Australia: The Queensland Flood Crisis - Part 2

Last Updated: 16 February 2011
Article by Robert Samut
This article is part of a series: Click The Queensland Flood Crisis for the previous article.

Commission of Inquiry into the floods

On Thursday 10 February 2011 the Commission of Inquiry into the Queensland Floods sat for the first time with Her Honour Justice Holmes presiding. All reports made by the Commission of Inquiry are to be made public. Justice Holmes is being assisted by Deputy Commissioner, Jim O'Sullivan (former Qld Police Commissioner) and Deputy Commissioner, Philip Cummins (an engineer specialising in dam safety and river management).

The Commission is to undertake an examination of the chain of events leading to the recent floods and their aftermath. The Commission has been established under the Commission Of Inquiries Act 1950. It is vested with all the powers of a Royal Commission, and will take public submissions from across Queensland and hold public hearings in affected areas. In keeping with the times, public hearings in affected communities will be streamed live onto the Commission's website.

Insurance companies and the insurance industry generally will be subject to close examination by the Commission. One gets the feeling that the majority of the public submissions made to the Commission (see below) will relate to insurers and insurance brokers, with Seqwater a close second. The Commission's terms of reference contain a 7-point hit list of enquiries. Number 2 on the list is an inquiry into the performance of private insurers in meeting their claims responsibilities.

Parties who think that their interests might be affected by the Commission's activities and findings may apply for leave to appear at those parts of the Inquiry that concern them. Application for leave needs to be made in writing by no later than 5.00pm on 28 February 2011.

The Commission of Inquiry is not a court. It is not able to make any binding or enforceable findings against a person, corporation or government authority. The terms of reference require it to (amongst other things) make recommendations which it considers appropriate, feasible and cost effective to improve:-

  • the preparation and planning for future flood threats and risks, in particular the prevention of the loss of life.
  • the emergency response in natural disaster events.
  • any legislative changes needed to better protect life and property in natural disaster events.

The Commission of Inquiry has called for public submissions on issues of flood preparedness to be provided by 11 March 2011, and for submissions addressing any other matters in the Inquiry's terms of reference to be delivered by 4 April 2011. Following receipt of these submissions public hearings will be held in Brisbane and regional flood affected areas. At those hearings witnesses can be examined and cross-examined. The Inquiry has the power to compel witnesses to attend and require the production of documents.

The terms of reference require the Commission to deliver an interim report by 1 August 2011 (focusing on matters associated with flood preparedness to enable early recommendations to be implemented before next summer's wet season) and a final report covering all relevant issues by 17 January 2012. So far as the insurance industry is concerned the Commission will report on its assessment of insurers responses to flood claims in January next year.

For those of you who consider it prudent to be represented at the Commission of Inquiry mark 28 February 2011 in your calendar as that is the last day on which applications for leave to appear can be made.

Should you have any questions regarding the process of the Commission or obtaining leave to appear please contact Robert Samut.

Excluding flood damage – did somebody tell the insured?

The Insurance Contracts Act 1984 (Cth) has its own set of insurance policies known as "prescribed contracts" which set out insurance terms for various types of domestic cover (known as "standard cover"). There is a prescribed contract for home buildings insurance. The prescribed home buildings insurance policy contains flood cover (that is, damage/loss caused by flood is not excluded).

Section 35 of the Insurance Contracts Act requires insurers to make any differences between their policies and the equivalent prescribed policy under the Insurance Contracts Act made known to the insured before a contract is entered into. The main aim of standard cover is to ensure that exclusions and limitations which an insured might not expect to be present within insurance cover are brought to the insured's notice. This part of the Insurance Contracts Act looks to protect mum and dad insureds from being left without cover in circumstances where they thought that their policy would respond. It does not apply to commercial policies of insurance.

Section 35 requires an insurer to "clearly inform the insured in writing (whether by providing the insured with a document containing the provisions, or the relevant provisions, of the proposed contract or otherwise)" of any diversions from standard cover. In recent days the question has been asked: How clearly must insureds be informed of the fact that their policies do not cover flood damage? Is it sufficient to have provided the insured with a Product Disclosure Statement and/or policy document which contains the flood exclusion somewhere within its pages?

