As Sewers Age, Canada’s Insurers See Mess of Claims

The Canadian insurance industry is seeking ways to stem a rising tide of claims for water damage to homes that it says results partly from aging sewer systems that badly need replacement.

Some of its response involves raising the rates paid by customers who live in riskier areas. But insurers also want towns and cities to upgrade sewer and surface-water systems to better deal with freak storms.

Higher claims for messy sewer back-up problems have made water-related damage the No. 1 type of home insurance claim, above fire, theft or vandalism.

“The average age of a sewer system in Canada is about 60 to 65 years, and the useful life of that type of system is about 75 years,” said Robert Tremblay, a director at the Insurance Bureau of Canada, the home and auto insurance industry group.

Sewer systems are even older in some big-city neighborhoods, Tremblay said, and were not designed to handle flash floods like those that occurred in parts of Toronto in August 2005. Damage from those storms cost the industry nearly C$500 million ($472 million).

This week, home and auto insurer ING Canada said its second-quarter profit fell 42 percent, partly due to a barrage of hail and rain storms. An underwriting loss in its personal property business came from C$40.9 million (US$38.6 million) in “catastrophe claims” from various storms. Catastrophe claims are those for severe damage from a single incident or related incidents.

“Historically, fire represented more than half our losses,” ING Canada President and Chief Executive Charles Brindamour told Reuters in an interview. “This has reversed in the last few years and the bulk of losses are now water-related losses, primarily sewer backup,” he said. Rising precipitation, too little investment in infrastructure, and greater urbanization are all key factors in the trend, Brindamour said.

“There’s no question that we’re paying out lots of dollars on water-related claims,” said Glen Oxford, national property claims manager at the Co-operators Group, based in Guelph, Ontario.

Anecdotal evidence suggests that storms are becoming more severe due to climate change, although Oxford said he’s not positive statistics bear that out. Still, the size and location of storm sewers have certainly been “contributing factors” in past losses, he said.

Customers in high-risk areas can take measures to mitigate the chance of sewer backup. For example, in some municipalities they can install a backwater prevention valve, he noted. “In areas where we do charge higher premiums for the sewer backup endorsement, we also provide discounts to the client that takes some of those mitigating steps,” Oxford said.

Some insurers may just withdraw from risky areas.

After a major rainstorm and flood left Peterborough, Ontario, under water in July 2004 — for the second time in two years — some companies stopped writing sewer backup coverages there due to concern over the local infrastructure, Oxford said.

Kathy Bardswick, chief executive of the Co-operators Group, has said the industry’s image suffers when people learn — often too late — that they’re not covered. “If water damage continues to increase both in frequency and severity as is the current trend, our industry may be in for a flood of resentment,” she wrote in an issue of Canadian Underwriter magazine this year.

Insurers increasingly don’t write certain risks in a particular area, and it is “not uncommon” for a third of all claims to be denied after major water-related events because clients did not understand their policies, Bardswick wrote.

An industry pool mechanism or some partnership with government might offer better ways of protecting homeowners, she suggested.

( Editing by Peter Galloway)