In our June 2012 update, we reported on the Insurance
Contracts Amendment Act 2012 (Cth) (Act) and
its effect for underwriters writing home building and contents
cover. Following submissions on an exposure draft of regulations
released last year, the accompanying changes have now been made to
the Insurance Contracts Regulations 1985 (Cth)
The reforms are limited to 'prescribed contracts of
insurance', including contracts for home building, home
contents, strata title residences and small businesses. The
inclusion of flood cover will not be mandatory in respect of these
contracts but as a result of section 37B(3) of the Act and the
corresponding regulation 29D, the following definition of
'flood' will apply wherever the term is used in the policy
documents or supporting materials:
" the covering of normally dry land by water that has
escaped or been released from the normal confines of any of the
a lake (whether or not it has been altered or
a river (whether or not it has been altered or
a creek (whether or not it has been altered or
another natural watercourse (whether or not it has been
altered or modified);
a canal; or
The explanatory memorandum to the Regulations states that this
particular formulation of the term 'flood' will enable
insurers to express either the inclusion or the exclusion of flood
cover and to adopt the definition without impacting negatively on
the extent of flood cover currently being provided.
The new framework contained in the Act and Regulations:
results in automatic cover in respect of 'flood' where
'flood provisions' are contained in the contract;
requires an insurer to 'clearly inform' an insured
whether such a contract provides flood cover; and
even where the policy itself provides that different coverage
limits apply for different flood events, imposes an obligation on
insurers to provide the maximum amount of insurance cover for flood
Insofar as policies for small businesses attract these
provisions, insurers are obliged by regulation 29D(2) to take
positive steps to verify the business size. When determining
whether a business is classed as a small business in this scenario,
insurers will be required to consider all relevant information and
where reliance on materials provided by the insured is required,
the duty of disclosure provisions in the principle act will
These steps are only required where insurers wish to apply a
definition of flood which differs from that set out in the
Regulations. The Explanatory Memorandum suggests that this is an
attempt to encourage insurers to adopt the formulation by
minimising compliance costs.
While the new requirements are now part of the Act and
Regulations, there is a two-year transition period commencing 15
June 2012 which means that unless an insurer elects to rely on
these any earlier, the reforms will not apply to contracts entered
into or events occurring before 15 June 2014.
While the Regulations also provide insurers with the option to
adopt the standard definition of flood sooner, it is hoped that
this the two year transitional period will provide insurers with
sufficient lead time to:
update the content of product disclosure statements;
retrain staff; and
implement any necessary systems changes.
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guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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Whereas most insurance policies exclude liability arising under contract, insurers can
positively benefit where an insured has limited or excluded its liability under contract.
This usually arises where the insured's contract has a limitation or exclusion of liability clause in the insured's favour.