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How does your insurer define a fire? 

Insurance industry no longer exempt from unfair contract terms. 

australian fire truck on country road
Last updated: 06 February 2020

Need to know

  • Insurers define fire cover in many different ways, leaving policyholders vulnerable to claim rejections
  • Our review of 26 insurers found language that was vague, clumsy and worryingly open to interpretation
  • How good is your fire cover? We rate the quality of cover in PDS docs from good to bad to borderline

"Fire cover" is a standard inclusion in home and contents insurance, but what does it actually mean? It turns out that what you're covered for is defined in many different ways. 

This lack of standardised terms among insurers means claims can be open to interpretation, which could end up giving you a nasty shock if you make a claim. 

Claiming because of bushfires

Bushfire claims can be especially complicated. 

For instance, was your property directly affected by bushfire? Did it catch fire as an indirect result? Were there flames on your property? 

What if your property was scorched, but not burnt to the ground, or only suffered smoke damage? 

What about partially burnt homes or valuable items that melted? 

The loose language and complicated exclusions around fire cover may give insurers more leverage to deny a claim 

Knowing the answers to such questions will mean getting your head around the many fire cover exclusions in policy documents (also known as product disclosure statements, or PDSs for short). 

They can be confusing, to say the least. One major insurer, for instance, excludes damage caused by "heat, ash, soot and smoke when your home or contents have not caught on fire unless it is caused by a burning building within 10 metres of the insured address". Many policies don't cover contents "in the open air". 

The loose language and complicated exclusions around fire cover may give insurers more leverage to deny a claim. 

In the current bushfire crisis, we have no reason to believe – so far – that this is happening. But in the case of another regularly occurring natural disaster in Australia, flood, it has certainly happened in the past. 

The lesson from the floods

Following the catastrophic floods in Queensland and northern NSW in late 2010 and early 2011, many homeowners who thought they were covered by flood turned out not to be. 

About 28,000 homes needed to be rebuilt, but many homeowners received no payout from insurers despite having paid premiums for years. 

The issue was language: insurers defined "flood" in many different ways. 

In the wake of the floods, the federal government conducted a review of insurance as it relates to natural disasters. 

About 28,000 homes needed to be rebuilt, but many homeowners received no payout from insurers despite having paid premiums for years

Despite resistance from the insurance industry, the review led to the adoption of a single definition of flood for all insurance policies, so that the tidal wave of denied claims that followed the Queensland floods wouldn't happen again. 

(It wasn't all good news. The government intervention led to a significant increase in insurance premiums for homeowners in what insurers deemed to be flood-prone areas, pricing many people out of the market. More than a few who were hit by the massive premium increases told us at the time that their properties weren't at risk. But that's another story.) 

woman confused about insurance policy

Figuring out which fire events you are and aren't covered for can be a tall order.

Single definitions for insurable events

The idea of a single definition for insurable events beyond flood cover has been around for a while. 

In 2017, a senate inquiry recommended that insurance policies have standard terms so policyholders could better understand what they are and aren't covered for. 

In December 2019, a report from the Australian Consumer and Competition Commission (ACCC) also recommended standard terms in insurance policies. 

In the case of fire, it would presumably help policyholders know whether they're covered in times like these. It would also help prospective home insurance customers choose the right home or contents cover

Once the wait for your cover to kick in is over, homeowners have a right to know what they are and aren't covered for – and in crystal clear terms

Of course, no homeowner will be covered if they take out insurance while bushfires are bearing down on their property. The waiting (or 'embargo') period after taking out a policy before the cover takes effect ranges from 48 hours to 72 hours to seven days. 

(A number of major insurers don't specify an embargo period, meaning you can take out cover to protect yourself from the likelihood of fire. But it won't take effect until the insurer says so, perhaps after fire has already affected your property.) 

But once the wait is over, homeowners have a right to know what they are and aren't covered for – and in crystal clear terms. 

Fire definitions in insurance policies – how does your insurer rate?

To get a better sense of the language issue, our insurance experts trawled through 26 PDSs looking for good, bad and borderline (just so-so) fire definitions. 

It's fair to say that the definitions, if some can even be called that, were all over the shop. 

In general, though, if your PDS says something like "we will cover you for loss or damage that is caused by or results from fire or explosion" you probably picked the right insurer for fire cover. 

Relatively exclusion-free language such as "caused by" or "results from" is what you want. 

After our trawl-through, we rated the fire cover in the insurance products according to the following criteria: 

Good: Simple, clear, broadly applicable terms and definitions. Minimal exclusions and no potentially unfair terms*.

Bad: Unnecessarily complex, long, with confusing exclusions or terms that could be considered potentially unfair.

