Flood Definition Finally Approved

Source: LMI Media

Just over a week ago, I challenged the Federal Government on the time it was taking to sign off on a common flood definition. See http://www.allanmanning.com/?p=1333.

It is in all likelihood this is just a coincidence, but it is nonetheless pleasing to see that the definition was finally signed off by Mr Shorten and his department yesterday.

A standard definition was first put up to the Australian Consumer and Competition Commission (“ACCC”) by Allens Arthur Robinson (“AAR”) back in March 2008. A copy of the original submission by AAR can be found below:

AAR submission for the ICA on Standard Definition for FloodAAR submission for the ICA.

While I was, like most people, in strong support of a common definition for flood, I, in good conscience, could not support this version of a flood definition when I was approached by one of the then NIBA Board Members for comment. My concern was that the overflowing of roadside curb and channelling was to be treated as flood. For long before I joined the insurance industry, this was regarded as the insurable peril of rainwater or bursting ,leaking and overflowing of water pipes, water apparatus etc.

I therefore immediately contacted the ACCC and asked if I could submit a letter outlining my concern despite the deadline being passed and I was kindly given approval to do so.

A copy of my letter and the attachments that I used in support of my position can be found below:

Manning Submission on Flood Definition; Appendix B; Appendix C; Appendix D; and Appendix E.

I would make two quick comments before moving on. 1. I have not attached my CV, which was Appendix A as this can be found under ‘About Me’. 2. When preparing the attachments, the true power of LMI PolicyComparison was brought home to me.

The ACCC agreed with my position and did not allow that particular definition. I believe that others also supported a “no” vote, including NIBA.

Following the 2011 floods around Australia, I did a great deal of soul searching as to whether or not I had done the correct thing by the insuring public and by my industry, but, in the end, I am sure it was the right thing to do. Therefore, I bit my tongue when I heard the ICA use, as an excuse, the fact that the ACCC had not granted a common definition in defence of the confusion following the Brisbane floods.

Following the floods, Mr Shorten pushed for a common definition and I again wrote this time to his department pointing out some flaws in the first definition put up.

The new definition reads:

The covering of normally dry land by water that has escaped or been released from lakes, rivers, creeks, reservoirs, canals, dams or other natural watercourses, whether or not they have been altered or modified.

This is in line with a definition first put forward by Mr John Lamble, the then general manager of NRMA General Insurance following localised flooding in Sydney in the 1970s following an enormous rain storm in Sydney
where the water blew out drain covers and/or overflowed drains around the suburbs and policyholders had that water plus rainwater running along the ground entering their homes. NRMA, like many insurers at that time, did not cover flood as standard and when Mr Lamble made the public announcement for NRMA that this was not flood, the industry followed suit and those claims were paid by all insurers. This approach has been adopted by most insurers ever since and is regarded by most as being fair and reasonable.

The phrase “escaping or released from” can cause confusion to some people. I considered this issue very carefully following specific requests to do so and in the course of our handing claims. LMI Group’s claims and policy drafting teams are in agreement that for something to escape, which in this case is the water, has to actually have been “in”, such as the river or dam etc. before it can be said to have “escaped from” that place.

An example occurred in Katherine in 1998. The waste water outflows from the town were positioned above the normal running height of the river. When the river level rose, it meant that treated sewerage overflow backed up through the entire system ,causing water to flow back up the pipe network into the drains located in shower trays in homes, motels and the like. It was determined that this all occurred before the Katherine River broke its banks. As such, the flood exclusion did not apply as the water had not ‘escaped’ from a natural watercourse and the damage as described was paid. There are many cases where the courts took this position and I am happy to provide them if anyone requires details.

Some insurers with a low risk appetite subsequently altered their definition to exclude losses from this cause but this definition puts the cover back in.

Where the water comes out of a man-made barrel drain taking water away from what was formerly a creek, that water is considered to be flood water. What I mean here is that in many places, a natural water course, a stream or creek, has been replaced by a large covered drain or pipe. Often a street or road is built over this drain. The street name may provide a clue to the existence of such a covered barrel drain. Creek Street in Brisbane or The Tank Stream are examples.

If water escapes from such a drain this is deemed to be “water escaping from” a modified water course and therefore would not be covered unless ‘flood’ is an insured peril.

Over the years since 1970, insurers have employed hydrologists to determine where water has come from. As a rule of thumb, under most policies, if the water that damaged insured property is on its way to a river, then it is rainwater running along the ground and not flood. In line with the principle of proximate cause, insurers have, in the main, accepted that damage first caused by such water is insured as rainwater damage and if the property is later inundated by water overflowing from a river, they would only exclude the additional damage.

Following the decision of Consolidated Wood Products Pty Ltd v Provincial Insurance Australia Ltd (1990)[1], it is now generally accepted that the word ‘canal’ includes a storm water channel.

Turning now to the words: “released from”. This includes situations as in Brisbane when the government authorities released water at the same time as the rain was falling which only compounded the situation.

It is now pleasing that the definition is in place. I am nonetheless disappointed that the Federal Government had to force the issue and that the insurance industry did not continue to demonstrate their long-standing social responsibility and offer up a fair and reasonable definition long before the Brisbane and other floods of 2011 and which was accepted 40 years ago!

The thing to keep in mind is that the ICA have now publically applauded the definition. See http://www.theaustralian.com.au/business/financial-services/industry-welcomes-flood-definition/story-fn91wd6x-1226399249922.

The Industry’s reputation/brand would now be much better than it curently is compounded by the distortion of the facts in respect of the ACCC’s real reason for knocking back a standard definition in 2008.

Consolidated Wood Products Pty. Ltd.
v Provincial Insurance Australia Ltd.
(1990) 6 ANZ Ins Cas 61-035.

One response to “Flood Definition Finally Approved”

  1. Nathan Rayner says:

    Interesting article Alan, but don”t beat yourself up about the delay within in the industry in building agreement for common definition. Better to get it right than half done in a hurry.

    Besides, while a common definition is good there is a big difference this and flood cover for all Australians. Insurers can still EXCLUDE flood and insureds still will not review what cover they”re buying and accept responsibility.

Leave a Reply