On 4 March 2011, the Federal Government announced the Natural Disaster Insurance Review (NIDR) in response to the significant natural disasters experienced in various parts of Australia early this year and late last year. One of the focuses of that review has been insurance cover for flood and, perhaps unsurprisingly for those in the industry given the debates over flood cover, whether the definition for flood should be standardised across the insurance industry.
Reforming flood insurance - clearing the waters
In April the government released a discussion paper entitled “Reforming flood insurance - clearing the waters” which invited submissions on two proposed reforms to disaster insurance, namely:
- a standard definition of flood, for inclusion in insurance policies; and
- short, simple, “key facts statement” summaries for insurance policies to be made available to consumers.
The government’s discussion paper suggests it is a question of when, not if, a standard definition of flood is introduced - most likely by amendment to the Insurance Contracts Act 1984 (Cth).
In addition to these proposed reforms, the discussion paper also sought to address other issues relating to disaster insurance such as:
- reliable flood risk mapping; and
- time frames for claims handling.
A standard flood definition
The discussion paper has adopted the Insurance Council of Australia’s division of “flood” risk into the following three categories:
- stormwater/rainfall runoff;
- riverine/inland flooding; and
- actions of the sea/sea level rise/storm surge.
The proposal for a standard flood definition is focused on the second category (riverine/inland flooding) and the proposed definition is:-
Flood means the covering of normally dry land by water that has escaped or been released from the normal confines of:
A. any lake, or any river, creek or other natural watercourse, whether or not altered or modified; or
B. any reservoir, canal, or dam.
Whilst the primary focus of the consultation paper in proposing the standard flood definition is to protect consumers holding home building and contents insurance, submissions were sought on whether the standard definition ought extend to other policyholders.
Submissions were required by 13 May 2011 and 12 public submissions were received (all are available online) from insurers, consumer groups, the Insurance Council of Australia and others. Whilst generally supportive of the proposed standard flood definition various concerns are raised, some of which we share.
Whilst the proposed move to a standard flood definition is to be applauded, such a definition may not be the panacea that many may hope for. There will undoubtedly still remain disputes over the exact cause of the inundation of water particularly if all three categories of flood are not covered. There will also undoubtedly be disputes over whether the incident being claimed for actually triggers the standard flood definition.
If the government proceeds with the proposed standard flood definition, it is our view that consideration ought be given to the impact of the Wayne Tank principle (if an event has two or more causes, one of which is covered by an insurance policy and the others not, then the policy does not respond to the event). The issue that arises is where there may be multiple causes of a “flood”, the exclusion of some flood types by the policy will mean that the claim is not covered.
The Insurance Council of Australia was generally supportive of the idea of a standard flood definition but identified some concerns with the definition proposed. Somewhat more importantly, they identified a risk that a standard definition may force some insurers out of the market for such cover. If this was to occur then an unintended consequence of a standard flood definition is likely to be a rise in the cost of such insurance.
There have been suggestions (possibly as a reaction to insurers ceasing to offer flood cover) that flood cover be made compulsory - a suggestion met with an angry response from some in the industry. The risk of such an approach is that those living in flood prone areas (a minority of the Australian population) will have their insurance cover subsidised by those living in non-flood prone areas. This is likely to be controversial particularly if the properties in more flood prone areas (such as those overlooking the Brisbane River) are owned by wealthier members of society. As one insurer has stated, it may be more appropriate for the government to “focus on mapping and mitigation, rather than an 'insurance solution' to the problem”.
Key Facts Statements - new summarised products disclosure regime for insurance contracts
The discussion paper also proposes that short, simple, “key facts statement” summaries for insurance policies be made available to consumers of general insurance products.
Under the current Product Disclosure Statement (PDS) regime there is already an obligation for insurers to provide information to consumers of domestic insurance contracts (ie home and content insurance) in a ‘clear, concise and effective’ manner. Both the Insurance Contracts Act and the Corporations Act (Cth) 2001 govern the disclosure regime for insurance products. A number of stakeholders have suggested that the current disclosure regime is ineffective because many policy holders do not read their PDS. The wide variance in the format of PDSs, as well as their length and complexity, has led to criticism that the regime fails in its objective of informing consumers about the nature and scope of policies on offer in the market.
The objective of the proposal to introduce a standardised key facts statement form is to require insurers to give consumers a single document that would simplify the process of product comparison and product evaluation. It is hoped that by having a one page reference, consumers will be better informed about what their insurance covers and does not cover. Importantly, the proposal currently being considered in the discussion paper only relates to home buildings and contents insurance policies.
The discussion paper includes a sample document and raises a number of options for consideration with respect to the format and content of key facts statements. Some of these are:
- a table comprising ‘what is covered’ and ‘what is not covered’ columns;
- a basic description of the policy; and
- short statements that give details of the covered amount, material risks to the insured (ie geographical problems to consider such as whether a property is flood prone or subject to land slippage), applicable cooling off periods, excess amounts and optional top ups for cover.
There are a number of implications should the proposed key facts statement summaries for insurance policies be implemented. For instance, what kind of sanctions will apply to insurers who breach the regime and what remedies will be available to insureds if misleading, incomplete or contradictory (ie a document is given that differs to an existing PDS) information is provided in a key facts statement. Another concern is the possibility that consumers will be mislead by the brief nature of key facts statements in that they will be unaware of the operative scope, extent and impact that coverage terms and exclusions may have on a policy.
The Government has indicated that it is currently seeking stakeholder feedback on the form and content of the proposed template of the key facts statement. After the consultation process has concluded a revised key facts statement template will be released and further focus group testing will be conducted.
The discussion paper has specifically sought feedback on a number of key questions, including (among others):
- Will there be any disadvantages with combined key facts statements where a PDS is also provided?
- At what time should a key facts statement be given to a consumer?
- Should wording also be provided to give guidance on how to use the key facts statement?
- Is the proposed treatment of policy type appropriate?
Where to from here?
The panel comprising the NIDR is to report to Bill Shorten (the Assistant Treasurer) by 30 September 2011 on a range of issues relevant to insuring natural disasters. The proposal the NIDR makes for a standard flood definition and the key facts statement will likely warrant close attention.