2011 ANZIIF TurksLegal Claims Scholarship
Runner up Natural disasters and underinsurance Renee Cassidy | Whitbread Insurance Brokers
Natural disasters always reveal many instances of underinsurance or failure to take out appropriate cover. What’s happened to personal responsibility in ensuring you have adequate insurance cover? Do Insurers need to play a role in ensuring the community has both adequate and appropriate cover? Do governments? How should underinsurance or inadequate cover be dealt with at the claims stage? Joseph Gellibrand, Attorney General of Van Diemens Land purchased Australia’s first insurance policy in 1833. The princely sum of £60 was paid to Alliance Assurance for a life policy providing £2000 cover. Mr Gellibrand’s family claimed on that same policy four years later following the disappearance of Mr Gellibrand, (suspected to be killed and eaten by Aborigines). Interestingly, this first ever claim led Insurers to amend their life insurance policies to exclude death as a result from ‘being involved in a collision with an Aboriginal native’. Was the £2,000 adequate cover? For a family in the colonies, it may not have been, we will never know. Since that time, there have been countless changes within the insurance industry. However the same inadequacy issues still arise today, only the magnitude has changed. At least Joseph Gellibrand had the foresight to purchase insurance for his most important asset. The 2009 Victorian Bushfires Royal Commission report states that as much as 13% of residential properties destroyed by bushfires could have been without insurance, however the insurance industry estimates this figure to be much higher. There is ample evidence that many more properties were significantly underinsured although the Commission was unable to calculate to the full extent. According to the Insurance Council of Australia, in excess of $1.2 billion in total claims were paid, highlighting just how expensive an issue underinsurance is for the community. Underinsurance or inadequate insurance is inevitably revealed following such a disaster, and is again significant in the recent catastrophes of the Queensland floods and Christchurch earthquake. Although these events vary both geographically and in aftermath, the one constant remains.
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Many people were underinsured. Despite the proven regularity of natural disasters in Australia, the level of non-life insurance coverage in households and businesses is particularly low when compared to other economies – in fact, according to 2007 OECD figures, our insurance density ratio (gross written premiums per capita) is around half that of the UK and approximately one third of that of the US (Ralston, n.d., p. 1). These OECD figures point to a disturbing trend in Australia – insurance does not appear to be significant on a lot of peoples’ radar. Some view insurance as unaffordable, unnecessary, not as essential as other bills, or, that the assets owned are too few to insure. Commercial consumers can choose to self insure and manage the risk by implementing a robust risk management program or alternatively they can choose to bear the cost of any damage if it occurs. Others make the decision to purchase insurance, but when faced with a loss following disaster, discover they are underinsured. It is only then, that consumers discover they are either underinsured or not insured at all. Why is it that consumers discover the deficiencies in their insurance when it’s all too late? There are several reasons; lack of education, ignorance to the value of their property, or choosing basic packages due to financial constraints. The perceived presence of Government assistance to provide compensation for those with inadequate insurance or charity contributions can also provide a disincentive to take out adequate cover. Society is becoming more litigious than ever, so it can be seen as a viable option to engage legal representation to sue the insurance advisor or the Insurer should the customer be found to be underinsured following a loss. In this case, the customer simply transfers their personal responsibility to another party. The media through its many channels can also influence the public perception with stories centred on disgruntled customers taking action against Insurers who are perceived to be providing an inadequate product or service. It provides the public with a supposed option of clawing back the loss they have suffered. Insurers are aware of underinsurance and play an active role in encouraging the community to have adequate cover, also providing support wherever they can to discourage underinsurance. Some Insurers provide risk surveys as part of their service. This not only provides accurate insurance values, but also information to Insurers regarding the level of risk and rating structure required. Insurers can use this information to identify and make risk recommendations. This benefits the client by reducing their premium and the likelihood of a claim occurring. Insurers also provide proposal forms for customers to select their desired insured values. It forces a degree of thought and consideration on the customers to nominate their assets value, though some Insurers do not require them anymore.
