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Finding a common definition of “flood” for insurance policies

By Ted Christie - posted Tuesday, 25 January 2011


“The objectives of this Code [include]:

a) To promote better, more informed relations between insurers and their customers;

b) To improve consumer confidence in the general insurance industry;…”

Clause 1.17 General Insurance Code of Practice (May 2010)

“A recent review of home and contents insurers by Choice found that 19 of the 43 insurers offered flood insurance, five offered it as part of additional coverage and 19 didn’t offer it at all.”

Ingrid Just, Choice Magazine Spokesperson on 666 ABC Canberra (13 January 2011)

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“The Insurance Council of Australia says that the ACCC blocked their attempt to introduce a common definition for flood…The ACCC did so for good reason. The definition may have resulted in even more insurance policies excluding damage for flood. The new clause was poorly drafted and would have led to consumer confusion.”

Fiona Guthrie (Letter to the Editor, Brisbane Courier-Mail, 1-2 January 2011)

The above statements reflect a long-standing problem within Australia that remains unresolved. Consumer confusion and uncertainty associated with interpreting insurance policies and the meaning given to the term “flood”, persist. For some residents, the consequences may be tragic as they may face the prospect of not being covered for damage to their homes following the recent floods in Queensland.

That such a situation exists today is difficult to reconcile with the reality of the Australian climatic environment - particularly as the Insurance Council of Australia recognizes that “Flood is a persistent risk in the Australian community that traditionally accounts for one third of natural hazard damage”.

There are many kinds of inundation risk that can lead to flood damage. The Insurance Council of Australia has divided flooding into three broad categories; the insurance consequences for consumers differ for each category:-

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  1. ‘Riverine / Inland Flooding/ Flooding’ refers to “inundation caused by rivers, creeks or artificial catchments (e.g. dams) overflowing their banks due to long duration rainfall over large catchment areas”.

    There are very large differences in how this type of risk is identified as insurance policies differ greatly. Many insurers use a unique definition of what flood means. Some insurers provide cover for this type of risk; but many insurers exclude flood damage from insurance policies.
  2. ‘Flash Flooding / Stormwater / Rainfall Run-Off’ identifies inundation by “water that is produced by high intensity, but short duration, storms producing very localised flooding conditions. Some descriptions of this type of flooding describe it as water running towards a natural water course”.

    The majority of insurance policies - but not all - cover this type of inundation risk.
  3. ‘Actions of the Sea, Sea Level Rise, Storm Surge’ identifies inundation “caused by movement of seawater. Movements of the sea can also be defined by terms such as ‘…high tides and king tides’”.

    There is very little cover available for this risk.

But there is another dimension to these categories and the consequences of inundation risk for consumers – the element of confusion. The problem is captured by the following observation made by ASIC: “The terminology in policy documentation can be confusing. The use of technical terms, differing definitions for common words (including the word ‘flood’), and technical meanings for otherwise commonly used words (such as ‘watercourse’) might not be understood by consumers”.

The general insurance industry has tried, for a number of years, to develop greater access to flood insurance products for Australian communities. In order to reduce consumer confusion, it is significant, through the “Flood Insurance Project”, that the Insurance Council has been working towards developing, what it refers to as, a “voluntary common definition” for inland flood.

Consumers need to be aware that what the Insurance Council of Australia envisages is that any common definition of flood arrived at would be adopted on a voluntary basis by individual insurers. To explain this point, the Insurance Council states that “insurers would remain free to offer coverage to alternative definitions for flood. However, consumers would be able to use the voluntary common definition as a reference point for comparison of the product actually being offered”.

In March 2008 the Insurance Council of Australia lodged an application with the ACCC seeking endorsement of an agreement to adopt, on a voluntary basis, the following definition that it proposed as a common definition for “inland flood”:-

“lnland Flood is the covering of land that is not normally under water by:
-water that overflows or escapes from a naturally occurring or man made inland watercourse (such as a river, creek, canal or storm water channel) or a water pool (such as a lake, pond or dam), whether it is in its original state or it has been modified; or
-water released from a dam whether it be accidentally released or intentionally released to control, mitigate, regulate, or otherwise respond to excess water, or
-water that cannot drain or run off as a result of water that is overflowing or escaping from an inland watercourse or water pool preventing the escape of water.”

The ACCC initially endorsed the Insurance Council’s proposed common definition – subject to a number of conditions being imposed: conditions to provide greater certainty for assisting consumers to understand the meaning of flood insurance as well as to improve the consistency of contractual terms dealing with flood insurance.

