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--  Feature Story  --

Tree Insurance

With the value of timber rising, having fire insurance on standing timber may become a way for forest companies to better manage risks in the future.

By Tony Kryzanowski

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Given that the value of wood in Canada is increasing due to the declining availability of new wood sources, insurance may play a more prominent role in the future as protection against losses from fire.

The move by Alberta’s Millar Western Forest Products to protect itself in the event that Lloyd’s of London denies its nearly $1-million claim for timber lost to forest fires is attracting a lot of interest within the forest industry. The company’s recent decision to file legal documents raises some intriguing questions for the industry about the insurability of standing and harvested timber.

According to Millar Western spokesperson Louise Riopel, the company had one year from the date of loss to file the necessary paperwork to entitle Millar Western to take the matter to court in the event of a refusal by Lloyd’s to pay the claim.

"We are insured for our cut and decked wood only," says Riopel. "The coverage was for cut timber that we had stacked in the forest." She says that Lloyd’s has since accepted Millar Western’s claim and it is currently in adjudication.

A survey of companies who suffered timber loss during Alberta’s massive spring fires in 1998 shows that others also carried insurance for harvested timber awaiting transport. Darrel Mackay, woodlands manager for Vanderwell Contractors Ltd. in Slave Lake, says they are insured for the value of the cost associated with harvesting the trees while the logs are still decked in the bush. However, they did not make a claim because they did not suffer a fire loss involving decked timber.

While Vanderwell lost some plantation wood, it was not insured against plantation fire loss. Mackay says his feeling is that the deductible and premiums would be too costly to insure plantations, although they have not investigated that option.

With the sometimes tenuous hold that forest companies have on rights to harvest wood on Crown land, the fact that they carry no insurance on plantation timber really comes as no surprise. However, what about plantation timber on private land? About 80 percent of the available timber in Nova Scotia, for example, is held on private land. Nova Scotia’s Ledwidge Lumber owns a number of plantations, but general manager Douglas Ledwidge says they do not carry insurance.

Given that in most areas of Canada companies are required to replant harvested timber on Crown land—and that the value of that wood is increasing due to the declining availability of new wood sources—insurance may play a more prominent role in the future as protection against losses from fire and infestation.

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The insurance industry seems open to providing forest companies with insurance on standing timber, not just harvested and decked trees.

Consider the position of the Alberta government, for example, in the aftermath of losing 19 million cubic metres of commercial timber valued at $1.5 billion in 1998. The government spent millions of dollars to fight fires, and also compensated companies for replanting areas deemed in a state of regrowth. At the same time, most forest companies are now looking for extended forest management agreements, in the range of 60 to 100 years versus the 20 to 25 years now common, so that they have a reasonable expectation of harvesting the trees they plant. What is the likelihood that governments will be willing to allocate lengthy forest management agreements and also come to the assistance of forestry companies each time there is a fire?

They may insist that companies carry fire insurance on standing timber so that governments aren’t expected to provide compensation each time forestry companies suffer a severe timber loss due to some natural disaster.

The insurance industry is open to providing forestry companies with insurance on standing timber, according to Alan Wood, vice president of the Prairie region for the Insurance Bureau of Canada.

"When we look at the basic premise of whether insurance would be available, I would say yes," he says. "It may even be a stand that has not yet been cut, but that they have a lease on and they have the right to go in and cut."

When it comes to purchasing fire insurance, however, timing is extremely important. He says it would not be available for purchase during a dry spell, or obviously when the calamitous fire is in progress. For example, insurance is out of the question if a fire has already started. It would be like being able to purchase earthquake insurance in the middle of an earthquake.

He adds that insurance is available for trees grown on plantations. The insurance industry would probably look more favourably on privately-held plantations or a well-managed, publicly-owned plantation for a number of reasons, including the fact that public access is limited on private plantations. Owners can control growing conditions such as spacing between trees and can control the under-story to minimize the availability of fuel should a fire occur.

The same is true on Crown land plantations, where companies aggressively employ pre-commercial, commercial and salvage thinning to ensure that only the most healthy trees continue to grow and that the understory is managed.

Vanderwell Contractors, for example, reported minimal fire damage to areas they had commercially thinned. The fire dropped into the understory and stayed there for several days without burning the trees.

Wood says to insure standing timber against loss, "is almost what we would call a manuscript kind of situation".

"In other words, you would go to an insurance company and explain exactly what your situation is, what your obligations and responsibilities are, and they would design a package or policy to fit what you need. Then you decide whether you can afford to pay the premiums."

Insurance is for fortuitous loss, in other words, something that could happen, but is not guaranteed or absolutely expected. An aggressive fire prevention program is a mitigating factor against high premiums.

Another way to keep premium costs manageable is to maintain a high deductible. For example, a company may decide that it is prepared to absorb up to $100,000 in losses, but wants to ensure for any loss beyond that.

"What you are doing with deductibles is you are setting up an insurance package that will protect you from an absolute catastrophe," says Wood, "but you personally look after all those losses that you could financially handle without too much problem."

One serious drawback to forestry companies wanting to insure standing timber is the mere handful of insurers who can afford to offer this type of protection.

An alternative to one massive protection policy might be to consider insurance for only certain types of standing timber, and only for certain destructive forces. Given the Alberta example of so many plantations needing to be re-seeded, it might be worthwhile to have insurance against fire for plantations only, as this often represents a company’s future viability within a specific region.

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