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Flood Premiums – Home Insurance (factsheet)

This fact sheet is for information only. It is recommended that you get legal advice about your situation.

Download our printer friendly version here (PDF): Flood Premiums

CASE STUDY

Alex has just received her building insurance policy renewal forms and was alarmed to see the premium had increased from $840 to $3600.

Alex could not work out what had changed.

Alex called her insurer and they explained that the policy was priced on risk and that was the premium price set. But, Alex had lived in the property for 10 years and could not understand why it had now increased!

WHY HAVE FLOOD INSURANCE PREMIUMS GONE UP?

Over the past few years a number of factors have combined to raise the price of flood cover and insurance more generally. These include:

  • The cost of claims generated by the series of major disasters in 2010-11
  • Australian insurers paying more for reinsurance (insurance that insurers take out to cover major events) because of these disasters
  • Improved information available about where and when floods will occur and how much it costs to fix damage
  • Increasing household or address level assessment and pricing of flood risk meaning those with lower risk are paying less and those with higher risk are paying more, and
  • Lack of information available to insurersabout local flood mitigation measures such as raised floor heights or even a levee, meaning these factors may not be taken into account.

Some of these factors – such as claims costs and reinsurance – have affected everyone who buys insurance because insurers spread the cost across all their customers. The other factors only affect very specific areas or customers (who may face higher local perils).

MY HOME AND CONTENTS INSURANCE PREMIUMS ARE RISING – I’M THINKING OF OPTING OUT OF FLOOD COVER

Stop!

Before you decide to change your cover and remove your coverage for flood you should consider the following:

  • What is the risk?
  • Am I in a flood prone area?
  • Is the insurer right? Are they taking all of the information about my house into consideration.

WHAT IS THE RISK?

Insurance premiums are calculated taking into account a number of factors, including but not limited to your claims history but also what the likelihood is that your property may be subject to various risks, including natural disasters like flood or bushfire. Events like floods can cause substantial damage, even if your risk of flooding is only a few centimeters above the floor (for example, replacement of flooring, carpets and structural damage).

Insurance companies now by law have a standard definition of flood across all policies.

What this means for insurers is that they are not able to reduce the risk (and with it your premiums) by excluding or limiting their exposure by putting in place conditions and exceptions that may have otherwise reduced their liability or exposure in the event of a flood.

Some insurers may choose not to cover you, or may decide to increase your premiums by a little or a lot because they have assessed your flood risk differently.

You may be tempted to opt out of flood to retain your coverage or reduce your premiums to save money.

This is risky, because if the insurer has classed your home as ‘at risk’ of flood damage they will be basing this on flood mapping data, or potentially some other reliable indicators that your home is in a flood prone area or zone. Before you opt out of flood or any coverage you should consider the following:

  1. Will another insurer cover me? Ring around other insurers – what do they say?;
  2. Have the insurers got it right? Do some research and know your own risk.

CASE STUDY

 Sandy lives in a cyclone prone area and was affected by a cyclone in 2008. Her local council has undertaken extensive mapping about the flood risks in her local area. She was zoned in a low risk area, but other parts of her suburb were high risk. Sandy also made renovations to her home after the last cyclone, increasing and strengthening the footings. Her builder told her she was now “cyclone rated” Her insurance was due for renewal, and she got a shock when she was informed that the insurer was declining to reinsure her due to her high risk. She rang the insurer and told them about the renovations in 2008 and that she was classified in a low risk zone. They said they were not going to change their mind. Sandy rang around and could not find insurance.

Sandy decided to escalate her dispute and she raised a dispute in internal dispute resolution about her insurance, she mentioned the renovations and her local councils mapping data.

The Insurer agreed to change their decision and offered her a renewal of her policy.

  1. SHOPPING AROUND

You can consider shopping around to see what the premium will be with another insurer.

Other insurers may calculate your risk differently because they may have different flood risk related information including mapping or local knowledge (meaning they have calculated your risk to flood damage as lower).

Another insurer may be prepared to offer you insurance at a lower cost including flood cover.

Hot tip! Remember when shopping around all products are different. Other products may be cheaper because your excess may be higher, or their cover for other items might be restricted, different, or more or less comprehensive. When shopping around make sure you read your policy wording so that you know that you are covered for all types of claims (like theft or storm). Also check that the way the insurer plans to pay the claim or match/replace building materials is what you would expect.

When switching insurers make sure you answer all questions put to you honestly. If you do not know the answer to a question (for example, it may relate to your partner’s claims history), you should say that you do not know.  Never guess or assume information in an insurance application.  Giving wrong or misleading information may result in a claim on your policy being refused.

