Energy Industry

‘Among the Largest Catastrophe Losses in Canadian History’

Business interruption losses from the Alberta fire will be "massive" according to experts.
By: | May 12, 2016 • 4 min read
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About 2,400 structures in and around Fort McMurray lie in ruins in the middle of 700 charred square miles of northern Alberta.

The oil sands boom town, once known as “Fort Make Money,” is now going to cost money — at least $4 billion (C$5 billion) by early estimates — to rebuild after a monster wildfire swept around and through parts of town the first week of May.

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The immediate insurance question is not the property loss in town; that is quite straightforward.

Rather, it is the length of the oil sands outage and two stages of business-interruption (BI) claims: immediate losses for the time out of operation, as well as possible contingent losses for refiners that rely on the oil sands for raw materials.

At the peak of the fire, 1 million barrels a day of oil sands production was taken out of service — about 40 percent of total output, and roughly one-quarter of all Canadian oil production.

Some operations have already airlifted in skeleton crews to begin safety checks in advance of resuming operations, but the bulk of production is expected to remain out of service for several weeks, if not a month or more.

The wildfires “will be a huge BI event,” said Paul Cutbush, senior vice president catastrophe management at Aon Benfield Analytics in Toronto.

“Even with no damage we will have to see when workers are allowed to come back — and then how many and how soon. A lot of these facilities have been used for evacuations, a goodwill gesture. A great deal will depend on manuscript wording for each policy.”

Waiting periods for BI claims will likely not be as large a factor as in past large losses, Cutbush noted. “It used to be that 90 days was standard. Today, that is shorter, 60 days, maybe even just 30.”

It may take longer than that to get claims sorted, because the size and scope of the fire has presented so many new unknowns.

“The biggest thing is getting people back to work,” said Cutbush, but they need places to live and shop.

“It is our understanding that a lot of the housing in the area was rental or temporary housing for oil sands and services workers.” That means not just property claims for the assets themselves, but lost value from their revenue.

Utilities and infrastructure also have to be inspected, repaired or replaced.

“There is also the issue of ash-contaminated water,” said Cutbush. “The Athabasca River is used for injection water, but ash can make the water caustic and not suitable for use without treatment.”Canadian Disaster Losses chart

The fires continue to rage uncontrolled, but are now in the deep boreal forest south and east of town. The evacuation order and state of emergency for the area remained in effect as of May 11.

During a press tour through the town, Alberta Premier Rachel Notley gave the first official estimate of initial recovery time: “First responders and repair crews have weeks of work ahead of them to make the city safe. I’m advised that we will be able to provide a schedule for return within two weeks.”

Official numbers said 88,000 people, were evacuated, but a local source puts the number closer to 100,000, counting transient workers.

Remarkably, there has been no loss of life, not even any major injuries. And the vast oil sands mining and processing operations that sprawl for more than 100 miles in every direction around Fort McMurray were undamaged.

On May 10, Notley met with industry officials and was told the operations were secure.

“The magnitude of the current destruction suggest that the new fires will generate among the largest catastrophe losses in Canadian history, affecting both personal and commercial property writers,” according to an initial evaluation by the ratings agency Moody’s.

“I suspect some of the [energy companies’ insurance] coverage may be on the lean side.” — Jason Mercer, assistant vice president and analyst, Moody’s

“Early estimates of the wildfires peg the cost of damages rising to C$5 billion or around 1.5 percent of Alberta’s GDP — an estimate that could increase,” Moody’s reported.

“The Fort McMurray fires destroyed four times as many buildings as the Slave Lake [Alberta] wildfire of May 2011, which cost Canadian property and casualty insurers more than C$700 million in pretax losses.”

“Home and auto insurance coverage in Canada is substantially similar to that in the U.S.,” said Jason Mercer, assistant vice president and analyst at Moody’s in Toronto, who co-wrote the report.

“The only notable difference is that some lines, such as workers’ compensation, are typically government issued.”

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BI is also similar in the two countries, Mercer noted. “There is named peril and all-risk. Both are available, but my sense is that all-risk is probably more difficult to get and more expensive, if only because of the higher number and cost of major losses in the province.

“More than half of the major losses in recent years in Canada have been in Alberta.”

Mercer also emphasized that the price of oil has been depressed for almost two years, leading some operators to tighten their belts – including insurance protection.

“I suspect some of the coverage may be on the lean side,” he said.

It will also depend whether companies have limited BI coverage — which would cover losses beginning with the evacuation and ending with the “all clear,” or extended coverage, which would “could run until there is a return to the profit level pre-event.”

Gregory DL Morris is an independent business journalist based in New York with 25 years’ experience in industry, energy, finance and transportation. He can be reached at [email protected]
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The Law

Legal Spotlight

A look at the latest legal cases impacting the industry.
By: | April 28, 2016 • 4 min read
You Be the Judge

Insurers Must Pay $58 Million

On sept. 12, 2008, a power plant unit owned by TransCanada Energy USA’s subsidiary TC Ravenswood in New York was taken out of service due to excessive vibrations. On Sept. 16, a crack in the unit’s rotor was discovered. The unit was out of action until May 18, 2009.

