Staying Dry

Overland flood insurance was generally unavailable to Canadian homeowners until this past May, when Aviva Canada Inc. began offering the Overland Water Protection option in Alberta and Ontario. It is anticipated the company’s coverage will be available in all provinces, except Quebec, by the end of the year.

Aviva Canada was quickly followed by The Co-operators Group Limited, which, late last spring, launched its Comprehensive Water Endorsement in Alberta and expects to expand that nation-wide over the next 18 months. Then in November, RSA Insurance became the third insurer to offer residential flood coverage in the country, providing its Waterproof coverage for new business. Starting January 17, it will be available to RSA Canada customers on renewal, except in Saskatchewan, Quebec and the territories.

While movement has been made, there are a number of areas where coverage gaps remain. Coastal flooding is still generally not available, while for high-risk areas – those where insurance is either not available or very expensive – industry professionals contend that flood coverage is a public policy issue that should not be borne by the insurers alone.

WHAT IS COVERED?

The Co-operators’ product covers a “number of perils,” including a river body overflowing its banks, says Rob Wesseling, the company’s executive vice president and chief operating officer for property and casualty operations. It further covers “water that overwhelms the natural or built-in infrastructure’s ability to carry it away” and traditional sewer back-up, Wesseling reports.

When the comprehensive water coverage is purchased, “you get all three, and there is not an option to buy one and not the other,” he says.

“Our rationale for structuring the coverage that way is that our clients tell us consistently that when they have four feet of water in their basement, it doesn’t really matter to them how or why the water got there.”

Both RSA Canada and Aviva Canada offer flood coverage as an endorsement to their sewer back-up polices.

“To qualify for the overland water endorsement, there has to be an active sewer back-up endorsement on the policy,” says Maz Moini, Aviva Canada’s vice president of commercial lines and reinsurance. “The two wordings have been fitted to each other, so to speak, to provide a more complete coverage. They work hand in hand, and that’s part of the reason behind that product structure.”

RSA Canada, for its part, gives homeowners the option of buying sewer back-up without the new coverage, but the insurer’s new sewer back-up wording is more restrictive than it was in the past. “That is going to be very clearly defined as to what is covered and not covered,” Donna Ince, senior vice president for personal lines at RSA Canada, says of the company’s new sewer back-up endorsement. In the past, the endorsement “was much broader and, in some respects, would cover flood – not intentionally – but it did cover flood.”

A case in point was the 2013 flooding in southern Alberta and in and around Toronto. “Some of the challenge we had with the floods in Alberta and in Toronto was this concurrent causation issue, where you had sewer back-up happening at the same time as you had clean floodwater coming in,” Ince points out. “You can’t really say, ‘Part of it is brown water, part of it is clear water.'”

Aviva Canada could relate. “Aviva has run into those situations where we basically sided on the side of the client in terms of paying out the claim, assuming the right coverage was available,” says Moini. “So if you had concurrent causation and there was a sewer back-up endorsement present on the policy, then the claim was paid out under the terms of the sewer back-up endorsement and the limits of the sewer back-up endorsement,” he explains.

HOW IS TAKE-UP?

Greg Robertson, vice president and commercial producer at R. Robertson Insurance Brokers Limited, says that take-up of the Aviva Canada option has been “very, very good” among homeowners

in low-risk areas. In these areas, the coverage would cost an additional $75 to $100 a year, says Robertson, who places home insurance with both Aviva Canada and Western Assurance, a subsidiary of RSA Canada. (He had not yet placed any RSA Canada coverage, which launched just two days before he was interviewed.)

With regard to the new Aviva Canada product, Robertson notes that customers in low-risk areas “are fairly comfortable purchasing the coverage because it is not a horrific outlay.”

For homeowners, “I find the take-up is based on geography,” Robertson says. For tenants, uptake on the coverage “is not great, especially when (the unit is) above the second floor,” he says. The situation “is similar” for condo owners.

