event, and
- that, before the insurance contract was entered into, the Insurer clearly informed the Insured in writing that the policy would not provide cover for the event.
It will often be sufficient for the Insurer to show that the exclusion was clearly set out within the policy wording or Product Disclosure Statement (PDS). That is, they are not necessarily obligated to provide a separate or ‘plain English’ explanation.
However, the important point remains that if there is any confusion about exclusions or the timing and provision of the necessary documents, these circumstances are matters which ought to be further investigated by an Insured.
The very nature of flood damage will often mean that Insureds have lost access to their records and documents, and in those circumstances it may be an important step to put the Insurer to proof to ensure it can effectively establish why flood cover should not be extended.
It is certainly not difficult to imagine circumstances in which an Insurer may not have complied with its notification obligations. For example, due to basic oversight or a breakdown in process, the Insurer may have simply failed to deliver the required policy documentation.
Further difficulties for Insurers may arise by virtue of the fact that insurance is sometimes arranged and paid for by telephone. If a consumer applied for cover in this way, and immediately accepted and paid for the cover without having been provided with a copy of the policy or other documentation, the consumer may well argue that ‘standard cover’ applies and that they are entitled to cover for any subsequent flood damage.
In addition to investigating the circumstances surrounding the formation of the initial insurance contract, it may also be necessary to investigate the circumstances of any subsequent renewals.
When a policy is renewed, the legal position is that a new insurance contract is entered into on each renewal.
In circumstances where the Insurer has changed the policy terms (for example, by introducing a new exclusion or restriction in respect of flood), they are accordingly obligated to provide the Insured with a copy of the new wording or PDS.
This presents another opportunity for oversight by the Insurer, and Insureds could again give consideration to ensuring that the Insurer can prove that the proper documentation was in fact delivered prior to the renewal taking effect.
Method of inundation
The way in which a property is inundated may also affect the coverage afforded by the policy.
At present, many Insurers define the term ‘flood’ differently to one another. Commonly, if damage to a property has been caused by rainwater runoff (for example, from a road), that event will not usually fall within the definition of ‘flood’ and accordingly any flood exclusion would not apply.
It is also worth considering that in some circumstances there may be concurrent causes of water inundation. For example, excess rainwater may have run off a road and flooded a house, while at the same time a waterway has risen and also contributed to the inundation.
It may be that one event would be covered (rainwater runoff) and the other excluded (waterway flooding), and in that case it may be difficult for an Insurer to enforce the flood exclusion where it is unable to effectively prove which event has caused particular damage.
A further example is that some policies may define ‘flood’ as including ‘the escape of water from a dam’. It is debatable whether this definition would include the intentional ‘release of water from a dam’ by government authorities, thus introducing another point of contention in relation to claims arising from the recent flooding of Brisbane.
Again, if an Insurer seeks to enforce a flood exclusion in such a circumstance, the onus is on it to establish the basis for the damage not being covered by the policy.
If an Insured has been declined indemnity for flood damage to their home, we suggest that they:
- carefully review their policy wording and seek legal advice if necessary
- investigate the circumstances in which they entered into the policy to establish whether they were properly informed in writing of the relevant exclusions before entering into the contract
- consider putting the Insurer to proof that it is entitled to rely on the flood exclusion and that ‘standard cover’ ought not apply, and
- if cover was arranged through an insurance broker, investigate whether the broker has provided proper advice in relation to flood cover and obtained insurance in accordance with their instructions.
Additionally, Insureds should note that if they are not satisfied with their Insurer’s initial response to their claim, they are entitled to seek an internal review of the decision by the Insurer’s dispute resolution department. If that process fails, the Insured may then take their complaint to the Financial Ombudsman Service for an external review of the Insurer’s decision.
It will invariably be prudent for Insureds to first explore these options before resorting to legal proceedings.
For further assistance or enquiries please contact:
Guy Humble on 07 3233 8844
Tim Case on 07 3233 8960
Cindy Hulsey on 07 3233 8726.