The Insurance Contracts Amendment Bill 2011 (Cth) (ICA Bill) has now passed in the Senate.
This heralds a new legislative framework for the creation of regulations that will set out:
The wording of the standard definition of flood and a finalised pro-forma of the KFS will be contained in the amending regulations to the Insurance Contracts Regulations 1985 (amending regulations). Public consultations have now closed on the wording of the draft version of the amending regulations. Treasury will consumer test prototypes of the KFS to determine an appropriate structure before the amending regulations are finalised.
Please see our previous article and alert on the proposed introduction of a standard definition of flood and KFS for prescribed consumer insurance contracts (together, proposed changes).
Background – stakeholder input on proposed changes to flood insurance regime
These developments in flood insurance reform have occurred against the backdrop of the recent floods in NSW and Victoria that were caused by a once in one hundred year deluge. The reforms also come after a review of the ICA Bill was conducted by the House of Representatives Standing Committee on Economics (Committee). Stakeholder Submissions were made in response to the review. Following this, Roundtable Committee Hearings were conducted and an Advisory Report was released which recommended that the ICA Bill be passed despite the existence of stakeholder concerns about the operation of the proposed changes.
Many of the issues that were raised in the Submissions and Roundtable Committee Hearings were not resolved by the Committee’s Advisory Report but were referred to the Federal Treasury and raised in its Discussion Paper about the use of KFS for Home Building and Home Contents insurance policies. Submissions to the Discussion Paper will be published shortly. Following this Treasury will develop the form, content and structure of the prototype KFS before consumer testing is commenced.
ICA Bill – stakeholder concerns addressed in Revised EM
The content of the ICA Bill, as passed after being presented for a third time, did not differ significantly from the first ICA Bill that was tabled before the House of Representatives. However, some of the key issues raised by stakeholders in the initial Submissions to the Committee and in the Roundtable Committee Hearings have now been dealt with in the Revised Explanatory Memorandum to the ICA Bill. Specifically, the Revised EM has been amended so that it contemplates the following:
Insurers may continue to use standard limitations in policies that provide flood cover
The Revised EM expressly states that the intent of the ICA Bill is not to restrict the use of standard limitations such as exclusions for: flood cover in the first 72 hours of a policy; high risk property such as pontoons; buildings which breach building laws and regulations; and flooding that is the result of deliberate damage to a dam. This clarification has been made in response to stakeholder concerns that section 37C of the ICA Bill would operate to unduly extend the scope of flood cover provided by insurers by preventing the use of standard limitations in insurance policies that offer flood protection.
Insurers will not have to re-supply insureds with flood cover information upon renewal, extension or reinstatement of a prescribed contract
The duty for insurers to clearly inform insureds of whether an insurance policy that is a ‘prescribed contract’ contains flood cover under section 37C of the ICA Bill has been limited to certain situations. The scope of the duty has been clarified in the Revised EM in response to stakeholder concerns that the wording of the ICA Bill required insurers to comply with the duty when renewing, extending or reinstating prescribed contracts, even where flood cover information had previously been provided to insureds.
The transition time for the proposed changes will start from the date the amending regulations are made and will end two years from that date. During the transition time, insurers will not be required to comply with the duty to clearly inform insureds on whether a prescribed contract contains flood cover.
Application of the duty
After the transition time has ended, insurers will have a duty to clearly inform insureds on whether a prescribed contract contains flood cover with respect to the following:
Prescribed contracts entered into before the start of the transition time - duty arises before the first renewal, extension or reinstatement that occurs after the transition time has ended; and
Prescribed contracts entered into after the transition time has ended - duty arises before a prescribed contract is entered into.
Carve backs to the duty
After the transition time has ended, the following carve-backs will exist with respect to insurers’ duty to clearly inform insureds on whether a prescribed contract contains flood cover:
where the duty has already been discharged, insurers will not be required to re-supply flood cover information upon a renewal, extension or reinstatement of a prescribed contract; and
where a prescribed contract is varied, the duty will only operate in relation to variations that impact upon an insured’s flood cover.
Treasury Discussion Paper – proposed KFS requirements, content, format and structure
It is anticipated that some of the outstanding issues of concern relating to the provision of a KFS with Home Building and Home Contents (combined and individual) (HSBC) insurance policies may be dealt with in the amending regulations that are developed after Treasury has consumer tested the prototype KFS.
When a KFS is not necessary
The Discussion Paper states that insurers will be able to defer the provision of a KFS in situations where it is not possible for one to be provided to consumers at the point of enquiry about a HSBC policy and that the KFS may be provided via electronic communication. It is also suggested that an exemption in the amended regulations will apply so that a KFS will not be required where:
a KFS has already been provided by the insurer and no change has been made to the terms of the HSBC policy;
the insurer reasonably believes another person has already provided a KFS with respect to the HSBC policy and no change has been made to the terms of the policy; or
a consumer elects not to receive a KFS.
Contents of KFS
The Discussion Paper proposes that a separate KFS should be issued for each HSBC policy held by an insured and that the KFS contains (among other things):
an outline of the difference between: sum-insured policies, sum-insured policies plus margin, total replacement policies, this outline will be accompanied by a clear statement specifying which of these categories of cover is held by the insured;
a list of ‘what is covered’, with content echoing the wording for prescribed events as found in the Insurance Contracts Regulations. The list of covered events may be restricted to those that confuse consumers the most or have the greatest financial impact on consumers;
a list of natural disaster events that the policy covers (the standard cover regime currently lists fire, earthquake, flood, tsunami and land slide as natural disaster events);
a list of ‘what is NOT covered’ which discloses if any prescribed events in the list of ‘what is covered’ derogate from prescribed events in the standard cover regime;
a list of the amounts of any standard sub-limits or excesses in the ‘what is covered’ section;
a warning that refers consumers to the PDS for the product where there is an option for one or more sub-limits or excesses to apply to the policy;
a statement outlining the cooling off period that applies to the policy;
a standard set of warnings stating that:
the KFS is merely an outline of the policy and not a comprehensive disclosure document, and that the PDS should be read before the policy is entered into;
consumers should consider their own particular financial needs and risks when deciding whether to take out the policy (general consumer warning); and
underinsurance may cause financial hardship which may in turn have negative health implications for consumers (health warning);
a brief explanation of the ‘Wayne Tank principle’ stating that where there are two or more concurrent causes of damage and one cause is excluded from the policy then any claim in respect of that damage may be excluded; and
a consistent structure and format prescribed by the amending regulations that will be applicable to all insurers (an A4 paper template containing standardised font and tables).
Next Steps
Insurers and consumers alike will soon be able see how various stakeholders have responded to the issues raised by Treasury in the Discussion Paper by viewing the Submissions. After the dust has settled, Treasury will then start consumer testing a new KFS prototype. Once this process is complete, the amended regulations setting out the standard definition of flood and the details of the KFS requirements will be tabled.
1. Prescribed contracts of insurance will be defined in the Insurance Contracts Regulations. It is expected that they will comprise Home Building and Home Contents (combined and individual) insurance contracts and contracts held by small businesses and strata titles. For more detail see our previous alert.