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Catastrophes and confusion kick-start standard cover review 

The Federal Government has bitten the bullet and is moving ahead with work to standardise more natural hazard insurance definitions and make an outdated standard cover regime effective, as record catastrophes and policy complexities sharpen the focus on an issue talked about for years.

Treasury has released a consultation paper, with submissions due by April 4, a technical working group or similar may be formed, and draft legislation may emerge from the process. 

“When disaster hits, consumers need to be confident the policy they buy meets their needs and expectations. No one wants to be surprised at claims time,” Assistant Treasurer Stephen Jones said. 

“Currently, the only standardised natural hazard definition is flood. Fire, storm and rainwater run-off definitions are not standardised, which can cause confusion about what people are, and are not, covered for.” 

The flood definition was regulated in June 2012 after catastrophes in Queensland and eastern states, with wording nailed down after a lengthy process. The current focus on consumer understanding of cover comes as the industry faces criticism over its handling of the record number of claims generated by the 2022 disasters.

Addressing affordability and availability issues and underinsurance has become a priority, but the pressure for standard definitions for perils beyond flood precedes the Hayne royal commission. 

A Senate general insurance review in 2017 recommended action, Treasury undertook preliminary consultations in 2019 and the Australian Competition and Consumer Commission’s three-year Northern Australia Insurance Inquiry, completed in 2020, took up the issue. The Albanese Government said it would look at the matter in its October 2022 budget. 

If implemented, changes flagged in Treasury’s latest consultation paper will have a significant impact on insurers, policy terms and consumer rights. 

Specifically, the paper looks at which terms might benefit from standardisation, with the nitty-gritty of the wording to be thrashed out later. 

It suggests such perils include fire, where there are differences around the treatment of smoke, melting and heat-related damage. Storm and stormwater and rainwater run-off are also noted problem areas, while storm surge, earthquake and actions of the sea are not seen as priorities, but Treasury is welcoming feedback. 

The paper flags three options for the standard cover regime, which has existed since the passage of the Insurance Contracts Act in 1984. 

The first involves repealing the regime, given current arrangements can be varied with little consumer awareness. The paper provides more detail around two alternative ideas, in a possible indication of the more likely paths. 

These involve offering a baseline level for home building only, where most issues arise and the demand for improvement appears greatest, or potentially offering different tiers, such as gold, silver and bronze covers.  

The consumer commission in its northern Australia review argued an effective regime could allow consumers to more easily benchmark insurers against each other on the standard cover offering, while not limiting an insurer from providing other products. 

Concerns around the application of “wear and tear” exclusions have also emerged amid a rise in claim disputes, but Treasury has signalled action there is in the hands of the industry. 

The Insurance Council of Australia (ICA) has announced work to develop a wear and tear standard definition following problems identified by the General Insurance Code Governance Committee and an Australian Securities and Investments Commission review, and that work is “being conducted independently” of Treasury’s consultation, the paper says.  

Consumer groups have continued to push for reforms after past inaction, most recently in a combined submission to the federal parliamentary committee inquiry into insurers’ handling of floods two years ago. 

“An overhaul of the standard insurance cover regime is long overdue, so this consultation is very much welcomed,” Consumer Action Law Centre Managing Lawyer Philippa Heir told 

“It is great they are open to looking at terms beyond storm and flood. Unfortunately, they are not prioritising wear and tear/maintenance exclusions. This is a gap, and we think they should look at this as well, due to the confusion these clauses have caused in recent flood events.” 

ICA says the consultation announced by the Federal Government aligns with insurers’ efforts to improve customer outcomes by improving transparency and consumer understanding. 

“We acknowledge there is more to be done to improve consumer understanding of policies, and standardised definitions for fire, storm and stormwater and rainwater run-off may assist with this,” CEO Andrew Hall said. 

“An independent review of the industry’s code of practice is currently under way and ICA has commenced discussions with insurers about the possible adoption of standardised clauses for maintenance and wear and tear exclusions in policies, which may also assist with providing greater clarity for customers.” 

Treasury’s consultation includes asking “to what extent” consumer misunderstanding of policies is leading to underinsurance or inappropriate insurance, what the consequences are of not addressing these issues and what other interventions may increase understanding. 

The definitions and standard cover regime review is another prong in the Government’s efforts to reduce risk and increase the resilience of households to natural disasters, sitting alongside a greater focus on mitigation investment, and pressure will be on insurers to deliver meaningful reforms.