Thinking | 21 November 2011

Flood insurance proposals

As part of its response to the National Disaster Insurance Review, the Federal Government has released the consultation paper titled ‘Reforming flood insurance – A proposal to improve availability and transparency‘, which outlines plans to:

  • require all insurers to offer insurance flood cover under home building and home contents insurance policies
  • introduce a standard definition of flood for the purposes of such flood cover
  • require insurers to provide a “Key Facts Sheet” to consumers in relation to an insurance policy in addition to a PDS and
  • establish a flood risk information portal to enable insurers to better understand (and price) such risk.

The government is seeking feedback on these proposals, including feedback in relation to specific questions about the proposals posed in the consultation paper.

Compulsory offer of flood cover

The proposal will not make it compulsory for any person to purchase flood cover.

Instead, it is proposed that all insurers will be required to offer flood cover in home building and home contents policies. It is not proposed that such cover be compulsorily offered in business policies.

Insurers offering flood cover will be able to give policyholders the option to “opt out” of such cover. However, insurers will not be required to provide such an “opt out” option. It will therefore be possible that some insurers would choose to always include flood cover in all home building and contents policies and therefore spread flood risk across all home insurance policyholders.

Standard definition of flood

The proposed standard definition of flood is as follows:

Flood means 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 water course, whether or not altered or modified or
  • any reservoir, canal or dam.

This definition includes many types of riverine flood but excludes storm damage and will likely exclude flooding resulting from action by the sea (for example as a result of a tidal wave on the seacoast or storm surge caused by a tropical cyclone).  It is not unusual for insurance policies to distinguish flood from storm and sea damage.  The consultation paper notes that flooding and storms often occur together and it is sometimes difficult to assess whether damage is caused by the storm or by flood. Accordingly, disputes about cover could arise if policyholders “opt out” of flood cover, incur losses and it is unclear whether the losses were caused by flood or storm damage.

Interestingly, the consultation paper only discusses such disputes in circumstances where policyholders “opt out” of flood cover. Such disputes could also arise if the policyholder “opts into” flood cover but the policy specifically excludes storm damage and a loss later occurs that could be caused by flood and by storm damage.  This is based on the principle that a loss which is caused by two or more causes is generally not covered if at least one of the causes is specifically excluded under the policy (even if one of the other causes is covered) expressed in cases such as Wayne Tank and Pump Co Ltd v Employers Liability Assurance Corp Ltd [1974] QB 57 and Baulderstone Hornibrook Engineering Pty Ltd v Gordian Runoff Ltd [2008] NSWCA 243.

This could leave open the opportunity for insurers to limit their risks in relation to flood cover by specifically excluding risks which commonly occur with floods, such as storm damage from policies that provide flood cover.

Other proposals

Other proposals mentioned in the consultation paper are as follows:

  • insurers will be required to provide a one page Key Facts Sheet for all home building and home contents policies which clearly sets out the key information features of the policy.  The Key Facts Sheet will complement the existing PDS regime and
  • a centralised portal hosted by Geoscience Australia which will be established to provide insurers with access to flood risk data and improve understanding of flood risk in Australia. This will help insurers better model (and price) flood cover.

What you need to do?

If you are interested in responding to the consultation paper on flood insurance, you need to do so by 30 March 2012.

Submissions should be directed to:

The General Manager
Financial System Division
The Treasury
Langton Crescent


Harry New

Harry leads our financial services team and focuses extensively on financial services law and corporate advisory.

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