Finding a common definition of “flood” for insurance policies

“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)

“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:-

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”.