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Risk In Context

Where is my La Niña flood risk exposure?

Posted by Rob Gardiner 09 December 2020

It’s official. The Bureau of Meteorology has declared a La Niña, which means there’s an increased risk of flooding this summer.1

Where is La Niña likely to cause property damage in the event of a flood?

Businesses with property assets or supply chains in flood exposed areas are potentially vulnerable to damage, but at what cost? Over AUD $700bn of GDP is exposed to flood risk every year in the Asia Pacific region. It’s important to identify which of your assets (or suppliers’ assets) are located in flood exposed areas.

Is your insurance cover adequate to help you through and manage the impact of a natural hazard event?

In late 2010 and early 2011, severe rain and flooding caused extensive damage across the states of Queensland and New South Wales in Australia. Flooding resulted in three-quarters of the state of Queensland being declared a disaster zone, with over 300 roads closed including nine major highways, 70 towns affected and thousands of people evacuated. 

In 2011, the Insurance Council of Australia, which collates statistics from general insurers, estimated catastrophe losses alone to be in excess of AUD $5bn.2 

Loss analysis and modelling can help identify assets at risk and quantify potential property damage so you can see whether your insurance cover is adequate and that your business can weather the storm. This analysis enables you to gain a greater understanding of your total property portfolio flood risk and exposure, so you can make informed decisions. For example, how much property insurance you should purchase and how to structure the policies with limits, retentions and other terms. 

However, loss modelling is only as good as the data that is fed into the model. Poor data can over-estimate costs and lead to additional premium spent on coverage that isn’t needed.

Am I insured for flood risk? 

A common property insurance policy will typically exclude cover for flood risks, unless specific arrangements have been made to include this cover. On the other hand, storm and other weather perils is a risk which is typically covered. For example, a standard policy wording commonly used in Australia excludes physical loss, destruction or damage occasioned by or happening through ‘Flood’, where ‘Flood’ is taken to mean ‘the inundation of normally dry land by water overflowing from the normal confines of any natural watercourse or lake (whether or not altered or modified), reservoir, canal or dam.’ 

However, it’s not always clear whether the damage has been caused by storm as opposed to flood. Prior to 2011, the Australian insurance market had not seen significant flood activity outside of known flood plains or zones for quite some time. The 2011 Queensland floods were a significant awakening for the insurance industry. We did witness several contentious claims, whereby insurers argued that flood was an incident, however deeper research by independent experts did prove, in most cases, that the water damage was caused by storm and tempest, and not inundation of a water source (i.e. flood). 

In a general principal of insurance, where there is a flood exclusion, it could be quite feasible that if there are two equally competing causes of a loss, one covered (in this case storm) and one expressly excluded (in this case flood), then the whole loss is excluded.

Insurance lessons from the 2011 Brisbane Floods 

After the 2011 Brisbane Floods, many businesses were surprised to learn they weren’t covered for flood risks. Here’s a few things you can do:

  • Review and verify property and liability documents to ensure you understand the flood cover in place, deductibles, sublimits, and excess flood insurance limits, particularly where there are “tailored” arrangements. 
  • Consider flood exclusions, flood definitions and who is responsible for claims, and under what condition the policies will respond, e.g. is your facility covered when operating as a shelter during a major disaster?
  • In the event of a loss, consider available evidence (e.g. hydrological) before categorising a loss as ‘flood’.
  • Use photos and records of the events as they unfold to assist in determining the cause of the damage and whether or not the cause is flood.

How do you mitigate flood risk? 

Flooding can occur fast, with little warning. Having clear, actionable risk mitigation and flood management plans in place before a natural disaster strikes can help you maintain the integrity of your assets, protect your supply chain and ensure business continuity. 

