Forget the insurers, let's blame the banks

The blame for many uninsured property and financial losses resulting from floods and from Cyclone Yasi can be sheeted home to banks, building societies, credit unions and other lenders.

Never mind the much-vilified insurance companies whose doubly-devastated policy-holders have found themselves not covered for flood or storm surge damage. While more than a few insurers may have failed to demonstrate any “utmost good faith” towards their policy-holders, the finger of blame in these tragic circumstances can also be pointed at a very culpable lending industry - without exception. By not making sure residential and business borrowers were fully and properly insured, banks and other lenders have failed miserably not only these customers but also themselves, and ultimately their own shareholders.

Why? Lenders always for good reason obliged their property borrowers to take out and maintain insurance, but have never - in my decades of experience in handling property buyers’ conveyancing - required borrowers to secure suitably protective flood and surge insurance. No lender, in my experience, ever asked a borrower for a flood search on a property being put up for security. (How many conveyancing solicitors raised flood and flood/surge insurance issues with buyer clients or undertook flood searches, is another question for another time).

Nevertheless, despite obtaining valuations which not unexpectedly should have indicated flood or surge risks, property lenders inexplicably never saw - until now - the advantage for customers, themselves and shareholders in specifically requiring at risk mortgaged properties to be insured against flood and surge damage.

Every property loan approval letter, in my experience, contains a condition similar to this from ING Bank:

“ING does not have to lend you any money until ING is satisfied that the mortgaged property is adequately insured with a reputable insurer, and that ING is noted on the policy as mortgagee”

Every lender wants to sight before settlement an official certificate of insurance over every to-be-mortgaged property, but no lender (in my experience) has ever asked for a copy of a borrower’s insurance policy to acertain what risks were actually covered - and what risks (more ominously) were not covered. Again I am not aware of any lender ever reading a policy, then pointing out to at risk borrowers that their insurance cover did not extend to flood or surge damage. To my knowledge, no lender ever even bothered, after considering its own valuation, to suggest to its borrowers that such extended cover might be a good idea.

The only legal restriction on lenders in this regard is in a Consumer Credit Code section which provides that lenders must not require borrowers to “take out insurance with a particular insurer (unless the insurer is the only insurer providing insurance of the relevant kind).”

Lenders have apparently universally assumed that security properties were “adequately insured” once one-page certificates of insurance had been supplied (after premiums were paid). As Australian Financial Counselling and Credit Reform CEO Fiona Guthrie noted recently in The Courier Mail, while loan customers have to have insurance, banks don’t “check the fine print”. “I bet they will now,” she added.

Meanwhile all lenders presently appear to be leaning over backwards for affected borrowers without flood or surge coverage. These unfortunate folk must now repair damaged properties while trying not to default under their loan agreements. For instance the Commonwealth Bank has set aside, and advertised, a $50 million “compassionate fund” to help customers who took out the bank’s own CommInsure policies which did not regrettably cover “riverine” flooding.

On the other hand Westpac Bank publicly assured customers with Westpac Home and Contents Insurance Cover that its policy covered “all floods, across all levels of cover”.

Similarly Bank of Queensland has run full page newspaper advertisements with this assurance: “If you have Vero Home and Contents insurance through BOQ, your policy includes automatic cover for flood damage.”

Last month it was reported across the nation how Westpac human resources chief Peter Hanlon had told the current Senate inquiry into bank competition that his bank was considering making flood insurance compulsory for home-loan customers. “It’s not the practice in Australia at the moment”, he said, “but it is something we are looking at”.

Every lender should immediately make flood and surge insurance compulsory for all borrowers - including business and commercial customers. No matter if the mortgaged property is on a hill, or that leased business premises may be “high and dry” - as many real estate agents now advertise properties for sale in certain suburbs. Such lender-required (and risk-spreading) insurance cover would need to extend very clearly - with fair and plain-language wording - to storms, flash-flooding, riverine flooding and ocean surges. If annual premiums for properties more at risk prove to be higher than for those less at risk, lenders may need to provide credit for this to their customers - as happens now with mortgage insurance premiums.

Insurers who are not prepared to offer the sort of comprehensive, no-nonsense and unambiguous cover required by lenders (and which is somewhat belatedly being pressed for by governments, the media, consumer bodies and flood and surge victims themselves) may find themselves writing fewer policies. Hopefully insurers, who do not presently include standard flood and surge cover in their policies, will see the merits of doing this.

One recent post-flood and post-cyclone newspaper editorial described the “agonies of uncertainty” resulting from insurance policy legalese and claims procedures while concluding that “insurers have a moral duty to end the agony”. This same sentiment could well apply in the same context to banks and other lenders.