Key points
- The Insurance Contracts Amendment Bill 2011 (Cth) has been introduced into Federal Parliament.
- The Bill sets up a legislative framework for a standard definition of "flood" in policies covering home building and contents, small business and strata titles and for Key Facts Sheets to be provided to insureds.
- Regulations will prescribe the actual definition of "flood" and the form and content of Key Facts Sheets.
- The Bill creates an offence of failure to comply with the proposed regulations concerning Key Facts Sheets.
- The Bill does not contain any of the much anticipated reforms to the Insurance Contracts Act 1984 (Cth) recommended by the Cameron/Milne reports.
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Overview of the Bill
The Insurance Contracts Amendment Bill 2011 (Bill) was introduced into the House of Representatives on 23 November 2011 and is at Second Reading stage. It seeks to amend the Insurance Contracts Act 1984 (Cth) (Act) to allow for regulations to be made which:
a) prescribe a standard definition of "flood" and
b) require Key Facts Sheets (KFS) to be given to insureds
in respect of prescribed contracts of insurance.
The Bill also makes some minor amendments to the headings of Divisions in Part IV of the Act and inserts definitions into
s.11(1) to facilitate the amendments.
Policies affected
While the proposed regulations will prescribe which policy types will be caught by the amendments, the Explanatory Memorandum (EM) indicates that they will apply to Home Building and Home Contents policies and those covering small businesses and strata titles.
Once the regulations are made, they will only apply to policies entered into after they commence, which, according to the EM, is intended to be two years after they are made. They will also not apply to events which occurred prior to commencement of the regulations.
Standard definition of flood
The Bill provides that the standard definition of flood will prevail over any other definition in the policy and an insurer will not be able to rely on any narrower definition in order to reject an insured's claim.
If however the insurer chooses to include a wider definition of flood, the policy will still provide cover for those events not included in the standard definition.
While the actual wording of the definition is intended to be the subject of further consultation, the EM indicates the Government's favoured definition is:
The covering of normally dry land by water that has escaped or been released from the normal confines of:
- any lake, or any river, creek or other natural watercourse, whether or not altered or modified; or
- any reservoir, canal, or dam
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Differing limits on flood cover
The Bill provides that if a policy provides different limits of cover for different flood events, e.g. $100,000 for damage as a result of water escaping from a river, but only $50,000 for water which escapes from a canal, the insured will be entitled to the higher of the limits, even if the damage was caused by the event subject to a lower limit.
Duty to clearly inform
Before entering a prescribed policy, an insurer must "clearly inform" an insured in writing whether it provides cover for flood.
Key Facts Sheets
The Bill provides for regulations requiring an insurer to provide an insured or proposed insured with a KFS in relation to coverage under a prescribed policy. The content of and manner of provision of these statements will be contained in the regulations although the Bill foreshadows that they might be provided electronically.
According to the EM, these statements are intended to set out what is and what is not covered in an easy to read and consumer friendly layout and will not replace Product Disclosure Statements nor discharge the obligations of insurers under other provisions of the Act to clearly inform an insured of certain things e.g. derogation from standard cover.
If an insurer breaches the proposed regulations by not providing or failing to provide a correct KFS, they will be taken to have committed an offence.
Comment
It is a little curious that the Government has chosen to introduce this 'halfway house' Bill in circumstances where the key content of its reform proposals is to be the subject of further consultation and then regulations.
Whatever is ultimately decided in terms of substantive reforms, the insurance industry should have a two year period from the date of the regulations to implement them.
Meanwhile the proposals to reform the Act in the wake of the reports by Alan Cameron and Nancy Milne and the Options Paper on unfair terms in insurance contracts remain on the shelf.
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Further information
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