February 2, 2017 by Pat Van Bakel, Chief Executive Officer, Crawford Canada
The Fort McMurray wildfire raged for 65 days, igniting May 1 and not fully contained until July 5. During that period, the fire devastated an area of 589,552 hectares, claimed some 2,400 buildings, most of those residential properties, and forced 88,000 inhabitants from in and around the city to evacuate.
As has been well-documented, the wildfire constituted the largest insured loss event in Canada’s history, with Catastrophe Indices and Quantification Inc. reporting last summer a total estimated insured loss of about $3.6 billion. While the majority related to personal lines claims – 58% for personal lines, 38% for commercial lines and 4% for automotive – some 5,000 commercial claims were also received, amounting to more than $1 billion.
All these facts have been extensively documented; what has not are the many claims challenges faced by the insurance industry as a result of the unique catastrophic event.
FIGHTING THE FLAMES
Just days into the fire, BMO Capital Markets reported on May 5 it estimated the rapidly growing fire could result in insurable damage of as much as $9 billion if Fort McMurray had to be rebuilt.
Within the first couple of weeks, the insurance industry was already on full alert; first notice of loss (FNOL) notifications were flooding in; the Insurance Bureau of Canada (IBC) had set up the Fort McMurray Working Group to act as a conduit among government, the insurance industry and affected residents; for the first time, IBC created the role of insurance industry claims liaison officer to deal on site with any insurance-related issues affected community members had; and insurance command centres were established in evacuation areas, with proof of policy often the only requirement for payment in those early stages.
Despite the response, the complexity and scale of the loss created a multitude of coverage issues.
In the initial weeks, insurers were tackling claims notifications with virtually no information to support their decision-making process (insurer access on a controlled basis was only granted on May 29; a small number of adjusters had been granted access earlier). Even when the fire was under control and the true level of devastation could be assessed, claims handling remained challenging.
Given the nature of the event, it was inevitable that potential disputes would arise. One of the most challenging aspects of establishing the cause of loss was deciphering if it was smoke-related damage or normal dust accumulation.
Most residents were given the benefit of the doubt on the existence of smoke damage, which triggered the broader policy coverages that were not available for mass evacuation circumstances only. This created a contentious issue about how much of the home and contents actually required professional cleaning as a result of damage.
Insurers also had to address the issue of “proof of loss.” With approximately 1,900 residential properties and their contents completely destroyed, it was virtually impossible for many insureds to provide evidence of the range and quality of items that had been lost, making replacement values difficult to set.
Even claims settled on an actual cash value (ACV) basis required an assessment of replacement value. Without evidence of what was in the home originally, it was impossible to validate for either the homeowner or the insurer, with many claims simply getting determined by policy limits.
The duration of the mass evacuation period also proved problematic. The evacuation was ordered on May 3, four weeks before the phased re-entry of residents commencing on June 1, and five weeks after resident access to the most severely impacted areas of Beacon Hill, Waterways and Abasand on June 8.
In some cases, the duration of the evacuation breached the time limits for civil authority/mass evacuation cover for additional living expenses (ALE) incurred where people were evacuated, but there was no damage to their respective properties.
In most cases, however, insurers were flexible on this, recognizing the uniqueness of the situation being faced.
Unsurprisingly, losses related to business interruption (BI) and contingent BI (CBI) have formed a significant component of the commercial claims received. For example, the Globe and Mail reported last May that oil and gas producers, upon which the local economy is heavily reliant, saw production disrupted, with 10 operators temporarily halting activity at a cost of $65 million per day.
One dynamic that is having a significant bearing on the value of BI and CBI claims is the fact that prior to the fire, the economy was experiencing a localized recession. For those businesses able to reopen, however, high demand for limited goods and services has effectively rebooted the regional economy.
This, of course, raises challenges for establishing BI claims settlement figures, as those companies unable to reopen have not been able to capitalize on this financial windfall.
While demand has been high, availability of staff and stock has meant many businesses have been unable to respond.
A further impacting factor is that in some badly affected areas, the populations that supported the local economy have simply not returned. So while businesses may have been able to resume operations, income has been significantly reduced.
Insurers have also been faced with controlling the spread of “neighbouritis,” a situation in which insureds demand that their insurers provide the same calibre of treatment received by their neighbours even if their policies do not provide the same level of cover.
This was a common issue following the southern Alberta floods of 2013, where insureds took to publicly “naming and shaming” their insurers.
SCALE OF THE REBUILD
Rebuild capacity is proving a major challenge in Fort McMurray. Local reports have indicated that in 2017, only 24 new builds had been scheduled for the area. With 1,900 residential properties destroyed by the blaze, the local construction industry simply does not have the capacity to meet demand. Even during the town’s boom period, it was said firms were only able to construct a maximum of 600 residences a year.
Northern Alberta and the remote location of Fort McMurray also pose a number of logistical challenges. For example, severe winters in the region significantly curtail the period during which construction is feasible. Further, the region is only served by a small airport, and a single highway provides the main route into the area, limiting the ability to quickly transport materials and resources.
Add to those challenges that a number of recent cost increases have needed to be factored into rebuild figures. Changes to the National Energy Code of Canada, effective November 1, 2016, are likely to result in higher insulation costs, while a recently introduced tariff by Canada Border Services Agency on drywall materials entering Western Canada from the United States has seen costs increase by 276%.
The particular characteristics of the Fort McMurray loss created a number of clause-related issues, particularly concerning guaranteed replacement and reinstatement stipulations. Many policies, for example, require that the location of the rebuild be either on the same site or adjacent to it, which, in many cases, is not possible.
Also, more than a third of Fort McMurray residents constitute a “shadow population” working for the oil producers, where the town is not their primary residence. With the fire having significantly affected work opportunities, many are looking to rebuild elsewhere.
In response to these issues, a number of insurers have chosen to extend the rebuild zone – some within provincial boundaries; others anywhere in Canada.
The decision as to whether or not to rebuild in Fort McMurray has also raised issues for multi-family dwellings where owners of adjoining properties do not agree on rebuilding. If the adjacent neighbour has chosen not to rebuild, the remaining insured is only able to recoup 50% of the cost of the wall.
This also creates zoning problems, as the particular site would have been designated for a multi-family property with a shared wall. Local authorities are currently reassessing any zoning restricting to help tackle this problem, the Regional Municipality of Wood Buffalo has reported.
That a loss of Fort McMurray’s magnitude should create such a raft of claims-related issues is to be expected. The uniqueness of the event demanded that insurers respond to a series of highly challenging claims scenarios.
Insurers, however, proved responsive
and flexible – often waiving or amending particular policy clauses to best serve the interests of policyholders.
The flexibility meant that, within weeks, the majority of claims issues had been resolved, a noteworthy achievement given the extreme nature of the event.
And while it is clear that some claims situations will take longer to reach a satisfactory resolution, Fort McMurray has provided a clear example of what can be achieved when communities, government and the insurance industry work together.
Pat Van Bakel, Chief Executive Officer, Crawford Canada