Sweet but Deadly, Lessons From Walkerton

Aging infrastructure, cut budgets and a blind political eye. With increasing pressure to cut taxes, Canada’s federal and provincial governments have for decades reduced investment and maintenance expenditure in public infrastructure. Repeatedly, reports have been issued of the resulting dangerous conditions of roads and highways throughout the provinces, all of which have garnered little response from the powers that be. It is therefore sad that an event such as the breakout of E-coli contaminated water in the Ontarian town of Walkerton, which led to several deaths, had to drive the message home. The lesson learnt from Walkerton is one which insurers are also taking seriously, the focus being the largest ever punitive class action law suit to have been filed in Canada.

As Canada’s untended infrastructure deficit increases, the Canadian insurance industry may find itself facing a tab that could easily eclipse the $11 billion in reassurance lined up to protect against earthquake damage. Ironically, concerns over liability and the potential for large class action lawsuits may prove to be the boost the country’s crumbling network of roads and water treatment systems need.

At the very least, property and casualty insurers are going to have to become more vocal about how the next round of government infrastructure spending is invested. “The insurance industry is going to have to make a decision about the design and maintenance of infrastructure. It is going to have to set the measurements,” says Jim Facette, president and secretary of the Coalition to Renew Canada’s Infrastructure (CRCI), an Ottawa-based lobby group.

Deaths raise attention

Certainly the national focus on decaying infrastructure has shifted dramatically since May when contaminated drinking water caused an E-coli outbreak in Walkerton, Ontario (population, 5,000) resulting in seven deaths, 2,000 reported illnesses and lingering concerns that 7% to 10% of residents may be left with kidney failure or damage. The Public Utilities Commission (PUC), responsible for Walkerton’s water treatment facilities, is covered by the Toronto-based Municipal Electric Association Reciprocal Insurance Exchange (MEARIE).

A $1 billion class action lawsuit on behalf of residents and businesses has already been filed in Superior Court. More will follow in what is expected to be the largest action in Canadian history. There is no doubt that Walkerton and the legal fallout from contaminated drinking water has sounded alarm bells, but in which direction?

“You don’t know how much to read into Walkerton because it is still so new,” explains Paul Kovacs, vice-president of policy development at the Insurance Bureau of Canada (IBC). The events leading up to Canada’s single largest outbreak of E-coli remain as murky as the contaminated water that caused the nightmare. Which also underscores the difficulty facing insurers: can a claim be accurately described as infrastructure related? “It is an extremely complicated challenge for insurers to decipher the various factors that contribute to the extent of damage,” Kovacs adds. “When you get into a traffic accident it can be the design of the road, the design of the vehicle, bad weather or how informed the driver was about the weather.”

In the case of Walkerton, it will be left up to a public inquiry to determine whether the tragedy was the result of decaying infrastructure (such as animal feces transported by storm runoff to an improperly sealed wellhead), bad water going unreported or a more likely, a deadly combination of the two. What is clear is that Walkerton is not alone.

Last month residents in North Bay (home to Ontario Premier Mike Harris) learned that the community’s only source of drinking water was polluted with bacteria which current chlorine treatments cannot kill. Elderly residents were cautioned to boil water.

Failing grades

Last year, the Sierra Club of Canada, a Victoria, B.C.-based chapter of the Earthjustice Legal Defence Fund based out of San Francisco, gave 15 of Canada’s largest cities a failing grade in a National Sewage Report Card. The Sierra Club did not offer a price tag for cleanup. Costs are staggering nevertheless.

In its 1996 report “State of the Debate on the Environment and the Economy: Water and Wastewater Services”, the National Round Table on the Environment and the Economy estimated unmet water and waste water investment to be $38 to $49 billion based on 15 to 20 years of neglect. More recently, the Canadian Water and Waste Water Association estimates that by 2015, $27 billion will be required to renew water treatment and distribution, and $61 billion would be needed to upgrade sewers and waste water treatment. “It’s hard to imagine government coming up with that kind of money,” says Elizabeth Brubaker, author of “Property Rights in the Defence of Nature”, and the executive director of Energy Probe, a Toronto-based think-tank which supports privatization of public infrastructure.

