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17 Jul 12
Statutory 'flood' definition clears up 2011's murky policy waters

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By Brad Russell (Partner) and Diana Mason (Senior Associate)

In June this year, the Insurance Council of Australia introduced Regulations that provide for a statutory definition of ‘flood’ for insurance contracts. This legislated definition should reduce confusion when making a claim and will help to avoid the recurrence of the situation after the January 2011 floods where many insureds were surprised to find that their policy did not indemnify them for the loss incurred.

The new definition is found in section 37B(2)(a) of the Insurance Contract Act 1984 (Cth) and defines ‘flood’ as ‘the covering of normally dry land by water that has escaped or been released from the normal confines of: any lake, or any river, creek or other natural watercourse, whether or not altered or modified; or any reservoir, canal, or dam’.

For the purposes of section 37A of the Act, the definition is only applicable to ‘prescribed contracts’. Prescribed contracts of insurance are ‘home and building insurance contracts, home contents insurance contracts, contracts that provide insurance cover in respect of destruction of or damage to a strata title residence, or contracts that provide insurance cover in respect of the loss or damage of equipment, stock, inventory or premises of a small business.

The Regulations introducing the definition allow for a two year transition period to allow insurers to adjust to the change, updating their product disclosure statements and retraining staff. Importantly for consumers, the legislation is not retrospective and will therefore only apply to prescribed contracts of insurance entered into, and flood events occurring, after 19 June 2012.

The significance to the insurance industry has been obvious during the past 18 months, with the prevalence of natural disasters and extreme flooding across a number of Australian States. These claims have totalled $2.72 billion in damages, with North Queensland suffering the most and incurring a total loss of $2.38 billion [1].

These events have also emphasised that many consumers lack awareness regarding the extent of their insurance cover. The widespread devastation highlighted the importance of protecting communities from risks, and of making the claims process simpler and more effective for insureds.

The key objectives of the new legislation are therefore to increase uniformity in the scope of cover and to reduce consumer confusion regarding what is included in their insurance. Insurers will be prevented from relying on a narrower flood definition to avoid liability and there will no longer be inconsistencies as to indemnity for neighbouring properties that are affected by the same flood event.

Unfortunately, there may be some negative ramifications from the introduction of the statutory definition. Insurers will incur additional compliance costs as they reassess and rewrite their policies, and retrain their staff. As a result premiums may increase and in some areas insurers may need to withdraw from the market entirely as the expanded scope of cover becomes commercially unviable.

It is also important for consumers to note that the Act itself does not make inclusion of flood cover mandatory. The effect is merely that, where damage from flooding is captured by the policy, the definition of what is a ‘flood’ is standardised.  Thus the consumer ought to still consult a professional as to whether they have purchased the appropriate policy for their circumstances, and whether flood damage is included in the scope of that policy.

 

[1] The Australian Industry Welcomes Flood Definition 19 June 2012.

Focus covers legal and technical issues in a general way. It is not designed to express opinions on specific cases. Focus is intended for information purposes only and should not be regarded as legal advice. Further advice should be obtained before taking action on any issue dealt with in this publication.

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