Insight: Putting out Fires

A fire is a fire is a fire….

Or is it? That is one of the central questions those in charge of Insurance Act rewrites in British Columbia and Alberta are addressing. Outdated legislation in both provinces has created uncertainty as to whether fires caused by earthquake, terrorism or vandalism are actually covered or not. A major aim of legislators is to bring clarity back for the sake of consumer protection — and for the insurance marketplace.

Legislation, unlike wine, does not tend to age well. With this in mind, British Columbia and Alberta have made significant steps to overhaul decades-old, outdated legislation. These provinces are amending their insurance acts not just for the stated purpose of consumer protection or out of goodwill to the insurance industry, but rather at the behest of the Supreme Court of Canada.

Several insurance-related court cases have made their way to the Supreme Court, but KP Pacific v. Guardian and Churchland v. Gore (both 2003) spurred the sharpest condemnation of “anachronistic” legislation. In KP Pacific, Canada’s highest court held British Columbia’s Insurance Act “is incapable of coherently addressing the modern multi-peril policy… In an insurance era dominated by comprehensive policies, it is imperative that Canada’s insurance acts specifically and unambiguously address how these statutes are to operate and the rules by which comprehensive policies are to be governed.”

In both provinces, especially in B.C., the issue of mandatory fire coverage has been raised in several ways. First, insurance companies have long asked for more flexibility to exclude fire-related risks (specifically, fires caused by terrorism and earthquake). Second, recent court decisions — dealing, for example, with vacant properties that have been damaged by vandalism-related fires — have served to undermine the policy goal of mandatory fire coverage. Lastly, the Supreme Court of Canada decided in 2003 that the fire part of B.C.’s Insurance Act did not apply to multi-peril insurance policies (even though such policies have a fire component). Accordingly, the mandatory coverage provided by the fire part may no longer be legally required in British Columbia in the case of multi-peril policies.

Many brokers believe in the common adage that “a fire is a fire is a fire,” meaning coverage includes fires resulting from any cause, except causes that are specifically listed in the policy or the Insurance Act. However, this old adage has been tested and stretched in recent years.

Sources cite examples of several overlapping sections in insurance legislation, such as:

* whether the consumer protection provisions of Part 5 (Fire Section) apply to the multi-peril policies common in today’s marketplace;

* what limitation periods actually apply (different periods depending on the type of policy); and

* whether fires caused by certain events not listed in the act as permitted exclusions — such as nuclear events, terrorism, earthquake or even vandalism — are covered.

The result has been confusion in the insurance industry — and, some say, excessive litigation. Is the loss covered, for example, if a property lies vacant for 30 days and is torched by vandals? Some court decisions, such as Morton v. CNS, have held that insurance companies do not have to pay these claims, since vandalism, not fire, was the proximate cause of the loss. Another example: since the consumer protection provisions of the fire part of the Insurance Act do not fit into the modern multi-peril policy, can insurers simply add in fire-following exclusions for a range of catastrophic events such as an earthquake or terrorist act?

“The fact is that the world has moved on from the era in which these acts were crafted,” says Lindsay Olson, vice president, Pacific region for Insurance Bureau of Canada (IBC).

“You don’t find too many fire policies anymore. They just don’t really exist. Policies are an amalgam of many perils, including fire. So we had more litigation going forward and ultimately reaching the Supreme Court. We ended up with extensive and destabilizing litigation. The Supreme Court in 2003 basically said: ‘Come on guys, you have to come up with new wordings because we can’t keep interceding in this debate.'”

Legislators have heeded the call and are updating what many consider to be an inconsistent set of rules and regulations. In B.C., a 2007 provincial Ministry of Finance discussion paper listed several proposals to bring increased clarity to many insurance issues, of which fire damage is arguably the most prominent. According to the ministry, British Columbia is currently considering the submissions received in response to the proposals contained in its March discussion paper. Legislation is targeted for Spring 2008.

Alberta in June 2007 introduced Bill 42, Insurance Act Amendments, without a public discussion paper. The legislation has passed first reading. The two provinces take different approaches in their proposed changes, but both aim to bring consistency and clarity to questions of policies, limitations and fire following.

