Into the Fire

A rash of condominium and apartment fire shock losses in Canada has placed builders risk insurance in the underwriting spotlight. This is currently one of the most difficult lines of business in the insurance marketplace.

The reaction of underwriters to a series of fire losses in Ontario, Quebec and Alberta has been swift and fierce. Prices are increasing anywhere from 50% to 100% (and more for certain risks), with underwriters demanding many more details in coverage submissions. Typically, this involves the kind and quality of construction materials. Many carriers are also placing “sub-limits” or higher self-insured retentions on accounts. Not only are there new terms and conditions on coverage, there are also generally lower policy limits and reduced capacity – with some markets simply walking away from the business.

Recent “hot spot”

The latest, and perhaps most devastating, loss occurred the afternoon of May 30 in Calgary’s Waterford Place condominium complex. A fire broke out in one of the buildings under construction in the complex, which consisted of four separate wood framed structures over a common single level concrete underground parkade. It spread rapidly through three completed buildings. In all, the fire affected eight buildings in the high-density site, with seven experiencing significant damage and one completely destroyed.

There were 27 fire engines on the scene and at least 33 people were hurt, mainly minor injuries resulting from heat and smoke. Fortunately, there was no loss of human life in the fire, although some pets could not be saved. More than 80 people were evacuated and hundreds of residents of the buildings were forced to relocate from their homes. The estimated insured loss of the Waterford condominium fire was pegged at about $60 million in total.

What can be learned in the immediate aftermath of the Waterford complex fire? Credit has to be given to Calgary’s emergency services, especially the police and fire departments. With flames shooting up to 20 meters in the air at one point, the Calgary Fire Department was able to bring the fire under control as quickly as possible. Other agencies, such as the Red Cross and the condominium’s manager, Condominium First Management Services, also responded quickly, setting up information lines and helping residents deal with the tragedy.

It is also worth noting that insurance, in this case, worked as it is supposed to. ING Canada was the lead underwriter (Allianz and AXA were also involved) in the condominium loss. We appointed Crawford Adjusters Canada within minutes of the loss. An adjuster was on scene shortly after the fire department. Information lines were set up, full-page advertisements were placed in local newspapers and centralized claims handling services were rapidly put in place.

The devastation caused by the fire will result in numerous personal and commercial claims. For the personal claims, residents have been told to retain all receipts for food and lodging, and to make detailed lists of belongings in their homes. These claims will be adjusted quickly and professionally. Then there are the commercial claims, which, by their nature, are more complex. The condominium building insurers will pay the majority of these losses. The coverages that could respond to the massive fire loss are builders risk insurance, contractors’ equipment coverage and commercial general liability.

Although the cause of the fire is still under investigation, all signs point to a subcontractor’s torch starting the blaze at the 2416 Erlton Street SW building, which quickly spread to other structures. Subrogation against any potentially responsible third-parties will be a significant issue in the months and years ahead.

Future market

What about the future of builders risk insurance and construction policies? There will no doubt be some rethinking by underwriters. The first area of concern is wood frame construction. Engineers, builders and architects are not in complete agreement about wood frame construction versus steel girders or concrete. There are many detailed issues to consider, such as flammability, spread of fire, load and durability of materials. Nevertheless, wood frame buildings have become a concern, due to several recent fires. Underwriters will be paying close attention to large residential or commercial construction sites that use wood frame construction. The increasing popularity of condominiums in the Calgary marketplace has also spawned a number of different financing transactions for development. In general, builders can pursue conventional, bare-land or phased development. Conventional development means that a condominium is built and finished before residents move in. In bare land or phased development, phases of condominiums can be finished and sold, while adjacent buildings are still under construction. This situation, with finished buildings and those under construction in close proximity, can last for two to five years. This was the case with the Waterford condominium complex.

It is likely that underwriters, and builders, will revisit the risk management, loss prevention and safety issues inherent in bare-land unit residential and commercial condominium developments. The risk of fire in buildings under construction and the spread of fire to finished units could lead to massive premium hikes and coverage restrictions. This is not just an issue in Calgary, but in urban centers across Canada.

Flammable materials

Another issue for insurers, builders and contractors, particularly in Western Canada, is cedar shake shingles. Shake is a western red cedar roofing and sidewall product made by splitting blocks of cedar, as opposed to shingles which are manufactured by sawing. These are used prominently in Alberta and British Columbia. Although they have an appealing look, they are quite flammable. Underwriters may take a strong second look at developments with extensive shake single construction.

All of these factors will be taken into account for a line of business that faces significant insurance challenges. Until recently, construction companies had access to a number of liability insurance structures, such as conventional annual renewal programs, project-specific liability policies, wrap-up or owner-controlled insurance programs and liability policies combined with warranty coverage.

Overall, in today’s marketplace, the availability and pricing of coverage has changed dramatically. Fewer insurers are willing to underwrite builders, especially those who build “attached” product, such as condominiums and townhomes. It will be the role of innovative brokers and carriers, in partnership with developers, to structure the best possible coverage in these market conditions. Risk management, loss prevention and safety issues will increasingly rise to the forefront in the construction and condominium industries.

Moving forward

The suddenness of the Waterford condominium complex fire shows how quickly life can be turned upside down. Hundreds of people were suddenly without access to their homes and belongings. Insurers can play a vital role in helping people to begin again. Hopefully, they can also play a role in helping a challenged construction, building and condominium industry secure coverage and manage its exposures.