The National Round Table estimates that a series of private-public partnerships devoted to rebuilding the nation’s water and sewage systems could generate $79 to $90 billion in new capital investment over the next 20 years. But the gradual erosion of Canada’s municipal water and wastewater infrastructure is only one strong current in a greater problem that is likely to see insurance exposure to risk increase, the cost of municipal premiums rise, and some companies opting to exit from underwriting infrastructure related specifics, such as sewer back-up, entirely.

This runs counter to the solution for another problem illustrated by the earthquake file. While most homes and businesses on the west coast, for example, have earthquake insurance, many public sector buildings and bridges do not, thereby eliminating a check against declining structures. This problem is compounded by governments that use legislation to absolve the public sector of liability.

According to the IBC, a combined 2% of expenditures by various levels of government goes toward infrastructure — down considerably from 5% of 30 years ago. “Infrastructure is competing against various priorities of government and losing. I don’t know if 5% was the perfect number, but 2% is too low,” says Kovacs.

Kovacs argues that at the same time investment in infrastructure has fallen, it is also not as targeted as it once was. The problem is, often wish list projects taking priority over maintenance. “The reality is that communities like to provide nice parks and recreational facilities for residents. They do so at the expense of water systems and roads, which are capital intensive and chew on a lot of budget,” Facette points out.

Putting a figure on Canada’s infrastructure deficit, however, is more difficult. Stripping out water and wastewater treatment, a study by Montreal’s McGill University estimates that $44 billion is needed to bring schools, hospitals, etc. up to standard. The CRCI calculates that over $16 billion is necessary to restore the 25,000 kilometers of highway designated by the federal and provincial governments to be the National Highway System, and including major arteries such as the Trans Canada Highway and Ontario’s Highway 401. “Nobody knows what the exact number is,” Facette says. Conversely, the insurance industry does not know the extent of liability, except that as structures decay, the stakes increase.

Lobbying for mitigation

The IBC has been addressing the infrastructure deficit by lobbying federal and provincial governments for more public money. The bureau has used the experience built up from years of work on the earthquake file to propose a $750 million public program to improve the capacity of Canadian communities to withstand natural disasters. “We try to set positive examples,” Kovacs says. “The floodway to absorb the Red River waters around Winnipeg cost $63 million. The analysis of the kind of damage that would have happened had the floodway not been in place would have been well over $1 billion. And imagine what you could have done with $3 billion if you didn’t have to spend it cleaning up after the i ce storm.”

There are encouraging signs that after decades of decline, the message is finally getting through. Ottawa plans to spend $2.65 billion over the next five years on infrastructure, in addition to $1 billion on federal projects. If the provinces and municipalities buy into the program similar to the model in place in 1994, that would make $9 billion available to rehabilitate tired systems. Whether this is sufficient to make a dent in the existing deficit and lower the risk of another Walkerton depends on how the money is invested, according to Facette. “The main criticism of infrastructure works programs is that the money is spent on new projects and not always on existing infrastructure,” he says. This increases both the capital base and maintenance costs. “We have to learn to say this is what we have, and this is what we need to maintain.”

Kovacs agrees that a basket of public money for infrastructure will contain a “few bad apples” but is confident that the Walkerton tragedy and the recent federal government scandal concerning job creation and training will make this next round of investment more accountable.

IBC’s lobbying for increased public spending on public infrastructure to manage public risk notwithstanding, the insurance industry has been remarkably silent when it comes to aging facilities. Whether Walkerton, and the potential for more lawsuits as a result of contaminants seeping into the drinking water of other communities across Canada, changes this attitude remains to be seen.

Certainly the industry has to take some precautions to lower exposure to risk. The difficulty in identifying infrastructure as a cause for claim rules out the creation of a fund similar to what is in reserve for earthquake damage. Facette suggests that bond agencies build maintenance and resources allocated to preserve infrastructure into government credit ratings. But what is needed is a plan to realistically reserve the orderly decline of Canadian infrastructure. Kovacs suggests that might be more difficult than it seems. “It’s hard for a lot of decision makers to see the potential benefit down the road when measured against investments that deliver immediate results.”