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Insurers further encourage the purchase of adequate insurance by utilising a policy clause known as the ‘average clause’. This highlights the adverse effects of underinsurance and, hopefully, stimulates their customer to carefully consider their sums insured. The average clause is essentially an insurance term used to describe calculating a payout against a claim where the policy undervalues the sum insured. In the event of a partial loss, the amount paid against a claim will be the same proportion as the value of the underinsurance (Maclean, 2009). The average clause should be the focus for consumers however many people are not aware of it until they suffer a loss. It can reduce the settlement figure to an amount significantly below the sum insured value, which is of even greater impact as the insured amount was already inadequate. Although the Insurance Contracts Act outlines the Insurers’ obligation to clearly inform the insured in writing of the provisions of insurance contract (Insurance Contracts Act 1984 (Cwlth), s.35), most Insurers acknowledge that it is best practice to ensure policy wordings are drafted in plain language so the average consumer can understand. With all the best endeavours that Insurers instigate to simplify the policy wording, generally the customer still does not read it until a loss occurs. There are clear benefits for Insurers to ensure that their customers take out adequate insurance cover. The presence of appropriate insurance cover means that the quantity of claims declined or partially declined will decrease, resulting in positive PR for Insurers and a higher level of customer satisfaction. Insurers can play a more active role in discouraging underinsurance – after all they are entering into a Contract and have shared responsibility with the policyholder. In some cases regular property valuations are compulsory, although for most policyholders there is no requirement to have property valued regularly. The Owners Corporation Act 2006 states that a prescribed owners corporation must obtain a valuation every 5 years for all buildings that it is liable to insure (Owners Corporation Act 2006 (Vic) s.6). Insurers could make it mandatory to have valuations on a regular basis. Should the policyholder not wish to do so for whatever reason, they have the option to sign a waiver acknowledging that the responsibility falls back to them should the property be found to be underinsured following a claim. Section 35 of the Insurance Contracts Act outlines the standard cover for prescribed events, meaning; the minimal level cover Insurers must provide. (Insurance Contracts Act 1984 (Cwlth), s.35), Consideration could be given for the standard cover to be reviewed to increase the levels of cover, or addressing the insured value limits in this section of the Act. Alternatively, Insurers could boost the cover afforded in their most basic policy to provide further consumer protection.
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There are some Insurers who exclusively deal with clients through an insurance broker. However, Insurers could benefit if they encouraged clients to consider the possibility of utilising the services and experience of an insurance broker. Insurance brokers’ specialist advice regarding coverage, policies required, how policies respond following claims, and assist in ensuring that the property is insured adequately. It is in essence, another layer of protection for the consumer, and a benefit to Insurers who are less likely to encounter incidences of underinsurance as they may with direct clients. A dedicated and wide-reaching marketing campaign by Insurers to encourage people to not only purchase one of their insurance products, but to ensure that coverage limits are adequate, would also be a positive step in the right direction. Governments are involved to some extent in addressing inadequate insurance. The Federal Government established the Australian Reinsurance Pool Corporation in 2003 to offer reinsurance for terrorism risk in Australia. The scheme covers insurance for loss or damage to commercial property owned by the insured, insurance for business interruption arising from loss or damage to or inability to use eligible property following a declared terrorism event (Terrorism Insurance Act 2003 (Cwlth). Compulsory Third Party insurance, required for every registered vehicle in Australia, ensures that anybody who is injured in a car accident is adequately covered. WorkCover is a similar concept, also compulsory, and as a no fault system is intended to provide protection to employees injured at work. To encourage the purchase of health insurance, the Government introduced the Private Health Insurance Rebate, at the same time discouraging people to withdraw by applying the Lifetime Health Cover loading added to premiums once the applicant turns 31. Additionally, there are several Acts in place to protect consumers’ rights when it comes to insurance, namely Insurance Contracts Act, Corporations Act and Code of Practice. Despite these measures, Governments tend to take a reactive approach to dealing with natural disasters. Most recently, the Federal Government faced a sizable challenge following the Queensland floods. As there had been no proactive approach to plan for events of this magnitude, the Government implemented a flood levy which was to be paid by people earning over $50,000. This is in addition to $2.8 billion dollars in spending cuts and another $1 billion of delayed infrastructure, not to mention the millions of dollars generously donated by Australians (Rebuilding after the floods, 2011).
