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Insurance industry counsels Alberta not to prohibit exclusion of claims for fire following terrorist events


January 12, 2010   by Canadian Underwriter


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Canada’s property and casualty insurance industry is “strongly cautioning” the Alberta government to scrap a proposal that would prohibit insurers from excluding claims for fire damage following terrorist or earthquake events.
Primary insurers would run a higher risk of insolvency if the government implements its recommended change to the province’s Insurance Act, the Insurance Bureau of Canada (IBC) and Reinsurance Research Council of Canada (RRC) said in a consultation paper submitted to the government.
The paper refers to a 2005 study by the Organization for Economic Co-operation and Development (OECD), which concluded it was very likely the insurance industry would not have sufficient funds to pay the multitude of claims following a serious terrorist attack.
The exposure for primary insurers is particularly high, since reinsurers would likely continue to exclude fire following a terrorist event or an earthquake, the IBC/RRC paper notes. The global nature of reinsurance risk transfer programs would not likely be responsive to legislative changes in specific jurisdictions like Alberta, or even Canada.
“In the absence of a government backstop [which would limit the exposure of private insurance companies to damage arising from terrorist events], the proposed regulation would severely challenge insurer solvency at the very time when insurance resources are most needed by the community,” the IBC/RCC paper says.
“In light of this, the proposed regulation ultimately runs counter to the intention of the Insurance Act and presumably the passing of such a regulation in the first place, [which is] to provide certainty that Albertans will be compensated in the unfortunate event that a major terrorist attack occurs.”
In the instance of fire following earthquakes, insurers are concerned the government’s proposal might lead to a confusing scenario of the type witnessed in New Orleans, where some damage claims after Hurricane Katrina were excluded and some were not (depending on whether the damage was created by wind or water).
The IBC and RCC paper suggests some consumers may be surprised to learn that their homeowner policies, which may cover fires following an earthquake, may not actually protect them from the shake damage caused by an earthquake.
In addition to expressing these concerns, the IBC and RRC show a willingness to re-define “terrorism” in the Insurance Act.
The province is concerned the current definition of terrorism in the Insurance Act is “too broad,” and therefore it might, for example, allow insurance companies to exclude damage created by acts of vandalism under the rubric of “terrorism.”
Addressing this concern, insurance companies proposed a different definition of terrorism, alongside an offer to discuss the definition further.


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