BILLS DIGEST NO. 87, 2011–12, 22 December 2011

Insurance Contracts Amendment Bill 2011

Paula Pyburne
Law and Bills Digest Section

Date introduced:  23 November 2011

House:  House of Representatives

Portfolio:  Treasury

Commencement:  On the day of Royal Assent[1]

Links: The links to the Bill, its Explanatory Memorandum and second reading speech can be found on the Bill's home page, or through http://www.aph.gov.au/bills/. When Bills have been passed and have received Royal Assent, they become Acts, which can be found at the ComLaw website at http://www.comlaw.gov.au/.

Purpose

The purpose of the Insurance Contracts Amendment Bill 2011 (the Bill) is to amend the Insurance Contracts Act 1984 (Insurance Contracts Act) to provide a framework for the making of regulations for a standard definition of ‘flood’ in respect of home building and home contents insurance contracts, and contracts held by small businesses and strata title holders.

In addition, the Bill will require the provision of a Key Facts Sheet with Home Building and Home Contents policies (but not similar policies held by small businesses and strata titles) which will outline key information about the policy in a concise form.

Background

Summer of natural disasters

As a result of a La Niña weather event, Queensland experienced higher than average rainfall during early December 2010, in addition to uncharacteristically persistent monsoonal rainfall from the end of 2010 to the beginning of 2011.[2]  The impact of this weather pattern was widespread.[3]  For example, on 12 January 2011 the Bremer River at Ipswich experienced a major flood peak.  Around 7221 buildings were flood-affected, including 3000 homes.[4]  On the following day, the Brisbane River experienced a major flood peak during which 14 100 Brisbane properties were affected, with 1203 houses suffering inundation.[5]

Just weeks later, category 5 Cyclone Yasi—one of the most powerful cyclones to have affected Queensland since records commenced—crossed the southern tropical coast near Mission Beach early on 3 February 2011, causing widespread damage.[6]

In Victoria, between September 2010 and February 2011, many towns and communities were also affected by floods that caused widespread damage and loss.[7]

In the wake of these weather disasters a number of formal government inquiries were established, to measure the scale of the social and economic costs, and to determine what steps, if any, could be taken to prevent this level of damage in the future. For example:

•       in Queensland—the Queensland Floods Commission of Inquiry was asked to report on, amongst other things, the performance of private insurers in meeting their claims responsibilities[8]

•       in Victoria—the Victorian Floods Review was asked to report on the adequacy of flood warnings and response[9] and

•       at the Commonwealth level—the Natural Disaster Insurance Review was tasked with considering the arrangements for the insurance of the assets of Australian individuals, small businesses and governments for damage and loss associated with flood and other natural disasters.[10]

Problems with insurance

Use of the term ‘flooding’

What became clear, particularly in the wake of the floods in Brisbane and Ipswich, was that many home building and home contents insurance policies covered ‘flash floods’, but not floods resulting from rising rivers.[11]  Currently, the types of insurance coverage for ‘flooding’ can be divided into three broad categories:

•       flash flooding/stormwater/rainwater runoff caused by high intensity, but short duration storms producing localised flooding—the majority of insurance policies cover this type of inundation risk

•       riverine/inland flooding/flooding caused by river, creek or artificial catchments like dams overflowing their banks due to long duration rainfall—many insurance policies do not cover this type of flooding, and

•       actions of sea/sea level rise/storm surge generally being inundation caused by the movement of sea water and can include king or high tides—there is very little cover available for this risk.[12]

This led to calls for a common definition of ‘flood’, with universal terms agreed upon and adhered to by all providers.[13]

Previous moves towards standard definitions

This is not the first time that the matter of standard definitions in insurance contracts has been aired.  The Insurance Council of Australia (Insurance Council) sought authorisation by the Australian Competition and Consumer Commission (ACCC) for an agreement between its members (both present and future) to voluntarily adopt a common definition of ‘inland flood’ in March 2008.[14]

However, on 3 September 2008, the ACCC refused the application on the grounds that the proposed definition would increase consumer confusion about the meaning and nature of flood cover, rather than improving consumer understanding. The ACCC was particularly concerned that the proposed definition introduced a range of new concepts, the legal implications of which were not clearly understood.[15]

