When flooding is a natural disaster – and when it isn’t

A newspaper recently reported an insurer’s decision to decline a claim for flood damage under a motor vehicle policy on the basis that flooding was not a “natural disaster” for the purposes of the policy.

The policyholder suffered flood damage to her vehicle as a result of the widespread flooding that occurred in the Auckland region in late August 2021.  She made a claim under her motor vehicle insurance policy with her insurer, State Insurance.  The policy included cover for natural disaster, so she expected to be covered.

The policy was a “third party, fire and theft” policy of the sort commonly taken out by younger drivers with low value vehicles, to keep premiums low.  These policies cover liabilities to third parties (usually other drivers whose vehicles are damaged) and losses that result from causes other than the policyholder’s driving errors, but damage to the insured vehicle itself caused by the policyholders’ own driving is not covered.  As young drivers are statistically more likely to be involved in motor vehicle accidents, this reduces the risk for the insurer, while incentivising policyholders to drive safely.

State’s explanatory brochure describes its policy as covering “fire, theft, attempted theft or natural disaster”.  Natural disaster might commonly be thought of as including a major flooding event.  State’s policy, however, defines it exclusively as “an earthquake, natural landslip, volcanic eruption, hydrothermal activity, tsunami or natural disaster fire, as defined in the Earthquake Commission Act 1993”.  Natural disaster fire is defined in that Act as a fire caused by, among other things, a storm or flood, but only in the case of residential land and in any event the insured event is a fire, not a flood.

The policyholder’s loss was not, therefore, caused by a natural disaster for the purposes of the policy.

This outcome may not be consistent with the understanding many people would have of the meaning of natural disaster.  Dictionary definitions generally give floods as an example of a natural disaster, as does the Insurance Council of New Zealand’s website.  The definition in the Act is a limited definition which may be more appropriate for insurance relating to real property than to chattels such as motor vehicles.

Policyholders who read only State’s brochure, or its “Key Benefits” guide at the front of the policy, might therefore say that they assumed that it provided cover for flood damage and other natural disaster damage as it is commonly understood.  Similarly, a person reading down to the basis of cover provisions in the policy would see the following wording: “You’re covered for sudden and accidental loss to the car caused by: a. fire, or b. theft or attempted theft, unlawful conversion, or c. natural disaster”, without any indication that “natural disaster” had a limited meaning.  Only a person who read the policy wording in full would discover, near the end of the policy wording, that natural disaster did not include flooding.

Insurers have obligations under the Financial Markets Conduct Act 2013 not to engage in conduct that is misleading or deceptive or likely to mislead or deceive in relation to the supply of a financial service, which includes acting as an insurer.  While insurers may say that policyholders should read the policy in its entirety, where policy wording contains definitions that may be viewed as significantly more restrictive than normal usage, policyholders may argue that they have been misled.  We recommend that insurers exercise caution when issuing policies that advertise cover in terms that are defined narrowly and that may be misunderstood by a person who does not read the policy wording to the end.

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