After the Storm
The Alberta floods tested the insurance industry's ability to respond to today's mega catastrophes. What worked? What didn't?
Cars smashing into parkade pillars. Boulders crashing through condos. Basements waterlogged. Homes destroyed. Businesses interrupted. Lives interrupted.
The devastation unleashed by the Alberta floods in June 2013 was unmatched in Canadian history. The total price tag is estimated at more than $6 billion, with the insurance industry on the hook for $1.7 billion to date. Though the catastrophe will have lasting effects on southern Alberta, how the catastrophe was dealt with could also have longstanding ramifications for the Canadian insurance industry. Decisions that were made quickly, as the waters peaked and then began to subside, could have a ripple effect on the handling of future catastrophe claims. Moreover, the floods turned what-if scenarios into real-life problems, exposing weaknesses in the industry and governments’ ability to respond.
For Pat Van Bakel, president and CEO of Crawford & Company (Canada) Inc. in Toronto, the most significant difference between the Alberta floods and other large CAT claims he’s experienced was the “name and shame” campaign that played out on front lawn signs, social media and mainstream media—and which led to contentious coverage positions on the personal line side, where sewer backup is frequently included but overland flood is always excluded.
“The [claims] where it was clearly overland flood, the coverage positions on those were fairly solid. That wasn’t generally the issue. The issue was more around concurrent perils…and the policy wordings vary from insurance company to insurance company. In some cases, the policies did extend coverage for events that were caused by concurrent perils, even if one of the perils was an excluded peril. In other policies, it was very clear that if in this case overland flood was a primary cause of damage, then there was no coverage,” Van Bakel explains.
He points out that assessing damage was often complex: “When you’ve got basements that are filled essentially to the ceiling with water…it’s obvious that some of the water came from overland flooding. It’s very tough to say that some of it didn’t come from the drains backing up—and separating the damages caused by each peril is virtually impossible in those circumstances.”
Complexities aside, what may have more lasting implications for the industry as a whole is that, in the face of tremendous public pressure, some insurers with what were believed to be iron-clad wordings ended up changing their positions. Other carriers with more ambiguous wordings are no doubt reviewing their policy terms to be better prepared to respond to similar events in the future and preserve the underwriting intent and avoid the risk of providing ‘unintended’ coverage. “This is somewhat of an industry issue,” says Van Bakel, “as the average policyholder uses what his or her neighbour is covered for as the benchmark for what they should be covered for, as opposed to relying on the legal terms and conditions of the insurance policy that they actually purchased. The evolution of social media is going to continue to amplify this issue in future events.”
Greig Boyle, executive vice-president, national operations at Granite Claims Solutions in Mississauga, Ontar-io, recognizes that many insurers were acting out of the best intentions. “A lot of insurers will lean in favour of the policyholder when there are grey areas in relation to the cause of loss…But when you do that, there are risks,” he says. “Reinsurers are getting involved with this incident—where there were large aggregate amounts of loss—and they will need to work with insurers to review what transpired so that they are aligned in their approach to the coverage questions.”
Gord Enders, too, appreciates that many insurers handled claims in the best interests of insureds. However, Enders, president of the Insurance Brokers Association of Alberta (IBAA), says that companies build wordings for specific reasons and then price their products according to those wordings. “A flood like this is going to put financial pressures on any type of company, but especially on those that have specifically excluded those types of water events,” he says. “These financial pressures can result in increased premiums, coverage limitations and higher deductibles for the insured.”
When insurers did extend coverage, there was still the question of how much. “The majority of our customers on the residential side have had coverage recognized under the sewer backup wording,” says Lee Rogers, president of Rogers Insurance Ltd. in Calgary. However, he points out that it was a challenge to manage the different ways insurers defined losses. “Some are saying the whole basement. Some are saying two feet. Some are saying four feet. Some are saying four feet with contiguous items, such as built-ins that would go all the way to the ceiling,” he says. “So there’s a lot of inconsistency with the insurance companies and what they will and won’t pay for.”
For Hilary Rickards, Guarantee Gold claims manager, that kind of quibbling was off the table. “Judging by what was seen and the type of losses that were coming in, I don’t think you could say that the top four feet was not sewer backup, or the top six feet,” she says. “We covered damaged basements and covered them all under sewer backup. There was enough water from that event that it made it very possible for that to be the case, so that’s how we treated it.”