At a Senate Estimates hearing in February 2011, the then Chairman of the ACCC, Graeme Samuel, warned that the proposal by the Federal Government and insurers to introduce standard definitions in insurance contracts could be anti-competitive.  He told the Parliamentary committee that standard definitions in insurance contracts for floods, storms and other accidents had the potential to lead to less cover for consumers.[16]

Insurance contracts and ‘unfairness’

Reports of insurers refusing to pay out on home building and home contracts in the aftermath of the widespread flood events prompted renewed calls for insurance contracts to be brought under the umbrella of the unfair contract provisions of the Competition and Consumer Act 2010 (formerly the Trade Practices Act 1974) on the grounds that:

… insurance companies are basically a law unto themselves when it comes to paying out on contracts.  Worse, they may even be quick to rely on confusing definitions and unfair contract terms to refuse to pay out.[17]

The Senate Economics and Legislation Committee (the Senate Committee) inquiry into the Trade Practices Amendment (Australian Consumer Law) Bill 2009, carefully considered the question of whether insurance contracts should be excluded from the unfair contract regime.[18]  The Senate Committee’s report states:

Section 15 of the Insurance Contracts Act 1984 provides that a contract of insurance is not capable of being made the subject of ‘relief’ under any Commonwealth or State Act. ‘Relief’, in this instance, is in the form of the judicial review of a contract on the ground that it is harsh, oppressive, unconscionable unjust, unfair or inequitable or relief for insureds from the consequences in law of making a misrepresentation.

The effect of this section means that the unfair contract provisions of either the ACL or the ASIC Act do not apply to contracts of insurance covered by the Insurance Contracts Act 1984. The exemption is not achieved through a provision of the bill.[19]

The Senate Committee recommended that ‘the government address insurance contract legislation to ensure that the Insurance Contracts Act provides a level of protection for consumer’s equivalent to that provided by the Trade Practices Amendment (Australian Consumer Law) Bill 2009.’[20]

That had not occurred at the time of the Queensland and Victorian flood events of late 2010 and early 2011.  However, on 12 December 2011, the Treasury issued a consultation paper, and sought public comment by 17 February 2012, in relation to unfair terms in insurance contracts.[21]

Lack of flood insurance for apartment owners

In addition to the difficulties with flood insurance experienced by home owners, it was reported that apartment owners in flooded buildings across Queensland would have to pay for structural damage and damage to common property because ‘while some insurers offer flood cover standard with house insurance policies, apartment owner corporations around the country are refused cover when they are in flood areas’.[22]

These sentiments were echoed in a paper prepared by Chris Connolly for the National Disaster Insurance Review, which noted that ‘strata properties are a large and growing segment of the homes in high flood risk areas,’ and that ‘consumers living in strata properties often have very little knowledge or control over the selection of insurance for the property’.[23]

Lack of flood insurance for small business

Businesses buy insurance to cover their public and product liability to others, damage to their property, including stock and motor vehicles, and interruption or disruption to their business caused by a range of events. The Natural Disaster Insurance Review panel stated that:

In the current market, there is limited availability of flood insurance for small businesses, for many of the same reasons that apply for homeowners; that is, the difficulty in adequately assessing and pricing the risk of flood. In addition, the fragmented nature of the small business insurance market results in a diseconomy of scale. When a low level of demand is combined with the high cost of developing a flood insurance offering, there is very little incentive for an insurer to offer flood insurance.[24]

The Natural Disaster Insurance Review panel added that it was ‘only aware of one insurer in the current market who offers flood cover as standard on small business policies’.[25]

Basis of policy commitment

The recent natural disasters highlighted not only the different approaches taken by insurance companies on coverage for water damage, including flood, but also issues with consumer understanding of insurance policies.  To address these issues, the Government proposed:

•       a standard definition of flood, for use in insurance policies, and

•       a short, simple, key facts summary for insurance policies to be made available to consumers.