Borderline: Fire definitions that aren't categorically bad, but aren't good either.

* According to the Banking Royal Commission (P305) / Treasury UCT Proposals Paper, a fair term is one that "will be reasonably necessary to protect the legitimate interests of an insurer if it reasonably reflects the underwriting risk accepted by the insurer in relation to the contract and it does not disproportionately or unreasonably disadvantage the insured" (our emphasis). Our analysis considered terms that don't satisfy the latter (bold) part of that definition to be "potentially unfair", although terms may also be unfair if they don't satisfy other parts of the definition.

Fire definitions in insurance policy PDSs: the good, the bad and the borderline

Insurer (FSP*)

Our rating

Reasons for our rating

 

Aami (Suncorp)

 

Bad

"Heat, ash, soot and smoke when the building has not caught on fire unless it is caused by a burning building within 10 metres of the insured address".

Confusing exclusion: If heat from a passing bushfire affects parts of your building or contents but doesn't ignite a burning building within 10m you might not be covered.

 

Allianz (Allianz)

 

Good

Allianz covers you for "loss or damage caused by":

• fire,

• bushfires and grass fires, or

• smoke.

The use of catch-all language such as "caused by" or "results from" is a good thing in a PDS, leaving little room for exclusions.

 

Apia (Suncorp)

 

Bad

"Heat, ash, soot and smoke when the building has not caught on fire unless it is caused by a burning building within 10 metres of the insured address".

Confusing exclusion: If heat from a passing bushfire affects parts of your building or contents but doesn't ignite a burning building within 10m you might not be covered.

 

ANZ (QBE)

 

Good

"We will cover: Loss or damage as a result of a fire or an explosion.

Loss or damage as a result of charring, melting or scorching as a result of a fire without the presence of flames."

The use of catch-all language such as "caused by" or "results from" is a good thing in a PDS, leaving little room for exclusions. 

 

Bank of Melbourne Essential Care (Westpac)

 

Borderline

Excludes cover for fire, scorching or melting if there was no flame present. Cover is inconsistent across Bank of Melbourne's three home insurance products (Essential Care, Quality Care, Premier Care).

 

Bank of SA Essential Care (Westpac)

Borderline

 

Excludes cover for fire, scorching or melting if there was no flame present. Cover is inconsistent across Bank of Melbourne's three home insurance products (Essential Care, Quality Care, Premier Care).

 

Budget Direct (A&G)

 

Bad

"...smoke or soot when no damage from fire has occurred". This is clumsy wording that could lead to potentially unfair exclusions.

CGU (IAG)

Good

"We will cover your buildings or contents for loss or damage as a result of a fire or an explosion.'' The use of catch-all language such as "caused by" or "results from" is a good thing in a PDS, leaving little room for exclusions.

 

Coles (IAG)

Bad

Flames have to be present for your cover to kick in: "We will cover you for loss or damage caused by burning with flames. We will not cover you for loss or damage caused by:

• scorching, burn marks or melting where there has been no flame, or

• heat, soot, smoke or ash, unless your buildings or contents have caught on fire."

Comminsure (Comminsure)

 

Good

"Your building and/or contents are covered for loss or damage caused by:

• fire (including bushfire); and/or 

• heat, smoke and/or soot as a result of fire." 

The use of catch-all language such as "caused by" or "results from" is a good thing in a PDS, leaving little room for exclusions.

 

GIO (Suncorp)

 

Bad

"Heat, ash, soot and smoke when the building has not caught on fire unless it is caused by a burning building within 10 metres of the insured address".

Confusing exclusion: If heat from a passing bushfire affects parts of your building or contents but doesn't ignite a burning building within 10m you might not be covered.

 

ING (A&G)

 

Bad

"smoke or soot when no damage from fire has occurred". This is clumsy wording that could lead to potentially unfair exclusions.

 

NRMA (IAG)

 

Borderline

Fire is not clearly defined in this product, which says: 

"If loss or damage is caused by fire, covered:

• fire

• bushfire".

You're not covered for scorching or melting unless flames are present.

 

QBE (QBE)

 

Bad

The phrase "Fire producing flames, but not charring, melting or scorching without flames" is clear but the exclusion "We won't cover damage caused by charring, melting or scorching as a result of fire without the presence of flames" is potentially unfair.

 

RAA (RAA)

 

Borderline

This product will cover you for "loss or damage as a result of fire including bushfire", but excludes cover for scorching or heat damage "where there has been no ignition" or "caused by cigarette/cigar marks or scorching".

