Insurance Claims, Flood Exclusions and Litigation!

How to interpret insurance policies and make sense of what is included and what isn’t and when to make a claim?

Contract and Duty of Good Faith and Duty of Disclosure

  • Firstly, insurance is a contract like any other and most people will be party to an insurance contract at some point or another;
  • The insurer and the insured have the duty to act in “good faith”, requiring parties to act honestly and fairly towards each other.
  • For example, for insurers, their duty includes ensuring their policies are unambiguous and easily understood by insureds. Claims must be assessed properly and efficiently, and they should not be delayed or refused without proper reason.
  • For the insured, the duty includes:
  • Disclosing all relevant information to the insurer before the policy is placed and during the policy period;
  • They must not make false or exaggerated claims and to cooperate with insurer when claims are being investigated; and
  • to cooperate with the insurer when dealing with demands by third parties. 

If either party breach their duty of good faith, there may be a claim of damages arising out of that breach and in some circumstances, it may make the insurance contract void.

Claims Process

  • In accordance with your duty of good faith and duty to disclose, you notify your insurer of a claim when you become aware of it. Your insurer investigates the claim to determine whether the policy responds and will either accept or deny the claim. If they accept the claim, they will apply an excess (sometimes called a deductible) and then pay for your damage. They may also pursue third parties in your name. This is called subrogation.
  • The best way to explain insurance is to give a couple of examples which may be relevant.

Motor Vehicle example – third party vs comprehensive

  • For example, say you have third party car insurance and have a car accident.

If it was your fault, your insurer will pay for the damage to the other car, but not your car.

If the other driver was at fault, your insurer will most likely deny the other party’s claim, but they still will not pay for the damage to your car because you do not have coverage for your vehicle. But, you still have a claim against that driver. You can make a claim directly against that driver for the damage to your car. That person will either pass that claim onto their insurer or be liable to pay it personally if their insurance is inadequate.

  • Whereas, if you have comprehensive insurance and you have that accident, your insurer will pay your damage and they may or may not choose to pursue the third party, be it the driver or some other party who contributed to or caused the accident.

They might not pursue the other party because it would cost more to litigate or pursue it legally then it would be to pay the damages.

In our example, if the accident occurred where there was road works and the road works contractor failed to have proper signage warning the driver’s to slow down, then the insurer may step into the shoes of the insured and sue the road works contractor for contributing to the damage.

Some contracts provide for Defence Costs

A Postman enters your property and your dog bites him. You will make a claim on your insurance. If your policy includes “defence costs”, your insurer will take up your defence on your behalf and pay your legal costs, but the Postman would not know that.

Most litigation or court cases in this country (and indeed around the world) involves an insurance company but you may not know that it is an insurer standing behind the other party. However, an experienced insurance lawyer will be able to tell if an insurer is involved because insurers use particular law firms.

Exclusions and Policy Interpretation

Insurance companies don’t cover everything. They specifically exclude certain events or causes.

A very common exclusion is “flood”. If you live on a flood plain, like the people in Brisbane, this is a huge problem.

Cyclone Yasi and the Brisbane floods of 2011 meant many property owners had their claims denied.  What you may not have seen behind the media was the big legal stoushes in the background, arguing about the legal definitions, the extent of coverage and policy interpretation regarding what is flood water and what is storm water, because whilst floods were excluded, most policies covered storm water damage.

These legal battles including lawyers for both insurers and insured parties (be it Mum and Dad home owners or businesses) engaging hydrologists to determine where water came from, when it caused the damage to premises. If it was found to be storm water or part of the damage was caused by storm water, that part of the claim was covered.

When a claim gets denied, it is worth considering whether that denial has any challengeable grounds. Lawyers specialising in insurance law advise on the extent or scope of coverage and how to mount a challenge. It is not uncommon for denials of indemnity (including many initially made in response to the floods of 2011 and Cyclone Yasi) to be overturned by a legal challenge.

When you get an Insurance Claim Denied, it’s not the End of the Line

For example, someone comes onto your property, lets say your farm to do some work in the shed. A fire happens and your farming equipment is damaged. You make a claim against your machinery and plant or property insurance policy which is refused due to a fire exclusion. The fire exclusion operates to exclude any claim arising out of a fire.

You still have a claim against that person. That person might be hired by a labour hire company and that company may have insurance. You make a claim for the damage against the person. The person in-turn, passes it onto the labour hire company and the labour hire company may pass it onto their insurer. Just because your insurance does not cover the damage, doesn’t mean that you lose your cause of action in common law.

What it does mean, is that your legal costs to pursue the third party will be borne by you rather than by an insurer under subrogation or using defence costs. Those legal costs may be recoverable if you win your case in court and the court awards a costs order in your favour. The costs order will make the other party liable to pay some or all of your legal costs.