Insurers are bracing for fallout from the Queensland floods on at least two fronts – resisting the compulsory flood cover option of the Federal Government’s Natural Disaster Insurance Review and preparing for an onslaught of criticism from the Queensland Government’s independent commission of inquiry.

The latter inquiry has received 647 submissions from a wide range of interested parties, but it may come as a surprise that just 60 of the 647 submissions to the commission are insurance-related.

Nevertheless it could still be a rough couple of months for the general insurance sector. Round two of the hearings are set down for September. Submissions are still being accepted as a number of organisations have been granted an extension of the original June 15 deadline.

An examination of many submissions by insuranceNEWS.com.au shows the commission of inquiry will hear plenty from the industry about the factors that make flood insurance so difficult, and why flood victims in such a large-scale disaster can’t really have the sort of claims service they might have been led to expect.

Those victims and their support organisations will detail allegations of bad claims-handling and policy misrepresentation.

Take the submission of the Balonne Shire Council, which is located in Queensland close to the NSW border, 500km from the coast. It suggests the insurance industry did not appear to be “actively forthcoming in attending the needs of their clients” during the various flood events that crippled the state last summer.

It says while there were some exceptions, the industry’s performance was generally not satisfactory, with ill-defined definitions of stormwater and flood in policy documents and residents unable to obtain flood insurance.

“An increased level of involvement, transparency and communication would benefit the insurance industry and communities,” the council says.

Legal Aid Queensland (LAQ) says it is currently assisting more than 300 people who are encountering issues with their insurance policies and or insurers, and that the recovery process has been made harder by the number and variety of different policies.

It also highlights what it sees as one of the biggest concerns – the inability of most ordinary Australians to be able to afford flood insurance.

LAQ says most fixed-income consumers could simply not afford flood cover, which is only offered by three or four insurance companies.

“Many or our clients who were long-term customers of Suncorp [the only company to offer automatic flood cover for personal lines] changed insurers as a consequence of steeply rising premiums over the past three years,” its submission says.

“Many other low-income homeowners have little chance of being able to access affordable insurance on their homes.”

While IAG MD Mike Wilkins supports the need for assistance for the financially disadvantaged, he says the way in which government assistance is provided across affected communities deters those who can afford to insure from doing so.

“Open-ended assistance is inequitable when provided to those individuals who are able to do so but choose not to responsibly insure,” he says.

“Governments need to avoid interventions that promote dependence on government assistance and reduce incentives for self-reliance and personal responsibility.”

Mr Wilkins says one way to address this issue is to apply an income tax measure to any government assistance packages to ensure that “continued incentive for prudent risk management by individuals to take out private insurance” remains.

The question of claims management will be a major aspect examined by the inquiry, with LAQ claiming that clients were persuaded not to pursue or lodge a claim in some cases and insurers failed in other cases to keep clients informed.

It says some policyholders were initially told their claim was viable but later had their claims denied. There are also numerous other complaints involving long phone delays, failure to adequately explain refusals, and the bundling of claims together in one package that should have been dealt with as separate events.

LAQ also highlights the use of hydrologists’ reports which it says are “general in nature and have limited use for individual cases”.

“Each report has to be read through the lens of the definitions in use by the particular insurer in the particular policy. The terms of policy exclusion lead to artificial distinction about when a ‘storm’ may have commenced and the sort of water which ultimately inundated property.”

Addressing concerns over delays in claims-handling, Suncorp submits that there is always a risk of the process being slowed down with large-scale disasters like the Queensland floods.

The insurance group, which covers flood through most of its brands, says it understands that while there is need to process claims in acceptable timeframes there is also a responsibility to all stakeholders to ensure claims are not paid without proper examination.

“The unfortunate reality is that after such events there can and will be attempts by a small minority to capitalise on the loss of others and make non-legitimate claims.

“If insurers paid claims without appropriate scrutiny or paid claims arising from risks not covered by the insurance policy there could be significant public policy complaints. It could promote inappropriate or fraudulent customer behaviours.”

Suncorp says its stringent loss assessment process uncovered a number of examples of this behaviour, including claims for cars parked away from a customer’s work or home but in the flood zone; people posing as assessors to gain unauthorised work; and claims of damage to properties not owned by the claimant, including photographs of damage involving other properties.

“It is critical to maintain a prudent sound insurance industry that both customers and insurers be required to fulfil their duty of good faith under the terms of an insurance policy.”

LAQ says there were also major issues surrounding what is covered in home insurance policies, with most people not understanding them.

“We anticipate providing many case studies illustrating this and the disproportionate harm suffered as a result of consumers having to assess their own risk.

“Some clients have discovered after the event that although their claims are accepted, the fine print in their insurance policy limits payouts to a capped amount, representing a significant decrease on the sum they had thought they were insured for and not enough to fund a rebuild.”

LAQ says many clients were told they were covered for flood at or soon after the point of sale, which is inconsistent with their policy documents.

The legal service believes this shows an inherent lack of knowledge by all parties, including insurance company staff and brokers, due to the complexity of the documents.

However, Suncorp says that the role of insurance and its responsibility in times of natural disaster like that seen in January needs to be taken into context.

It says all stakeholders need to take accountability for mitigation measures before these catastrophic events occur to minimise the damage.

“While insurance provides a means of reducing the impact of loss on individuals, families and businesses after an event, the role of other stakeholders, in particular state government and local authorities, is crucial to reducing the damage that these events can cause in the first place.

“The management of natural hazard risks such as flood is the collective responsibility of governments, businesses, communities and individuals… State and local governments must supplement insurance with strategies and programs that improve disaster resilience.”

Suncorp says in order for insurers to price the risk of future flood events there needs to be a public understanding of the link between pricing and mitigation measures like the construction of levies and encouraging settlement in areas that are not vulnerable to flood, cyclone, earthquake and bushfire.

“Ultimately the performance of insurance providers in providing low-cost premiums and meeting claims obligations will always be primarily dependent on successful risk mitigation by government,” it says.

IAG also submits that work needs to be done on building codes and flood mapping in order for residents to be able to adequately mitigate their risks and for the insurance industry to be able to price it.