Walk away to avenge insurance companies

HERE are some misconceptions highlighted by the Queensland floods. First to insurance.

People think they insure “things” – a house, a car, a boat, a house’s contents. But they do not. They insure against damage or loss caused by defined events. Some events are included, others are not.

Much has been done to reform insurance law and practice in the past 20 years, in particular plain-English policies and changes to legal doctrines which in the past have favoured the insurer. But still significant elements of insurance contracts are not properly communicated to the insured.

Have you ever been asked point blank among the reams of questions from the smiling lasses in insurance-company advertising: “You do understand, don’t you, that if your house is flooded you get nothing from us?”

So a lot of insured people got a rude shock to discover their policies did not cover flood. But a ruder shock is about to hit the banks and other lenders arising from the same misconception about the nature of insurance.

Lenders usually demand that the house be “insured”. But they assume wrongly that the house itself is being insured, whereas in fact only damage or loss caused by defined events is covered.

So lots of their insured borrowers will find themselves with houses that cannot be repaired (indeed will cost money to cart the remains away) and no money from the insurance company or anyone else to rebuild. And they may not even be allowed to rebuild in some flood-prone areas, or forced to rebuild on stilts at prohibitive cost.

Moreover, they will be sitting on flood-prone land which few people will want to buy at any price, let alone the pre-flood value.

Many of these people will have very large mortgages around their neck and before long they will have to pay rent and repayments on new furniture. Ends will not meet.

The banks and other lenders are going to find themselves with a lot of bad debt.

The best thing many of these people could do is to file for bankruptcy and start again. They would rid themselves of large mortgage debts over low-value land. Many would not have significant other assets worth worrying about.

Many people find bankruptcy a difficult moral choice. Quite rightly, they are proud of being able to pay their debts and do not want to be seen welching on them.

Indeed, in the past unpaid debt was seen as quasi-criminal. Remember the Debtors’ Prison described so melancholically by Charles Dickens.

Not now. In later years when explaining the bankruptcy – “the Queensland floods took everything” – they would probably gain some sympathy.

And on the moral front, they should not be too perturbed. After all, it was the banking-insurance conglomerates that did the dirty over the insurance policies in the first place. They excluded one of the most significant risks to which avaerage householders are exposed: flood.

A lot of insurers invest quite heavily in shares in banks and other financial institutions, so, having dodged liability using the fine print of policies that few read, maybe it will be poetic justice if the value of their shares in the banking sector tumbles as a result of people (who have paid premiums for years) walking away from their mortgages.

In future, of course, lenders will not want to get caught out. They will not only insist that the house be insured, but that it be insured against flood, including inundation from the sea.

That will do more to promote sensible building regimes and to make people wake up to climate change than all the dithering and hand-wringing by governments and environmentalists.

At present, the dominant attitude seems to be: “Don’t worry about the future, after all, what have future generations ever done for me.”

In the new regime, however, you simply will not be able to borrow to buy houses and businesses (or re-finance them) in flood-prone areas or areas likely to be affected by rising sea levels – or the insurance premiums will be so high as to make you think twice about it.

The Queensland floods may well be a portent for the property and insurance markets in a changing climate.

The next misconception is over the way some economists have viewed the floods.

They have argued that the floods will only dent Gross Domestic Product by as little a half a percent, so it is not all that catastrophic after all.

In fact, they say, all the economic activity to repair the damage will help the economy and increase GDP. The real economic worry, they say, is that floods will mop up unemployment and might even cause an outbreak of inflation which will require a rise in interest rates. Further, the Federal Budget might not move into surplus as early as expected because of the help the Federal Government is giving flood victims.

Let’s hope the floods cause us to change economic thinking in Australia.

Economists and economic journalists and commentators are obsessed with total national income and inflation. They seem to care little about total human well-being, the environment or the human cost of unemployment, just as long as we have enough unemployment to ensure we do not have an inflationary wages blow-out.

You might like to think of the infrastructure of Queensland as being similar, in the economist’s eye, as the environment in general: it does not matter much if it gets ravaged, provided Gross Domestic Product (or income) goes up.

We are slaves to GDP. We measure our progress as a nation by it. Financial journalism is so powerful that politicians are terrified if any of its three measures of economic (and therefore total) health go wobbly: GDP, inflation and the surplus.

But other valuable things are not counted in these things – volunteer work (amply illustrated after the floods); clean air; national parks; beaches; good education and so on.

Economists, and the commentators beholden to them, go beserk if we have two successive quarters of what they oxymoronically call negative growth. But GDP growth is no measure of real well-being, especially if population growth consumes most of it and causes existing wealth, infrastructure and the environment to be shared among a greater number thus reducing average well-being.

The floods show us we need a new index to measure wealth and well-being index per head of population. We could measure the success of government and the nation against it rather than against measures that are obsessed with increasing purely monetary income.

The third misconception is that of area and distance.

We are in Port Douglas in Tropical North Queensland. Emails, text messages and phone queries from Canberra and Sydney ask us how we are faring in the floods.

I reply, “Surely, we should be asking you that question. After all, the floods are closer to you than us.”

Port Douglas, just north of Cairns, is 1750 kilometres from Brisbane. Brisbane to Sydney is just 925 kilometres and to Canberra 1200 kilometres.

But the floods are in Queensland. You are in Queensland. So you must be flooded. And the more dramatic the television pictures, the more dire your position must be.

This geographic exaggeration has resulted in a downturn in international tourism in places further from the floods as London is to Rome, just because they are in Queensland.
CRISPIN HULL
The article first appeared in The Canberra Times on 22 January 2011.