In B.C., a major proposal in the government discussion paper is to extend the consumer protection provisions (statutory conditions) for Part Five of the Insurance Act for all types of policies, including multi-peril, all-peril or comprehensive, homeowners, condo and tenants.

“We agree with the proposal to extend the statutory conditions,” says Ted Lewis, president of the Insurance Brokers Association of British Columbia (IBABC), which sent its feedback to the finance ministry in late April. “The best thing is to standardize it so all those contracts come under the same part — and the fire part is the logical place to do that.”

The B.C. government also contemplated, and ultimately rejected, an option to merge the general and fire parts of the Insurance Act. In its discussion paper, the finance ministry stated: “If the general and fire parts were to be merged, and all the provisions of the merged part were to apply equally to all types of insurance contracts, the new part would either under-protect consumers or intrude heavily into commercial contracts.”

Representing member insurance companies, IBC generally agrees with the proposal to extend the provisions of the act to all personal property policies, according to Olson. However, the B.C. government also floated the idea of extending the statutory conditions to “small and medium-sized businesses,” stating that “many small business owners face similar issues as homeowners when purchasing fire and other property insurance for their businesses, and intervention may be justified to ensure that their interests are protected.”

Olson notes “our fear is that when you start applying this to certain classes of consumers, and the definitions of those classes are pretty fuzzy, you are not getting clarity, consistency and stability. If you have a medium-sized business, it is subject to the protections of statutory conditions, but if it grows and becomes a big business, now it is not. The approach, which would make the line moveable, makes it dangerous from the perspective of requiring more litigation and court time to make those definitions clear.”

A second key proposal of the B.C. discussion paper is not to add earthquake to the list of permitted exclusions for fire following, but to allow terrorism to be excluded. Citing consumer protection, the ministry argues “a consumer who believes that buying a fire insurance policy will provide coverage for fire, whatever the cause, would be unfairly surprised to find that some fires are not covered. This is a particularly important issue for consumers in British Columbia, where the risk of a major earthquake is substantial.”

Lewis says the government proposal “adds definitive clarity; you cannot exclude fire following earthquake. For the companies that have been pricing for it for years, and paying their reinsurance accordingly, it is not a
big change. It just means everyone is going to know that fire following earthquake is not excluded.”

Olson argues the issue is not so simple. She says consumers who buy homeowner insurance may falsely believe they are covered for all forms of earthquake damage, including shake and fire following, whereas in reality they are not.

“Right now, the earthquake shake portion of coverage is in a separate endorsement, and is subject to the terms and conditions specific to that endorsement,” she says. ‘The fire portion comes under the homeowners policy, with different terms and conditions. What we are advocating is that all damage or coverages pertaining to that earthquake event would be found under the same endorsement and subject to the same terms and conditions, including deductibles.”

With respect to terrorism, there seems to be general consensus that fire following should be added to the list of permitted exclusions already noted in the act, such as riot, war and insurrection. As the B.C. discussion paper notes, “the current act already excludes fire following a lengthy list of hostile acts. Therefore, the proposed exclusion of terrorism can be seen as a modern refinement of existing policy.”

VACANT PROPERTIES

A third crucial issue related to fire following in B.C. is fire damage to vacant properties due to vandalism. Multi-peril homeowner policies include coverage for fire and vandalism. However, vandalism coverage excludes loss — i.e. broken windows and graffiti — in circumstances in which the premises are left vacant for any period. In contrast, fire coverage typically continues for 30 days after the property is vacated. This discrepancy has created problems when a fire in a vacant property is caused by vandalism. A series of court cases, such as Morton v. CNS and Chung v. Les Garrison Agencies, appear to have determined that fire losses owing to vandalism are to be considered under the vandalism part of the policy; therefore they would be excluded in accordance with the vandalism/vacancy exclusion clause.

The B.C. discussion paper recommends that “the provisions in the act stating that fire coverage includes fires resulting from any cause be retained and clarified,” and that “the meaning of ‘vacancy’ be defined to provide a statutory ‘grace period’ of 30 days during which coverage for fire, and for vandalism resulting in fire loss, would continue.”

