07/05/2013 02:23 EDT | Updated 09/03/2013 05:12 EDT

Why the Alberta 2013 Flood Recovery Funding may Turn out to be Wrong for Albertans

The 2013 flooding in the Province of Alberta, which resulted from excessive rainfall from June 19 to June 25 and the subsequent overflow of water tables across the region, was officially declared to be the "largest in provincial history" by Premier Allison Redford.

In fact, it was so bad that it now has its own Wikepedia entry.

The full damage assessment is still under review as of this post writing date. However, the Edmonton Journal did report a preliminary estimate in an article posted on June 25.

Initial estimates from BMO Capital Markets insurance analyst Tom MacKinnon suggest total damages to homes, businesses, vehicles and other private property are likely to run between $3 billion and $5 billion. That's roughly 20 to 30 times the amount of damage caused by southern Alberta's last major flood, in 2005.

The flooding had hardly ended when the Premier's office pledged $1-billion in flood relief for families and municipalities. A very noble act indeed. Albertans truly deserved to hear supportive statements from its elected leaders in the midst of the chaos and devastation.

However, if it turns out that the pledge was made prematurely, it may have unintended consequences for all Albertans. Here are three potential challenges that could arise.

Insurance Claim Denials

Overland flooding, which is insurance speak for water entering your premises through doors and windows (as opposed to backflow of the sewer) is not a covered peril under all homeowners policies. This meant affected homeowners would not be reimbursed by their insurers for damages and repairs. However, there remained that grey area of Sewer Backup. Claims could be submitted for that peril, right? Maybe not. Reports were out in the media the week following the end of the flooding that some insurers were outright denying claims made for sewer backup damages. Some affected homeowners and small businesses were denied the claims under the pretext that damage caused from sewer backup was indirect result of the overland flooding and thus would not be covered.

Now it should not come as major shocker to the public that claim denial does happen often enough in the insurance business. The truth is that if the insurers had to pay every claim in full in accordance with terms and conditions of the policy, it would make insurance incredibly expensive for everyone and/or bankrupt the company, in which case there would be no insurance coverage to begin with. Here is a great article in the Financial Post on Why universal flood insurance is a bad idea. Then there is also the aspect of fraudulent claims that drives up the cost of insurance for everyone. That being said, there is also the precedence in the United States, where the Congress and/or the President has stepped in to "gently coerce" the insurers in paying up the victims of natural disasters or acts of terrorism when it was initially denied by them.

Now it appears that in the case of claim denials for the Alberta Flooding, insurers have been generally expedient in sending out adjusters, evaluating the damage, and submitting the letter of claim acceptance or denial to the claimants. Where denied, claimants can commence application for recovery aid from the Relief Fund. But this very act raises another question.

Is it possible that insurers are prompt in issuing letters of claim denials in order to pass the buck to the Provincial Flood Relief Fund?

If the funding was not declared in definite amounts and if the Province mandated that insurers should attempt to resolve flood related claims in a responsible manner and in good faith, would it be possible that we would not be hearing of prompt denial letters in the media?

Is the funding even realistic?

It will be a while before we know the total count of the damaged properties from the flood. But for hypothetical reasons, let us assume that the total count of properties severely affected is 10,000. Not an unrealistic number given that just the Town of High River had roughly 5,000 residents evacuated. If the $1 billion is equally distributed among the group of 10,000, the per property payout amounts to only $100,000. That will barely get you the basement and then some. This does not even take in to account the loss of personal effects, business interruption in the case of small businesses, and other intangible losses. With Alberta's budget already in the deep red, it is unlikely that additional relief funds will be made available without the aid of Ottawa.

Taxpayers end up footing the final bill in the end

With some insurance companies denying damage claims, the only recourse left to affected homeowners and businesses is to rely on the Relief Fund. With the relief fund being limited in funds available, the final recourse will be for individuals to foot the bill for repairs on their own. This means in the short to medium term discretionary consumer spending will abate that can have further consequences on retail sales and job growth in the Province. I also recall this great adage my tax accounting professor would tell us.

What the government giveth, he eventually taketh

How exactly is the Province going to replenish the depleting Alberta Heritage Savings Trust Fund and bring our budget back in the black without some form of increased tax levy on individuals and/or businesses?

There have also been some media reports on how homeowners and small businesses can expect to see further premium increases (even among those not affected by the flooding) by those insurance companies who will cover the claims for damages.

This triple whammy threat may turn out not be true. Or it just may. only time will tell if the Alberta 2013 Flood Recovery Funding turns out to be wrong for Albertans.

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