Following its draft determination, the ACCC then undertook further consultation with a number of industry/statutory bodies – the Insurance Council of Australia, ASIC, the National Insurance Brokers of Australia - and consumer representatives. On consideration of the submissions received, the ACCC concluded that some concerns could not be addressed by imposing conditions. The ACCC decided to withdraw its endorsement of the Insurance Council’s proposed common definition because of concerns related to:-

(a) “The terminology put forward by the ICA, in particular that the proposed common definition introduces new terminology, expands established concepts and seeks to diminish the doctrine of proximate cause”;

(b) “The ICA's proposed common definition, by potentially increasing consumer confusion, may inhibit the ability of consumers to make informed choices leading to an increased risk that consumers may obtain cover which is inappropriate for their needs.”

But, the impasse between the Insurance Council of Australia and the ACCC in failing to reach agreement for a common definition for “flood” suggests that there may be limitations in the effectiveness of the actual participatory process used.

Finding a common definition of “flood” for the Australian environment is no longer simply an insurance issue - but a public interest issue. As a result, finding a common definition of “flood” requires a process that maximizes public participation. All sectors having common interests in this public interest issue, or likely to be affected by a common definition, must be effectively involved in the participatory process. Having an independent dispute resolver to convene the participatory process is essential for reaching mutual agreement.

Three separate sectors (or “alliances”) have been identified that are central for resolving any public interest issue conflict, such as finding a common definition for “flood”:(i) Sectors with an economic interest e.g. local government authorities; the Insurance Council of Australia (ii) Sectors with a special interest but with no immediate financial stake e.g. consumer groups; scientific professionals (hydrologists, climatologists, fresh water ecologists) and (iii) Community sectors that have to live with the outcome or decision. The participatory process should ensure that there is a balanced representation between competing interests in these three sectors.

Understanding the needs for resolving public interest issues is best illustrated by the comments made by a former Governor-General of Australia, Bill Hayden, when opening a National Conference on Public Issue Dispute Resolution: resolving controversial public interest issues, where parties hold competing interests, requires a participatory process that may satisfy the principles of the democratic ideal; the solution should be one that enables all parties to emerge with some sense of gain and certainly with the knowledge that their views have properly been taken into account by the ultimate decision-maker; decision-making responsibilities are to the general public interest and not merely to a sectional group.

Shared responsibility and joint action between the various sectors is very much a part of the global trend in contemporary participatory processes for resolving public interest issues. These procedural features help resolve information conflicts, a major cause of public interest problems.

For example, in the case of finding a common definition of “flood” in the context of the Australian environment, information conflicts are created by different opinions as to what information is relevant for the meaning given to “flood”.

In addition, the community needs to understand the meaning and application of the term “flood”, as defined in their policy, to avoid information conflicts associated with different interpretations of the common definition.

In order to find a common definition for the term “flood” - and to offset possible misfortune for consumers - the Insurance Council of Australia should now consider adopting a process that is based on accepted principles for effective public participation and conflict resolution; and is one that promotes public trust and confidence. This would lead to a sense of ownership in the common definition for the term “flood” arrived at and so facilitate its implementation by all sectors.

The position of the ACCC is very clear. Its earlier decision does not prevent the insurance industry from seeking their endorsement of a revised proposal for a common definition for “flood” in the future. The ACCC provided objective encouragement for the general insurance industry to do so.

The Insurance Council has stated (5 November 2010) that “Unfortunately…ACCC did not authorise insurance companies to adopt a common definition …Flood cover has now been developed by several insurers and there is no longer an opportunity for further attempts to implement a common definition as existing products would then need to be recalibrated and recast”. However, the severity and extent of floods throughout eastern Australia in 2011 warrants a new direction and vision by the Insurance Council to build on its past foundation and to take the leadership role for developing a common definition for “flood”.

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About the Author

Dr Ted Christie is an environmental lawyer, mediator and ecologist specializing in resolving environmental conflicts by negotiation and is the author of the cross-disciplinary (law/science/ADR) book, Finding Solutions for Environmental Conflicts: Power and Negotiation (Edward Elgar Cheltenham, UK). Ted Christie was awarded a Centenary Medal for services to the community related to education and the law. He was the Principal Adviser to Tony Fitzgerald QC in the “Fraser Island Commission of Inquiry” and a Commissioner in the “Shoalwater Bay Commission of Inquiry”.

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