For Ted Lewis, this proposal validates a long battle brokers in B.C. have fought to protect consumers from allegedly unfair claims practices of denying fire losses due to vandalism. “We have been leading the battle on that one for some time,” he says. “The government certainly recognized that a fire is a fire is a fire, no matter what the cause.”

Lewis notes most major insurers have come on board and agreed in writing that they will not exclude these types of losses. “Consumer protection is the reason why we took such a strong position and fought this thing for so long,” he says. “Thankfully, the government agreed with us, and insurance companies, to their credit, also agreed that this is something that should be corrected.”

Olson notes the preferred route for insurance companies to deal with the fire and vandalism issue is to let the marketplace sort it out. “Our members felt that having to apply a legislative solution to this was overkill,” she says. “By and large, many insurers intend to cover for fire in the first 30 days of a vacancy; it is a question of insurers finding the right words to put that into their contracts. It is a competitive market and the market will deal with it.”

Alberta’s draft insurance legislation takes a somewhat different direction than B.C. in dealing with many of the same issues (i.e. statutory conditions, consumer protection and fire following damage). Bill 42 recommends, for example, that statutory conditions — which provide a substantive right or impose a key obligation on a policyholder or insurer — will be made applicable to all general insurance contracts, not just fire or auto policies. The proposed new law also includes the requirement of regulatory approval for exclusions for damage caused by fire.

“Essentially, they are not leaving it up to the insurers anymore,” says Ginny Bannerman, incoming executive director of the Independent Insurance Brokers Association of Alberta. “What they are saying is that if an insurance contract includes coverage for fire, that basically it will cover all fires, no matter how caused, unless there is a specific exclusion in the regulations. What I like is that it brings more certainty and clarity. The insurers won’t be able to do their own exclusions as they go forward.”

The Alberta legislation does, however, leave some unanswered questions in the form of regulation-making authority, according to Jim Rivait, vice president, Prairies region, IBC. “Some insurers are likely to have concerns about the requirement that if the peril of fire is covered by the policy, the only causes of fire that may be excluded are those approved by the superintendent,” he says. “We do have misgivings about the power to prescribe by regulation other perils, for which certain causes may not be excluded unless the superintendent approves the exclusion. We will be presenting those concerns to the government.”

The proposed amendments in both B.C. and Alberta seem to agree on harmonizing limitation periods (the time allowed to submit a claim) for all types of insurance policies to two years. In the past, insurance legislation in the provinces have contained as many as four different limitation periods, depending on the policy, causing litigation around applicability. The trigger would be “the date the cause of action arises against the insurer.” Insurance companies would also be required to give notice to the consumer before the expiry of the limitation period.

“This proposal addresses several points,” the IBABC notes in its submission to the finance ministry. “First, the existing act contains conflicting limitation periods, which has been the cause of much grief and court time. Next, it aligns B.C.’s Insurance Act and Limitation Act (which is also currently under review), and potentially these with corresponding acts in other provinces. Finally, it addresses the fact that consumers have been confused and sometimes unaware of what limitation periods apply in their situations.”

Bannerman adds that “extending the limitation period to two years for all policies favours consumers. From the standpoint of a broker, the nightmare would be to have a claim that could be potentially covered by several policies; you could have one limitation policy in the auto policy and another in the property policy.”

Alberta’s Insurance Act amendments and clarifications to regulation-making authority will not likely be formalized until 2008, Bannerman notes. “There are some sweeping changes to how we have done insurance in the past,” she says. “The government is aware that a long lead-in time is required for the education process.”

Similarly, draft legislation in B.C. is not expected until Spring 2008, giving the government time to incorporate feedback from its discussion paper.

Far from being just a regional issue, the implications of Insurance Act changes in Alberta and BC could be felt in all of the common law provinces. “We have advocated harmonizing regulations across the country as much as possible,” says Olson. “Instead of 14 regulatory solitudes and varying legislation, it is a lot simpler if we can get harmonization across the country.”