 

RAC (RAC)

 

Borderline

RAC says "we cover loss and damage caused by fire" but fails to define "fire". Confusingly, it excludes damage caused by "heat not directly involving fire or as a result of your building or contents undergoing a process necessarily involving the application of heat".

 

RACQ (RACQ)

 

Borderline

RACQ says "a fire needs to have an actual flame", which would leave you uncovered for smoke, scorch or melt damage. 

 

RACT (RACT)

 

Borderline

RACT's needlessly complicated definition of "fire" also says "a fire needs to have an actual flame". And you won't be covered for any damage unless the fire is within 100m of your home.

 

RACV (IAG)

 

Borderline

Fire is not defined in this policy, and scorching or melting won't be covered unless there are flames.

 

SGIC (IAG)

 

Borderline

Fire is not defined in this policy, and scorching or melting won't be covered unless there are flames.

 

SGIO (IAG)

 

Borderline

Fire is not defined in this policy, and scorching or melting won't be covered unless there are flames.

 

TIO (Allianz)

 

Good

"We will cover you for loss or damage that is caused by or results from fire or explosion". The use of catch-all language such as "caused by" or "results from" is a good thing in a PDS, leaving little room for exclusions.

 

Virgin Money (A&G)

 

Bad

"...smoke or soot when no damage from fire has occurred". This is clumsy wording that could lead to potentially unfair exclusions.

 

Westpac Essential Care (Westpac)

 

Borderline

Excludes cover for fire, scorching or melting if there was no flame present. Cover is inconsistent across Bank of Melbourne's three home insurance products (Essential Care, Quality Care, Premier Care).

Woolworths (Hollard)

Borderline

No cover unless there are flames, and no cover in any case for "damage to heat-resistant item that ignites (cooking appliance, dryer, etc)".

 

Youi (Youi)

Bad

Needlessly complicated wording, but it's clear that you won't be covered for scorching, melting or smouldering unless there are flames. Confusingly, cover is different for buildings and contents.

* FSP - Financial Services Provider

Unfair contract terms still allowed in insurance - for now

A major issue at play here is the insurance industry's exemption from the ban on unfair contract terms that the ACCC imposed on other businesses. 

At long last, the exemption was lifted shortly after publication of the original version of this story. 

CHOICE has fought for years to see this exemption lifted, and very recently legislation to this effect passed through federal Parliament.  

Basic home insurance covers events such as flood, fire, and theft. But many insurers offer a higher level of 'accidental damage' cover, which is intended to cover accidents such as a scorched carpet as a result of a heater tipping over. 

Much of the confusion in fire definitions stems from insurers attempting to distinguish between the two levels of cover. 

It means the wording in policy documents could be taken more broadly to exclude damage from soot, ash, smoke and scorching as a result of bushfire. 

At CHOICE, we agree with the banking royal commission proposal that insurance contracts be included in unfair contracts legislation

Take this example of clumsy exemption wording from Auto and General (A&G), provider of Budget Direct insurance.

A&G says you wouldn't be covered for "smoke or soot when no damage from fire has occurred, unless you have selected and we have agreed to provide optional Accidental Damage cover".

So if you take precautions to protect your house from bushfire and it doesn't burn as a result, but is damaged by smoke or soot, then the phrase "smoke or soot when no damage from fire has occurred" could mean your claim is denied. 

At CHOICE, we agree with the banking royal commission proposal that insurance contracts be included in unfair contracts legislation.

If the proposed wording for including insurance contracts in unfair contracts law were adopted, the A&G exclusion could "disproportionately or unreasonably disadvantage the insured". This means the law could potentially protect you from the ambiguity of an insurer's unclear terms, and lower the risk of your claim being unfairly denied. 

The ICA weighs in – or not

We got in touch with the Insurance Council of Australia (ICA), the peak body representing the insurance industry, for comment. We asked whether it thought that the unclear and inconsistent language around fire in home and contents insurance was a cause for concern. 

We also asked whether it supports the standardisation of terms in insurance PDSs in general. 

Our line of questioning did not go down well with ICA spokesman Campbell Fuller. 

"Household policies are responding appropriately to claims relating to the bushfires," he says. 

"No concerns about policy wording as suggested by CHOICE have been raised with the Insurance Council of Australia. The ICA is concerned that CHOICE's article may cause unnecessary and unjustified fear among householders who are already experiencing emotional, financial and physical stress following catastrophic bushfires. The ICA notes CHOICE has not been able to provide any examples of detrimental consumer outcomes nor provided its findings.

"If any customer has a concern about policy wording they should contact their insurer." 

We care about accuracy. See something that's not quite right in this article? Let us know or read more about fact checking at CHOICE.

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