The good news is that any confusion over coverage was cleared up fairly quickly, according to Boyle. “Within a matter of 48 to 72 hours, we were dealing much less with the coverage issues and were full steam ahead on the quantification and loss adjustment inspection and settlement phases,” he says.
And, at the end of the day, many insureds ended up receiving coverage for at least a portion of their damage. “I would suggest that, in most cases, on the broker side anyway, the majority of customers ultimately will be somewhat satisfied with the end result—although probably very unsatisfied with the process to get there,” says Rogers.
Part of the problem was delay due to resource constraints, suggests Van Bakel. “We had a couple of years of pretty benign weather in Canada, so insurance companies had reduced the amount that they were outsourcing, both to the restoration contractors as well as to independent adjusters. They had reduced some of their own in-house staff, and all of the suppliers in the supply chain to the industry basically had reduced their staff as well. So the capacity of the industry in general to respond to events like this had been reduced,” he says. “From an industry perspective, I think there has been a little bit of an awakening on the need to make sure that contingency plans and catastrophe response plans are well thought out in advance, including testing and integrating the dependencies, including supply chain, into that process.”
Process hiccups endured by insureds also included difficulties accessing government relief. “The coordination of the government program versus any insurance coverage wasn’t always a perfect match, and there were a lot of moving parts,” observes Jeff Sedgwick, national claims director, The Co-operators.
He explains, “As an industry, we weren’t always sure exactly how to counsel our clients. If they did not have coverage, there were particular procedures we had to go through to make sure that they could proceed with the government program, and there were some nuances there that were difficult at times. And, on the government side, they had multiple insurers with different coverages to deal with and it was difficult for them to figure out what is their response going to be, and who are they providing funds to, and who are they not providing funds to?”
Enders sees brokers as a valuable link to a community’s disaster response plan, well-positioned to help fill out the necessary paperwork and reduce paper-shuffling between organizations. “As a broker, you know the area, you know the clients and you’ve got their trust,” he says.
Mitigation Begins at Home
In terms of lessons learned, Sedgwick emphasizes that flooding is a nation-wide societal issue, and that mitigating potential future damage has to involve many stakeholders working proactively, rather than reactively.
“We have to get a better understanding of what our exposure is to flooding on a national level. This starts with reviewing and improving our flood mapping. It’s good in some parts and it’s non-existent in others,” he says. “Once we have that in place, there needs to be some sort of approach on how we’re going to mitigate that as a society. The Winnipeg Floodways are a good example of what was done to avert disasters that happened over and over again…And then, finally, insurance does have a role to play in terms of transferring risk and using our expertise to measure and assess and provide products and services to Canadians and communities.”
Marilyn Horrick, national vice-president, Guarantee Gold, agrees that addressing flood risks will involve more than just the insurance industry and that municipalities can take action to help mitigate loss. The Guarantee has also partnered with the Institute of Catastrophic Loss Reduction to provide brokers and insureds with resources to build awareness of water and the damage it can cause.
“There are a number of things that customers can do within their own homes, within their own capabilities, and I think that it is part of our responsibility to educate them about taking action and mitigating water loss down the road,” she says. “Part of that might include raising electrical devices and electrical panels, and installing backup valves and sump pumps within a monitored system.”
To empower insureds, Sherif Gemayel, president of Sharp Insurance in Calgary, is working with his team on creating a preparedness plan for clients—“a template for them to be able to use in the event of a fire, in the event of a sewer backup, in the event of a flood, whatever it may be.” That’s just one of the opportunities he sees for brokers coming out of the Alberta floods.
“It has opened up a whole new door to talk about coverage that may be available that [clients] previously didn’t think about,” Gemayel points out. He says his clients want to make sure they’ve got adequate sewer backup coverage, and are also looking at additional endorsements, such as water coming into the home through the roof. In addition, they’re checking to see if they’re covered for the true cost of rebuilding their home.
For Rogers, looking beyond the myriad challenges, large catastrophes like this one are a chance “to really get behind our purpose as brokers.” He concludes, “A lot of times, you don’t get to really justify or identify with the value you can bring to the table for your customers. In an event like this, you can. It’s the single biggest moment in our industry where we can fail or succeed.”
Copyright 2014 Rogers Publishing Ltd. This article first appeared in the January 2014 edition of Canadian Insurance Top Broker magazine