Reforms to standardise insurance definitions for natural perils should include a focus on exclusions and qualifications that can leave consumers exposed after they thought they were covered, the Financial Rights Legal Centre says.

Multiple inclusions and exclusions in product disclosure statements (PDS) are often overlooked by consumers, who may assume policies are more or less the same for commonly understood events such as storm and fire, and who may find comparisons daunting, a report commissioned by the FRLC has highlighted.

“What people do not necessarily know about, and where problems arise, are the exclusions and qualifications to these concepts that are included in the fine detail of PDSs,” FRLC CEO Karen Cox says.

The report, titled Standardising general insurance definitions, recommends more work to define events and clarity around common exclusions such as “wear and tear” and “malicious damage”. It proposes exclusions and qualifications could potentially be provided in a more easily comparable tabular form.

The report says insurers differ in what they effectively include in flood and storm damage, despite “flood” being a standardised definition, with similar issues also existing for fire and smoke damage.

“Examination of the PDSs of 34 home insurance policies revealed significant variation between them, not only in the definitions of key terms, but in the inclusions and exclusions of the policies,” it says.

“Although some of these variations may appear minor on the surface, they are likely to become critical at the time a claim is made as they determine whether or not a person is covered for damage incurred.”

Twenty-two of the insurers examined regarded flood and storm as separate insured events, 12 policies considered these events together and “considerable variation” existed in the inclusion of wind, hail, rain, rainwater runoff, storm surge and cyclone. Flood cover was considered optional by five insurers.