Government proposes standard flood definition for insurers

Insurers will be required to use a “common sense” definition of “flood” in home and contents insurance cover to prevent a repeat of what happened following the 2010 and 2011 summer floods, when some home owners received no compensation.

A standard definition, which will be included among draft regulations to be released for consultation by the government by the end of the year, sets out that:

“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.”

“The Gillard government will introduce a standard definition of ‘flood’ to ensure we don't have a repeat of what happened after last summer's floods, where people with insurance policies with one definition of ‘flood’ received compensation while people living next door, with a different policy and different definition, received nothing at all,” announced Assistant Treasurer Bill Shorten in partnership with Attorney-General Robert McClelland.

“Many families and individuals affected by the 2010 and 2011 floods were not even aware their insurance did not cover flood. All policies that offer flood insurance will be required to contain the standard definition and this will end the confusion.”

The standard definition proposal is part of the government's response to the 47 recommendations in the final Natural Disaster Insurance Review report commissioned to examine insurance for flood and other natural disasters following the 2010 and 2011 summer floods.

The review made a range of recommendations encompassing flood risk management, insurers’ claims handling and dispute resolution processes, and the provision of flood insurance.

Shorten called the review’s recommendations “a good place to start in mitigating the risk of disasters and making sure everyone has the appropriate insurance arrangements to set them on the path towards recovery after disaster strikes”.

In addition to requiring insurers to use a mandatory definition, the government is also consulting on a proposal that all insurers must offer flood cover as part of home building and home contents insurance policies, while giving consumers the opportunity to opt out of that cover.

The Insurance Council of Australia, which represents the nation’s biggest insurance companies, has rejected the proposal estimating it will cost $5,000 to $7,000 in additional premiums to cover each of these homes against the risk of flooding.

Other recommendations to come out of the NDIR review that the government will act on include:

• It will invest $12 million over the next four years to establish a flood risk information portal after the review highlighted the need to improve availability and consistency of flood risk information.
  
  
• Implementation of a requirement for insurers to provide their customers with a key facts sheet for all home and contents policies clearly setting out all key information about the features of the policy in addition to the existing product disclosure statement. Further consultation on the content of the key facts sheet will take place early next year.
  
  
  • To work with lenders to develop a scheme whereby they remind borrowers annually of their obligation to maintain insurance and of the risks of under-insurance.
    
    
  • The government and insurance industry have already agreed to remove the provision that the General Insurance Code of Practice doesn't apply during natural disasters

A process of consultation will be undertaken with relevant stakeholders with an issues paper to be released in 2012 following completion of the consultation process on the mandatory opt-out proposal.