"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. 

Progress since February

Following our initial investigation in February 2020 in the wake of the catastrophic bushfires in many parts of Australia, some insurers have added much-needed improvements to their fire cover. One insurer, QBE (issued by QBE), has done a complete reversal and overhauled its terms for the better and other insurers have also taken action.

Youi to improve definitions

Youi home insurance, which we rated as 'bad' in the original version of this story, has also recently committed to improving its fire definition (although it's still rated 'bad' until that change comes into effect).

Andrew White, Youi's executive general manager for actuarial operations, told us earlier this week that the insurer "is already in the process of developing a change to the Home PDS that will be released later this year. 

"As part of this change, Youi will be adding equivalent cover for soot or smoke damage to buildings, in addition to the cover that is already present for contents. Cover for damage from soot or smoke will also be extended to include flames within 100 metres of a building, instead of 10 metres". 

New A&G terms to take effect 1 May

Auto & General insurance company, which includes the brands Budget Direct, Virgin Money and ING, recently added significant improvements to its fire cover, after previously having received a rating of 'bad' in our analysis. To the company's credit, the changes lift its rating to 'good'. 

"As part of our normal product update process, Auto & General will extend our home and contents insurance to cover damage from heat, ash, smoke or soot that is a result of a fire within 100 metres of the insured address," says A&G director Jonathan Kerr. 

We shouldn't have to play whack-a-mole with bad insurance policies. Australians should have the peace of mind knowing that if the worst happens, their home is covered.

Dean Price, CHOICE senior campaigns and policy advisor

According to Kerr, the change will be applied in May 2021 to all home and contents insurance products and brands that Auto & General underwrites.   

"We will apply these updated terms to claims determinations with immediate effect, prior to the new policy terms being deployed," Kerr says. 

But other insurers whose cover is merely 'borderline' are lagging behind.

"Fire definitions have improved across the market, but we need standard definitions for all natural disasters. We shouldn't have to play whack-a-mole with bad insurance policies. Australians should have the peace of mind knowing that if the worst happens, their home is covered," says CHOICE senior campaigns and policy advisor Dean Price.

"Whereas a flood means the same thing in every insurance policy across the country, the same cannot be said for fires," Price says.

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' sustained smoke damage? What about partially burnt homes or valuable items that melted?

Loose language, complicated exclusions

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, used to exclude 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. 

The lesson from the 2010–11 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.) 

Working out which fire events you are and aren't covered for can very challenging.

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. 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, most homeowners won't 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 turned down new policy applications in 'red zones' during the 2019-20  bushfire crisis.) 

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?

In 2020 we rated nine brands (issued by five underwriters) as 'bad' for fire cover definitions, out of a total 27 brands we compared. 

Since then, five underwriters (representing 10 brands in our comparison) have changed their fire cover and earned a 'good' rating in the process. Nine of those brands had previously had a bad rating and one was 'borderline'. 

To the insurers' credit, some egregious clauses have been removed, such as Suncorp's stipulation that a building must be on fire within 10m of your own if you want cover for smoke damage.

Due to these improvements, the number of underwriters we rate as bad on fire cover is down to one, Youi. 

And the number of brands that have earned a good rating has more than doubled.  

But, as detailed above, Youi has committed to making improvements. We'll upgrade their rating when those changes come through. 

Good, bad or borderline?

To get a better sense of the language issue, our insurance experts trawled through dozens of 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. 

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.

* FSP – financial services provider.

Unfair contract terms no longer allowed in insurance 

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 CHOICE, we've fought for years to see this exemption lifted, and in 2020 legislation to this effect passed through Federal Parliament.  

Cover confusion

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. 

'Clumsy' exemption wording

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. 

Under unfair contracts law, 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, when we first published this story in 2020 amid a catastrophic bushfire season. 

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 the ICA spokesman

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 said. 

"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." 

Stock images: Getty, unless otherwise stated.

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