The Co-operators’ Wesseling reports more than 90% of the insurer’s homeowners clients in Alberta are buying the new coverage on renewal, reporting a “little over” 24,000 have purchased the product. “We are about halfway through our renewal book now,” he says.

Of the 60,000 homeowner clients in the province, Wesseling notes, “we expect by the time we get through our renewal book in May, we will have between 27,000 and 30,000 homes for Albertan families insured.”

Though Aviva Canada is not releasing figures “for competitive reasons,” says Moini, it did report last Marsh that the average cost per residential water claim increased 37%, from $11,709 in 2004 to $16,070 in 2014. “For a number of years now, in terms of claims dollars paid out, water has surpassed fire as the number 1 cause of loss for Aviva.”

The experience has been similar for The Co-operators, Wesseling reports. “We fully expect that we will pay substantially more in losses associated with all types of flooding as a result of the launch of this coverage,” he says, adding “that’s why we are doing it. There’s an unmet need out there.”

In its new water endorsement, The Co-operators notes it insures loss or damage caused by the following: surface water; flood; discharging, back-up or overflow of water or sewage; rising of the water table; or water below the surface of the ground, including that which exerts pressure on or flows, seeps or leaks through any opening in a sidewalk, driveway, foundation, wall or floor.

RSA Canada’s endorsement, for its part, covers “fresh-water flooding and damage that is also caused by eaves and downspouts and drains,” Ince says, with the insurer adding, it covers “losses that result from the accumulation or run-off of surface waters, including torrential rainfall when water enters the property.”

WHAT GAPS REMAIN?

All that said, some water coverage is still not available to Canadian home insurance policyholders.

• The Co-operators does not cover waves, tidal water, tidal waves or tsunamis, or spray from any of the foregoing, whether driven by wind or not;

• RSA Canada does not cover floods related to saltwater, tsunami, dam breach or levy, or a coastal flood; and

• Aviva Canada does not cover coastal flooding.

“Up until now in the Canadian marketplace, there aren’t catastrophic loss models that can help us quantify losses from those types of events,” Moini says of coastal flooding. “So if we cannot quantify, it’s difficult for us to price it from an actuarially sound risk basis,” he says. “We think it’s possible that as more models come online that that coverage may be provided in the future.”

Moini’s view is that The Co-operators does not cover continuous or repeated leakage of water or sewage, while Aviva Canada does not cover losses that result from maintenance issues, such as leakage of water from a pipe or seepage of water from the foundation.

Ince points out that fewer than 3% of existing RSA Canada customers will not qualify for the company’s new water coverage. “The reasons may be a combination of customers living in a zone where the product isn’t available, existing claims history, or the product type is not eligible,” she says. “This percentage is aligned with the number of Canadians living in very high-risk areas who will be challenged to find coverage.”

Wesseling reports that in Alberta, The Co-operators is offering its new water endorsement to all homeowners, even those located in high-risk areas.

Homeowners who “are at a very high level of risk can buy down a limit or buy up a deductible to manage their individual affordability,” he explains.

Moini notes that with some properties, the “actuarially sound premium” could exceed $10,000 a year. “That leads us, as well as the rest of the market, I think it’s fair to say, to sit back and say there are areas where the coverage is not workable,” he says. “What we need to do is think about solutions – and these are broader industry solutions – on how to think about potentially making some level of coverage available in those areas as well for insurers that are in those areas and that is what the industry is working through right now” with Insurance Bureau of Canada (IBC).

At the recent National Insurance Conference of Canada, Don Forgeron, IBC’s president and chief executive officer, said the new residential overland products “will likely not deal with all of the high-risk properties, and for that, we believe we need government involvement.” Government involvement “should be focused on pre-planning instead of after-the-fact financial support,” Forgeron said.

“Damage from water, be it flood or otherwise, is not something that is going to be successfully managed on the balance sheet of insurance companies alone,” Moini maintains. “We need some public policy. We need a Canadian solution and we need everyone to recognize what their role is in mitigating risk.”