Co-Insurance: One of the Trickiest Concepts in Commercial Insurance

Well, That Was Unexpected…

In the wee hours of November 1, 2019, a huge storm ripped across Southern Ontario, causing over $50 million worth of damage in its wake. We’ve had big storms in this area before, but this storm was different.

Typically, in the insurance industry, we have a few types of storms. We have the  regular ones, where you might see a few older roofs sustain damage, maybe some siding damage, perhaps a few basement floods. Those storms are easy enough to plan for. Heck, often insurance companies don’t have to raise everyone’s rates to recover from those losses.

Then there are what we term “catastrophic weather events.” Those are the storms that cause significant damage in a concentrated geographic area, and the number of claims exceeds a threshold. For example, if an insurance company were to experience 500 claims from a single storm in the Region of Niagara, they might term that as a “catastrophic weather event.” Until recently, those were the storms we talked about. Those events were what drove rates up for everyone.

But on Halloween night, we experienced winds gusting to over 130 kms per hour in Port Colborne. Not in coastal Louisiana or Florida during August, we had hurricane-force winds in Port Colborne, in October. Let that sink in...

Here’s the thing. In insurance, the policy contract is sacred. Insurance companies live and die by the contract wordings. If we have enough catastrophic weather events, without any rate relief, small or under-funded companies can actually find themselves out of business. But the Halloween storm was something that was never planned for. So the fallen trees, damaged roofs and siding, and flooded basements cost the industry quite a bit of money in damages, damages for which the companies paid, there were also damages that the policy contract never planned for, and consequently could NOT cover.

Here’s the sticky point. The contract covers certain damages. Those losses are either specifically described (“fire”, “wind”, “sewer backup”) or specifically excluded (“wear and tear”, “settling”, “nuclear hazard”). The policy exclusions are those caused by hazards that either cannot be quantified, like liability losses from intentional injury to others, or are so rare that they were never expected. See, if the policy covers it, they have to collect premium from everyone to cover those losses. If something has never happened, the actuaries cannot possibly calculate the rate to insure it. So the week following the big storm, there were quite a few people who felt that the insurance companies were exploiting “loopholes” in the policy contract in order to deny claims for good and decent people.

Remember, the contract is sacred, and it’s also un-feeling. If you were one of the unlucky ones who lost a boathouse or a dock to the angry lake that night, you weren’t covered. Not because you are insured by a bad company, and certainly not because you are anything but wonderful in your own right. You weren’t covered because the insurance contract specifically excludes losses caused by tidal waves, or wave damage. And the policy excludes those losses because they never happen, at least not often enough that our industry can plan for them.

There was a time, early in my career (I’m that old) when all homeowner policies covered sewer backup losses as part of the standard wordings. Back then, we were still most afraid of fire and burglary, as those were the things that people suffered most. Then there were some trends in claims activity, due to aging infrastructure and population growth, that we realized that flooded basements were the new fire. So we pulled that coverage out of the standard policy, and for a fee, you could add coverage for those losses back onto your policy. This way, if you lived in an area that experienced an inordinate amount of basement floods, you paid more. It was only fair.

I think that in the next few years, with the significant climate change we’ve seen already, you might see optional coverages like Tidal Wave/Wave Damage coverage available, with separate deductibles and coverage limits, available on the standard homeowner’s insurance policy. And if you live along the shore of a lake, the rates for that coverage will be higher than if you live inland. And when that happens, you can cover your break wall, boathouse and dock against the next unexpected storm.