The blame for many uninsured property and financial losses from the recent floods and Cyclone Yasi can be sheeted home to banks, building societies, credit unions and other lenders.
BY TIM O’DWYER
Never mind the much-vilified insurance companies whose doubly-devastated policy-holders found themselves not covered for flood or storm surge. By not making sure residential and business borrowers were properly insured, banks and other lenders failed not only these customers but also themselves and ultimately their own shareholders.
Why? Lenders always for good reason oblige their property borrowers to take out and maintain insurance, but have never – in my decades of handling the conveyancing for property buyers – required borrowers to secure suitably protective flood and surge insurance. No lender, in my experience, ever asked for a flood search.
Despite obtaining valuations which one would expect should have indicated flood or surge risks, these same lenders inexplicably never saw – until now – the advantage for customers, themselves and shareholders in specifically requiring at-risk mortgaged properties to be insured against flood and surge damage.
Every property loan approval letter, in my experience, contains a condition similar to this from let’s say, Bank X:
“Bank X does not have to lend you any money until Bank X is satisfied that the mortgaged property is adequately insured with a reputable insurer, and that Bank X is noted on the policy as mortgagee.”
All lenders want to see an official certificate of insurance over every to-be-mortgaged property, but none (in my experience) have ever asked for a copy of a borrower’s insurance to ascertain what risks were covered. Lenders have apparently assumed that a property was ‘adequately insured’ if the certificate of insurance was supplied (after the premium was paid). As Australian Financial Counselling and Credit Reform chief executive officer Fiona Guthrie pointed out recently in The Courier Mail newspaper in Queensland, while loan customers have to have insurance, banks don’t “check the fine print”. “I bet they will now,” she added.
Meanwhile all lenders appear to be leaning over backwards for borrowers without flood or surge coverage who must now repair damaged properties while not defaulting under loan agreements. For instance the Commonwealth Bank has set aside, and advertised, a $50 million ‘compassionate fund’ to help customers who took out the bank’s own CommInsure policies which did not cover riverine flooding.
On the other hand Westpac Bank publicly assured customers with Westpac Home and Contents Insurance Cover that its policy covered “all floods, across all levels of cover”.
Similarly Bank of Queensland (BOQ) has run full-page newspaper advertisements with this assurance: “If you have Vero Home and Contents insurance through BOQ, your policy includes automatic cover for flood damage.”
Last month The Courier Mail reported how Westpac human resources chief Peter Hanlon told the Senate inquiry into bank competition that his bank was considering making flood insurance compulsory for home loan customers. “It’s not the practice in Australia at the moment”, he said, “but it’s something we’re looking at”.
Every lender should immediately make flood and surge insurance compulsory for all borrowers – including business and commercial customers. Such lender-required insurance cover would need to extend very clearly with fair and plain-language wording to storms, flash flooding, riverine flooding and ocean surges. If premiums for properties more at risk are higher than for those less at risk, lenders might allow for this in their lending – as happens now with mortgage insurance premiums.
Insurers who are not prepared to offer the sort of comprehensive and unambiguous cover required by lenders (and currently being pressed for by governments, the media and consumer groups) may find themselves writing fewer policies.
Hopefully insurers, who do not presently include flood and surge cover in their policies, will see the merits of doing this.
Tim O’Dwyer is a Queensland solicitor, email@example.com