On 5 April 2011, the Treasury released a consultation paper entitled, Reforming Flood Insurance: Clearing the Waters, seeking submissions on these proposed measures.[26]  Thirteen submissions were received.[27]

According to the Assistant Treasurer, Bill Shorten MP, ‘industry and consumer groups have indicated broad support for these measures’ and they would be implemented by this Bill.[28] The Government proposes to release draft regulations about the wording of the standard definition of ‘flood’ for consultation by the end of the year.[29]

Committee consideration

On 25 November 2011 the Senate Selection of Bills Committee resolved that the Bill not be referred to a Committee of the Senate for inquiry and report.[30]

On 2 June 2011, the House of Representatives Standing Committee on Social Policy and Legal Affairs (Social Policy and Legal Affairs Committee) commenced a formal inquiry into the operation of the insurance industry with specific reference to extreme weather and disaster events.[31]  There is no set date by which the Social Policy and Legal Affairs Committee is required to publish its report.

Position of major interest groups

The Insurance Council, which is the representative body of the general insurance industry in Australia, has stated that ‘the 2011 proposed standard definition for flood is generally supported by the majority of Insurance Council members as an acceptable compromise for what is a complicated risk to determine.’[32]  It has also noted that ‘any final definition arrived at by the Government as a result of this consultation process will need to pass the simple tests of commercial reason, underwriting practicality, clarity and common sense’.[33]

Financial implications

According to the Explanatory Memorandum, ‘the Bill has no financial impact on Commonwealth expenditure or revenue’.[34]

Main issues

Mandatory definition not mandatory coverage

It is important to note that standard cover is prescribed under the Insurance Contracts Act for homeowners’ buildings insurance[35] and home contents insurance.[36] The matters prescribed are the risks, the exclusions and the amount payable.

Among other things, the prescribed risks (events) include the destruction of, or damage occurring to, a home building on a site[37], or the contents of a residential building[38], being destruction or damage that is caused by, or results from storm, tempest, flood, the action of the sea, high water, tsunami, erosion or land slide or subsidence.

However, an insurer may offer less than the minimum prescribed risk if it informs the insured in writing of the proposed terms before or at the time the contract is first entered into, or first renewed, extended or reinstated, whichever is the sooner.[39]

This Bill will ensure that where an insurer offers coverage under a prescribed contract for ‘flood’ the word ‘flood’ must comply with the standard definition (when it is incorporated into the Insurance Contract Regulations 1985 (Insurance Contract Regulations).  According to the Explanatory Memorandum, homeowners’ buildings insurance and home contents insurance contracts, as well as insurance contracts for strata titled properties and for small business will be prescribed by the regulations.[40]

Most importantly though, the Bill will not make it mandatory for an insurer to provide coverage for ‘flood’ in respect of any of those policies.

Key facts sheet

The proposal to require a key facts sheet responds to the comments of consumer representative groups to the Treasury consultation.  The joint submission by the Brotherhood of St Laurence, Choice, Consumer Action Law Centre, Financial Counselling Australia, Footscray Community Legal Centre, Insurance Law Service at Consumer Credit Legal Centre NSW and National Legal Aid points out that that many consumers were unaware that they only had limited cover for flood, and that:

The only time they became aware of their level of cover for flood was when they came to make a claim and their insurer advised them that the limitation was in their Product Disclosure Statement (PDS)

To understand their level of cover involved reading various technical definitions within the PDS and then piecing together the legal implications of the limits of cover.[41]

The proposed key facts sheet would be in addition to the Product Disclosure Statement which is already required by the Corporations Act 2001.

