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) (Regulations).
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 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; or
- a dam.”
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 related loss.
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 apply.
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.