The Last Word

Fort McMurray fire could have ripple effect on cost of insurance for the forest industry

By Jim Stirling

Loggers justifiably grumble about the rising costs of simply staying in business. Day to day operating expenses like tires, gas and equipment parts consistently trend upwards. Now the implications of a warming climate are poised to add a few more grey hairs—and potential bills for loggers and truckers.

Higher temperatures punctuated by more extreme weather patterns are occurring more frequently. One of the more direct, and costly, effects of those are the increasing risks of wildfires. When wildfires become more intense and unpredictable, the damage caused can be catastrophic. Eventually, someone or something has to foot the bill.

It’s what insurance is for and the premiums paid for it—general liability, equipment and property, for example—respond to the broader market forces that influence it. Insurance companies estimate the Fort McMurray wildfire in northern Alberta this May will cost them $3.58 billion.

“There is little doubt that the Fort McMurray wildfire is one of the most horrific and damaging natural disasters in Canadian history,” declared Bill Adams during a conference call after the damage figures had been tabulated. Adams is vice-president, western and pacific, with the Insurance Bureau of Canada. “The vast majority of the overall costs of the fire will be borne by insurance policies,” he added.

The $3.58 billion is a mind boggling figure and eclipses the previous costliest insured disaster in Canadian history, the Quebec ice storm of 1998.That event cost insurers about $1.9 billion in 2014 dollars, reckons the Insurance Bureau of Canada. The flooding in southern Alberta cost around $1.8 billion in insurable claims while the forest fire that almost wiped out Slave Lake, Alberta in 2011 cost about $742 million in claims.

The Fort McMurray conflagration destroyed more than 1,800 detached homes and 600 other housing units around the city. It forced major oilsands extraction companies to curtail production by around one million barrels of oil a day for two weeks.

The wildfire’s influence was far reaching. Statistics Canada figures show the real gross domestic product in Canada contracted by 0.6 per cent in May. Statistics Canada attributed that to the economic fallout from the forest fires.

The effects of the Fort McMurray fire are also likely to filter down to the logger and trucker, especially for those working in Alberta. The province now has the unenviable record of being the site for seven out of the 10 most expensive Canadian insured disasters. The Insurance Bureau of Canada’s Adams was cagey: “What impact this will have on (policy costs) will be determined at a later date by individual insurers.”

Wildfires routinely cause interruptions to production schedules and cash flows for logging contractors and licencees. Wildfire risks curtail bush operating hours for the forest industry—and trigger outright work shutdowns.

On occasion, the forest industry is blamed for causing a forest fire or allowing one to get worse. A case in point focused on the cause of a June 2010 forest fire southeast of Vanderhoof, in central British Columbia. The Crown alleged the licencee and its subcontractor doing the logging were negligent in the blaze.

The Crown argued that flammable debris near the exhaust of a feller buncher likely caused smouldering on the forest floor which subsequently ignited. The logging block contained predominantly beetle-killed lodgepole pine. The province was seeking about $5.5 million in damages, it claimed were attributable to lengthy suppression costs on the stubborn 6,100 hectare fire; lost stumpage value; the lost value of immature timber stands and reforestation costs.

The B.C. Supreme Court Justice hearing the issue ruled in July 2016 that the provincial government had not proved its case. “In my view, the province has not established that it is more likely than not the fire started as a result of the (harvesting) operation,” Justice Bruce Greyell said in his judgment. “In my view, there is a fair inference to be drawn that the fire was a holdover fire which was the result of lightning on the (previous) evening of June 17.”

The case reinforces the need for heightened vigilance during warm weather harvesting operations. And it emphasizes the wisdom in investing in comprehensive insurance packages.

The effect on those premiums from the Fort McMurray wildfire is hard to predict. “But it will spill over,” believes Hedley Larson, an insurance broker at Capri Insurance Services’ Vernon, B.C. office. Larson has been selling insurance for about 25 years and represents 30 to 40 different insurance companies. He specializes in the commercial sector, including heavy equipment in the logging and mining industries. The home insurance sector might be the first to feel the pinch, given the heavy losses incurred there in the Fort McMurray fires, he surmises. Larson noted loggers’ insurance premiums have been pretty steady for the last several years. “But they are claim-based and every contractor is a bit different.” Loggers who haven’t made an insurance claim in 20 years of operation are obviously in a better position than those who have filed two or three claims, he points out.

“My crystal ball is no better than anyone else’s, but will all individual contractors experience cost increases? Probably not. I don’t expect that,” he says. But losses on the scale of the Fort McMurray wildfires bring home the importance of having adequate insurance with a reputable company, adds Larson.