PR disaster follows natural disaster for insurance companies that denied Alberta flood claims

Last month's devastating floods in Alberta also unleashed a torrent of bad publicity for insurance companies that denied many homeowners' damage claims.

But the Globe and Mail reports the PR disaster that followed the natural disaster has caused some insurers to backpedal and reconsider settling claims that were initially rejected.

A lot of Albertans weren't happy when they found those warm and fuzzy insurance company TV commercials didn't reflect reality when it came to their situations.

Most homeowner insurance policies cover flooding due to sewer backup but not the kind of overland flooding responsible for much of the damage in Calgary, High River, Canmore and other Alberta communities.

The first signs that things were going sideways appeared in early July when homeowners complained about inconsistent policies from different insurers. Some honoured the sewer-backup provisions while others denied claims, arguing the damage was caused by overland flooding, not sewer backup.

"It is disappointing,' Tom Carter told CBC News earlier this month after his claim by AMA Insurance was turned down. "I was sick to my stomach. You think you are covered and then you find out that you are not.

"The houses on either side of us are covered through other companies."

[ Related: Calgary flood damage to cost city $256 million ]

AMA Insurance claims director Troy Bourassa said at the time that each insurer uses different language in their policies covering sewer backup.

"Ours excludes damage caused by flood and excludes sewer backup damage when that sewer backup was caused directly or indirectly by flood," he told CBC News.

The wave of denied claims triggered an angry backlash from homeowners, who erected signs on their properties to "name and shame" the offending companies, including AMA Insurance, TD Insurance and RBC Insurance Services.

The spontaneous campaign had an effect within days. Last week, TD Meloche Monnex Insurance reversed itself, suggesting it would honour disputed sewer backup claims.

"Recognizing the extent of the devastation and the hardship that many of our customers are experiencing as a result of the flooding, TDI will pay sewer backup losses from this event according to the endorsement and its limit," the company said in a statement on its web site.

"TD’s insurance representatives will be reaching out to affected customers in the next few days."

The flip-flop came apparently after Alberta Premier Alison Redford called TD Insurance's president, CBC News reported. She tweeted about the exchange.

The Globe said other insurers have followed suit, apparently concluding that limiting damage to their brands was important than just paying the disputed claims.

But is that a good thing for the rest of us?

Analyst Peter Routledge of National Bank Financial explained that covering more damage claims — flood costs are expected to reach $1 billion, compared with $300 million in insurance payouts for Alberta's 2005 flood — will result in higher insurance premiums.

“It’s not just TD and RBC," Routledge told the Globe. "If all the property and casualty insurers decided it’s a lot more costly to deal with PR issues than just pay claims out when we have these extraordinary floods, at the end of the day, the probability of a bad event happening that they’d have to pay for goes up, and they’d have to increase their premiums."

[ Related: Flooded Alberta homeowners on their own if they rebuild in high-risk areas ]

The insurance industry's stance isn't hard-heartedness, insurance broker John Rigby told the Globe.

“Insurance companies pay insurance themselves, and if they were to choose to ignore policy wordings — to bow to public pressure and help customers out — they risk a reinsurer refusing a portion of their claim," he said.

Routledge suggested the situation could lead to a wholesale change, as insurance companies decide that the best way to avoid an Alberta-style backlash is to include catastrophic damage coverage for things like flooding in homeowner policies, which would also affect premiums.

But Financial Post commentator William Watson argues universal flood insurance is a bad idea. He wrote in a July 4 column that providing such coverage for those who insist on living in flood-prone areas would be so costly that the risk would have to be spread to other policyholders who don't actually need it.

The determination of flooded-out Albertans to rebuild on their properties may be admirable, Watson said, but it shouldn't be subsidized by everyone else.

"They want to build again where the risk is high? That’s a risk they should take, not the rest of us."