Canadian Underwriter

Judicial determination on interpretation of property Cat XOL with reinsurers sought

July 18, 2017   by Angela Stelmakowich

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Alberta Motor Association Insurance Company is looking to divide the loss arising out of the Fort McMurray wildfire, which exceeded a duration of 168 hours, into six multiple loss occurrences in line with its reading of its property catastrophe excess of loss (Cat XOL) reinsurance agreement with a number of reinsurers.

AMA Insurance is looking to recoup monies owed (including difference between payouts made and the estimated total payable to policyholders relating to the wildfire), costs and such other relief the court deems just and equitable, notes a statement of claim filed with the Court of Queen’s Bench of Alberta in Edmonton on July 7.

As of May 2016, AMA Insurance notes that 12,896 insurance policies issued by the company to policyholders in the Regional Municipality of Wood Buffalo, including the urban service area of Fort McMurray, were in effect. These covered 4,894 homes and businesses and 14,660 automobiles.

By June 30, 2016, the company had paid more than $293 million under the policies in relation to the wildfire, and the amount of losses paid or payable under said policies was estimated at approximately $418 million.

At the time of the wildfire, the policies were reinsured by the defendants – Lloyd’s Underwriters, Aspen Insurance UK Limited, Everest Reinsurance Company, Hannover Ruck SE, SCOR Canada Reinsurance Company, Swiss Reinsurance Company Ltd. and the TOA Reinsurance Company of America – pursuant to the 2015 Property Cat XOL with AMA Insurance, which took effect June 1, 2015.

None of contentions within the claim have been proven in court and defendants have between 20 days and two months to file a defence, depending on if served in Alberta, elsewhere in Canada or outside of Canada.

Related: Alberta Motor Association takes legal action to recover money from reinsurance companies providing Fort McMurray wildfire coverage

The statement of claim points to Articles 5 and 8 of the agreement: the first is said to address liability “in respect of each and every loss occurrence”; the second is said to deal with a forest fire “of greater duration than 168 consecutive hours.”

In part, AMA Insurance notes, the Cat XOL agreement states the following: [AMA Insurance] may divide that disaster, accident, or loss into two (2) or more “Loss Occurrences”, provided no two (2) periods overlap and no individual loss is included in more than one such period, and provided that no period commences earlier than the date and time of the occurrence of the first recorded individual loss sustained by [AMA Insurance] arising out of that disaster, accident or loss.

AMA Insurance is claiming six loss occurrences pursuant to the 2015 Property Cat XOL from the time the first evacuation order was issued (May 1, 2016) and the lifting of the mass evacuation order (June 4). All loss occurrences run 168 hours or less and cover the timeframe of 8:00 pm on May 1, 2016 to 11:59 pm on June 4, 2016.

“In accordance with Article 8(C), no two periods overlap, no individual loss is included in more than one period, and no period commences earlier than the date and time of the occurrence of the first recorded individual loss sustained by AMA Insurance arising out of the Fort McMurray Wildfire,” the statement of claim notes.

Related: Impact of Fort McMurray wildfire softened by reinsurance risk sharing: DBRS

The claim states that Loss Occurrence One runs from 8 pm on May 1, 2016 through to and including 11:59 pm on May 3, 2016, while Loss Occurrence Two runs at 12:00 am on May 4, 2016 through and including 11:59 pm on May 10, 2016.

Reinsurers who are parties to the Cat XOL agreement, including the defendants, “have paid their respective shares of Loss Occurrence One in full. Two reinsurers other than the defendants have also paid or agreed to pay their respective share of Loss Occurrence Two in full.”

However, the claim adds, the defendants have refused to pay their respective shares of Loss Occurrence Two, “principally based on their respective contentions that Article 8(C) does not allow AMA Insurance to divide a loss occasioned by a forest fire of more than 168 hours in duration into Loss Occurrences that are not each 168 hours in duration.”

AMA Insurance contends in the claim that it has a legal interest in receiving a judicial determination regarding interpretation of Article 8 of the agreement in relation to losses arising out of a forest fire longer than 168 consecutive hours.

In announcing last week it was taking legal action against a number of companies that provided reinsurance coverage for the Fort McMurray wildfires, AMA Insurance noted it was seeking a summary judgement.

“The issue is a matter of interpretation of a contract. We have interpreted the contract differently than the reinsurers,” noted a company statement. None of the reinsurers on the 2017/2018 treaty are involved in this legal dispute.

The company reported at the time it has been paid $200 million in reinsurance and $165 million is currently owed by reinsurers. “Based on legal opinions from a number of independent experts, we are confident we will recover the money we are owed.”

Related: Insurance industry should look ahead to even larger losses than Fort McMurray, ICLR chair suggests

As the matter is currently before the court, AMA Insurance told Canadian Underwriter it is unable to provide any further comment.