Standard flood definition raises too many uncertainties
The Australian Competition and Consumer Commission today issued a decision denying authorisation* to a proposal by the Insurance Council of Australia for a common definition of 'inland flood'.
"The ACCC supports efforts to establish a common definition of flood that is widely understood by consumers and can be used as a benchmark for flood cover in insurance policies," ACCC Chairman, Mr Graeme Samuel, said today. "However, the definition proposed by the ICA is unlikely to achieve this aim.
"The Australian community has experienced a number of severe floods in recent years. These events have focussed a spotlight on the need to improve consumer understanding of what the term 'flood' means in insurance policies and the extent to which particular policies include flood cover."
The ICA has developed a definition of inland flood which insurance companies could voluntarily adopt, and sought the ACCC's authorisation for this definition.
The ACCC consulted widely on the definition of inland flood put forward by the ICA. Significant concerns about the proposed definition of flood have been raised by a range of consumer bodies including the Consumer Law Action Centre, the Consumers' Federation of Australia, the Insurance Law Service, the Legal Aid Commission of New South Wales, and Legal Aid Queensland.
A number of consumer groups with experience representing consumers in disputes about flood cover in insurance policies raised concerns about the terminology chosen by the ICA. These consumer groups argued that the ICA's definition would in fact increase consumer confusion about the meaning and nature of flood cover rather than improving consumer understanding. The ACCC is particularly concerned that the ICA definition of flood introduced a range of new concepts the legal implications of which are not clearly understood.
"The ACCC recognises that this is a complex issue and encourages the ICA to work with consumer groups and other interested stakeholders to develop a common definition of flood that will make it easier for consumers to understand what the term flood means and the extent to which their individual insurance policy covers them for flood damage," Mr Samuel said.
This decision does not prevent the insurance industry from seeking authorisation for a revised proposal in the future.
The ACCC's determination will be available from the ACCC website, under the Public Registers and Authorisations Register links.
*Authorisation provides immunity from court action for conduct that might otherwise raise concerns under the competition provisions of the Trade Practices Act 1974. Broadly, the ACCC may grant an authorisation when it is satisfied that the public benefit from the conduct outweighs any public detriment. The ACCC conducts a comprehensive public consultation process and issues a draft determination before making a decision to grant or deny authorisation.
In March 2008 the ICA lodged an application with the ACCC seeking authorisation of an agreement between its members to adopt, on a voluntary basis, a common definition of 'inland flood'.
The definition of 'inland flood' proposed by the ICA was:
lnland Flood is the covering of land that is not normally under water by: - water that overflows or escapes from a naturally occurring or man made inland watercourse (such as a river, creek, canal or storm water channel) or a water pool (such as a lake, pond or dam), whether it is in its original state or it has been modified; or - water released from a dam whether it be accidentally released or intentionally released to control, mitigate, regulate, or otherwise respond to excess water, or - water that cannot drain or run off as a result of water that is overflowing or escaping from an inland watercourse or water pool preventing the escape of water.
In its July 2008 draft decision the ACCC considered that it could grant authorisation to the ICA's proposal if a number of conditions were imposed. These conditions sought to provide greater certainty that the proposed common definition would assist consumers in understanding flood insurance and would result in improvements in the consistency of contractual terms dealing with flood insurance.
Following the draft determination a number of additional submissions were provided by the ICA, consumer representatives, the Australian Securities and Investments Commission and the National Insurance Brokers Association.
Key issues for consideration raised during the course of the ACCC's consultation process were:
the potential for a standard definition to promote greater recognition and understanding of flood insurance amongst consumers
the potential for a standard definition to result in the simplification and harmonisation of complex contractual terms dealing with flood insurance
concerns that the ICA' s proposal may restrict competition between insurers in the provision of flood cover
concerns that the ICA's proposal may reduce the current level of product differentiation between insurers in relation to flood cover
concerns as to the effectiveness of the ICA's proposed communications campaign
concerns about the terminology put forward by the ICA, in particular that the proposed common definition introduces new terminology, expands established concepts and seeks to diminish the doctrine of proximate cause
concerns that the ICA's proposed common definition, by potentially increasing consumer confusion, may inhibit the ability of consumers to make informed choices leading to an increased risk that consumers may obtain cover which is inappropriate for their needs
concerns that, in the absence of strong industry support for a move to greater harmonisation of contractual terms dealing with flood insurance, the ICA's proposal would deliver limited benefits to consumers.
Having had regard to these additional materials the ACCC can no longer be satisfied that the imposition of conditions would alleviate its concerns.
In particular the ACCC notes that the potential for the proposed common definition to introduce new concepts and to increase consumer confusion is not a concern which can be addressed by the imposition of conditions.
The ACCC has therefore decided to deny authorisation to the ICAl's proposal.
The ACCC recognises the efforts by government and industry aimed at improving both the availability of flood insurance and consumer understanding of flood issues. The ACCC also recognises that this is a complex issue and encourages the ICA and its members to continue working with consumer groups and other interested stakeholders.
The ACCC encourages the ICA, its members and interested stakeholders to consider refinements to the proposed common definition which may alleviate the concerns identified by this determination.
The ACCC notes that its decision in this matter does not prevent the insurance industry from seeking authorisation of a revised proposal in the future.
