The Insurance Contracts Amendment Act received Royal Assent on 15 April 2012 (the Act).
The Act reflects the Australian Government's response to the treatment of policyholders affected by the widespread flooding in Queensland, New South Wales and Victoria in 2010-2011. Emerging from these natural disasters, consumers called for clarification as to precisely what was covered by insurance policies, to what extent these policies provided cover for flood and what cover for flood meant. This consumer demand culminated in the Government's 5 April 2011 publication of the consultation paper 'Reforming flood insurance: Clearing the waters' ( refer to our previous publication here) and later in the Act itself. Key objectives of the Act are to generate greater uniformity in the scope of cover provided by insurers for flood events and to improve consumer awareness in relation to the kinds of flood cover available. The Act seeks to achieve these aims through a standardised definition of 'flood' and the mandatory distribution to consumers of a 'Key Facts Sheet' providing policy information.
The legislation took effect from the date of Royal Assent however the regulations implementing the legislative framework will not commence for at least a further two years.
Standard definition of flood
Whereas previously the term 'flood' was undefined in the Insurance Contracts Act 1984, the amending Act introduces a legislative framework for regulations establishing a standard definition of flood applicable to 'prescribed' insurance contracts, namely, those for home building and home contents cover and those held by small businesses and strata titles.
While the Act does not make the inclusion of flood cover mandatory in respect of these 'prescribed contracts', section 37B(3) of the Act requires that where the term 'flood' or other grammatical forms of the word are used in either the policy documents or supporting materials, the standardised definition of 'flood' will apply.
Through the operation of the standardised definition, the legislative framework:
- prevents insurers from relying on a narrower definition of a flood claim1; and
- imposes an obligation to provide the maximum amount of insurance cover for flood related loss, even where the policy itself provides that different coverage limits apply for different flood events2.
The provisions surrounding the standardised definition, which will be set out in the Insurance Contracts Regulations 1985 (Regulations), are specifically formulated to generate consistency in respect of payouts for flood claims and to redress the situation previously faced by policyholders where different categories of 'flood event' led to substantial differences in the amount these policyholders were able to claim for flood-related loss, despite responding to the same trigger event and, in some circumstances, despite the policyholders occupying neighbouring properties. However, the definition of flood provisions will not have retroactive application and will therefore only apply to prescribed contracts of insurance entered into, and flood events occurring, after the commencement of the Regulations.
Key Facts Sheets
The new legislation also requires that insurers provide consumers with a Key Facts Sheet upon receipt of a consumer request for information with respect to prescribed contracts of insurance.3
The Key Fact Sheet is a one page document summary which must set out:4
- what is covered;
- what is not covered;
- the cooling off period;
- what type of cover is offered under the policy; and
- an explanation of how the Key Fact Sheet is to be used.
This particular reform is targeted at equipping consumers with the information necessary to compare home building and content insurance policies to facilitate greater consumer awareness.
While there is benefit to be gained from the reforms, including greater consumer confidence in insurance generally, the Explanatory Memorandum to the Act acknowledges that insurers will incur additional compliance costs as they reassess and rewrite policies to satisfy the legislative framework. These costs are expected to relate to both initial set up and ongoing compliance. As a result, insurers will inevitably be forced to reprice policies and, in some circumstances, particularly in flood prone areas, commentators are suggesting that insurers may need to withdraw from the market entirely as the expanded scope of cover becomes commercially unviable, which could impact the global consumer benefit that the Government is trying to achieve. However, given that the Regulations are not yet finalised, and that these will not take effect for a further two years, it is still likely to be some time before a clear picture emerges on this issue and as to how the provisions will play out in practice generally.
1Insurance Contracts Amendment Act 2012,
2Insurance Contracts Amendment Act 2012, section 37D(4)
3Insurance Contracts Amendment Act 2012, section 33C(1)
4Insurance Contracts Amendment Act 2012, section 33B
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