  1. ASSESS YOUR OWN RISK

Flood maps are often available on local council websites.  Check with your local council or your local Catchment Management Authority. Currently, there is no national localised database, however the National Flood Risk Information Portal is at www.ga.gov.au* (this website is in development and has some information and links which may get you started depending on where you live).

Your home may be in an area that has been zoned as subject to different risks, such as  flood risk, like a 1 in 100 year flood . All insurers in Australia are obliged to take account of floods greater than the 1-in-100 year flood when offering flood cover, so be sure to understand your risk of rare and extreme floods when shopping for flood insurance. Although your home might be outside the one-in-100 year flood zone, or its floor height may be above the one-in-100 year flood level or protected by a levee, there may still be a chance your home could be flooded. There also may be other risks, such as overland flow or local watercourses that you may not be aware of.

Some local councils may have flood mapping as part of their zoning and planning controls. You can contact your local council and ask to look any flood maps that they use.

You also need information as to the extent and type of risk you may face, for example some areas may only face low level flooding of a few inches whereas other areas may face larger catastrophes with higher flood levels.

MY NEIGHBOUR IS INSURED WITH THE SAME INSURER AND HIS PREMIUM IS NOT SO HIGH!

Your risk compared with someone on the same street as you can be different. Many insurers take into account particular features of your home and your neighbours home, such as whether you have raised the stumps or foundation level, the elevation of the land, and whether your house is on a slope.

Your home may be on a watercourse or drainage system and more prone to flood than your neighbour even if you are on the same street. For some insurers, it is dependent on local geographic factors that can be different from house to house.

There are also other factors that may mean your premium will be different to that of your neighbor including your sum insured, your level of cover or your claims history.

You should tell your insurer about any specific features of your property that make it less flood prone like your local flood map or structural alterations done to your home. You can also raise this information with any other insurer when shopping around to see if they will take it into account when calculating the premium.

Premiums are calculated taking into account the expected depth of flooding, so if you have taken any mitigation strategies to raise your home’s flood level, or divert watercourses and improve drainage get your evidence together and let your insurer know.

MY INSURER IS NOT TAKING INTO ACCOUNT ALL THE RELEVANT INFORMATION

If you feel the insurer has not calculated your premium correctly, you can ask them to review it in their internal dispute resolution (IDR) department.  The General Insurance Code of Practice sets out how an insurer should deal with your complaint (see Fact Sheet What can I do if my insurance claim is refused and www.codeofpractice.com.au).  Under s75 of the Insurance Contracts Act you can request reasons in writing about how your insurance premium was calculated and why it was not renewed or why the premium increased. Under clause 4.8 of the GICOP the insurer is required to give you reasons, refer you to another insurer and provide you with information about their complaints handling procedure.

If you feel the insurer has it wrong, and the response from IDR is not satisfactory, you have very limited grounds to challenge that decision in the Financial Ombudsman Service Australia (FOS). You can only challenge where there is an error or misapplication of the premium.

It is unlikely the insurer will allow you to see its flood maps, as this is generally sensitive commercial information that they want to keep confidential from their competitors. You would need evidence from other sources, like current flood maps, engineers, hydrologists or other experts as to the assessment of the risk of flood at your address.

Other factors you should bear in mind are:

  • The age of the flood mapping. If the reports are very old you must consider whether they are no longer relevant in light of any developments that may have taken place in your local area relevant since the mapping was done.
  • If you have made modifications to your building such as increasing the height of the slab, stumps or footings of your property, you should make sure you let your insurer know. They may take into account any building design features that you have added to reduce the risk of property damage in the event of flood.

FOS is free, but can take many months to review matters and the insurer may object to you being provided the statistical information and premium pricing. As the FOS process is slow you may need to arrange alternate insurance to ensure you are insured. If you cannot find affordable cover, ask whether you can pay the premium less the flood cover while you idspute the cost of the additional cover.

I’M WILLING TO RISK OPTING OUT

Before you opt out of flood, you need to consider the risk to yourself, your family and your local area.  Insurance products are essentially transferring the cost of a particular event to a third party, by not having insurance for a risk event you are in effect self-insuring and bearing the cost of the event yourself. Extreme weather events like flood may seem to you an unlikely occurrence, especially when they are described as a one in a hundred year flood, but if it does happen ensuring you and your family are covered and able to replace your home and contents is extremely important to your own financial and emotional wellbeing.

NEED SOME MORE HELP?

See Fact Sheet: Getting Help for a list of additional resources.

Last Updated: February 2017