When is a flood not a flood?

Standard Definition of Flood Regulations Finalised:

The Gillard Government enacted Regulations that give effect to the standard definition of flood as part of its continuing efforts to make flood insurance simpler and more effective following recent natural disasters.

Regulations were made at a meeting of the Executive Council to provide a standard definition of “flood” for home building and home contents; small business; and strata title insurance contracts.

The regulations include the word “flood” to be used in these insurance contracts to mean:

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

  • any lake, or any river, creek or other natural watercourse, whether or not altered or modified; or
  • any reservoir, canal, or dam.

The standard definition of ‘flood’ will be used if the insurer offers flood cover in their home building, home contents, small business and strata title insurance policies.1/2

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In our January B2B article we recommended a healthy new year audit of your business. Auditing your business contracts may not only improve your business potential and balance sheets, but may avert serious disaster when a contract is inadequate or ineffective.

In the aftermath of recent flood events in Queensland and Victoria, and closer to home in Queanbeyan, affected home and business owners will be meticulously analysing their insurance cover to ascertain whether they are covered and how much for.

Your insurance cover is a contract between you and your insurer. Your policy schedule tells you the amount of cover you have, and your policy document tells you what events you are covered for and what may jeopardise the extent of your cover (for example, under-insuring, non-disclosure).

Incursion of water to your premises is a complicated insurance event because policies often differentiate between the sources of water: storm water, rainwater and floodwater are examples. Floodwater damage is a common exclusion in an insurance policy. The source of water can therefore be crucial to the success of an insurance claim for water damage, and policies must be read carefully – both before and after a flood has occurred.

I had an interesting time in Katherine in the Northern Territory as a young lawyer when the Katherine river broke its banks and flooded the town. I advised many businesses regarding insurance claims and participated in the first litigation by a business against an insurer and insurance broker (Elilade Pty Ltd v Nonpareil Pty Ltd [2002] FCA 909). The claimant’s business insurance excluded flood, defined as inundation by water overflowing the normal confines of a natural watercourse. However, eyewitness and hydrological evidence was called to establish that there was an initial ponding of rainfall in the premises, up to 300mm in depth, prior to the river breaking its banks. The 300mm ponding caused damage to business stock before the river broke its banks, including damage to stock above the waterline via humidity. Damage caused by this initial inundation was covered because it was not floodwater.

In the Elilade case, close examination of the policy definitions and of the event itself by qualified experts led to a payout under a policy that on the face of it seemed to be ineffective.

The business owners in Elilade did not know that they were not covered for flood until they were flooded. They enjoyed a partial success in the recovery of monies because of the hydrological evidence, however it would be infinitely easier to examine your policies carefully in advance to ensure that you are covered for all potential risks to your business.

For more information or to make and appointment contact our Business Services team:

p: 02 6206 1300 | e:  info@elringtons.com.au

 

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1. Fixing Flood InsuranceJoint Media Release Attorney-General  Robert McClelland; Assistant Treasurer Minister for Financial Services and Superannuation Bill Shorten

2. Standard Definition of Flood Regulations Finalised