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Canadians contemplate environmental dilemma.

Canadians Contemplate Environmental Dilemma

Although risk managers and insurance-industry professionals in Quebec work with different laws, insurance market and even a different language from the rest of Canada and the United States, they nevertheless share similar concerns when it comes to certain risks. Two of these risks, environmental liability and directors and officers' liability, were recently discussed at the Montreal RIMS chapter annual insurance day in March.

"Today, the environment is the number one issue around the world," said Mr. Clifford Lincoln, member of Quebec's Legislative Assembly and former minister of the environment for the province. "It's a crucial issue that we all have to solve together. And within the problem, the question of insurance looms very large because you can't carry toxics between here and another country, or between one city and another, or warehouse toxics or do anything without liability cover."

Mr. Lincoln said it is getting to the point where the economies of the industrial world cannot function to capacity without being extremely conscious of the environment. "Today, the environment and the economy are so closely linked that we are getting to the stage of environmental economies where nothing will be produced or started without a complete assessment of the environmental risks," he said.

"More and more risk managers are going to be faced with decisions that are really decisions of the environment--insurance decisions and industrial decisions," he added.

Thus, innovation in environmental technology is undeniably the wave of the future. "Firms might have to spend much more money to install new clean technologies," Mr. Lincoln said. "It will be costly, but the rewards will be much greater because clean technologies and clean industries are profitable. They may require more capital at the start, but they will pay their way much more than unclean industries."

Ron Davis, assistant vice president at Arkwright Mutual Insurance Co. in Toronto, urged risk managers to look at how their companies' operations affect the environment from cradle to grave. "From a loss control perspective, risk managers must look at every single process and component of their manufacturing operations to determine what happens to the raw materials, the byproducts and waste materials," he said.

Questions to explore, he continued, were whether any environmental exposures were transformed during manufacturing. Also, what happens to the byproducts? Are they sent off to haulers, and if so, what do they do with them? "The property is in your hands, and it's going to follow you for a long time even if it is not in your control anymore," he said.

Currently, there are only two companies which provide EIL insurance in Canada, said David Smith, senior underwriter from Ian Elliott Ltd., in Toronto, which has policy limits of $2 million. The other is American Home Assurance Company, an American International Group unit, which has limits of up to $15 million in Canada. "For a large company, the relatively high premiums which the coverage would cost might be better utilized to pay for loss control and funding for catastrophic losses," Mr. Smith said. "Financial risk management is the only real solution available to these companies."

Mr. Davis spoke about the impact that financial maneuvers can have on a company's environmental liabilities, especially when companies acquire property. "Risk managers must educate their managements as to the implications of acquiring or selling land or property that has been exposed to hazardous materials," he said.

He also said they should urge corporate management to conduct site inspections and environmental studies with the acquisition or disposal of any properties. Most importantly, risk managers should be encouraged to meet directly with underwriters to see how their policies would respond in the event they had a contamination loss.

Directors and Officers

John Rankin, manager of corporate insurance for the Royal Bank in Montreal, explained that the corporate reimbursement aspect of a D&O program is the central concern of the risk manager. "The question is whether or not the corporation needs to insure what indeed is a very remote risk, particularly in Canada," he said.

Mr. Rankin said if protection is broad under the company's bylaws and the corporation has substantial assets and earnings, directors may think there is no need for insurance. "I don't think that is the case," he contended. "The need for insurance may be reduced, but there are still areas where coverage is needed."

However, Mr. Rankin also said the statistics available in Canada reveal that both the magnitude and frequency of these losses are much less than in the United States. "I think we will see in the future more and more suits in Canada and more court decisions in favor of the plaintiff against the individual directors," he said.

Mr. Rankin cited a 1987 survey by The Wyatt Company of 152 Canadian companies which estimated that the claims frequency in Canada is only 84 percent of the frequency in the U.S. The report found that nonfinancial firms had 50 percent of their suits from shareholders and financial institutions had 85 percent of their suits from customers. In 1987, 87 percent of the Toronto Stock Exchange companies bought D&O insurance, whereas only 32 percent of companies with assets under CAN$25 million bought the insurance. Of the companies which did not buy insurance, 25 percent saw no need for the insurance, 9 percent stated the cost was too high, and 5 percent said the coverage was too limited.

While the lawsuits against Canadian directors are significant, there has not been a regular stream of catastrophic actions, said Greg Winterson, vice president of Encon Insurance Managers Inc. in Ottawa. "However, what we are seeing is a run on individual actions, breech of contract actions, wrongful dismissal, wrongful hiring and intimidation." There is a place for D&O in Canada, he concluded.
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Title Annotation:environmental liability insurance
Author:Oshins, Alice H.
Publication:Risk Management
Date:May 1, 1989
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