There is now a standard definition of “flood” for the purposes of home building and home contents insurance, small business insurance and strata title insurance. Or, as the Minister for Financial Services and Superannuation put it, “A flood is a flood”.
Previous updates have outlined the reforms being made to flood insurance (see the most recent alert here).
The reforms were introduced in April 2012 by making amendments to the Insurance Contracts Act 1984 (Cth). Accompanying changes have now been made to the Insurance Contracts Regulations (Cth).
The Regulations now contain the following standard definition of "flood" (reg 29D(1)): the covering of normally dry land by water that has escaped or been released from the normal confines of any of the following:
- a lake (whether or not it has been altered or modified);
- a river (whether or not it has been altered or modified);
- a creek (whether or not it has been altered or modified);
- another natural watercourse (whether or not it has been altered or modified);
- a reservoir;
- a canal;
- a dam.
How do the reforms change the law?
The reforms make changes to "prescribed contracts of insurance", which include contracts for home building insurance, home contents insurance, strata title residence insurance and small business insurance (see reg 29C for what is and is not a prescribed contract of insurance). In summary:
- an insurer must "clearly inform" an insured whether such a contract provides flood cover;
- the standard definition of "flood" applies whenever "flood" is used in a contract (or other document given by an insurer in connection with the contract);
- where a contract includes "flood provisions" (provisions covering loss or damage caused by or arising from an event that is or would be a "flood"), the contract is taken to provide cover in respect of "flood"; and
- where a contract includes flood provisions that provide different amounts of cover in response to different flood events, the highest maximum amount will be taken to apply to all such events.
See Act s 37C, 37D.
Special provisions apply to prescribed contracts of insurance covering small businesses (defined in reg 29B). Where an insurer proposes to use the word "flood" in such a contract and give "flood" a meaning other than the standard definition, the insurer must take reasonable steps to ensure that the contract is not one in respect of loss to a small business: see reg 29D(2). However, this does not apply to an agreement to renew, extend or vary a contract, or reinstate a previous contract.
What is the timing of these reforms?
The new requirements are now part of the Act and Regulations, but there is a two-year transition period. This means that, unless an insurer decides to rely on them at an earlier time, the reforms:
- will not apply to contracts before 15 June 2014; and
- will not affect the operation of such contracts in relation to events occurring before 15 June 2014.
If an insurer decides to rely on the Regulations in relation to a contract made on or after 15 June 2012 and before 15 June 2014, the Regulations will apply to that insurer and that contract.