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Operating in a new climate

Environment exposures in the forefront

Operating in a new climate

QUEBEC CITY — Risk managers need to be on the front lines of preparing their organizations to deal with climate change, including keeping up on emerging environmental risks and case law.

By his own admission, Tim East, director of risk management at The Walt Disney Co. in Burbank, California, is no expert on climate change or environmental issues.

“I am, like you, a risk management professional,” he told the RIMS Canada conference in Quebec City last month. “We have a unique role to play within our organizations because our fundamental responsibility is preparing our organizations to accept risk, to prepare for risk, to prepare for threats and to make our organizations more robust and sustainable over time. Rather than being afraid of this issue, this is something we can and should embrace.”

Knowing the organization's flood exposure, for example, starts with flood maps, which are often spotty and out of date, said Louis Gritzo, Boston-based vice president and manager of research at FM Global, which is developing a worldwide, low-resolution but detailed and frequently updated flood map based on geospatial data to be released next year.

“In a changing climate, maps being up to date is vital,” Mr. Gritzo said. “If you're looking at maps from the "70s or "80s, they're too old.”

Key risk management steps include elevating the company's operations and equipment and having a plan to deal with the threat of rising water levels, which can include physical protection measures such as temporary water gates developed in the wake of Superstorm Sandy, though these measures can protect against up to only 1 meter (39.4 inches) of water, Mr. Gritzo said. Flood waters from Sandy topped 8 feet in some places, according to the according National Oceanic and Atmospheric Administration.

Risk managers also need to be aware of recent environmental case law in Canada, which increases the importance of purchasing insurance specifically covering such risks, said Gabrielle Kramer, a partner at law firm Borden Ladner Gervais L.L.P. in Toronto.

“In recent times, courts are more likely to find that liability polices do not cover pollution risks,” she said. “Special-purpose policies are necessary to cover not only Canadian pollution risks but pollution risks around the world ... and global risks that could come back to Canada.”

This possibility came into stark focus in a September decision by the Supreme Court of Canada, which ruled that Ecuadorean villagers could seek to enforce a $9.5 billion environmental damages judgment against San Ramon, California-based energy giant Chevron Corp. in an Ontario court. The villagers won the judgment in 2011 for damage caused by oil exploration and extraction, but Chevron had no assets left in Ecuador, so the villagers turned to Canadian courts in 2012.

Another noteworthy decision involves the City of Kawartha Lakes, which the Ontario Court of Appeal held liable in 2013 for cleaning up furnace oil that leaked from private property into a local lake. The property owner's insurance was exhausted before completing the cleanup, which flowed through city property.

“A technically innocent party could have responsibility if the polluter doesn't have the means to respond,” Ms. Kramer said.

Pollution legal liability insurance covers the cost of new pollution conditions and unknown pre-existing pollution, but generally excludes known conditions, which buyers are required to disclose before binding or face a coverage denial, said George Boire, environmental practice leader at Marsh Canada Ltd. in Toronto.

Environmental disasters can be costly even for companies with insurance.

A 2009 oil pipeline spill in the La Crau Nature Reserve in France — a habitat for endangered species — resulted in significant environmental damage, according to a European Commission-funded report. The pipeline was operated by Southern European Pipeline Co., which bore cleanup and remediation expenses of more than €55 million including the pipeline repair.

“Needless to say, a €12 million ($13.5 million) limit was not sufficient to cover the loss,” said Robert Wade, assistant vice president of environmental risk at Ace INA Insurance in Toronto.

Risk managers also need to be aware of emerging environmental risks, including road salt that, in sufficient concentrations, poses risks to animals, plants and aquatic environments, creates liabilities for public sector entities responsible for salting, but also private sector entities that have to salt their locations in wintry conditions.

“It's becoming a standard exclusion in a lot of the environmental policies that are being offered, so you're stuck with the problem,” said Kimberley Slugg, assistant director of insurance and risk management at Smartheit shopping center operator Smartcentres Management Inc. in Vaughan, Ontario.