How a storm became a flood

Many insurers, said Wendt, have amended their flood definitions to include pluvial flood. He expects policyholders with storm coverage to face problems, especially when their properties are in pluvial flood zones, because what was regarded as a storm event is now defined as flood, denying them coverage.

Wendt said six months after the floods in February and March, his brokerage was still dealing with up to 300 claims.

He suggested that one reason some of these claims remain unresolved was because some policyholders were seeking damage payouts on storm coverage. Wendt said a significant number of Honan clients have storm cover, considered standard under many traditional property policies. However, under the changed flood definition, he said, after the next big flood event storm coverage claims could be ruled out.

“Certainly, when you look back at Brisbane [during the 2011 floods], it was a lot more cut-and-dry, pardon the pun,” said Wendt. “Whereas now with this new revised definition it makes it very difficult to argue storm versus flood because the two are actually now no longer mutually exclusive.”

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Wendt said flood and storm coverage is a topical concern for both brokers and their clients.

“Given what’s happened this year, it’s a discussion that comes up quite frequently in relation to, how much cover do I have? What do I need? What’s it going to cost me? How do underwriters respond and react?” he said.

One reason behind the ongoing concern is the sheer scale of the recent flood disaster.

The Insurance Council of Australia (ICA) called the February-March floods that hit South-East Queensland, the Northern Rivers and other parts of New South Wales “a record-breaking” event. The ICA’s claims damages tally is more than $5.1 billion

“This makes this year’s flood the second costliest extreme weather event in Australia’s history, passing 1974’s Cyclone Tracy and sitting only behind 1999’s Sydney Hailstorm, which caused insured losses of $5.57 billion (normalised to 2017 values),” said a recent ICA media release.

However, the other cause for concern among Honan’s brokers and clients – and a main reason or the firm’s update to policyholders – was this changing of the flood definition.

“We were undertaking a number of renewals on some large clients and one of those involved an insurance company that took a shift in the definition of their flood position from your stock standard industry view,” he said.

According to the ICA, the industry’s standard definition of flood in Australia is the “covering of normally dry land by water that has escaped or been released from the normal confines of: any lake, or any river, creek or other natural watercourse, whether or not altered or modified; or any reservoir, canal, or dam.”

Wendt said the main difference is that “pluvial conditions” are now being included in a shifted flood definition.

According to the International Risk Management Institute (IRMI) based in Dallas, Texas, pluvial flooding is commonly referred to as flash floods and is principally caused by downpours in areas without adequate drainage.

According to a 2020 report by the Geneva Association – the only global association of insurance companies – with input from Insurance Australia Group (IAG), pluvial flooding is one of three forms of flooding.

“There are several kinds of floods,” said the report, Flood Risk Management in Australia, “Including fluvial floods (river floods), pluvial floods (surface water flowing towards rivers), coastal floods (storm surge and coastal tidal flooding).”

Wendt said the insurance industry has usually differentiated storms from floods by treating storms as inundations of water from the sky.

“Put simply, anything that causes damage to insured property that comes out of the sky is considered storm,” he said. “As water hits the property or comes into the property, if that causes damage to that property, or any of the contents of that property, then that would be considered as a storm event.”

Wendt said precipitation that doesn’t enter from the top of the building or is the result of inundation from below the building, or in the ground, is considered flood damage.

“That’s a very simple analogy,” he said.

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The new flood definition is a direct result, said Wendt, of the recent flood event and the way many buildings were impacted. In response, insurers have changed how they see the pooling of water.

“You had this rain event, it was difficult to get assessors in but also to make the distinction between the proximate cause, was it from a storm or was it flood?” he said. “That then delayed the settlement of a significant amount of claims and because of that underwriters, by adding this pluvial flood definition, have reduced their exposure but also made it clearer for policyholders to make a claim.”

If the water that comes from the sky inundates the property, pools on the ground, escapes that building and then affects the adjacent building, “that’s now under the pluvial flood definition and now considered flood,” he said.

He said “the vast majority” of Australia’s top 10 property and casualty markets’ insurers are shifting to this pluvial definition of pooling water.

“We would expect that there’s probably going to be more insurers that take the same view,” said Wendt.