Australia: Rising waters place pressures on insurers in claims emanating from natural disasters

Introduction

Australia has long been regarded as a beautiful and untamed land. Severe geographical and climatic events such as bushfires, floods, earthquakes, cyclones and hail have increased in frequency and severity and may one day become the norm. With this rise in natural disasters, the Australian insurance industry has been forced to adapt, not only to accommodate the high volume of claims, but also to provide greater clarity to consumers on the scope of cover with respect to flood events.
This article:

• highlights how natural disasters can place a strain on insurers;
• focuses on the key difficulties associated with flood cover; and
• outlines the Federal Government and Insurance Council of Australia's response to these issues.

The strain of natural disasters

Natural disasters, by definition, involve widespread, catastrophic damage. In the wake of such destruction the sheer volume of insurance claims invariably soars, inundating insurers with claims that place them under great stress. This is particularly true for insurers that are signatories to the General Insurance Code of Practice and are thus expected to manage claims and handle disputes in accordance with the Code's standards and timeframes.

By way of illustration, as at 24 June 2011 approximately 500,000 insurance claims had been made by policyholders arising from natural disasters in Australia, including the Victorian and Western Australian hail storms, Cyclone Yasi and the Queensland floods.¹⁴

The issue with flood cover

Over the years, the Australian insurance industry has time and again proven its ability to respond to certain forms of natural disasters, namely bushfires,¹⁵ cyclones,¹⁶ and hailstorms. Floods, on the other hand, have proved to be problematic.

The issue with flood cover most recently came to the fore in the aftermath of the series of floods that devastated Queensland and rural Victoria in the summer of 2010/2011,¹⁷ giving rise to over $2 billion in claims,¹⁸ particularly in the context of consumer home building, home contents and home unit insurance policies. Difficulties stemmed from two key factors.

• How the term 'flood' was defined in the policy in terms distinguishing it from 'storms'. Confusion arose when storm damage, including water related damage, was covered under a policy but flood damage was not.
• Consumers were, in the main, largely unaware of the scope of cover of their insurance policies, specifically whether floods were covered or excluded.

The response

The Federal Government responded to the flood insurance coverage issue by establishing the Natural Disaster Insurance Review in March 2011, chaired by John Trowbridge. The Review Panel's report was presented to Treasury on 30 September 2011 and the report, together with the Federal Government's response, was released in November 2011.

In brief, the outcome of the Review included the following.

• The Insurance Contracts Amendment Act 2011 (Cth) (2011 Amendment) was enacted to insert a new Division 1A in Part V of the Insurance Contracts Act 1984 (Cth) (ICA). It established a framework for four key reforms.
• The introduction of a standard definition for the term 'flood' in home building, home contents, strata title and small business insurance policies (Insurance Policies), thereby reducing confusion as to the scope of any flood cover in the policy and increasing the efficiency with which insurers can manage flood claims.
• The requirement that insurers clearly inform consumers in writing whether their Insurance Policies provide flood cover.
• The requirement that insurers provide consumers with a Key Facts Sheet containing key information in relation to their Insurance Policies in a concise, easy to understand format, so that they know exactly what is and is not covered by their policy.¹⁹

These reforms were implemented by the Insurance Contracts Amendment Regulation 2012 (Cth), which inserted a new Division 8 in Part II, and Part IV of the Insurance Contracts Regulation 1985 (Cth).

• The Insurance Council of Australia revised the General Insurance Code of Practice to insert a new section 4 applying to catastrophes and disasters resulting in a large number of claims. Section 4 effectively excuses insurers that are signatories to the Code from strict compliance with the standards and timeframes in the Code for claims management.

Further clarity with respect to the scope of cover of Insurance Policies came with the enactment on 15 April 2012 of the Insurance Contracts Amendment Act 2012 (Cth) (2012 Amendment). The 2012 Amendment revised the drafting of section 37D in the 2011 Amendment, providing certainty that flood cover would not inadvertently be provided in circumstances where the policy wording included both an express flood benefit and an express flood exclusion, yet the policy schedule made clear that only the express flood exclusion applied (that is, in circumstances where the policy schedule switched off the express flood benefit and switched on the express flood exclusion).²⁰

Conclusions

The changes implemented by the Federal Government and the Insurance Council of Australia have gone some way towards easing the rising pressures on insurers to promptly manage high volume natural disaster claims, particularly in the context of floods. They also represent a positive step in providing greater clarity to consumers as to what exactly is covered in their policy.

The former Federal Government rejected proposals that mandatory flood cover be introduced in all home building and home contents policies, and ruled out government subsidies for policy holders in high-risk flood zones, adopting the position that it is more appropriate to address areas that affect the provision, cost and uptake of insurance, such as phasing out taxes on policies or investing in flood-prevention.That decision was welcomed by the Insurance Council of Australia, which stated: 'Government subsidies would distort the insurance market, might not assist those most at need and may serve to encourage rather than discourage development in at-risk communities'.²² The current Federal Government, with its mantra of letting the market provide the solution, is unlikely to adopt a different position.

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