R5-16p14_LegalSpotlight.inddTransCanada filed a claim for $7 million in property damage and $50.8 million for loss of gross earnings from Factory Mutual Insurance Co., National Union Fire Insurance Co., ACE INA Insurance and Arch Insurance Co.

The insurers denied the claim.

In legal proceedings, the insurers argued the crack that damaged the unit formed before the policy went into effect on Aug. 26, 2008, and that the plant’s loss of sales were not covered because they were incurred after the period of liability ended.

National Union later settled.

TransCanada countered that the all risks policy covered the breakdown because the unit was operating properly when the policy began.

The New York Supreme Court ruled on March 2 that “it is irrelevant here whether the crack existed or could have been discovered before the policy commenced.” It also ruled for TransCanada on the loss of capacity revenue.

The losses, the court ruled, “were neither speculative nor incapable of being linked directly to the period of liability at issue.” &

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Scorecard: The insurance companies must pay TransCanada $58 million to cover its property damage and business interruption costs.

Takeaway: It was immaterial when the cause of the damage began as long as the property damage was sustained during the policy period.

Sophisticated Buyers of Coverage

Templo Fuente De Vida Corp. formed Fuente Properties in 2002 to acquire a property for a church and daycare centers.

Templo and Fuente (collectively Templo) received a funding commitment from Merl Financial Group Inc. (which later restructured and renamed itself First Independent Financial Group).

However, Templo had to terminate its purchase agreement when the funding did not materialize on the closing date. It filed suit against First Independent in February 2006.

On Aug. 28, 2006, First Independent gave notice of the claim to National Union, which had issued the company a $1 million directors, officers and private company liability policy.

Templo and several defendants, including First Independent, reached a settlement exceeding $3 million. First Independent assigned its rights under the National Union policy to Templo.

National Union denied coverage because of the delay in notifying them of the claim. On Feb. 11, the Supreme Court of New Jersey agreed with both a lower court and an appeals court, upholding the insurance company’s decision.

At issue was whether the insurance company had to establish it suffered prejudice by the late notice in a claims-made policy. For occurrence policies, the state has ruled that insurers must show they are prejudiced by late notice because many insureds are unsophisticated consumers.

For insureds under a claims-made policy, such as D&O, however, the court ruled insureds are sophisticated buyers of insurance. &

Scorecard: National Union will not have to contribute a share of a $3 million-plus settlement agreement.

Takeaway: New Jersey insureds with claims-made policies are treated as sophisticated consumers who are expected to comply with policy terms.

Ingredients for Dismissal

In July 2008, Wisconsin Pharmacal Co. placed an order with Nutritional Manufacturing to manufacture its Daily Probiotic Feminine Supplement chewable tablet, sold at a major retailer. The tablet was to contain Lactobacillus rhamnosus (LRA), a probiotic ingredient.

Nutritional Manufacturing ordered a supply of LRA from Nebraska Cultures of California Inc., which in turn ordered the LRA from Jeneil Biotech Inc.

After the tablets were manufactured and sold by Pharmacal, the retailer notified the company in April 2009 that the tablets contained Lactobillus acidophilus (LA) instead of LRA.

R5-16p14_LegalSpotlight.inddNutritional Manufacturing assigned its causes of action against Nebraska Cultures and Jeneil to Pharmacal, which filed suit against those companies on Jan. 14, 2011, along with their respective general liability insurers, Evanston Insurance Co. and The Netherlands Insurance Co.

In October 2011, a Wisconsin circuit court dismissed some of the allegations and held others in abeyance while it decided whether the insurers must defend and indemnify its insureds. The court ultimately granted the insurers’ request for summary judgment.

That decision was reversed by the court of appeals, which ruled the defective ingredient physically injured the other tablet ingredients, and that the claim was covered by the policies.

On March 1, the Supreme Court of Wisconsin reversed that decision, in a 3-2 ruling.

It ruled there was no property damage because the policies covered only products that caused damage to “property other than the product or completed work itself.” Because the LA ingredient was integrated into the tablet, it did not cause damage to “other property,” it ruled.

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In addition, it ruled, there was no “loss of use of tangible property” because a “reduction in value” of the tablets is not the same as “loss of use.” &

Scorecard: The insurance companies do not have to defend or indemnify Nebraska Cultures or Jeneil.

Takeaway: Blending all of the ingredients together into one tablet created one product.

