Coverage for overland flooding now available – and not a moment too soon.

A major complaint levelled against the insurance industry is that it has failed to provide coverage for consumers who, through no fault of their own, have seen their homes and belongings destroyed by flood. With the announcement by Co-operators that insurance coverage will now be made available for overland flooding, let us hope the critics will be silenced.

When consumers and media comment about the absence of flood coverage from homeowners’ policies, they almost always accuse insurers of excluding ‘Acts of God’. Insurance professionals know there is no such exclusion. The Co-operators’ website discusses the term ‘Act of God’. The site correctly notes that Canadian insurers do not use this term within their wordings. The website goes on to say, ‘No insurance company in Canada offers flood insurance under a home policy.’

That is, until today. Co-operators will no doubt be updating this section of their website.

Although 2014 was a relatively kind year for the industry when it comes to catastrophes – at least compared to 2013 – the frequency and severity of flood events is expected to increase in the coming years as the result of climate change. With this in mind, the news that overland flood coverage is now available in Canada is as timely as it is welcome.

For the moment, Co-operators is offering this coverage extension in Alberta only, but plans are underway to make the product available in the other provinces. In a press release, the President and CEO of Co-operators, Kathy Bardswick, is quoted as saying, ‘As a co-operative, we seek to address unmet needs, and there is clearly a need to provide Canadian homeowners with better protection against flooding. Our coverage is available to homeowners throughout [Alberta] – not just those who have a low risk of flooding or sewer backup.’ According to the press release, coverage for overland flooding will be available as an endorsement to homeowners’ policies. It will be added upon renewal to existing policies that currently have coverage for sewer backup. Coverage will be provided for flooding caused by a body of water overflowing its banks, by sewer/water backup, or by an accumulation of surface water caused by heavy rain. Clients will choose the amount of coverage and the deductible.

As with Guaranteed Replacement Cost coverage a generation ago, now that the Overland Flooding genie is out of the bottle, other insurers may feel compelled to follow Co-operators’ lead or risk being left behind. Prior to the Co-operators’ announcement, RSA and Aviva indicated that they plan to offer an overland water endorsement in the very near future. [On June 1st, Aviva announced it is now offering overland water protection to policyholders in Ontario and Alberta. Aviva plans to offer the coverage throughout the rest of Canada by the end of 2015.]

As much as Co-operators is to be applauded for taking this bold initiative, the offering of this coverage presents some significant underwriting challenges. For one thing, unlike claims for most other perils, claims for overland flooding are almost always severe. In addition, there is the challenge of adverse selection. Whereas all homeowners are more or less equally vulnerable to a claim from other perils, it’s fairly easy for policyholders to figure out whether they are at great risk of overland flooding. Anyone with a home in a low-lying portion of a river valley with a history of flooding is going to want this coverage and will be drawn to insurers that offer it. Anyone with a home on high ground far removed from a body of water is going to think twice about spending the money to add this endorsement. The combination of high-severity claims and adverse selection will make it difficult to underwrite and price this coverage.

By offering coverage for overland flood to all policyholders, Co-operators has addressed an unmet need. For this, they should be applauded. As consumers take advantage of this coverage option from Co-operators and, eventually, other insurers, the industry will no doubt face challenges when it comes to assessing, and properly charging for, the risk faced by individual properties. Although there may be bumps along the way, underwriters and actuaries will sort out these problems. In the meantime, consumers will at last have the option of being insured against a peril that is truly catastrophic in nature.