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Showing early initiative, New Zealand was one of the first countries to address this issue back in 1945 with the establishment of the Earthquake Commission (New Zealand EQC). The EQC, a Government owned Crown entity, provides primary natural disaster insurance to the owners of residential properties in New Zealand. The beauty of this scheme is that only those who have taken out an insurance policy are rewarded – it is not paid out to those who have not purchased private insurance. The EQC contributes up to NZ$100,000 for each dwelling affected, with an additional NZ$20,000 for domestic contents. The policyholders’ Insurer then pays any further amount separately. The scheme is funded by disaster insurance premiums being added to the policyholders’ regular insurance policy. The EQC subsequently obtains cover with reinsurance companies to reduce its own risk. Following recent earthquakes in Christchurch (2011) and Canterbury (2010), the fund has been instrumental in assisting many affected by these events who may otherwise have been uninsured, or have to rely on Government assistance. People are sensitive to pricing of insurance, additional taxes added to base premiums can increase the cost to the point where it becomes unaffordable. In fact by adding stamp duty, Fire Service Levy and GST, the price of the policy can potentially increase by 50%. The Government needs to review making insurance more affordable to encourage growth in policies written, which in turn will improve economic efficiency and provide better protection for the community. A step in the right direction is FSL reform which would remove FSL from insurance policies, replacing it with a new broad based tax. While this is currently in force in WA and Tasmania, the implementation across Victoria has been delayed and is now expected to be rolled out in 2012. The remaining states have made no commitment (Why John Brumby dumped the FSL, 2010). At face value, the concept of compulsory property insurance has certain validity, however following closer review of the implications, it is not the easy solution it first appears to be. It penalises clients who deliberately avoid insurance by choosing to self insure, not to mention the logistics, manpower and expense required to monitor that all people have taken out insurance policies to cover their assets. In any case, this will still leave many clients exposed to being underinsured as it will not regulate the appropriateness of the insured figure. Ideally, all clients should have adequate and appropriate insurance cover. However, underinsurance at the claims stage is not always avoidable. From personal experience, Insurers dislike having to deal with claims affected by underinsurance. It indicates it may be difficult to manage, that there will be an unhappy customer to deal with and possibly even end up as a Dispute or at the Financial Ombudsman Service, not to mention negative PR and media attention. On the other hand, it is almost worse to be in the brokers’ shoes at this time. The feeling of personal responsibility and having let your client down are commonplace at this time, as well as the risk of a potential Professional Indemnity claim.
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Currently, many Insurers rely on the disclosure and contract signed by the insured and honour the figure selected at policy inception. The average clause is also applied to the claimed amount if underinsured. Insurers focus should primarily be to attempt to reduce the cost of the overall claim, reducing the out of pocket costs for the client. This can be done by reviewing building materials used, altering floorplans for rebuild, or minimising business interruption by enabling continuing trade if possible. It is common for a cash settlement to be offered by Insurers in the event that insured values are inadequate. Generally this is an attractive proposition for the client who can then attend to rebuild at their leisure. However this is an ideal opportunity for Insurers to demonstrate their value by driving the claims process. There are policy benefits that are additional to the sum insured – this includes professional fees, removal of debris and mitigation costs. As these benefits are not included in the sum insured value, they are not affected should the insured value be inadequate. It would show customers that Insurers are proactive and may result in a long-term customer as they feel they have received assistance during their time of need. Regrettably, being underinsured at the claims stage sometimes just needs to be accepted as an unfortunate part of the education process and for consumers to learn from mistakes when reviewing their insurance covers in future. With climatic changes and the intensity and frequency of natural disasters increasing, it is inevitable that claims will increase and the issue of underinsurance will continue to be pertinent. There is no easy solution and it is erroneous to suggest that the responsibility lies with any one party to address the issue of underinsurance. It is important for the Federal and State Governments as well as Insurers and representatives of the policyholders to sit down together and provide a strategy to deal with this ever pressing problem that, with the current economic climate will only get worse and cost everyone dearly. The adequacy of that policy sum insured in 1833 may have affected only one family – now it affects the entire nation.
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References 1. 2009 Victorian Bushfires Royal Commission, released 31 July 2010 2. Professor Deborah Ralston, Melbourne Centre for Financial Studies, http://www.melbournecentre.com.au/files/Underinsurance_Deborah_Ralston.pdf. Retrieved 22-10-2011 3. Angus Maclean (2009). “Don’t let under-insurance be an average condition”. Newsletter 2009. Lycetts Holdings Limited. http://www.lycetts.co.uk/bin/pdf/original_pdf_file/newsletter2009-final. pdf. Retrieved 22-10-2011 4. Insurance Contracts Act 1984 (Commonwealth of Australia), s.35 http://www.comlaw.gov.au/Series/C2004A02944. . Retrieved 16-10-2011, 5. Owners Corporation Act 2006 (The State of Victoria), s 6. http://www.legislation.vic.gov.au/Domino/Web_Notes/LDMS/PubStatbook.nsf/51dea49770555ea6ca256da4001b90cd/C19F852FC46 C28E9CA2571EE001DE65C/$FILE/06-069a.pdf. Retrieved 16-10-2011 6. Terrorism Insurance Act 2003 (Commonwealth of Australia) http://www.arpc.treasury.gov.au/. Retrieved 22-10-2011 7. Rebuilding after the floods, 2011, Press Release. http://www.pm.gov.au/press-office/rebuildingafter-floods. Retrieved 16-10-2011 8. Earthquake Commission. http://www.eqc.govt.nz/. Retrieved 22-10-11 9. Why John Brumby dumped the FSL, 2010. http://www.insurancenews.com.au/analysis/whyjohn-brumby-dumped-the-fsl. Retrieved 22-10-11
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