NSW floods could expose underinsurance. Here’s how to protect yourself

Another year, another ‘once-in-a-century’ natural disaster.

Flooding on New South Wales’ mid-north coast has thrust non-insurance against climate change risks into the spotlight after the Insurance Council of Australia (ICA) declared a catastrophe.

The ICA’s decision, after more than 5000 claims were submitted, means insurers will fast-track support to affected policy holders.

But the pain many home owners are experiencing may worsen if they find their home is among the cohort of underinsured.

The Climate Council has estimated that unless natural disasters are mitigated, home insurance policies could become “effectively unaffordable” for one in 19 Australian homes by 2030.

How bad is Australia’s non-insurance problem?

Analysis of the insurance sector estimates 90 to 92 per cent of Australian properties are insured in some capacity.

Principal of risk management firm Fortified, Karl Sullivan, said that figure falls off for contents insurance, with renters less likely to insure their personal effects due to insufficient funds, the perception of poor value for money, or the belief their landlord covers them for any damage.

But Mr Sullivan, who is a former head of risk and operations at the ICA, said the biggest issue exposed in floods is non-insurance.

“Most insurance products in Australia include flood as standard … but what we see is some people don’t purchase it, and if water comes through your property, your insurer could turn around and say you didn’t pay that premium,” Mr Sullivan told The New Daily. 

Kate Bower, insurance data analyst at consumer group Choice, said one factor contributing to non-insurance against water damage is owners stumbling on inclusions.

An industry-standard definition for floods was legislated in 2011 after the 2011 Queensland floods. But confusion reigns over every other type of water-related event – with different exclusions for every policy.

“Flood is what’s referred to as water covering land that is usually dry that has escaped any natural water course. That’s different from water that’s come in from storm run-off, which would be counted as a storm, or a burst pipe that would count as an escape of liquid,” Ms Bower told The New Daily. 

She said the details of specific insurance policies would be tested in the current crisis.

Those on the mid-north coast or the Hawkesbury-Nepean Valley are likely to have flood damage, while those elsewhere in NSW are likely to have damage from stormwater runoff, burst drains, or a leaky roof.

So, how do you work out how much risk to take on?

Mr Sullivan said savvy home owners would have done the hard yards well before buying their property.

He said the first sign of a potential flooding risk is insurers unwilling to cover them. Or, in the event they are offered a quote, the price would be heavily inflated.

Nevertheless, Mr Sullivan said risk assessments should be ongoing as home owners in flood-prone areas can be caught out by gravitating towards “thinner” products.

“Most people without flood insurance will have actively entered into that situation with their insurer and typically done that to save costs,” he said.

“But most people are sensible, everybody’s rational, and if they suddenly find out they’ve got a large risk to contend with, they’ll rationally look for ways to mitigate that risk, which could be through insurance, or [through elevating] the home or [having] a flood plan in place.”

Mr Sullivan said “sophisticated” councils, such as Brisbane City Council, send out flood risk reminders with rate notices.

Home owners have state government information at their disposal, too.

Some provide flood zone maps highlighting ongoing risks of flooding in particular locations, while rural council websites sometimes include lot-specific information about potential flood risks.

With all that considered, Ms Bowers said home owners should ensure their policy has a ‘sum insured’ – which is the total value of the insurance policy in the event the home and all contents are destroyed – that’s aligned to a level of risk they are happy to stomach.

“It’s a good idea to calculate that, because you know that if you did lose everything and you’d need around $800,000 to rebuild your life, most people are not going to have that [money] on hand,” she said.

As premiums rise, is there any way to drag down costs without affecting coverage?

The ICA recently sounded the alarm on growing flood claims, prompting premiums to rise as insurers mitigated massive losses.

But there are still ways to counter the rising costs.

Ms Bower said there were two main ways to reduce them: By shopping around and altering policy excesses.

“Every insurer will use a different way of assessing risk, so if you live in a flood-prone area, just because you get one very expensive quote from one insurer, don’t assume they’ll all be the same way,” she said.

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