How Risk Can Set You Free

The 2010 edition of the RIMS Canada Conference promised a focus on ingenuity and innovation. Held in Edmonton, Alberta, conference speakers discussed a new attitude towards risk that emphasizes opportunity over fear (as outlined by plenary speaker Salman Rushdie); new ways to transfer risk (such as private-public partnerships); and new perspectives on existing risks (such as the Alberta oil sands risk). In addition, the defence bar noted the creative way in which the plaintiff bar is using D&O limits to further settlement negotiations.

RISK WITHOUT FEAR

There is no such thing as 100% security, only degrees of insecurity, Salman Rushdie, a controversial and renowned author, told delegates during his keynote address at the 2010 RIMS Canada Conference in Edmonton.

“Once a person accepts that fact, they are free,” he said.

Rushdie’s novels have earned him top literary prizes around the world, but drew the ire of the Iranian government in the late 1980s under Ayatollah Khomeini.

Publication of Rushdie’s 1988 novel, The Satanic Verses, caused Khomeini to issue a ‘fatwa’ — a death edict — against the British author. Rushdie went on to spend the next nine years under the protection of the British secret service, earning the same degree of security normally reserved for heads of state or the monarchy.

During this time, Rushdie said he learned to accept that even with the strictest security — and by extension, the most diligent risk management plan — no one is ever free of risk.

Despite having the most robust plan, strategy and training in place, “nobody is ever going to come to you and give you a free pass,” he said. “Once you realize that day will never come, then it becomes a difference of what you are prepared to live with and what you’re not prepared to live with.”

Acceptance of this fact allows individuals to go on to achieve great things, or “open the universe a little bit more,” he continued. “If you want to open the universe a little bit more, you cannot do that sitting safely in the middle of a room. You have to go out to the borders and push out.”

THE POWER OF P3s

Municipal and provincial governments are increasingly using public-private partnerships (P3s) as risk transfer mechanisms to build infrastructure, says RIMS Canada Conference panelist Chris Baisley of Deloitte Touche in Calgary, Alberta.

Baisley said P3 projects are much more predictable and not as volatile as traditional projects. They allow the government to retain much less risk, while reducing the total cost of construction.

P3s differ from traditional delivery of infrastructure in that the different components of the project are bundled together into one contract. In contrast, in traditional projects, a tender is put out and the government hires contractors independently of one another.

“P3s require a consortium of designers, constructors, financiers and operators already in place for the bidding process,” Baisley said. “Procurement can take as long as a year, and the stakes are quite high for bidders.”

The “high pursuit cost” for bidders is based on the fact that in P3s, a bid must:

• include a complete design of the project;

• show a 30-year operating plan;

• show the financing is in place for the construction; and

• have all contracts in place for the construction of the project.

P3s have a fixed opening date, with no delays for weather, funding or scheduling. The project also has a fixed cost, mitigating against cost overruns and scope creep.

Most importantly, the government does not pay for the project until it is completed, which protects against delays.

“As a result, delivery tends to be much faster, sometimes years earlier than traditional projects,” Baisley said. “For example, in Alberta a P3 project delivered 18 schools in 1.5 years — a task that would have taken double or triple that time period with traditional contracts.”

OIL RISK: THE ENVIRONMENTAL FOOTPRINT

The Alberta oil sands operations have a domestic environmental footprint, but the alternative of getting oil from other countries carries greater environmental and political risks, according to David Percy, the chair in energy law practice at the University of Alberta’s Law School.

In his seminar, ‘Thinking About the Oil Sands: Economic Boon or Environmental Disaster?’ Percy suggested technological advances in the production of bitumen (the heaviest, thickest form of petroleum) in Alberta’s oil sands would reduce the environmental impact of fuel processing. But the government needs to get more aggressive to provide incentives for those types of technological advances, he added.

Comparing the environmental impact on a ‘well-to-wheels’ basis, he noted the actual production of upgraded bitumen in Alberta’s oil sands is slightly worse than in Nigerian crude operations. “But we have to remember that crude oil from the Middle East or Africa is transported by sea,” he said. “And that creates a vast amount of green house gas emissions from the tankers.”

Also, Saudi Arabian crude is getting heavier, forcing deeper drilling. And countries like Venezuela, Mexico or Nigeria have politically charged environments and weak environmental policy track records.

The Alberta oil sands industry is in its infancy, Percy said. There were only two operating projects in 2002, although many more players exist today. “I think many players will produce a variety of technical advances very quickly — i.e. there will be competition to spur those advances. But I also think the province has to get much more active and provide incentives for the right kind of advances.”

The oil sands have recently been the target of an international, aggressive marketing campaign aimed at comparing the risk in Alberta to that of the BP oil spill.

In response, the “mantra of ‘oil sands are really not as bad as you think’ is basically what we have at the moment, and it’s not very effective [at swaying public opinion],” Percy said.

“Green oil sands stand alongside clean coal and error-free deepwater drilling in the public’s mind at the moment. What we need is to do better in the oil sands than in light crude [production]. If we are to sell it to the public, we have to show why it is better and has less of an environmental impact. We have to have policy to get us there.”

THE SKY IS THE D&O LIMIT

Plaintiff counsel in security class action suits are increasingly using the defendant’s level of D&O insurance as a settlement negotiation point before obtaining leave by court, said Jay A.R. Cassidy, a senior vice president at Marsh in Toronto.

Cassidy was a panel member during the 2010 RIMS Canada Conference session ‘Recent Trends in D&O Liability’ in Edmonton on Sept. 28.

Two recent class action suits in the Ontario courts, Timminco and Orsu Metals, have had a big impact on Canadian class action trends, he said.

In both cases, plaintiff counsel sought at a very early stage — after the claim had been filed, but before leave by court had been granted — the production of the defendant’s D&O policy.

“Now I can tell you that [the plaintiff bar] doesn’t really care what the definition of ‘wrongful act’ or ‘insured’ is,” Cassidy said. “They want one number and one number only — the limits.”

The court allowed the motion in both cases, despite the fact that counsel did not yet have standing as the plaintiff counsel.

“This was the ‘Wow’ for the insurance industry,” Cassidy said.

“Without getting too far offside, if you wave a steak in front of a lion, they’re probably going to eat it. So if you have a document that says the company has $100 million — and that’s not technically the company’s money, but the insurer’s money — plaintiffs are going to jump at it.

“It will amaze you the number of times, over and over again, the level of D&O insurance becomes the settlement negotiation point.”

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There is no such thing as 100% security, only degrees of insecurity. Once a person accepts that fact, they are free. If you want to open the universe a little bit more, you cannot do that sitting safely in the middle of a room.