In our 28 November 2011 Insurance eBulletin, "Flood cover amendments introduced into Federal Parliament", we reviewed the Insurance Contracts Amendment Bill 2011 (Cth) which has since become law.
Among other things, the Bill set up a legislative framework for a standard definition of "flood" in policies covering home building and contents, small business and strata titles. Regulations prescribing that standard definition were released last week.1
These new regulations do not require insurers to provide cover for flood, however if insurers choose to either include or exclude flood cover in such policies, the term will have a standard meaning, regardless of the form of words used in the policy..
The new standard definition of 'flood'
New Regulation 29D provides that the term 'flood' in prescribed contracts of insurance means:
the covering of normally dry land by water that has escaped or been released from the normal confines of any of the following:
a) a lake (whether or not it has been altered or modified);
b) a river (whether or not it has been altered or modified);
c) a creek (whether or not it has been altered or modified);
d) another natural watercourse (whether or not it has been altered or modified);
e) a reservoir;
f) a canal;
g) a dam.
Insurers may still provide wider flood coverage if they choose.
Types of policies affected
The new standard definition applies to the following types of policies:
- home building & contents;
- destruction or damage to strata title residences;
- loss of equipment, stock, inventory or premises of a small business.
If however the policy was arranged by an insurance broker (not acting under a binder) in the course of providing financial advice, the standard definition is not automatically applicable (although can still be used). Presumably this is because the amendments are designed as a consumer protection measure and it is assumed that insurance brokers will consider the appropriateness of a non-standard definition of flood in a policy and advise their client accordingly.
Meaning of "small business"
If turnover for the last financial year is known, a business will be considered "small" if:
- turnover in the last financial year was less than $1m; and
- its employees worked no more than 190 hours each week.
If turnover for the previous financial year is not available, the business will be covered by the new regulations if its employees worked no more than 190 hours each week.
If an insurer proposes to use a non-standard definition of flood in a business policy, regulation 29D(2) requires it to take "reasonable steps" to determine whether the proposed insured is a "small business". If the business fits the definition, then the standard definition will apply. This reasonable steps requirement will not however apply to renewals, extensions, variations or reinstatements of previous business policies.
Insurers will necessarily have to rely on information provided by the insured business and so the duty of disclosure will no doubt apply.
Strata title policies
"Strata title residence" is defined in the new regulations as a residence to which the following criteria apply:
(a) the portion of land on which the residence is located exists as the result of the subdivision of the title to a larger portion of land into separate titles for use for residential purpose;
(b) property that is common between the residence and one or more other portions of land is managed by a single body corporate (however described);
An ‘owners corporation’.
(c) the title to the portion of land on which the residence is located is regulated under the law of the State or Territory in which the land is located as a ‘strata title’, a ‘community title’ or another description that refers to the title being created as described in paragraphs (a) and (b).
It seems this definition may apply to strata title properties with mixed residential/commercial use but will not apply if the property is used exclusively for commercial purposes.
When do the regulations take effect?
The new regulations are in effect now however will only apply the standard definition to prescribed policies entered into on or after 19 June 2014.
Insurers may however choose to include the new definition in policies before then and if so, may rely on the regulations.
What should insurers do?
Over the next two years, insurers should:
- review underwriting guidelines to take into account the new definition and whether it alters the coverage provided by affected policies;
- update applicable policy wordings and product disclosure statements;
- educate staff about the changes; and
- consider whether systems changes are required.
1 Insurance Contracts Amendment Regulation 2012 (No. 1)
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