Wayne Tank principle

A number of submitters to Treasury[42] strongly recommended that an attempt should be made to provide an explanation to policy holders of the effect of the case of Wayne Tank and Pump Co Limited v Employers Liability Insurance Corporation Limited (Wayne Tank).[43]  Under the Wayne Tank principle:

where there are two or more concurrent causes of the loss, only one of which is within the ambit of coverage of the Policy but the other is not expressly excluded from it, the Policy responds to the entire loss.  If however, one of the concurrent causes is the subject of an express exclusion, the entire loss is excluded even if that other cause was within the scope of cover.[44]

The Wayne Tank principle has been endorsed by other Australian courts.[45]  The effect of the Wayne Tank principle has been described as ‘a pregnant trap for consumers who, even where they have relevant flood coverage, may still not be indemnified for their loss’ in the event of flood.[46]  It has been suggested that:

This aspect of flood insurance is not an issue that will be addressed by the endorsement of a standard definition of ‘flood’, though it is an issue that may come into the sights of those wanting greater transparency for the provision of flood insurance in the future.[47]

Delayed commencement

Although the Insurance Contracts Amendment Act 2011 (when enacted) is to commence on the day of Royal Assent, the regulations to which it relates will commence two years after the day the regulations are made in respect of each of the measures.  This responds to the concerns of insurers that they will need ‘a two year transition period if changes are required to be made to Product Disclosure Statements (PDSs)—due to renewal processes and the length of time it takes to rewrite and reprint PDSs’.[48]

Key provisions

Schedule 1 to the Bill relates to the definition of ‘flood’.  Item 1 of Schedule 1 inserts proposed Division 1A into Part V of the Insurance Contracts Act.  Within Division 1A, proposed sections 37A‑37E set out the requirements that regulations define the term ‘flood’ for certain prescribed contracts.  The provisions operate as follows:

•       the new Division 1A relates to ‘prescribed contracts’—the Explanatory Memorandum indicates that, for the purposes of Division 1A, homeowners’ building insurance and home contents insurance contracts, as well as insurance contracts for strata titled properties and for small business will be prescribed, but the Bill itself does not specifically name these products

•       regulations must define the meaning of ‘flood’ for the purposes of the Division: proposed subsection 37B(1)

•       where the term ‘flood’ is used in a prescribed contract it will have the same meaning as the meaning which has been specified in the regulations—even if the term ‘flood’ is given a different meaning in the contract: proposed subsection 37B(3)

•       if an insurer is offering a person insurance coverage under a prescribed contract, the insurer must notify the person in writing if the prescribed contract does not cover loss or damage caused by, or resulting from flood: proposed section 37C, and

•       where a ‘maximum flood cover amount’ has been prescribed by regulation, a prescribed contract which includes flood cover is taken to provide the highest maximum amount of insurance cover in respect of loss or damage arising from flood: proposed subsection 37D(4).

Schedule 2 to the Bill inserts new Division 4 into Part IV of the Insurance Contracts Act.

Proposed section 33C contains the obligation upon an insurer to provide a Key Facts Sheet in respect of a ‘prescribed contract’.  According to the Explanatory Memorandum a ‘prescribed contract’ for the purposes of new Division 4 will be home building insurance contracts and home content insurance contracts, but the Bill itself does not specifically name these products.[49]

The Key Facts Sheet must comply with any requirements in relation to its form and/or content which are, in turn, to be prescribed by regulations: proposed section 33B.  An insurer commits an offence if the insurer engages in conduct which contravenes the requirement to provide a Key Facts Sheet.  The penalty for failure to comply with the requirement is a maximum amount of $16 500 (150 penalty units).

Proposed section 33D operates to ensure that the provision by an insurer of the Key Facts Sheet is does not supplant the obligation to provide a person with the Product Disclosure Statement required by the Corporations Act 2001.

Concluding comments

The detail about what classes of contracts will be ‘prescribed contracts’ in which there is to be a standard definition of ‘flood’ will not be known until the relevant regulations are made.

Similarly, the detail about what classes of contracts which will be the ‘prescribed contracts’ which will require a Key Facts Sheet (in addition to a Product Disclosure Statement) will not be known until the relevant regulations are made.  It is to be hoped that the Key Facts Sheet will contain, amongst other things, a plain English explanation of the effect of the Wayne Tank principle on the insurance contract which has been entered into.

Members, Senators and Parliamentary staff can obtain further information from the Parliamentary Library on (02) 6277 2434.

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ISSN 1328-8091

[1].               However it should be noted that the regulations to which this Bill refers will commence two years after the day the regulations are made in respect of each of the measures.