Understanding what to do is one thing, knowing when to act is another. As a starting point, here’s some things you might consider:

  • Build flood walls / barriers 
  • Elevate properties and equipment 
  • Install pump stations 
  • Anchor structures to foundations 
  • Create water diversion channels 
  • Move operations away from rivers, streams, and creeks 
  • Have an emergency communication plan in place
  • Pre-record a voicemail message and consider redirecting business phones to other lines or services 
  • Have all employee, vendor, and client contact information on hand
  • Locate gas mains and electrical shut-offs
  • Prevent floodwater from backing up into sewer drains by using plugs or installing flood vents or flood-proof barriers
  • Identify meeting place(s) and time(s) for key employees 
  • If conversations are held with customers or suppliers that may be material to claim measurement, it is essential to document them

What’s your increased cost of operating due to climate change? 

It can often be difficult for companies to gain a complete picture of the risks and opportunities associated with climate change. This inability to fully assess climate and resource-constrained risks and associated lost opportunities presents greater costs than many businesses are aware of. 

Climate change continues to impact the severity of weather events like La Niña. Examples of physical impacts include property damage and business interruption (as a result of more volatile extreme flooding – on the coast or inland – exacerbated by sea level risk and potential shifts in the distribution of cyclone activity and other severe events). 

Insurers are reacting by increasing premiums and enforcing stricter exclusions and lower limits. According to the United Nations, ‘economic losses from natural disasters and weather catastrophes will reach USD 160 billion per year by 2030 with only 8 percent of losses likely to be covered by insurance.’

If you’re prepared early, you have options 

The message is clear: Businesses that make informed insurance and risk decisions ahead of time will be better placed to rise to the challenges that La Niña suddenly presents. 

Here are some of the ways Marsh can help: 

  • Understanding your flood risk exposures 
  • Undertaking a business interruption review 
  • Creating and reviewing a flood emergency response plan
  • Updating business continuity plans to cover the management and logistical process for continuing or resuming and recovering interrupted critical business functions 
  • Understanding the specific wording in your insurance policies and whether any extensions or exclusions will apply 
  • Investing in risk mitigation strategies to help reduce the severity of potential flood or cyclone loss events

Need help now? Contact us here.

1. Bureau of Meteorology, 2020, ‘Climate Driver Update’. http://www.bom.gov.au/climate/enso/ 

2. Insurance Council of Australia, ‘2011 Year in Review’. https://www.insurancecouncil.com.au/assets/files/2011.pdf  

The information contained in this publication provides only a general overview of subjects covered, is not intended to be taken as advice regarding any individual situation and should not be relied upon as such. Insureds should consult their insurance and legal advisors regarding specific coverage issues. All insurance coverage is subject to the terms, conditions, and exclusions of the applicable individual policies. Marsh cannot provide any assurance that insurance can be obtained for any particular client or for any particular risk. Statements concerning legal matters should be understood to be general observations based solely on our experience as insurance brokers and risk consultants and should not be relied upon as legal advice, which we are not authorized to provide. All such matters should be reviewed with your own qualified legal advisors. LCPA No: 20/609.

Rob Gardiner

Marsh Pty Ltd (ABN 86 004 651 512, AFSL 238983) (“Marsh”) arrange this insurance and is not the insurer. The Discretionary Trust Arrangement is issued by the Trustee, JLT Group Services Pty Ltd (ABN 26 004 485 214, AFSL 417964) (“JGS”). JGS is part of the Marsh group of companies. Any advice in relation to the Discretionary Trust Arrangement is provided by JLT Risk Solutions Pty Ltd (ABN 69 009 098 864, AFSL 226827) which is a related entity of Marsh. The cover provided by the Discretionary Trust Arrangement is subject to the Trustee’s discretion and/or the relevant policy terms, conditions and exclusions. This website contains general information, does not take into account your individual objectives, financial situation or needs and may not suit your personal circumstances. For full details of the terms, conditions and limitations of the covers and before making any decision about whether to acquire a product, refer to the specific policy wordings and/or Product Disclosure Statements available from JLT Risk Solutions on request. Full information can be found in the JLT Risk Solutions Financial Services Guide.