In Hams & Anor v CGU Insurance Ltd (2002) 12 ANZIC and Marsh v CGU Insurance Ltd [2003] NTSC 71 (cases which followed the Katherine floods in January 1998) it was held that providing the insured with the policy documents was sufficient to clearly inform the insured of the derogation of the insurance policy from standard cover ie. to inform of the exclusion of flood cover. However the courts have held that there can be special circumstances in which the complexity of, or confusions within a policy document may mean that the provision of it to an insured is not sufficient to clearly inform the insured of the limitations on cover. In Marsh v CGU Insurance Ltd the court held that the policy clearly told anybody who read it that flood damage was not covered. The rejection of cover was upheld. In a not so clearly worded policy document the result may have been different. In the Marsh decision Justice Mildren said in part:-

"Even though section 35 is plainly beneficial legislation, a fair reading of section 35(2) does not warrant the conclusion that the result need go further than provide for the relevant exclusion in the policy wording in clear and unambiguous language and in a manner which a person of average intelligence and education is likely to have little difficulty in finding and understanding if that person reads the policy in question."

Following these two decisions the Corporations Act 2001 (Cth) introduced specific disclosure requirements for some insurance products (insurance policies sold to retail clients, which includes home building insurance). For insurance products subject to this regime, a PDS must contain information about any significant characteristics or features of the product or of the rights, terms, conditions and obligations attaching to the product. The incorporation of a flood exclusion in a home building insurance policy would be something an insurer would need to mention in the PDS document. Compliance with section 35 of the Insurance Contracts Act may be achieved through the PDS ie. by clearly informing the insured in writing of the deviations from standard cover in the PDS.

Expect to see arguments run that "hiding" a flood exclusion in a PDS or policy document is not "clearly informing" the insured.

What flood exclusion – nobody told me!

A recent decision of the Financial Ombudsmen is relevant. Case number 213228 dealt with a home insurance policy containing a flood exclusion. The policyholder was affected by severe storm activity in Roma, Queensland, in March 2010. The policy contained a flood exclusion. Ultimately it was established that the property damage had been caused by a flood as defined in the policy.

The insured argued that he had never been provided with a PDS or policy wording that identified the flood exclusion and he was therefore entitled to standard cover under the Insurance Contracts Act which provided for flood cover.

Issues in dispute were:-

  1. whether the insurer had established on the balance of probabilities that it provided a copy of the PDS or policy documentation to the insured.
  2. whether the insurer is entitled to refuse indemnity under the terms and conditions of the policy.

The panel reviewing the case was satisfied that the policy excluded a loss resulting from floodwater, but was not convinced that the insured received a policy document or a PDS relating to it.

Evidence was provided by a company employee that the insured was sent an offer to insure and confirmation of cover documents. But he could not say that a PDF or policy document would definitely have accompanied these documents. Effectively he said it was his practice to put them separately in the same envelope. The insurer's failure to satisfy the panel that it had provided the insured with a copy of the PDS meant that the insurer could not rely on the flood exclusion. The insurer therefore had to cover the loss. The panel was concerned that the insurer had not done enough to establish that the PDS was forwarded to the applicant within the requirements of section 35.

The situation was different in the Katherine flood cases referred to above. In these cases the clear and well documented internal procedures of the insurer allowed it to establish that it had satisfied its duty of disclosure in cases where the insured had denied receiving that information.

Tunnel vision

In Chester County, South Carolina, insurance companies are creating a storm – literally. To simulate hurricane like conditions, an insurance industry group has constructed a wind tunnel of a size sufficient to accommodate nine large residential homes. Within this tunnel 105 fans deliver gusts of 175 miles per hour with the goal being to come up with a design and construction of a house that can withstand the worst that mother nature has to offer.

Julie Rochman, chief executive of the Institute for Building & Home Safety said in relation to the wind tunnel:-

"One thing we as a society don't really do anymore is build for where we live. We build for how we want to live. . . . There is a wonderful ability to be living in denial and where disaster happened a long time ago we get disaster amnesia."

When fully operational the wind tunnel centre will be able to generate hurricane force winds with torrential simulated rain. To add to the mix, the tunnel also has a fire pit which simulates how wild fires can spread from house to house.

In a country that consistently sees fires and rain, Australian insurers should take good note of the results coming out of the Chester County tunnel.

For further information on this topic 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.

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This article is part of a series: Click The Queensland Flood Crisis for the previous article.
This article is part of a series: Click The Queensland Flood Crisis - Part 3 for the next article.
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