Seven Mile Beach, Broken Head

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Catchwords: Business law, flood insurance excluded, what is “flood”, “storm and tempest”, “escape of water”, “inundation”, different, “downpour”, insurance policy, exclusion clauses, Harper v Zurich Australian Insurance, Gray v MMI, McIntosh v Dylcote Pty Ltd, MMI v Stargift

If you have recently had the water variety of flood cover, you’ll probably be looking at your insurance policy to see if you have the financial variety. Are you indemnified?

Interpreting your policy might not be as easy as it seems at first flush.

Many policies these days exclude cover for flood in the definition section of the policy, or under exclusions. However, this has not stopped many legal cases on the subject from being brought in the Courts.

As a result, there is a body of law which might assist flood victims in the interpretation of their own personal policies, in light of the actual damage and how it was caused.

Storm and tempest, which is often covered in insurance policies, is not flood. Storm was interpreted to mean a disturbance of atmosphere manifesting itself in heavy rain. Tempest was interpreted as a violence of wind involving rain or not. So, heavy rain is a “storm”. (See: “Harper v Zurich Australian Insurance” per Clarke J. (as he then was) SCNSW 12/06/87 unreported.

A flood is an escape of water from a natural water channel (e.g. a creek), whereas an escape of water from a man-made storm water channel, a pipeline or drain, is not a flood. (See: Harper above)

A flood is not an inundation of water by run-off surface water from surrounding areas. (See: “McIntosh v Dylcote Pty Ltd” per Bryson J. SCNSW 25/03/00 unreported, though flood was not a part of the decision)

If water escapes away, it is not a flood, as a flood requires filling to overflowing (See: Harper above)

A sudden downpour of rain is not a flood, as a flood requires an overflowing.

When looking at exclusion clauses in insurance contracts, the Court will construe then against the insurer (the contra proferentem rule) and interpret them as an ordinary Australian would. (See: “MMI v Stargift” SCNSWCA, per Kirby P. (as he then was) 21/12/84 (unreported)

Even though there is an exclusion clause in the insurance contract for flood, if it is a prescribed contract, for a residential building, and proper notice was not given of the exclusion, the insurer may still have to pay. (s35 Insurance Contracts Act 1984, Regulations 9-12 and “Gray v MMI”-SCVICFC 22/11/94 (unreported) – a general store and residence succeeded)

So while each case will turn on its own facts, its own exclusion clauses in the particular policy, whether an insurance broker gave the correct and full disclosures and exactly how the particular damage was caused, there may be some room for manoeuvre.

For instance, you might ask the question, was the actual crop loss caused by the storm and the sudden rain downpour, rather than flood that caused the damage?

One thing is for certain, there is no legal impediment that insurance companies can’t cover flood damage. They only exclude it, presumably because they can make more money on premium income, by covering easier risks, with less downside.

Perhaps, rather than looking to the banks for rescue packages, or the government for handouts, the legislature should look at making laws for the compulsory contribution by insurance companies to add flood risk in their portfolios. I am sure most farmers would want to pay it, if they could get it.

Jonathan de Vere Tyndall

Article updated 7 January 2015, originally published in The Land on1 February 2001

Editors note: The articles published contain comment only and not legal advice, for which you should retain a solicitor. No responsibility is accepted for the accuracy of the contents.