Bushfires… at what cost?

By Debbie Pilling, senior risk consultant, Willis Risk Services

Once again, a class action against an electricity distributor that is alleged to have caused a bushfire destroying a significant number of properties has hit the headlines.

Editor’s note: In May, New South Wales power company Endeavour Energy become the subject of a class action by residents and business owners whose properties were burnt out by the devastating Blue Mountains bushfires in October 2013. The class action was filed in the NSW Supreme Court over a claim that has been estimated will exceed $200 million in property loss and damage, with as many as 600 affected property owners. The case is significant for the energy sector, because it could link the costs associated with damage and loss of life from bushfires to energy infrastructure providers. 

These news reports are becoming more common as affected property owners look for compensation for their destroyed or damaged properties where they are either uninsured or underinsured.

There are a number of factors contributing to these cases becoming more frequent including the public becoming more fully cognisant of their rights, active litigation funders, changing environmental conditions and individuals looking to hold someone accountable for their loss.

Whatever the reasons, large corporations hold significant insurance for their liability exposures and are seen by some as having very large pockets.

Electricity suppliers are not the only organisations exposed to these actions. Local authorities, fire services and rail companies, among others, have the potential to directly or indirectly start bushfires or put properties at risk.

What is the responsibility of local councils approving development at the rural urban interface or refusing for trees to be cut down? How about the responsibility of the fire service when back burning gets out of control?

In today’s litigious world, there are certain individuals who seek to apportion blame wherever there is the possibility of a payout, but there may also be an obligation by those who do cause bushfires to compensate those who sustain a loss.

From a national perspective, the broad areas exposed to seasonal bushfire are well known. Identifying the bushfire liability financial impact that could stem from a business is far more complicated. Some companies have a fairly confined exposure based on their assets, for example, power lines or rail networks. However, what about local councils or emergency services?

Quantifying the potential exposure is extremely complex involving many factors including identifying properties at risk, the potential spread of a fire, variations on the “stay and defend or leave early” policy adopted by at risk homeowners, among others. Added to these are the complexities for each individual factor.

Identifying properties at highest risk of bushfire does not rule out a loss for properties at less risk, which could be impacted by flying embers. Using historical bushfire footprints as a guide to future risk may not be quite so relevant, where the land use has changed or fire services have relocated.

The reaction of homeowners at risk from a bushfire was expected to change after the Black Saturday bushfires in 2009. However, recent research has found most people in high bushfire risk areas would adopt a ”wait and see” approach on whether or not they should leave their home for a safer environment on a “code red” day (the most extreme of days on the fire danger rating system).

We have seen relatively few catastrophic bushfires, although, this has meant that research on the cost associated with bushfires is limited to only a few very significant events (such as 2009, 1983 and 1967). Interestingly, in the US, where wildfires carry many of the same traits as bushfires in Australia, research focuses on the cost from a fire fighting perspective, including the impact on firefighters themselves, rather than the extensive damage to properties and homeowners.

In Australia, a few reports have considered not just the cost to property but also the economic costs associated with death and injury. Other areas not so readily quantifiable, that should be considered, are the impact to the environment, such as polluted water or health issues including respiratory conditions occurring hundreds of kilometres from the site of a fire.

Since 2009, Willis has worked closely with a number of organisations with potential liabilities to identify and quantify that level of potential risk. This includes not just their own assets or the property of others, but also those additional potential costs from injury, business interruption and other indirect costs.

Class action legal costs have the potential to be significant and are currently averaging around $7.5 million per case in general. Litigation funders typically receive 30 per cent of the settlement per event but no precedent has been set whether the courts would look to increase the settlement to ensure sufficient funds are available for the claimants themselves.

Litigation funding only occurs where there is insurance available but what happens when insurance is insufficient? Who pays the costs? Could we have a scenario where those seeking compensation are actually the same entities that will be penalised with higher taxes or pay higher electricity bills to cover the costs?

With all of these issues in mind, the Royal Commission into the 2009 Black Saturday bushfires has already highlighted the need for shared responsibility between those in authority and those at risk. This emphasis was also influenced by a perceived increase in public expectations of emergency service agencies.

The success of the fire and emergency services may have encouraged increased public reliance on them, and decreased interest among those at risk in developing their own bushfire management capacity. One interview notes homeowners leaving for work waving at the firefighters staying behind preparing to defend their properties, presumably supremely confident their actions would be successful and their properties safeguarded. Expectations may need to change significantly before a shift in responsibility is acknowledged.

The Royal Commission has stated that it would be a mistake to treat Black Saturday as a ‘one-off’ event. With populations at the rural-urban interface growing and the predicted impact of climate change, the risks associated with bushfire are likely to increase.

Until community resilience and shared responsibility is more effective, ignoring the potential threat and associated costs could be catastrophic for many organisations.


Previous articleNZ’s first fast-charge EV station opens
Next article18MW gas power station for Carnarvon