Flood Update Review

Flood definitions update for insurers

The Government has released the final Regulations to the Insurance Contracts Amendment Act 2012 (No. 41, 2012) (the Act) setting out the standard definition of flood that the insurer will be required to use.

• New flood provisions relate to home building, home contents, home building and contents, small business and residential strata insurance policies (subject to certain carve outs).
• The insurer must inform the client if flood cover is or is not being provided.
• The new definition is designed to cover riverine/inland flooding, where waters rise after a prolonged period of heavy rain. It is expected that most existing policies already cover flash flooding (stormwater/rainfall runoff).
• The new definition does not include inundation by seawater, from sea level rises, storm surges and the like.
• The provisions will apply to small business policies but only where they provide cover for loss of or damage to the equipment, stock, inventory or premises. A small business is defined as having turnover of less than $1 million in the last financial year and/or where no more than 190 hours are worked by employees each week.
• Only residential strata insurance is included in the provisions (pure commercial insurance policies are not included).

These provisions will come into effect as of 19 June 2014 for policies entered into post 14 June 2012, unless the flood event occurred before 19 June 2014.

Purpose of the change

• Reduce confusion with what is and what isn’t included;
• Standardise the definition of “flood” to avoid situations where the same event to neighbouring properties results in different claims assessments; and
• Improve the ability to compare between different insurers.

The new definition of “flood”

“Flood” is now defined to mean the covering of normally dry land by water that has escaped or been released from the normal confines of any of the following:

• A lake, river or creek (or any other natural watercourse, whether or not it has been modified);
• A reservoir;
• A canal;
• A dam.

The proposed definition covers what is commonly known as riverine/inland flooding; i.e. inundation caused by watercourses or catchments overflowing their banks due to long duration rainfall over large areas.

The other forms of water damage are classified as:

• Stormwater/rainfall runoff: High intensity, short duration storms producing localised flooding (sometimes termed flash flooding). Most insurance policies cover this risk.
• Actions of the sea/sea level rise/storm surge: Inundation caused by movement of seawater. Few insurance policies cover this risk.

What policies are subject to the new flood definition?

The new definition and provisions of the Act apply to the following:

• Home building insurance contracts;
• Home contents insurance contracts;
• Insurance contracts that combine home building insurance and home contents insurance;
• Insurance cover in respect of destruction of or damage to a strata title residence;
• Contracts that provide insurance cover in respect of the loss of the equipment, stock, inventory or premises of a small business; and
• Contracts that provide insurance cover in respect of damage to the equipment, stock, inventory or premises of a small business.

Insurance broker carve out

The new law won’t apply if a broker is:

• Acting for the client; or
• Acting for an insurer under a non binder arrangement; and
• Providing general or personal advice to the client in the course of arranging the contract.

Insurers will be open to agree with insurance brokers on how flood will be defined in their policies. Brokers will need to take care that clients are appropriately protected.

Obligation on the insurer to clearly inform the insured

An obligation is imposed on insurers to clearly inform the insured in writing whether the contract provides insurance cover in respect of loss or damage caused by, or resulting from, flood.

The notice must be given:

• Before originally entering into a prescribed contract after the transition time;
• For a prescribed contract that was entered into before the transition time – before the first renewal, extension or reinstatement of the contract that occurs after the transition time (the insurer is not required to provide information more than once); and
• When varying a prescribed contract if that variation relates to provisions providing for, or in relation to, the insured’s insurance cover in respect of flood.

The regulations and the new definitions have no application until 2 years after commencement date of the regulations (which commenced on 19 June 2012).

An insurer can decide to rely on the regulations and if they do, the regulations apply to the insurer and the contract.