The cost of protecting Oregon's expansive forests from catastrophic fires could burn a hole in the state's budget big enough to force lawmakers to cut spending for other vital programs.

But a unique forest fire extra expense policy guards the state against the possibility that a devastating forest fire season would create such budget woes for Oregon.

State Chief Risk Officer Dan Hartman inherited the program from two award-winning risk management predecessors, but he played an important role in reshaping it.

Indeed, state coffers could have been at risk several times during the past decade if the program had not been overhauled. And this year, drought conditions that could fuel a troublesome forest fire season likely will develop by autumn, a subcommittee of the Oregon Drought Council has warned. Oregon's forest fire season typically runs from late June until November.

While the coverage is unique to Oregon, lead underwriter Ian Maguire, agricultural underwriter for Wellington Underwriting P.L.C. in London, said Wellington is open to making the coverage available to other states that can meet the firefighting benchmark that Oregon has established. Wellington is the underwriting management agency for Lloyd's of London syndicate 2020.

According to the Oregon Department of Forestry, forest covers about 28 million acres of the state's 62 million-acre land base. The federal government owns about 57%, private interests own 38%, the state owns 3% and other public entities own the remainder

The state's Forestry Department is responsible for fighting fire on 15.8 million acres of forest-2.8 million acres of federal land in Western Oregon and the remainder private and state land. The remaining 12.2 million acres are protected by either local fire districts or the U.S. Forest Service.

Firefighting costs can mount quickly during a huge conflagration, noted broker Gil Henderson, whom Mr. Hartman enlisted to line up broader coverage under an already unique program.

For the Forestry Department's military-like firefighting efforts, "it's not unreasonable during a big fire to spend $1 million a day," said Mr. Henderson, a managing director for Marsh USA Inc. in Portland, Ore. Marsh USA is a unit of Marsh & McLennan Cos. Inc.

The state, however, shifts the responsibility of paying the cost of fighting forest fires primarily to the Emergency Fire Cost Committee, which represents owners of large tracts of land typically used for logging operations or for grazing. The state Board of Forestry appoints four members to the committee to serve four-year terms.

The committee supervises and controls a special fund that covers firefighting costs. The fund is financed with proceeds from special levies on the landowners.

The committee uses the fund to purchase a unique firefighting extra expense insurance policy through the state's Risk Management Division, which is part of the Oregon Department of Administrative Services. The division has lined up a group of U.S. and European underwriters, including several Lloyd's syndicates, to write the coverage.

Messrs. Hartman and Henderson say that no other state has such coverage. Officials from other states occasionally inquire about the coverage, but no other state has arranged it, they said.

Both said the advantages that Oregon has with underwriters, some of whom have participated in the program since its early days, is a long relationship with them, a solid track record of investigating the causes of fires and subrogating against the responsible parties, and detailed Forestry Department records of how the department has fought each blaze it faced.

In the program's early years, the committee purchased $1 million of coverage above first a $325,000 self-insured retention and, later, a $500,000 retention, for a premium that ranged from $45,000 to nearly $93,000. The special fund paid the insurance premium and covered the SIR. Each year, the coverage renewed on July 1-the typical starting date of the fire season.

But beginning in 1980, the committee, the state and the underwriters had to begin dealing with the Forestry Department's high and rising costs to battle forest fires. Those costs often had far exceeded the committee's SIR and the policy premium combined, which meant that insurers were underwriting the program at a loss.

Initially, in 1980, the premium more than doubled to approximately $139,000, and the SIR doubled to $1 million. Limits continued at $1 million until the next year, when underwriters doubled them to $2 million.

Except for 1985, when the onset of the insurance industry's hardest market ever left the state with nowhere to turn for the coverage, the program worked well until 1987. Because losses in several years did not exceed the SIR, underwriters began to see some profit in writing the coverage. And in the couple of years that losses exceeded the SIR, underwriters made at least some profit, according to Risk Management Division documents.

Beginning in 1987, however, unusually bad forest fire seasons in three consecutive years spiked the Forestry Department's firefighting costs to the point that not only did underwriters shoulder heavy losses but also the state government had to subsidize the depleted firefighting fund.

In 1987, the worst year during that period, the Forestry Department's firefighting costs topped $19 million, according to Risk Management Division records.

The loss not only exhausted the committee's $2 million firefighting fund and fully consumed the policy's $2 million of limits, but it also put state government on the hook for covering a $15 million unbudgeted expense. The Legislature had to turn to an emergency fund to cover the loss, Mr. Hartman explained.

The governor, concerned that future catastrophic fire seasons might wreak even greater havoc with the state's budget and threaten funding for other vital programs, directed the Administrative Services Department's predecessor to protect the state's budget from such an event.

