Walkerton: a risk management nightmare

Over the past decade unwelcome attention has been turned to an issue that most Canadians take for granted, the guarantee of a safe and dependable supply of water. Canadians pay some of the highest municipal, provincial and federal taxes in the world, and in return count on a dependable source of clean water.

Across Canada, treatment plants routinely check for the level of chlorine and have automated monitors that will shut down water supplies when a lack of chlorine is detected. Under normal circumstances the testing procedures and the disinfecting systems that keep E. coli out of drinking water are effective and rigorous. A study done by Health Canada five years ago, however, identified the Walkerton Ontario area and neighboring counties (as well as most of rural southwestern Ontario) as potential hot spots for water contamination. At the same time the study was released, the provincial agency that monitored drinking water in Ontario stopped testing for the E. coli bacteria when the government privatized much of the province’s water testing system.

While the eventual source of the infection may never be known, there is a suspicion that manure from large farming operations laced with a strain of E. coli 0157:H7 bacteria found its way into Walkerton’s drinking water after a torrential downpour on May 12th, 2000. According to preliminary press reports, a chlorinator in the water purification system in Walkerton was not working between May 14 and 16th, allowing untreated water to flow to the town. The Walkerton Public Utilities Commission received a fax from A & L Canada Laboratories, its private testing lab, on Thursday, May 18, 2000 indicating that a water sample showed E. coli contamination. Unfortunately neither the Ministry of the Environment nor the Public Health Office was notified. There is a considerable debate as to whether the lab was under any obligation to report their findings to anyone other than the Utilities Commission. It was not until May 21, 2000 that Public Health Officials began testing the town’s water supply independently. By then, local doctors were raising the alarm about an epidemic of bloody diarrhea. It was only at this point that a public advisory to boil drinking water was issued.

Swift legal response

As with most bacterial infections, speed is essential in responding. The particular type of E. coli found in Walkerton causes severe illness if it is not medically treated within 48 hours of the onset of symptoms. If toxins are not flushed out, they can cause permanent kidney damage or death. Symptoms are often misdiagnosed as flu, and the victim is given contaminated water in the mistaken belief that it will help to relieve fever. The legal community was swift to respond. By May 26, 2000 class action suits claiming hundreds of millions of dollars in damages had been launched against the Town of Walkerton and the local public utilities by the law firms of Siskind, Cromarty, Ivey, & Dowler and Crawford, Mill & Davies. Harvey Strosberg announced to the press that his office was “on top of it” and that this was a “classic situation for a class action”. Robert Garcia, a lawyer in Walkerton, also declared his intention to file a class action suit.

The legal actions were announced a matter of hours after Medical Officer of Health Dr. Murray McQuigge suggested in a press conference that the deaths could have been prevented. By accusing local officials of being responsible for a tragic mishandling of the water supply, Dr. McQuigge placed Walkerton Mayor David Thomson, Public Utilities Chairman Jim Kieffer and Utilities Manager Stan Koebel in a position of considerable professional embarrassment and some personal peril.

While the Medical Officer of Health may eventually turn out to be correct, it is always distressing to see liability assigned in such a public manner without access to the complete records or an independent review. In a matter of days, the media was reporting that the Walkerton Public Utilities Commission might have broken the law when it failed to report the deadly strain of E. coli found in the town’s water supply.

In the wake of the deaths, the Ontario Clean Water Agency, which operates more than 200 treatment plants in Ontario, was appointed to take over operations of Walkerton’s treatment plant from the town’s Public Utilities Commission.

Government response

In a report released July 27, 2000, Gordon Miller, Ontario’s environmental watchdog criticized the provincial and municipal governments for their roles in the crisis. Anticipating that cow manure will be proven to be the culprit, he concluded that government had failed to address the environmental effects of large-scale factory farms. In addition, Com- missioner Miller criticized the Ministry of the Environment for failing to protect the safety of drinking water. Since taking office, the Government of Ontario has privatized water testing and laid off a considerable percentage of the Ministry of the Environment staff, previously assigned to monitoring drinking water.

Prior to these privatization efforts, both the MOE and the Medical Officer of Health would have been notified of potential contamination. While government labs would have been disciplined for not following the guidelines, private labs have no legal obligation to report contamination to health authorities.

New laws

In response to the crisis, the Ontario government began drawing up new environmental controls on the massive farming operations that have been identified as the possible source of the contamination. The proposed legislation to be tabled in the fall would:

Specify rules for the location and capacity of farm buildings not currently covered by the Building Code;

Establish education and training standards for farmers engaged in large scale operations;

Require farmers to keep detailed records of operations;

Require detailed plans pertaining to the use, storage and handling of natural fertilizers, including manure;

Set out a range of fines including clean up costs to be paid by uncooperative offenders in the case of health and safety risks.

On June 12, 2000, Attorney General Jim Flaherty announced that the government planned to pass legislation allowing civil servants and private sector employees to cooperate with government inquiries in the future without the fear of employer reprisals.

The new law was passed last month, and will be enforced with fines ranging from $20,000 to $2 million on an employer who punishes workers for providing information. The regulations also clarify the chain of responsibility for water testing and the reporting of contamination. Most importantly, many water-treatment systems will be upgraded or replaced — although this will be passed on to the public through higher taxes.

