With increased incidence and severity of flooding events in Australia insurers are becoming more selective about the terms that insurance cover for floods is provided under. In some areas flood insurance is either unavailable or premium prices are unaffordable. Here's a summary of the conditions property owners need to be aware of affecting insurance cover for floods.
What flood and water damage insurance cover is available?
For home and contents insurance for property owners floods are defined as the inundation of usually dry land by water breaking the confines of natural watercourses such as lakes and rivers, or manmade structures such as reservoirs, canals or dams. This does not include inundation by seawater, from sea level rises or storm surges.
This flooding definition may also apply to strata titles and the loss of the equipment, stock, inventory or the premises of a small business. Even if your policy excludes flood damage you may still be covered for storm or rainwater damage, or flooding caused by rain falling from the sky rather than overflow from watercourses.
While most insurers provide rainwater cover some won't if you have chosen not to take out flood insurance, so it's critical to check the terms of your property and contents insurance policy.
How flood and water damage options are available with property insurance
For home and contents insurance flood insurance may be offered as a standard inclusion, with the flexibility to opt out, an optional extra or simply not be available except as a non-standard inclusion.
In the case of business insurance flood cover is not standard and has to be selected as an optional cover.
If you opted out of flood cover, did not opt in for flood cover or your policy excludes flood risks, your insurer may still assess any claim you make to determine how your property was inundated. This may be required to establish whether other inclusions in your policy (cover for storm water run-off for example) could apply to all or part of your claim.
By law insurers must clearly inform you in writing whether the policy contract provides insurance cover in respect to loss or damage caused by or resulting from flooding.
How do insurers determine the flood risk to property?
In partnership with state and territory governments, the general insurance industry has developed and licensed the National Flood Information Database (NFID)1 for use by insurers in determining the flood risk to individual properties.
The database comprises 11.2 million property addresses correlated with government flood risk mapping. Insurers refer to this database to calculate premiums, along with other criteria including building type, location and claims history. Insurers may also refer to other information sources including local government flood mapping, historical flood information, terrain data and insurance claims information.
Their assessments are intended to deliver a profile of how often a property is expected to flood and how severe the flooding may be for consideration as an insurable risk.
Government response to the risk of flood damage underinsurance
To try and ensure the availability of flood insurance at affordable premiums the Federal Government committed $10 billion of the 2021 Budget to provide a flood and cyclone damage reinsurance pool, now called the Treasury Laws Amendment (Cyclone and Flood Damage Reinsurance Pool) Bill 2022.
Reinsurance refers to the underwriting of insurers by other financial organisations who 'buy their risk' and thus provide sufficient funds to allow for high value claims. The pool is intended to support cyclone and related flood damage and applies to residential, strata and small business property insurance policies "to ensure Australians in cyclone-prone areas have access to affordable insurance".
Backed by a $10 billion government guarantee and administered by the Australian Reinsurance Pool Corporation (ARPC)2 the pool has been operational since 1 July 2022. The cyclone pool operates Australia wide, but targets support to cyclone-prone areas, and provides reinsurance for insurers operating in those areas. The intention is to contain premium costs which have risen sharply in some areas due recent payouts for flood claims.
How Gallagher can help
Property and small business owners in proximity to water courses in flood prone areas may be able to access hazard data and analysis to assist with understanding risks and exposures better via Gallagher expertise and industry services.
Our Gallagher business property experts are aware of the complexity of the issues involved and will provide guidance to clients seeking support with flood risk exposures.
