Ontario's environmental law broadens D&O responsibilities

Companies with operations in Ontario, Canada, have stringent responsibilities under revised environmental laws that are designed to hold them accountable for environmental infractions, thus boosting interest in environmental insurance to address the new exposures.

The Environmental Enforcement Statute Law Amendment Act—commonly known as Bill 133—aims to protect the environment by toughening both the requirements for companies to comply with environmental regulations and the penalties for failing to comply.

In response to a number of contamination incidents occurring in Ontario, provincial legislators amended existing environmental statutes via Bill 133 to give Ontario's environmental regulators more tools to prevent or minimize the risk of discharge of contaminants and to punish companies that allow these incidents to occur.

"I think in general it definitely shows Ontario is moving toward a more protective stance on environmental issues," said Christine Little-Collins, regional manager, national accounts, for AIG Environmental of Canada in Toronto.

Bill 133, for example, allows a penalty of up to $100,000 per day to be imposed on a company involved in an unlawful spill or discharge. It also includes sentencing guidelines for courts to apply when a person or company has been convicted of an environmental infraction that impose stiffer penalties if the court finds aggravating factors existed (see box).

"Essentially, they're trying to deter or punish those trying to avoid compliance to make money," said Rosalind Cooper, a partner in the environmental law group of Fasken Martineau DuMoulin L.L.P. based in Toronto.

The law also established a doctrine of "absolute liability" for infractions, meaning that environmental penalties can be imposed regardless of whether the pollution was deliberate or accidental. "That has struck a lot of people in the regulated community as repugnant and contrary to public policy," said Doug Thomson, head of the environmental law group of McCarthy Tetrault L.L.P. in Toronto.

In addition, Bill 133 broadens the responsibility of directors and officers. Now they are required to take all reasonable steps to ensure that the corporation complies with specific environmental requirements. They also are under the onus to prove they took all reasonable steps in the event of a Bill 133 prosecution.

"That means there's more accountability in upper management," said Katherine van Rensburg, leader of Gowling Lafleur Henderson L.L.P.'s national environmental law practice in Toronto. An increase in charges against directors and officers is likely "because their statutory duty has been strengthened and it's going to be harder for directors and officers to defend themselves because of the reverse onus."

The prospect of "very high" fines and jail time for environmental infractions is a key aspect from a risk manager's perspective, said Sharon Ferrari, the Toronto-based vp, environmental services and risk management, for real estate company Bentall Capital L.P. Ms. Ferrari and her staff have been communicating with employees, directors and officers about their responsibilities under the environmental law. "You have an obligation to train them both from a health and safety perspective, but also to make sure they understand what the ramifications for them are under Bill 133," she said.

While many of the Bill 133 provisions became effective immediately after the law was passed in June 2005, one of the most contentious provisions—the environmental penalties—still is in the consultation phase. Proposed regulations that outline exact methods to calculate the amount of the environment penalty and ways for companies to seek penalty reductions were released in October and are scheduled to take effect May 1, 2007.

The environmental penalty provision has been one of the most controversial aspects of Bill 133 because it can be levied immediately after an incident without allowing companies to present a due diligence defense, environmental lawyers say.

Amid significant opposition from the business community, governmental regulators decided the environmental penalties would be applied only to companies in the Municipal Industrial Strategy for Abatement sector, which consists of companies in regulated industries such as chemical manufacturing, industrial minerals, electric power generation and petroleum. There is widespread consensus, though, among environmental experts that regulators eventually will seek to expand the penalty provisions to other sectors.

While Bill 133 provisions apply only to companies based in Ontario or companies that have facilities in Ontario, other provinces are watching how the new regulatory regime develops to see if implementing similar laws and regulations would be feasible, experts say.

Canadian risk managers who are aware of the bill are looking at ways to comply with its provisions while also looking at potential environmental insurance purchases. For example, an Aon Reed Stenhouse Inc. client that recently purchased a MISA facility in Ontario bought an environmental insurance policy to backstop its potential liability, said Kate Dodge, vp and national environmental practice leader for Aon Reed Stenhouse in London, Ontario.

Bill 133 likely will increase demand for environmental insurance, an increase that the market can handle due an "all-time high" in capacity as several carriers have joined traditional markets such as AIG and Zurich North America in writing the coverage in Canada, which has created a much more reasonable pricing environment, Ms. Dodge said.

Insurer response uncertain

How insurance policies, though, will respond to certain Bill 133 exposures—namely the environmental penalty provision—is still an unsettled question.

Environmental penalties awarded by Canadian courts are uninsurable because environmental policies exclude criminal fines, but penalties assessed by environmental regulators under Bill 133 are administrative actions and administrative fines, so such penalties are insurable, Ms. Dodge said.

"The insurance policies will respond as long as it's allowed by law," Ms. Dodge said. "When our clients are made aware of this and realize it's something they can transfer rather than self-insure, certainly insurance is looking a little more palatable."

Insurers, though, have not given a firm response when asked whether the environmental penalties can be covered by insurance policies, said George Boire, senior vp and leader of the environmental practice of Marsh Canada Ltd. in Toronto. It is an issue that will likely be decided via litigation, he said.

It is too early to tell how the insurance response to Bill 133 will develop, AIG's Ms. Little-Collins said.

"We're still kind of learning how the insurance world will be impacted by the bill," she said.