That responsibility fell to Mr. Hartman, who then was manager of loss control and insurance for the Risk Management Division. He immediately enlisted the aid of Mr. Henderson and Chuck Hersh, a senior vp at Marsh USA. The brokerage at that time was part of Sedgwick Group P.L.C. and just had been awarded the state's account.

Over the next few years, Mr. Hartman and the brokers worked on revamping the program. Messrs. Henderson and Hersh dealt with the insurance markets, and the brokers and Mr. Hartman explained to the Emergency Fire Cost Committee how and why the program had to be restructured. Mr. Hartman testified at many of the public hearings on the program that the committee held.

The central concept in reshaping the program was to make it a true catastrophe program, so no loss likely would ever blow through both the program's SIR and excess limits. That would mean that the state would not again face the emergency funding situation it did in 1987, and that the Emergency Fire Cost Committee would not be forced to borrow from the state treasury to cover a shortfall in its fund.

Redesigning the extra expense coverage as a catastrophe program also would mean that the committee would have to assume more risk so that underwriters would not be covering expected firefighting costs.

Mr. Hartman and his broker team laid the foundation of the rebuilt program with a probable maximum loss estimate that the Forestry Department developed after reviewing a string of bad fire seasons during the 1940s, Mr. Hartman explained.

Factored into that figure, however, was the state's network of logging roads, which allows firefighters today to reach blazes much more easily than they could decades ago, he said. In addition, firefighting resources are better deployed throughout the state, equipment and technology have improved and the commander at a blaze has more authority to pull in additional resources quickly to control a fire, according to Mr. Hartman.

To finance that higher retention, the special levy on landowners would have to be increased. In addition, technical changes had to be made in the levy procedure in the event the emergency fund reached its statutory maximum.

Those changes required legislative and Forestry Department approval, which Mr. Hartman worked on securing.

While the program was being restructured, Mr. Hartman and his brokers were able to modify it to better protect the state.

In 1988, the year after the state's forests suffered heavy damage, premiums jumped more than sevenfold to nearly $1.8 million. But underwriters also nearly quadrupled the policy's limits to $7.65 million.

Still, because of a second consecutive bad fire season, insurers on the extra expense risk "lost their shirt that year," Mr. Hartman recalled.

In 1989, underwriters doubled the committee's self-insured retention to $4 million and raised the premium 9.8% to more than $1.95 million. They did, however, bump up policy limits to $8 million.

By 1990, the Legislature had approved the revamped extra expense catastrophic coverage, and the underwriters, including many that had written the coverage for years, were lined up.

The policy limits more than quadrupled to $35 million over an SIR that nearly doubled to $7.5 million. Premiums rose nearly 24% to $2.4 million.

Another important improvement in the program was that underwriters agreed to shift the policy's renewal date to April 1 from July 1. That change ensured that the committee would not be required to meet two SIRs during a single fire season when the first blaze in the season ignites before July 1, Mr. Hartman explained.

The Risk Management Division and its brokers also negotiated a three-year coverage period. That coverage change was designed to stabilize the coverage and its costs.

Since 1990, the SIR has gradually increased to $10 million, and policy limits have grown to $43 million. Referring to the SIR, Mr. Hartman said: "Our burn level keeps going up because the cost of fighting fires is going up."

Meanwhile, premiums have remained relatively stable.

More importantly, the revised program has provided the state the catastrophic coverage necessary to protect its budget at a stable price.

In addition, underwriters are beginning to see a profit in continuing to write the coverage. Through April 2000, the last policy period for which figures are available from the risk management division, premiums exceeded insurance recoveries by nearly $1.4 million over the life of the coverage. But all of that difference was accounted for during the 1999 policy year, according to risk management division records.

And while landowners have faced steeper levies, the emergency fund now is fully funded, according to Mr. Hartman. Under state statute, the fund is fully funded at $10 million-the SIR under the extra expense coverage

That means landowners this year could face a substantially reduced levy.

"The government came in and provided a good protection plan" for the state's Forestry Department, owners of large land tracks and the Legislature, Mr. Hartman said.

"That really had to be done in order to make it a stable program for them" at a reasonable cost, he said.

Mr. Maguire of Wellington said the unique coverage "has been beneficial to both sides." He said Wellington did not consider abandoning the coverage when Oregon's losses mounted, because Wellington is committed to underwriting agricultural and forestry business, which includes large timber stands owned by pulp and paper producers.

"The lesson we've learned from dealing with Oregon is, here's a product that can work," Mr. Maguire said.

He noted that a few other states in recent years have contacted Wellington about underwriting similar coverage for them. "Certainly, if they can satisfy us, then the product works and there's a commitment then to write that," he said.

Those states, however, would have to meet the benchmark Oregon has set for protecting its forests, he said.