[2].               Queensland Floods Commission of Inquiry, Interim report, Brisbane, August 2011, p. 24, viewed 1 December 2011, http://www.floodcommission.qld.gov.au/publications/interim-report

[3].               Ibid., Chapter 1—Summary of weather and flood events.

[4].               Ibid., p. 27.

[5].               Ibid.

[6].               Bureau of Meteorology website: http://www.bom.gov.au/cyclone/history/yasi.shtml

[7].               Details of the floods are contained on the Victorian Floods Review website: http://www.floodsreview.vic.gov.au/

[8].               Queensland Floods Commission of Inquiry, Terms of reference, Queensland Government Gazette, vol. 356, no. 12, 17 January 2011, viewed 2 December 2011, http://www.floodcommission.qld.gov.au/__data/assets/pdf_file/0003/8778/QFCI-Interim-Report-Appendix-1-Terms-of-Reference.pdf

[9].               Victoria Floods Review, Terms of reference, 10 June 2011, viewed 2 December 2011, http://www.floodsreview.vic.gov.au/about-the-review/terms-of-reference.html

[10].               Natural Disaster Insurance Review, Terms of reference, 2010, viewed 2 December 2011, http://www.ndir.gov.au/content/Content.aspx?doc=home.htm

[11].               C Zinn, ‘Flood insurance as clear as mud’, Herald Sun, 28 January 2011, p. 27, viewed 24 November 2011, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22media%2Fpressclp%2F514292%22

[12].               Insurance Council of Australia and Choice, ‘Insurance cover for floods’, Herald Sun, 18 January 2011, p. 4, viewed 3 November 2011, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22media%2Fpressclp%2F492984%22

[13].               C Zinn, ‘Flood insurance as clear as mud’, op. cit.

[14].               Application for authorisation, 20 March 2008, viewed 2 December 2011, http://www.accc.gov.au/content/trimFile.phtml?trimFileTitle=D08+23939.pdf&trimFileFromVersionId=842063&trimFileName=D08+23939.pdf

[15].               Australian Competition and Consumer Commission, ‘Insurance Council of Australia Limited—Authorisation A91086’, 20 March 2008, viewed 2 December 2011, http://www.accc.gov.au/content/index.phtml/itemId/814227/fromItemId/401858

[16].               Economics Legislation Committee, Additional Estimates, Senate Hansard, 24 February 2011, pp. E88–E89, viewed 2 December 2011, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22committees%2Festimate%2F13580%2F0001%22

[17].               F Zumbo, ‘It’s time to curb unfair insurance contracts’, Canberra Times, 23 February 2011, p. 19, viewed 2 December 2011, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22media%2Fpressclp%2F573466%22

[18].               Economics Legislation Committee, Trade Practices Amendment (Australian Consumer Law) Bill 2009, [Provisions], September 2009, Chapter 8, viewed 2 December 2011, http://www.aph.gov.au/Senate/committee/economics_ctte/tpa_consumer_law_09/report/report.pdf

[19].               Ibid., p. 47.

[20].               Ibid., p. 68.

[21].               Details of the consultation paper can be viewed at: http://www.treasury.gov.au/contentitem.asp?NavId=037&ContentID=2256

[22].               B Hurley, ‘No flood insurance joy for unit owners’, Australian Financial Review, 22 January 2011, p. 19, viewed 2 December 2011, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22media%2Fpressclp%2F500755%22

[23].               C Connolly in consultation with consumer representatives, A consumer perspective on the NDIR issues paper, NDIR, September 2011, p. 8, viewed 5 December 2011, http://www.ndir.gov.au/content/commissionedpapers/2011/consumer_perspective_sept_11.pdf

[24].               Natural Disaster Insurance Review, Inquiry into flood insurance and related matters, Issues paper, June 2011, p. 31, viewed 5 December 2011, http://www.ndir.gov.au/content/issuespapers/NDIRIssuesPaper.pdf

[25].               Ibid.