Anne Freedman is managing editor of Risk & Insurance. She can be reached at [email protected]
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Sponsored: Liberty International Underwriters

Helping Investment Advisers Hurdle New “Customer First” Government Regulation

The latest fiduciary rulings create challenges for financial advisory firms to stay both compliant and profitable.
By: | May 5, 2016 • 4 min read
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This spring, the Department of Labor (DOL) rolled out a set of rule changes likely to raise issues for advisers managing their customers’ retirement investment accounts. In an already challenging compliance environment, the new regulation will push financial advisory firms to adapt their business models to adhere to a higher standard while staying profitable.

The new proposal mandates a fiduciary standard that requires advisers to place a client’s best interests before their own when recommending investments, rather than adhering to a more lenient suitability standard. In addition to increasing compliance costs, this standard also ups the liability risk for advisers.

The rule changes will also disrupt the traditional broker-dealer model by pressuring firms to do away with commissions and move instead to fee-based compensation. Fee-based models remove the incentive to recommend high-cost investments to clients when less expensive, comparable options exist.

“Broker-dealers currently follow a sales distribution model, and the concern driving this shift in compensation structure is that IRAs have been suffering because of the commission factor,” said Richard Haran, who oversees the Financial Institutions book of business for Liberty International Underwriters. “Overall, the fiduciary standard is more difficult to comply with than a suitability standard, and the fee-based model could make it harder to do so in an economical way. Broker dealers may have to change the way they do business.”

Complicating Compliance

SponsoredContent_LIUAs a consequence of the new DOL regulation, the Securities and Exchange Commission (SEC) will be forced to respond with its own fiduciary standard which will tighten up their regulations to even the playing field and create consistency for customers seeking investment management.

Because the SEC relies on securities law while the DOL takes guidance from ERISA, there will undoubtedly be nuances between the two new standards, creating compliance confusion for both Registered Investment Advisors  (RIAs)and broker-dealers.

To ensure they adhere to the new structure, “we could see more broker-dealers become RIAs or get dually registered, since advisers already follow a fee-based compensation model,” Haran said. “The result is that there will be likely more RIAs after the regulation passes.”

But RIAs have their own set of challenges awaiting them. The SEC announced it would beef up oversight of investment advisors with more frequent examinations, which historically were few and far between.

“Examiners will focus on individual investments deemed very risky,” said Melanie Rivera, Financial Institutions Underwriter for LIU. “They’ll also be looking more closely at cyber security, as RIAs control private customer information like Social Security numbers and account numbers.”

Demand for Cover

SponsoredContent_LIUIn the face of regulatory uncertainty and increased scrutiny from the SEC, investment managers will need to be sure they have coverage to safeguard them from any oversight or failure to comply exactly with the new standards.

In collaboration with claims experts, underwriters, legal counsel and outside brokers, Liberty International Underwriters revamped older forms for investment adviser professional liability and condensed them into a single form that addresses emerging compliance needs.

The new form for investment management solutions pulls together seven coverages:

  1. Investment Adviser E&O, including a cyber sub-limit
  2. Investment Advisers D&O
  3. Mutual Funds D&O and E&O
  4. Hedge Fund D&O and E&O
  5. Employment Practices Liability
  6. Fiduciary Liability
  7. Service Providers D&O

“A comprehensive solution, like the revamped form provides, will help advisers navigate the new regulatory environment,” Rivera said. “It’s a one-stop shop, allowing clients to bind coverage more efficiently and provide peace of mind.”

Ahead of the Curve

SponsoredContent_LIUThe new form demonstrates how LIU’s best-in class expertise lends itself to the collaborative and innovative approach necessary to anticipate trends and address emerging needs in the marketplace.

“Seeing the pending regulation, we worked internally to assess what the effect would be on our adviser clients, and how we could respond to make the transition as easy as possible,” Haran said. “We believe the new form will not only meet the increased demand for coverage, but actually creates a better product with the introduction of cyber sublimits, which are built into the investment adviser E&O policy.”

The combined form also considers another potential need: cost of correction coverage. Complying with a fiduciary standard could increase the need for this type of cover, which is not currently offered on a consistent basis. LIU’s form will offer cost of correction coverage on a sublimited basis by endorsement.

“We’ve tried to cross product lines and not stay siloed,” Haran said. “Our clients are facing new risks, in a new regulatory environment, and they need a tailored approach. LIU’s history of collaboration and innovation demonstrates that we can provide unique solutions to meet their needs.”

For more information about Liberty International Underwriters’ products for investment managers, visit www.LIU-USA.com.

Liberty International Underwriters is the marketing name for the broker-distributed specialty lines business operations of Liberty Mutual Insurance. Certain coverage may be provided by a surplus lines insurer. Surplus lines insurers do not generally participate in state guaranty funds and insureds are therefore not protected by such funds. This literature is a summary only and does not include all terms, conditions, or exclusions of the coverage described. Please refer to the actual policy issued for complete details of coverage and exclusions.

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This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Liberty International Underwriters. The editorial staff of Risk & Insurance had no role in its preparation.




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LIU is part of the Global Specialty Division of Liberty Mutual Insurance.
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