Furthermore, Ontario Environment Minister Dan Newman has announced that his ministry is beginning work immediately to make mandatory changes to regulations on water testing in Ontario. The changes will require:

All labs — or facilities performing tests on drinking water — must be accredited. At the present time, municipalities are only “strongly encouraged” to use accredited facilities;

Municipalities must inform the Ministry of the Environment if they change the laboratories doing their water testing;

All Certificates of Approval for water facilities in Ontario will be reviewed by the Ontario Ministry of the Environment every three years;

Notification procedures for labs will be made “absolutely and unequivocally clear” to avoid any possible confusion about reporting obligations. If test results indicate unsafe drinking water, the lab will be required to report the results to the Ministry of the Environment and the Medical Officer of Health, as well as the municipal water facility operator.

Insurance coverage issues

From an insurance perspective, the Walkerton E. coli outbreak will have a dramatic impact on the underwriting and assessment of both provincial and municipal risks. Liability policies are intended to protect municipalities and provincial governments from the financial consequence s of a “wrongful act” for which they are responsible. The policies anticipate, however, that the occurrence is not reasonably foreseeable by the insured. The “insuring agreement” of a typical municipal or provincial liability policy reads: “Bodily Liability Injury: To pay on behalf of the insured all sums which the insured shall become obligated to pay by reason of the liability imposed upon the insured by law…for compensatory damages because of bodily injury, sickness, disease, shock, mental anguish, mental injury, assault and battery sustained during the policy period by any person and death at any time resulting therefrom.”

The definition of “wrongful act” varies, but a typical definition states: “A ‘wrongful act’ shall mean any actual or alleged error or misstatement or misleading statement or act or omission or neglect or breach of duty by the insureds in the discharge of their duties, individually or collectively, or any matter claimed against them, solely by reason of them being or having been insured during a policy period.”

Furthermore, “loss” is typically defined as: “The amount which the insured is legally obligated to pay on account of a claim or claims made against the insured for wrongful acts for damages awarded by a court of civil law, judgments, settlements, costs (exclusive of salaries of officers or employees) and defense of legal actions, claims or proceedings and subject to the limit of liability set out in the declarations.”

Penalties or punitive and exemplary damages are ordinarily excluded under liability policies, however, some provincial and municipal policies will extend coverage for exemplary damages up to a specified limit in return for an increase of premium. Many liability policies also have an exclusion clause which states that coverage will not be extended if on or before the inception date of the policy, the insured knew or could have reasonably foreseen that such wrongful act could lead to a claim.

In cases where there are extensive internal reports warning a government body of impending catastrophe, this will become a critical issue — at what point was a tragedy like Walkerton “reasonably foreseeable”?

Most provincial and municipal policies give the insured the right to defend and settle cases subject to the insurer agreeing to reimburse legal fees including disbursements. This provides the government with the ability to make expeditious settlements without prolonged negotiations with the insurer, provided the loss falls within the coverage in the policy.

Risk management concerns

Risk management issues that will have to be dealt with in the wake of the Walkerton E. coli outbreak are as follows:

Factory farming. It is important to recognize that manure is an organic waste and that run off from farms can cause considerable damage to surrounding areas, both in the form of bacteriological contamination and other forms of water pollution. In the aftermath of the Walkerton outbreak, legislation will establish some safeguards for large farming concerns which will hopefully restrict the potential for catastrophic liability. At the same time, it will be incumbent on underwriters to inquire with regard to the status of the fertilizer control safeguards in underwriting large commercial farming risks.

Provincial governments. With government cut-backs, the possibility of statutory “blind spots” becomes a serious potential problem. It is easy for a provincial ministry to cut staff and privatize certain functions, however it can take decades to pass legislation setting out the responsibilities of the replacements. Safeguards previously in place must be preserved, if privatization is to be successful in the long term.

The public recoiled in horror as provincial and municipal officials publicly pointed the finger at each other in the wake of the Walkerton crisis. The public perception was that neither level of government could accurately determine for a period of some weeks what the regulations were with regard to drinking waters and who was obliged to report contamination. From a risk management perspective, the spectacle of the Premier and other publicly elected officials making provocative comments with regard to liability “off the cuff” in front of the media renders subsequent defense efforts difficult if not impossible.

Municipal governments. In the wake of the Walkerton incident, previously forgotten reports dealing with the status of the water system in rural Ontario have come to the forefront of attention. The conclusion of the experts is that most municipalities in Ontario are woefully ill equipped to test water and to assess the lab results. In addition, the studies suggest that in most Ontario towns the pipes in the water mains are either badly corroded or have considerable tuberculation (the buildup of mineral and particulate deposits). Others are of substandard construction, making it an almost impossible task to clean out contamination once it is in the system.

It appears that municipalities will take the step of replacing or inspecting the water mains only when there is a serious accident. From a risk manager’s point of view, this is not a healthy situation and raises the question of when a municipality reasonably ought to know that there is a potential claim.

Testing labs. The potential exposure for laboratories carrying out inspections and other work previously performed by the Ministry of Environment has increased considerably. There is substantial disagreement between the large testing laboratories as to whether they have a duty, formal or informal to go directly to the Public Health Commission or the Ministry of the Environment in an instance where water turns out to be contaminated. Duty or not, there is potential for civil liability if a lab fails to act.

It is important to consider as well that E. coli bacteria, while a particularly dramatic and deadly organism, is only one of a number of potentially lethal contaminants that show up regularly in Ontario drinking water, including parasites, metals and other industrial pollutants. If there is one positive thing that comes out of this tragedy, it must be that the insurance industry and public officials work together in the future to recognize potential problems and solve them rather than factoring in illness and death as a cost of doing business.