[26].               Australian Government, Reforming flood insurance: clearing the waters, consultation paper, Commonwealth of Australia, Canberra, April 2011, viewed 2 December 2011, http://www.treasury.gov.au/documents/1995/PDF/clearing_the_waters_april2011.pdf

[27].               The text of each of the submissions can be viewed at: http://www.treasury.gov.au/contentitem.asp?ContentID=2039&NavID=037

[28].               B Shorten (Assistant Treasurer and Minister for Financial Services and Superannuation), ‘Second reading speech: Insurance Contracts Amendment Bill 2011’, House of Representatives, Debates, 23 November 2011, p. 23, viewed 2 December 2011, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22chamber%2Fhansardr%2F14965034-cdb8-4a26-98aa-26c862a1cd0e%2F0071%22

[29].               B Shorten (Assistant Treasurer) and R McClelland (Attorney-General), Fixing flood insurance, joint media release, no. 152, 14 November 2011, viewed 5 December 2011, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22media%2Fpressrel%2F1225676%22

[30].               Selection of Bills Committee, Report no. 17 of 2011, Senate, Canberra, 25 November 2011, viewed 2 December 2011, http://www.aph.gov.au/Senate/committee/selectionbills_ctte/reports/2011/rep1711.pdf

[31].               Details of the terms of reference, submissions and oral testimony given to the inquiry and the final report (when published) can be viewed at: http://www.aph.gov.au/house/committee/spla/insurance/index.htm

[32].               Insurance Council of Australia, Submission to Treasury, Reforming flood insurance: clearing the waters, 16 May 2011, p. 1, viewed 5 December 2011, http://www.treasury.gov.au/documents/2039/PDF/Insurance_Council_of_Australia.pdf

[33].               Ibid., p. 2.

[34].               Explanatory Memorandum, Insurance Contracts Amendment Bill 2011, p. 4.

[35].               Regulations 9–12, Insurance Contracts Regulations 1985.

[36].               Regulations 13–16, Insurance Contracts Regulations 1985.

[37].               Subregulation 10(a)(xi), Insurance Contracts Regulations 1985.

[38].               Subregulation 14(a)(xi), Insurance Contracts Regulations 1985.

[39].               Subsections 11(9)-(11) and subsection 35(2), Insurance Contracts Act 1984.

[40].               Explanatory Memorandum, p. 8.

[41].               Consumer representatives, Submission to Treasury, Reforming flood insurance: clearing the waters, discussion paper, 13 May 2011, p. 4, viewed 5 December 2011, http://www.treasury.gov.au/documents/2039/PDF/Consumer_Representatives.pdf

[42].               For example Clayton Utz, Submission to Treasury, Reforming flood insurance: clearing the waters, April 2011, p. 7, viewed 5 December 2011, http://www.treasury.gov.au/documents/2039/PDF/Clayton_Utz.pdf and National Insurance Brokers Association, Submission to Treasury, Reforming flood insurance: clearing the waters, 19 May 2011, viewed 5 December 2011, http://www.treasury.gov.au/documents/2039/PDF/NIBA.pdf

[43].               Wayne Tank and Pump Co Limited v Employers Liability Insurance Corporation Limited [1974] QB 57.

[44].               Clayton Utz, Submission to Treasury, Reforming flood insurance: clearing the waters, April 2011, p. 7, viewed 5 December 2011, http://www.treasury.gov.au/documents/2039/PDF/Clayton_Utz.pdf

[45].               Max Hams and Others v CGU Insurance Limited [2002] NSWSC 273, 12 April 2002, viewed 5 December 2011, http://www.austlii.edu.au/au/cases/nsw/NSWSC/2002/273.html

[46].               A Lu, J Johnson and C Harris, ‘Clearing the muddied waters of flood insurance’, Australian Insurance Law Bulletin, March 2011, pp. 50–55 at p. 53.

[47].               Ibid.

[48].               Suncorp Group, Submission to Treasury, Reforming flood insurance: clearing the waters, May 2011, p. 4, viewed 6 December 2011, http://www.treasury.gov.au/documents/2039/PDF/Suncorp.pdf and Insurance Council of Australia, op. cit., p. 3.

[49].               Explanatory Memorandum, paragraph 2.13, p. 15.