The city of Ipswich is not usually a location that Federal
ministers choose to release key policy changes, but yesterday was
different when Bill Shorten released the report by Treasury,
Reforming Flood Insurance - Clearing the
Waters.
Key proposals contained in the report are:-
- a standard definition of "flood".
- a one page Key Facts Statement for home and contents insurance policies.
The Government is seeking feedback and submissions from members of the public on both proposals. The closing date for submissions is 13 May 2011.
Flood
With regard to the public confusion regarding what is (and what
is not) a flood the report refers to:-
"The variations in usage of the term 'flood' and
'flooding' in policies are a potential source of confusion
for many consumers. For example, a policy which is stated to cover
'accidental flood' or 'flash flooding' could give
the initial impression that the policy covers risks arising from
rivers breaching their banks. However, the policy might contain an
exclusion for riverine flooding cover that would be evident on a
careful examination.
The different approaches taken in policies to 'flood'
and related terms and potential confusion for many consumers makes
product comparison difficult and may lead to underinsurance for
flood risk."
The proposed definition is:-
"Flood means the covering of normally dry land by water
that has escaped or been released from the normal confines
of:-
A. any lake, or any river, creek or other natural water course,
whether or not altered or modified; or
B. any reservoir, canal, or dam."
The proposed law reform is to restrict the use of the term
'flood' or 'flooding' in insurance contracts for
anything other than riverine flooding. So for instance the terms
'flash flood' and 'accidental flooding' would
disappear under these reforms. The reforms will ultimately be
effected through the Insurance Contracts Act 1984 (Cth).
How exactly it is to be done is not set out in the report. It
appears that the Government is in 2 minds ie. whether to limit the
standard definition to domestic policies (home buildings and home
contents policies) or also include business policy holders.
It seems that insurers will be free to use their own definitions
for other types of inundation such as storm water, rainfall runoff
and actions of the sea. The alternative of defining these other
types of inundation within legislation is raised in the report but
not with any apparent enthusiasm.
Key Facts Statement
The Key Facts Statement (KFS) is a response to consumer concerns
regarding the size of insurance documents, including the product
disclosure statement (PDS), and their complexity. In domestic
classes there is already an obligation on insurers to present
information in a PDS identifying important features of the policy
and the scope of coverage in a "clear, concise and
effective" manner. The report refers to:-
"Concerns have been raised by a number of stakeholders
that the PDS rules for general insurance, as currently implemented,
may not be as effective as they could be for informing consumers
about the policy, and enabling comparisons between policies. This
is likely to be connected with the length and complexity of the PDS
and the variations in presentation.
If key information about policies is not readily accessible to
consumers, there is a greater risk of consumers acquiring insurance
that does not fully match their requirements, and may contribute to
underinsurance."
The proposal being considered involves the issuing of a KFS to be
no more than one A4 page in length which contains a set of key
facts about the policy. A draft sample is set out in the report.
The KFS or parts of it might be prescribed by the Government in the
amending legislation. The KFS may not only need to be provided on
inception but also at each renewal. The Government seem undecided
on this point.
Implications
Rob Whelan, Chief Executive of the Insurance Council of
Australia has been very active in working with Bill Shorten,
Assistant Treasurer, to settle upon the standard definition of
flood. Whilst there may be a few tweaks to the definition contained
in the Treasury Report, any amendments are unlikely to be
significant.
The proposal to differentiate between riverine flooding and storm
water or flash flooding is sensible. There is no doubt that
domestic policy holders are often genuinely confused about the
difference between the 2 events.
The proposals do not impose any obligations upon insurers to cover
flood in circumstances where they otherwise would not.
One would hope for a generous transition period to allow policy
wordings to be amended to contain whatever definition(s) is
ultimately legislated.
As for the KFS that will also most likely be standardised, or at
least the essential terms proscribed by legislation with variations
between insurance companies limited by the maximum size of this
document ie. one A4 page.
We assume that the obligation to provide the KFS to domestic
policy holders will be contained in the Corporations Act 2001
(Cth) which will allow this document to be distributed
electronically (under the Insurance Contracts Act there is
no ability to effectively deliver documents electronically).
One of the benefits in the government settling upon a definition
for 'flood' and the contents of the KFS will be that the
other reforms to the Insurance Contracts Act, which have
been sitting in somebody's drawer for far too long, may be put
back on the table and brought back before Parliament for passing.
Previously these amendments were not given the attention they
deserved because insurance was not really a priority. Now the
amendments are not being passed because insurance is too high a
priority. It seems the government is waiting for the reforms
indentified in this report to be finalised (as well as
considerations regarding whether or not to include insurance
contracts in unfair contracts law) before it proceeds with the
other amendments.
Should you require any further information about these reforms or
other government initiatives such as the Natural Disaster Insurance
Review, please do not hesitate to contact
Robert Samut who will be pleased to assist.
This is the final publication in our series on legal issues
arising out of the Queensland floods. If your company has staff who
are involved in flood claims, we have a workshop focussing upon
legal and evidentiary issues which we can deliver in your boardroom
(using your policy wordings). For more on our training program,
please contact
Robert Samut.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.