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Canadian Wildfire Present Challenges to Business Owners and Their Insurers

The Canadian wildfire which started in early May 2016 southwest of Fort McMurray affected a population of about 90,000 and led to destruction of over 2,400 structures. The sheer ferocity and speed of the fire took both public services and local residents by surprise. While causing a great deal of personal misery for those affected, the catastrophe’s aftermath will present significant challenges to insurers and business owners.

The effects of the widespread damage are stark, as shown by the pictures of the residents of Fort McMurray evacuating the city, blocks of burned out houses and charred remains of the infrastructure. The masses evacuating the city and trying to find a safe haven was a consequence of the fires which went beyond the graphic examples of the damage inflicted. Overall, the practical problems and obstacles many insurers are facing are myriad, especially when helping businesses recover and having to deal with multiple claims.

Loss of Business Records

Data is one major factor. One of the challenges initially faced will include the loss and destruction of business records that insurers would typically rely on to provide evidence of the losses sustained. Standard disaster recovery plans of maintaining data at offsite locations or data warehouses may be shown to be ineffective if off-site locations are also destroyed containing these back-up records.  Data reconstruction may be required, with possible sources being bank records, business records retained by the business’s accountants, or from annual tax filings, but these efforts may take time. Most insurers require a minimum standard of evidence and gathering this can prove to be an arduous and time consuming endeavour, particularly when businesses are likely to be putting pressure on insurers to resolve their claims as quickly as possible so that they can return to normal operations.

Physical Recovery

Physical recovery following the catastrophe also presents challenges.   Access has been problematic due to the imposition of civil authority evacuation orders which denied access to the properties throughout May and may extend into June.  Access to large portions of Fort McMurray (including the downtown area that avoided the flames) was restricted by police to essential personnel since the evacuation with checkpoints being put in place to limit entry to authorised individuals.   Insurers and their representatives only recently gained access, and residents have only been  allowed access on a phased basis starting from the 1st June.  Electricity and gas services, whilst initially interrupted, have been reinstated for the majority of the city but key services such as a functioning hospital and medical facilities need to be in place before access and recovery efforts can properly go ahead. Following access, and once the full scope of damage has been ascertained, the sourcing of contractors and materials may impact the recovery efforts as the available supply may be limited, leading to delays in completing repairs, construction and cost escalation. This could  lead to a significant increase  in the relative value of Business Interruption (BI) claims.

Availability of Labour

The availability of labour can be a considerable obstacle to a quick recovery.  The scale of the Canadian disaster could lead to depopulation in the area as the availability of housing units and infrastructure restricts population. This will clearly be an issue for Fort McMurray given the scope of damage sustained.  While efforts will be made to quickly construct temporary housing, the process of constructing suitable housing will take a period of time before capacity becomes available.   During this interim period, labour may be limited.

Indirect Losses

What can be often forgotten are the risks to those surrounding properties and urban areas that were not directly damaged by the wildfires. Clearly many properties were affected physically in a wide area, but the financial impact  can extend to those businesses not sustaining any significant damage. In this case the downtown area and majority of the city was not physically affected.  These businesses will potentially have compensable losses under a number of extensions of its insurance policy. This could include restrictions in access to their property during any closure periods due to civil authority and the indirect impact on their ability to operate due shortage of labour, service interruption or damage to businesses suppliers or customer bases.

Insurance claims delivered in an effective and efficient manner are crucial for businesses affected by the catastrophe to recover from their losses.  While claims of certain policies should be relatively easy to quantify, many firms could also have a variety of additional extensions to address the financial risks and ensure their swift recovery, all of which are likely to need individual assessment before the appropriate claims settlement can be reached. Endorsements for indirect loss will be particularly important, given that the majority of Fort McMurray was not physically affected, but critical services were affected and access was significantly affected due to the imposition of civil authority which resulted in the evacuation of the city to ensure physical safety.

As forensic accountants the challenges to the emerging situation is the need to consider each and every claim on an individual basis, given the policy cover in place.  As policies vary with some coverage being more broad than others, some businesses may not be able to fully recover from its losses.

It will take many months for the impacts of the Fort McMurray to be fully understood and addressed.  National and international media attention and the scale of the damage will put insurers under public and government scrutiny. Business owners and its insurers will have to work through the process of determining the cause of loss and consider the policy cover in place.

By Flemming Jensen. Published in Insurance Day, 08 June 2016.

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