Absolute Liability

The federal government has vowed to impose absolute liability of up to $1 billion on major oil pipeline operators and this has some insurance professionals questioning whether there is enough capacity in the Canadian property and casualty insurance industry to cover the risk.

One lawyer says the impact of the pipeline proposal will depend on how the law is worded, while a senior civil servant predicts a similar proposal for nuclear power plants will “substantially change the premiums” for nuclear operators.

“It certainly opens up the opportunity for insurers to provide capacity, but the issue is, is there enough capacity in the Canadian market to give $1 billion to every major pipeline carrier?” asks Stephen Stewart, managing director and chief agent for Ironshore Insurance Ltd.’s Canada branch. Stewart refers to a May 14 announcement by federal natural resources minister Greg Rickford that the ruling Conservatives plan to introduce “absolute liability,” for all pipelines regulated by the National Energy Board. This means that companies are “liable for costs and damages regardless of fault.” For major oil pipelines, this will be up to $1 billion, Natural Resources Canada explains in a press release.

Rickford also said May 14 that the government plans to require that major oil pipeline operators have a “minimum level of financial resources” so they can respond quickly to incidents.

The measures are similar to proposals announced June 26, 2013 — by then-natural resources minister Joe Oliver — to require that pipeline companies hold “minimum financial capability” of $1 billion so they can respond to incidents such as spills.

“I don’t think the fact that they (plan to impose) absolutely liability changes things,” Stewart says of Rickford’s May 14 announcement. “The requirement to carry $1 billion does, because I think what’s going to happen is carriers will look for ways to mitigate the risk and part of that will be risk transfer, (which is) where insurance comes in.”

So pipeline operators will have to “assess their risk a little more closely,” Stewart advises.

“The proposed absolute liability requirement will mean that underwriters will have to be even more diligent than they already are in assessing the risk management practices, mitigation plans, processes and corporate culture around pipeline integrity, control and leak detection and overall operational excellence of pipeline operators,” writes Kevin Doyle, head of energy for Canada, Zurich Global Corporate in North America. Doyle reports that major pipelines operators already have a “culture of awareness that starts at the board level,” as well as spill prevention measures and emergency response plans.

“Many pipeline operators already have the insurance limits, financial strength and specific reserve funds dedicated to respond to a major incident that would adequately cover the $1 billion in financial capacity required by the legislation,” notes Doyle. “However, some operators, if subject to the legislation, may have to up their game from a risk management perspective for underwriters to feel comfortable putting up the significant third-party liability limits that would be required to help meet the proposed legislative financial requirement.”

How this affects liability risk depends exactly on how the law is worded, suggests environmental lawyer Rosalind Cooper, a partner with Fasken Martineau DuMoulin LLP.

“Everything revolves around the wording of the legislation,” Cooper says. “Until you actually see the actual wording and the way that it comes together, you cannot really assess what the ultimate impact is going to be.”

At press time, it was not clear whether operators will have to provide proof of actual insurance or whether some other form of capacity will suffice. Pipeline operators seeking insurance to cover up to $1 billion may have to look outside of Canada for underwriters, Ironshore and Zurich suggest.

“It is unlikely that there is sufficient capacity in Canada to cover additional liabilities, but there is in the global insurance market,” notes Doyle. “Of course, any insurer from outside Canada would need to ensure that it complies with Canadian insurance and tax laws around admitted placement.”

For his part, Stewart asks whether or not it is “incumbent upon (the federal government) to allow carriers the option to carry unlicensed insurance without incurring” a tax penalty.

Rickford’s May 14 announcement on pipeline operators’ liability was one of several recent efforts by the federal government to ensure the cost of pollution is borne by the polluters themselves – whether or not they are proven to be at fault.

For example, Bill C-3 – if passed into law – would “establish strict liability” for owners of ships with hazardous or noxious substances. The intent is to have Canada implement the provisions of the International Convention on Liability and Compensation for Damage in Connection with the Carriage of Hazardous and Noxious Substances by Sea (also known as the HNS Convention). That convention stipulates that ship owners are “liable for damage caused by any hazardous and noxious substances in connection with their carriage by sea on board the ship.” There are exceptions, such as war, a “third party” acting with intent to cause damage, and when the client fails to give the ship owner data on the hazardous nature of the cargo.

With Bill C-3, the Conservative government also proposes to “introduce compulsory insurance for the liability for the pollution damage caused by a spill of hazardous and noxious substances from a ship.”

Currently, Cooper explains, if there is a spill at sea, “it really is up to the ship owner and the company whether they have the financial wherewithal to deal with the damage.” With Bill C-3, Cooper adds, “the idea would be to have a situation where it’s mandatory to have insurance available so that if there is an incident, that there is an ability to know that the company will be able to have access to funding to deal with the clean-up.”

Bill C-3 was returned to the Commons in March by the Standing Committee on Transport, Infrastructure and Communities, but at press time had yet to pass third reading. It proposes to allow Cabinet ministers “to enter into certain insurance arrangements and other arrangements, to create almost a compensation fund, that is available in the event of a spill or incidents, in case there is not anybody here to pay for it, for whatever reason,” Cooper says, adding that ship owners are currently allowed to be self-funding.

Another government bill – which at press time was ready for third reading in the Commons – is C-22. If passed into law, C-22 would make $1 billion the limit of liability, “without proof of fault or negligence,” to which some offshore energy producers would be “subject in the event of a spill or damages caused by debris.” Currently oil and gas producers’ absolute liability limits are $30 million and nuclear operators’ liability – $75 million – has been the same since 1976.

Bill C-22 would also require nuclear operators to “have a commensurate amount of insurance or fiscal security that demonstrates they are able to handle the $1 billion worth of absolute liability,” Jeff Labonte, director general for energy safety and security at Natural Resources Canada, noted during hearings this past June before the House of Commons Standing Committee on Natural Resources.

During the committee hearing, Calgary Centre MP Joan Crockatt asked Labonte whether or not Bill C-22 would impose insurance premiums increases.

“We expect that the change of the liability amount to $1 billion will substantially change the premiums in the insurance market for the operators,” Labonte replied. “The number of operators is small and the community of insurers is small and has to be approved. Under the bill the Minister of Natural Resources has to approve an insurance policy to make sure it’s consistent with the act.”

At press time, there were four nuclear p ower generating stations operating in Canada. A fifth – Hydro Quebec’s Gentilly station on the St. Lawrence River southeast of Trois Rivieres – was shut down in December 2012.

Ontario Power Generation operates two plants on Lake Ontario: Pickering, about five kilometres east of the Toronto city limits and Darlington about 35 kilometres east of Picking. Ontario’s third station – operated by Bruce Power – is on Lake Huron north of Kincardine. In New Brunswick, NB Power operates the Point Lepreau plant, about 50 kilometres west of Saint John.

Once the $1 billion in absolute liability takes effect, nuclear operators will want “greater competition” in insurance, says John Barrett, president and chief executive officer of the Canadian Nuclear Association, said during the Commons committee hearings.

“It is my understanding that under the previous act and the limits there, the pool of insurers – the Nuclear Insurance Association of Canada – was able to handle the requirements, and the premiums were paid on that basis,” Barrett said in reply to a question from natural resources committee vice-chair Geoff Regan, the Liberal MP for Halifax West.

“As it goes up to $1 billion, the view of (nuclear) industry is that, as in any market, a little more competition might help. It has been a kind of monopoly by the small group of insuring companies, and this might be a good way of seeing if there’s enough competition to bring down the premium.”