Reviewing policy coverage in the wake of the catastrophic Queensland and New South Wales “Rain Bomb” event

The damage bill from the past fortnight’s storm and flooding events in Queensland and New South Wales is set to top $2bn, making it one of Australia’s most expensive natural disasters.  Whilst the recent events have occurred in the context of consecutive La Niña weather systems, climate change is having a demonstrable impact on the frequency and severity of catastrophic storms and therefore it is important to understand how Property and Business Interruption insurance responds to these events.  The insurance industry is expecting weather related claims to increase in the future and policyholders must be prepared. See our article on the increased incidence of natural disaster here.

Following the 2011 Queensland Floods, the insurance industry adopted a standardised definition of Flood under Property policies and it has become common knowledge that insurers treat Flood and storm damage differently; Flood damage is often excluded unless the cover is specifically requested, and insurers charge additional premium and impose restrictive conditions, including higher excesses and lower sub-limits, for Flood cover.  These practices are seen across both domestic and commercial Property policies.

Regulation 34 of the Insurance Contracts Regulations 2017 (Cth) provides that under Property insurance policies, Flood means:

“the covering of normally dry land by water that has escaped or been released from the normal confines of any of the following:

                     (a)  a lake (whether or not it has been altered or modified);

                     (b)  a river (whether or not it has been altered or modified);

                     (c)  a creek (whether or not it has been altered or modified);

                     (d)  another natural watercourse (whether or not it has been altered or modified);

                     (e)  a reservoir;

                     (f)  a canal;

                     (g)  a dam.”

Issues can arise where there has been a sustained period of rain prior to a watercourse breaking its banks which results in water being unable to escape storm water drains.  There can be disputes as to whether the backup is due to water being unable to escape due to a flooded watercourse, or if the severity of the rain and failure of infrastructure itself is the cause.  This is ultimately a matter of fact that turns upon the circumstances in each event and insurers will often appoint hydrologists to provide an expert opinion as to whether the damage was caused by Flood or storm water.

It is possible that property is damaged by both storm and Flood water and at different times and there is established legal authority referred to as the Wayne Tank Principle, that holds that where there are both covered and excluded proximate causes of loss under an insurance policy, the exclusion takes precedence.[1]  Policyholders may be able to demonstrate that insured and uninsured events were separate and that some or all of their loss occurred due to storm damage.

Most Property policies allow full limit cover for storm damage, whereas Flood cover is typically sub-limited to a much smaller amount and carries a higher excess.  Accordingly, where the damage is likely to exceed a Flood sub-limit or Flood cover has not been purchased, to maximise coverage policyholders must be able to demonstrate that the damage was caused by storm water.

It is important to remember that Business Interruption Insurance, being either loss of rent for landlords or loss of gross profit for producing businesses, is consequential upon there being physical damage that is covered by the terms and conditions of the policy.  Accordingly, if a policy excludes Flood or has a low sub-limit for Flood, consequential Business Interruption loss is subject to those same exclusions and conditions.

Bellrock recommends that Property owners review their policies to determine whether:
  1. Their sums insured have been accurately set and are up to date;

  2. They have taken Flood mapping into account;

  3. Their policy covers Flood and, if so what is the Flood limit / sub-limit and what is the Flood excess?

For larger Property programs comprising multiple assets, it is important that this review entails all properties that are being covered.  It is often the case that insurers will impose restrictive Flood conditions for locations with a key exposure.

For policies covering Contents, it is recommended that a current asset register be maintained to show all items of covered property.

It is important to note that Flood cover usually comes at a premium, particularly where there is a tangible exposure.  For many policyholders, Flood cover may be too expensive or insurers may refuse to offer it altogether (see our recent article on the issue of property insurance affordability here). However, if there is a concern of Flood damage occurring to your property, it is always worthwhile considering whether it can be covered and at what cost.

In the event of a claim that has the potential to be declined or only partially covered due to Flood coverage restrictions, Bellrock recommends the following course of action:
  1. Take reasonable steps to prevent damage before it occurs, where it is safe and practicable to do so;

  2. Engage a builder or relevant trades to make the premises safe from any further damage, including turning off electricity;

  3. Request the builder or relevant trades provide repair quotes. For contents, seek replacement quotes. Insurers are typically more lenient on the requirement to produce multiple quotes during catastrophic events due to the shortage of repairers;

  4. Take photographs and video of the damage – if seeking to claim storm damage, any visual evidence showing the water entering the premises separate or, prior to, water backing up from a Flooded watercourse can be vital;

  5. Lodge a claim with the insurer;

  6. Request the insurer appoint a loss adjustor as soon as possible – they are often in high demand during catastrophic disasters;

  7. Determine whether your Property policy makes an allowance for Claims Preparation costs and whether it is necessary to appoint a professional Claims Preparer to act on your behalf in relation to policy coverage issues and in quantifying large and complex losses;

  8. Keep a record of all damaged items and take photographs of same;

  9. Ensure you and the Claims Preparer, if one is appointed, attend onsite inspections with the loss adjustor and any experts they have appointed – particularly the insurer’s hydrologist, as their opinions can influence the course of the entire claim. Having input at this stage can correct any misassumptions made in relation to the cause of water ingress; and

  10. Seek to mitigate your loss by getting your business operating in any capacity possible – for example, this may mean hiring alternative premises or offering a reduced range of products and services.

Lastly, it is important to remember that insurance is only one facet of a property owner’s overall risk management strategy.  Prudent property owners should take Flood and storm damage into account in undertaking risk assessments and maintaining their assets.  Where possible, property owners should ensure their buildings are built in accordance with the current National Construction Code and adhere to best practice guidance for preventing and mitigating Flood and storm damage.

Bellrock has extensive experience in placing Property policies and handling significant Flood claims.  If Flood and storm damage are concerns for you and your business, our team are here to assist with further information and advice. Please contact us via the form below.

[1] Wayne Tank and Pump Co Ltd v Employers Liability Corp Ltd [1973] All ER 825

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