Although more than two years have passed since the January 2011 Brisbane floods, many residents and business owners remain unsatisfied with their lack of insurance cover for the cost of property damage and business interruption losses.
A recent decision of the Queensland Supreme Court1 might help business insurance policyholders at least get their insurers to re-open declined claims. The Court has found that a flood exclusion very similar to the standard Mark IV and Mark V Industrial Special Risks (ISR) flood exclusions does not exclude damage caused by flooding due to stormwater drains backing up.
The plaintiff’s business premises situated on Castlemaine Street in Milton was inundated by the back-flow of water from the Brisbane River through local storm water drainage pipes during the January floods. That is, although the flood waters originated from the Brisbane River, they were not as a result of the river breaking its banks.
The insurer declined to indemnify the plaintiff on the basis of an exclusion in the insurance policy for ‘flood’, which was defined as:
‘…the inundation of normally dry land by water overflowing from the normalconfines of any natural watercourse or lake (whether or not altered or modified),reservoir, canal or dam’
The plaintiff rejected the contention that the water from the stormwater drains came within this exclusion, but the insurer argued that the pipes were either an ‘altered’ or ‘modified’ natural watercourse or a ‘canal’.
Decision of the Queensland Supreme Court
Applying a literal approach to the construction of the contract of insurance, Justice Jackson concluded that the pipes were not an ‘altered’ or ‘modified’ natural watercourse, and were instead a functional replacement of the natural watercourse. Nor did he agree that the pipes constituted a ‘canal’, when that term was read in association with the terms ‘reservoir’ and ‘dam’ in the definition. Finally, while the floodwaters had originated from a natural watercourse (i.e. the river), he found that the ordinary meaning of the phrase ‘overflowing from the normal confines of a natural watercourse’ was directed to the place from where the overflowing occurred (i.e. the pipes), not the place from where the water was originally sourced.
The plaintiff was therefore granted a declaration that the insurer was liable to cover the loss occasioned by flood water damage.
Implications for policy holders
This decision has potentially wide-ranging ramifications for business insurance policy holders whose insurance claims were rejected on the basis of the ISR flood exclusion.
This is because the wording of the exclusion clause in this case is very similar to the standard flood exclusion provision contained in the Mark IV and Mark V Industrial Special Risks (ISR) insurance policies, which respectively define ‘flood’ as:
‘…the inundation of normally dry land by water escaping or released from thenormal confines of any natural watercourse or lake whether or not altered ormodified or of any reservoir, canal or dam’ [Mark IV]
‘…the inundation of normally dry land by water escaping from or released from the normalconfines of any natural watercourse or lake whether or not alteredor modified) or any dam, reservoir or canal’ [Mark V]
Although each definition contains slightly different wording, and different wording to the definition examined in LMT Surgical, policyholders would argue that there is no material difference between the term ‘overflowing’ and the phrases ‘by water escaping from/or released from’. However, it is important to recognise that the Judge in this case placed significant emphasis on a strict literal interpretation of the exclusion provision, and its meaning in the context of commercial contracts, so it is possible that differences in wording could lead to different outcomes.
Some might say that this decision is a victory for common sense, as policyholders should not to have to worry about discriminating between the source of waters which cause flood damage. As with all insurance contracts, the precise wording of the provisions will determine the scope of cover, and the specific circumstances of each claim will influence the prospect of recovery. Policy holders affected by floods whose claims have been declined should have a second look at their policy – it just may be worthwhile.