Exploding Fortunes

When the Sunrise Propane Industrial facility lit up Toronto’s night sky with a series of explosions at 4 a. m. on Aug. 9, what ultimately might have been destroyed is the insurance industry’s relatively good fortune.

For the past three years, Canadian insurers have been able to report that man-made disasters haven’t taken a bite out of their bottom lines. Not so anymore.

When the Sunrise plant exploded into a gigantic fireball, residential houses next to the plant had windows shattered and doors blown out by the concussive force of the blast. An estimated 12,000 residents were evacuated while firefighters attempted to bring the blaze under control.

It is amazing that, given all of the potential for massive property damage nearby, only 50 homes were damaged beyond repair. On the night of the explosions, windows of apartment buildings well beyond the 1.6-km evacuation zone established by emergency services could be heard rattling with each new blast of a propane tank going up in flames. Businesses in the area had their windows blown out and police established a watch over these areas to prevent looters, who nevertheless made their presence known.

Thus far, a global damage total is well beyond reach. Initial reports from the police estimated damages in the area of “tens of millions,” although it is unknown what such a figure would include. Certainly, there will be residential claims for repairing windows, doors and other damage caused as a result of the explosions. Expect also commercial claims for business interruption, damage to property and for any loss of merchandise due to what looting there might have been. Eager trial lawyers announced their intention to launch a class action even before the cause of the explosion was determined. They suggest that since the company carried dangerous goods, it is automatically liable for negligence in situations such as this. Stay tuned to hear how the defence will respond.

As for damages sustained by the company, when Sunrise Propane was contacted, a company official answering the phone said the company had not yet been able to ascertain the scope of the damage to their facilities. He said at that point police and firefighters were still keeping employees away from the site (still considered to be a danger).

It’s hard not to think of the 2005 Suncor oil refinery explosion in Alberta when trying to come up with a reference point for damages incurred in an industrial explosion. Only recently has the Suncor litigation been resolved; all told, the final price tag for the Suncor explosion tallied at just northward of Cdn$1 billion.

Early indications are that the Sunrise Propane damage tally will not reach that level. Still, it will be interesting to see what will happen to the claims totals once liability for the blast is determined.

If the company were to to be found liable, insurers may try to subrogate the claims, essentially passing along their claims payments to the company. This would affect the legal bills associated with any commercial claim the company might make (assuming liability is covered under its insurance policy). It might also kick-start a D&O commercial claim against the company’s executives.

And if the company isn’t liable, it would still have a large claim to make under its own insurance policy.

Either way, the tail of this unfortunate disaster will be a long one. It serves as an unpleasant reminder that insurers are relying a great deal on luck when it comes to avoiding major disasters. One has to wonder if the good fortune seen in 2006-07 may in fact have gone up in flames.

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It will be interesting to see what happens to the claims totals once liability for the blast is determined.