Fire Following B.C.’s Bill 6

Bill 6 received its third reading in the B.C. legislature on Oct. 6, 2009, and will shortly come into force. In a news release by the Ministry of Finance of B.C., the Ministry states: “The language of the Insurance Act has also been strengthened to ensure that fire coverage includes fires resulting from any cause, except those that are specifically excluded by regulation.”

As of press deadline, I have not yet seen these “regulations,” so I can only hope they will allow some adjustments to the changes the finance ministry announced above. Specifically, there are two problem areas in extending “fire coverage from any cause.”

EARTHQUAKE

It seems a foregone conclusion that fire coverage will include coverage for fire resulting from any earthquake, whether the insured bought earthquake coverage or not. In the event of an earthquake causing a fire, then the Cdn$500 deductible — the typical fire deductible for homeowner’s coverage — will apply. Also, if someone bought earthquake coverage and their house burned down as a result of a quake, do not think of applying the 5% or 10% earthquake deductible (which might have been the case in the past).You must now only use the fire deductible or be accused of being unfair in comparison to the policyholders who only bought fire cover. (This will be the case unless the whole insurance industry decides to apply two fire deductibles — one for fire resulting from earthquake and one for all other causes.)

Given the increases that RMS #9 software is causing to an insurer’s aggregate exposures, I am wondering if this legislative change has been factored into the models.

Another problem is that covering fire only, but not the shake damage, is akin to what happened in New Orleans and Mississippi, where wind damage was covered but not flood. This causes confusion with the insured. Coverage should be all in (Fire + shake) or all out (no coverage).

If a house has both fire and shake damage, would this require a deductible for fire and another one for the shake damage? I think you can see the issues that this could cause.

TERRORISM

Most reinsurance contracts carry an absolute terrorism exclusion for terrorism. Many residential and commercial insurance contracts also carry terrorism exclusions. Part of the reason is that terrorist acts are hard to predict and model for, unlike natural catastrophes. But Bill 6 in B.C. could conceivably put the insurance companies on the hook for fire following a terrorist event. This would leave the insurance companies without reinsurance protection for that event, since most reinsurance treaties have a terrorism exclusion.

In most countries where terrorism is covered, there is usually a government backstop or coverage to protect the insurance industry. This is not so in Canada.

Fortunately in Bill 6 under section 28.5 subsection (3) the following is stated: “Unless a contract that includes coverage for loss or damage by fire specifically provides otherwise, the contract does not cover insured property against loss or damage caused by contamination by radioactive material, resulting directly or indirectly from fire, lightning or an explosion described in subsection (1) (b).”

At least insurers will not pick up the damage from a “dirty bomb.” However, other terrorist events that result in fire could conceivably be covered.

The industry does need clarity on the regulations that will or will not apply to such events for both earthquake and terrorism. Uncertainty benefits no one. We can only hope the government of B.C. is listening.

———

Covering fire only, but not the shake damage [of an earthquake], is akin to what happened in New Orleans and Mississippi, where wind was covered but not flood.