When the Water Rises, What’s Covered?

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When the Water Rises, What’s Covered?

Front-line insurance reps, like brokers and customer service representatives, need to know what's covered, and what policyholders are up to in this increasingly wet world.

March 7, 2010

That water has taken over as the number one property claim spot is well known. Less obvious is what it means to front-line insurance reps and policyholders.

Complications Count
For instance, it’s a common misconception among policyholders that overland flooding is covered–it rarely is, notes Robert Tremblay, the Insurance Bureau of Canada’s (IBC) director of research. “Floods are not an insurable peril,” he says. “What’s covered is sewer backup.”

Martin Beaulieu, head of personal lines at Intact Financial Corp., explains that flooding usually results in complicating factors that may be covered. “If you have a multiplicity of causes, if one is covered then the coverage responds,” he says. “It’s very rare that you have a flood and there’s not a sewer problem.”

And yet, that cause-and-effect phenomenon isn’t always cut-and-dry. Consider what happened in the case of Lundstrom v. United Services Automobile Association. According to an analysis of the case by Virginia-based lawyer

J. Kent Holland Jr., sometimes it can be difficult to tell when the cart is in front of the horse.

Here’s the story: Soon after moving into their new abode, the new homeowners discovered water in a stairway after a rainstorm. They convinced the builder to investigate. The builder cut holes in the roof to find out what was happening. But that caused bigger problems–the holes let in even more water during ensuing rainstorms. Mould developed. The homeowners filed an insurance claim for the water damage and mould. But the insurer explained that the policy didn’t cover mould damage. The insurer said it covered losses “ensuing” from water damage, however.

The case went to court, and in the end, the judge sided with the insurer. Why? It all hinged on the concept of “ensuing loss.”

In the court’s decision, mould would have had to cause the water damage in the first place for the homeowner to be covered for the mould. Since it was the other way around, the court decided that the mould exclusion had to stand.

This case illustrates just how complicated water-related policy issues can be. “The reality is you’ve got to look at the contracts before you can say what is covered and what isn’t covered,” says Wayne Ross, Aviva Canada Inc.’s vice-president of property claims. “It depends on what the policyholder selected…. That’s where the broker comes in and talks to the client. What’s their risk tolerance? What is it they’re prepared to pay?”

Renovations & Inflation
Another complicating factor has to do with the way people use their homes these days.

Gone are the days of unfinished basements. What used to be a dank cellar has become prime living space, often sporting expensive electronic equipment, high-end electric light fixtures, and home-gym gear.

“It used to hold up the house,” says Fred Plant, president of Plant Hope Adjusters Ltd. in Moncton, N.B. “[Now] it becomes the fourth bedroom, the playroom, the extra bathroom and the laundry room.”

“Someone tells you it’ll cost $45,000 to refinish the basement,” Plant says. “Some people are agog at that.”

The basement has become valuable–and more complicated to fix when there’s suddenly four feet of sludge in it. “Someone tells you it’ll cost $45,000 to refinish the basement,” Plant says. “Some people are agog at that.”

And time can also play tricks. When a homeowner started their renovations, years ago, the cost of materials may have been low compared to today’s costs. “Today, you’re buying a sheet of plywood at $65 a sheet, whereas I might have bought it at $23 a sheet” in the past, says Plant.

Broker’s Role
Communication is always important, but considering this situation–fancy basements plus increased water issues–it’s particularly important for the industry’s front-line representatives to stay abreast of the renovations their customers undertake.

“This is where brokers have to be vigilant–where people have added value to their homes [brokers need to make sure] they’re keeping up with their coverage,” Plant says.

Keeping up is a major challenge for the industry overall. As IBC’s Tremblay explains, this sector might not have the best information to work from.

“We always took for granted that climate is constant,” he says. “What we’re seeing is the climate is changing. The return period of meteorological events has changed drastically over the years. And yet… the intensity, duration and frequency (IDF) curves that engineers are using to design infrastructure have not changed.”

In Toronto in the last 23 years, there have been five 50-year intense-rain events, Tremblay says. The city has had two 100-year intense-rain events in that period, too. “Things have obviously changed. The IDF curves have to be updated.”

Environment Canada is working on it, “but they face some significant challenges,” Tremblay says, explaining that over the years, the government has closed a number of the environment-observation stations that used to provide that picture. “They have less data to draw from.”

Still, the government seems to be trying to get ahead. For example, instead of using point IDF curves (specific locations, like a street corner), Environment Canada is examining the use of grouped data. This type of data would provide a regional IDF curve that would provide a picture across an area–the entire GTA, for instance.

“You have to give them the time… to iron out all of the meteorological issues,” Tremblay says.

Tips for Brokers
First and foremost, say sources, brokers need to move fast if a customer calls in a water claim. The longer water sits, the worse damage it does. “They know, and we know, time is of the essence,” Ross says.

Also, brokers need to keep vigilant about communicating with customers, Tremblay says. “People don’t know what they’re covered for. ‘I didn’t know what I was covered for until the water started to rise,’ is how most people [react].”

Brokers could also act as the first line of education for property owners. For example, talk about the advantages of installing water-mitigation systems, like sewer backflow valves, and the advantages of replacing old plumbing. As Tremblay points out, “nobody wants raw sewage in their basement.”