Canadian Underwriter

Black Summer…

September 1, 2003   by Sean van Zyl, Editor

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Those in the industry who had been looking forward to an easy-going summer would have been jolted by the series of adverse events that seemed to cascade one after the other in the final stages of the season. Basically, short of pestilence (although would mad cow disease qualify in this category?) insurers were faced with a plague of unwelcome developments of almost biblical proportions.

Although a long-boiling pot, the political tensions surrounding the cost of auto insurance in Atlantic Canada came to a head with a strong shift in mindset by the provincial authorities toward government-run insurance (see article on page 42 of this issue for further details). Similar political grandstanding is expected to surround auto insurance in the approaching Ontario election.

By the end of July, the B.C. authorities began to realize that they were facing more than their usual outbreak of seasonal fires, which by the end of August, about 18 forest fires had become an uncontrollable raging blaze that swept through parts of Kelowna and areas around Kamloops. Typically, forest fires have not posed much of an insurance risk, as they tend to occur in non-populated and generally non-economic areas. However, with fires still burning at the time of this writing, the B.C. blaze is looking to become Canada’s second largest natural catastrophe insured loss with over 320 residential and commercial structures destroyed (the 1998 ice storm and the Calgary hailstorm are the other top loss events). Rough estimates peg the insured loss from the B.C. fires at around $200 million, with the provincial government having indicated a total damage cost of more than $500 million. Although, some in the insurance industry believe that the insured cost alone could well top $400 million (see article on page 24 for further details).

After fire came the darkness… On August 14, the lights went out in what became known as the “blackout of 2003”, which due to a power grid failure resulted in a power outage (expected to be accidental versus terrorism) stretching across southern Ontario and the northeast of the U.S., leaving more than 50 million people in the dark. Within 24 hours, about 75% of power capacity had been restored in most areas, although the various authorities warned that further outages could occur in the days ahead. The public and businesses were asked to restrict their electricity use for another week.

While the blackout is not expected to generate any material losses in both insurance terms as well as economic output (most business interruption covers exclude power outage short of a deliberate act such as terrorism), some observers believe that the insurance industry, risk managers/corporations, and the provincial, state and city authorities got off lucky. The event could have been more severe and prolonged, while diagnosis of what went wrong highlights the vulnerability of this very large (and outdated) power grid to deliberate attack at any number of remote and unsecure points. Notably, the Toronto fire authority reported that it received more than three times the average number of emergency calls totaling more than 2,100 during the night of the blackout. The risk of fire, looting, breakdown of public services such as water sanitation and sewage disposal could have resulted in devastating economic consequences had the power outage lasted for an extended period of time (the ice storm produced many such concerns). If nothing else, anecdotal reports suggest that the blackout had many people in the insurance industry busy in determining or waiting to see whether the event would spark insured losses.

And then there was perhaps the insurance industry’s greatest pestilence: the litigation curse. Around mid-July in a civil litigation action between an “ex mushroom farmer” and a relatively small Ontario mutual insurer over dispute of a claim, a jury awarded the plaintiff an unprecedented $2 million in punitive damages (with a further $300,000 in general damages and $150,000 for business interruption).

Determination of the award appears to have little connection to past practices of calculation (for instance, the award is extremely disproportionate to the value of the assets and revenue of the mutual insurer). But, most importantly, the jury damage award flies in the face of the “rules” applied by the Supreme Court of Canada in determining punitive damages. And, in this respect, the latest punitive damage award far exceeds the previous landmark award of $1 million set by the Whiten vs. Pilot Insurance Co. case, which was upheld by the Supreme Court of Canada (see article on page 36 of this issue for further details).

While it is likely that the $2 million damage award will not be upheld on appeal, the direction that punitive damage awards appear to be going in Canada must be leaving many insurance CEOs feeling uncomfortable about the future. Other than that, throw in a few global killer heat-waves, locust infestations, a hurricane or two and a couple mad cows, and the summer seems to have just flown by. So, what did you do this summer?