Australia: The Insurance Contracts Act - recent flood amendment and the Unfair Contract Terms (UCT) laws

In brief - Amendment to the Act in response to the Queensland floods of 2010-2011

There have been significant increases in premiums related to cover for flood damage. Treasury is considering extending the Unfair Contract Terms laws to insurance contracts. (This article is a continuation of our earlier article How does the Insurance Contracts Act affect insurers and what are the planned developments to the Act? )

Flood amendment a response to National Disaster Insurance Review

There has been one recent amendment to the Act this year, quite separate from the proposed changes set out in the Bill discussed in the first part of this article. This is a specific amendment to address a controversial public issue in Australia, namely cover against flood damage.

The Insurance Contracts Amendment Act 2012 (Cth) was given royal assent on 15 April 2012. This amendment to the Act is the legislative response to the Natural Disaster Insurance Review which resulted from the Queensland floods of 2010-2011.

How is a flood defined under the Insurance Contracts Act?

Section 37B of the Act now provides that regulations are to define the meaning of "flood" in prescribed contracts (home building and contents, small business and strata title insurance policies).

The Insurance Contract Amendment Regulations 2012 have adopted a quite liberal definition of "flood" as follows:

Flood means the covering of normally dry land by water that has escaped or been released from the normal confines of:

  1. Any lake, or any river, creek or other natural watercourse, whether or not altered or modified; or
  2. Any reservoir, canal, or dam.

Greater clarity for consumers and uniformity of coverage for flood damage

Further, section 37C of the Act now provides that an insurer must clearly inform an insured whether a prescribed contract provides insurance cover in respect of flood.

Insurers can elect to offer consumers the ability to opt out of flood cover, or alternatively, to include flood cover in all home and contents policies of insurance.

The purpose of these amendments is to seek to improve consumer awareness in relation to the cover that is provided by commonly purchased insurance policies, and to give greater uniformity to the scope and extent of cover provided to policyholders in the event of flooding.

Impact of flood amendments on premiums and compliance costs

Significantly and perhaps unsurprisingly, since these "flood" amendments, insurers have already advised of significant increases in premiums relevant to flood cover.

As time passes, the amendments could also lead to higher compliance costs for the industry, re-pricing of policies and, potentially, the withdrawal of products from the market.

Unfair Contract Terms laws and the insurance industry

A further recent issue was raised concerning unfair terms in insurance contracts. This followed a paper put out by the Productivity Commission in its 2008 Review of Australia's Consumer Policy Framework, Unfair Terms in Insurance Contracts, which recommended that a new generic, national consumer law should apply to various sectors of the economy. It further recommended that this generic law should include national Unfair Contract Terms (UCT) laws.

UCT laws currently do not apply to insurance contracts

The UCT laws were implemented in July 2010 and now extend to the Commonwealth and all others states and territories. The UCT laws apply to various sectors of the economy, save for those excluded from their operation.

The UCT laws apply to most financial products and financial services through the ASIC Act. However, in their present form, the UCT laws do not currently apply to insurance contracts.

Treasury considering extending UCT laws to insurance contracts

From last year, Treasury has been considering extending these provisions to insurance contracts. A draft Regulation Impact Statement was released for public consultation and submissions. Submissions have now closed and the matter is under ongoing consideration by Treasury.

The original rationale for excluding insurance contracts from the UCT legislation was that the Act already provided sufficient safeguards for consumers, particularly in relation to the unfair cancellation of contracts.

Complaints against insurers related to flood damage claims

Issues flowing from the Queensland floods have put insurance contracts and the UCT laws back on the government agenda, following a series of complaints against a number of insurers by affected property owners alleging that insurers were acting unfairly in meeting flood damage claims. Accordingly, there is probably now greater momentum for change than was the case a year ago.

If these amendments come into effect, Australian insurers will need to review their policy wordings in the light of the UCT laws and (for example) remove or better explain terms which are not part of everyday language.

Proposed Bill strengthens consumer focus and provides safeguards for insurers

The proposed changes in the Bill would bring into effect some of the recommendations made by the Review Panel. However, there is a possibility that the Bill may undergo further changes, including in relation to unfair contract terms, if it is considered again by parliament.

However, the real point to note is that this legislation has been mooted for many years now and in particular since the Review Panel recommendations were made. There has been broad support for change from both major political parties. However the Bill has been given low priority during the life of the current government.

In our view, the 2010 proposed Bill strengthens the consumer focus of the legislation in some reports, but also provides some useful safeguards for insurers. It is certainly not a radical change to the legislation.

Patrick Monahan Patrick Tuohey
Insurance and reinsurance
Colin Biggers & Paisley

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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Patrick Tuohey
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