A Bill has now been introduced into Parliament that proposes to amend the Insurance Contracts Act 1984 (Cth) (the Act) so that:
a standardised definition of flood will apply to all prescribed contracts of insurance; and
a Key Facts Sheet detailing significant policy information must be supplied to consumers of home building and home contents policies.
The Insurance Contracts Amendment Bill 2011 (Cth) (Bill) was introduced into the House of Representatives on 23 November 2011. Its objective is to implement the key proposals in the recent treasury consultation papers Reforming flood insurance: Clearing the waters and Reforming flood insurance: A proposal to improve availability and transparency. Please see our earlier article for a summary of the issues surrounding the National Disaster Insurance Review’s (NDIR) proposal to implement a standardised definition of flood and introduce a requirement for the provision of Key Facts Statements.
It is intended that the Bill, if enacted in its current form, will improve consumer awareness in relation to the kind of cover that is provided by commonly purchased insurance policies and will give greater uniformity to the scope and extent of cover provided to policyholders by various insurers in the event of flooding.
Standard definition of flood
If enacted, the Bill will create a legislative framework for the development of regulations that establish a standard definition of flood applicable to: home building; home contents; small business; and strata title insurance.
The Bill does not make the inclusion of flood cover mandatory in respect of prescribed contracts of insurance. Rather, the Bill assures that where the term ‘flood’ is used in policy wordings for prescribed contracts of insurance, a standardised definition of flood will apply. The Bill contains a requirement for insurers to clearly inform insureds as to whether a prescribed contract of insurance provides flood cover[1].
Where a prescribed contract of insurance extends different maximum amounts of insurance cover for different flood events, the Bill imposes an obligation on insurers to provide the maximum amount of insurance cover for flood-related loss that is available under the policy.[2] This requirement is designed to give greater consistency in respect of payouts for flood claims. It is directed to preventing situations such as those that occurred in the wake of the recent floods in eastern Australia where different categories of ‘flood event’ applied to different policyholders, leading to substantial dissimilarities in the amount that insureds were able to claim for flood-related loss under various insurance policies which responded to the same trigger event (ie the Brisbane flood).
It is proposed that the actual wording for the standard definition of flood will be detailed in the Insurance Contracts Regulations 1985 (Regulations). Draft regulations containing the wording for the definition of flood are expected to be released for public consultation next month. By way of guidance, the Assistant Treasurer and Minister for Financial Services and Superannuation has indicated that the standard definition for flood will provide consistency with respect to the meaning of what is commonly referred to as ‘riverine flooding’, ie:
“the covering of normally dry land with water that has escaped or been released from the normal confines of any lake, river, creek or other natural watercourse or alternatively, any reservoir, canal or dam”.[3]
In concurrence with this, the proposed definition of flood set out by Treasury in the consultation paper Reforming flood insurance: A proposal to improve availability and transparency states 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.”
Key Facts Sheets The Bill requires that insurers must provide consumers with a Key Facts Sheet (KFS) upon receipt of consumer requests for information with respect to home building and home contents insurance policies.
Draft Regulations will be released in early 2012 which will prescribe the content of a KFS. The Government has indicated that the pro-forma KFS will be consumer tested prior to its finalisation and that the information provided in a KFS must be concise and clear. It is expected that the implementation of a uniform content requirement for a KFS will facilitate consumer comparison of home building and home contents insurances and lead to greater consumer awareness of the content of policies. Importantly, the Bill signals that the Regulations may prescribe circumstances where a KFS ‘may or must’ be provided via electronic means.[4]
Next steps and call to action The Bill is currently before the House of Representatives and, if passed, will be placed before the Senate in early 2012. Draft Regulations outlining a standard definition for flood and providing details as to the content requirements of a KFS are expected to be released before the end of the year and early next year respectively. Until then, the content of the Draft Regulations will be eagerly awaited within insurance circles.
Insurers ought to be aware that they can provide comments and suggestions with respect to the likely impact of a standardised definition of flood and the introduction of a KFS by making a submission to the Department of Treasury in response to the November 2011 consultation paper Reforming flood insurance: A proposal to improve availability and transparency. Submissions are due before 30 March 2012.
In light of the above mentioned developments, it is clear that the flood insurance reform agenda has not only gained traction but has now accelerated; in a recent speech to Queensland Parliament, the Premier of Queensland Anna Bligh has urged insurers to voluntarily adopt the proposed standard definition of flood before the start of the wet season.[5]
Footnotes
[1] Insurance Contracts Amendment Bill 2011 section 37C.
[2] Insurance Contracts Amendment Bill 2011 section 37D(4).
[3] Mr Shorten, ‘Assistant Treasurer and Minister for Financial Services and Superannuation’, (Second Reading Speech for the Insurance Contracts Amendment Bill 2011, House of Representatives, Wednesday 23 November 2011).
[4] Insurance Contracts Amendment Bill 2011 section 33C(2).
[5] Insurancenews.com.au, Bligh wants insurers to adopt flood definition now (2011) <http://www.insurancenews.com.au/local/bligh-wants-insurers-to-adopt-flood-definition-now> at 28 November 2011.