Senate passes ship owners’ pollution insurance law

Canada’s Senate last week passed one bill that would establish strict liability, for hazardous substance incidents, for ship owners and has sent a different bill proposing $1 billion in absolute liability, for the nuclear and offshore petroleum industries, to committee.

Bill C-22, the Energy Safety and Security Act, passed second reading Dec. 4 in the Senate.

A day earlier, Bill C-3 – which would establish strict liability, for ship owners, for incidents involving hazardous and noxious substances – passed third reading in the Senate with no amendments. Once it becomes law, Bill C-3, the Safeguarding Canada’s Seas and Skies Act, will require all Canadian-flagged ships to have pollution liability insurance. Bill C-3 will also allow the federal government to provide war risk coverage to airlines and certain other aviation firms, such as freight forwarders, baggage loading contractors, aircraft cleaners and airport security firms.

In Bill C-22, the federal government proposes to create the Nuclear Liability and Compensation Act and repeal the Nuclear Liability Act (NLA). That bill was sent Dec. 4 to the Standing Senate Committee on Energy, the Environment and Natural Resources.

NLA stipulates that nuclear operators, are “without proof of fault or negligence, absolutely liable” for breaches of duties imposed by NLA. Those duties include ensuring that no injury or damage to third parties occur as a result of the fissionable or radioactive properties of the material that they hold. Nuclear operators must have $75 million in basic liability insurance for each nuclear installation and that required coverage has not changed since 1976.

“I think all senators would agree that the current limit is unacceptable,” Alberta Senator Scott Tannas (and founder of Western Financial Group Inc.) said Nov. 20 when he tabled Bill C-22 for second reading. “This new $1 billion limit is an amount that has been determined to be sufficient to deal with the consequences of a controlled release of radiation, within the capacity of insurers to provide insurance at reasonable costs, and in line with liability limits in other countries.”

Under Bill C-22, the federal government proposes to initially increase the limit to $650 million, on royal assent. It would then be gradually increased over three years to $1 billion. The Minister of Natural Resources would be required to review that limit every five years and would be authorized to increase the limit by regulation, said Dave McCauley, director of the uranium and radioactive waste division at Natural Resources Canada, during the National Insurance Conference of Canada in September.

Canada’s nuclear operators buy liability and first-party property insurance through an association of insurers – the Nuclear Insurance Association of Canada (NIAC) – that form liability and property damage pools for nuclear installations.

For nuclear operators, Bill C-22 would “broaden the definition of compensable damage to include physical injury, economic loss, preventative measures, and environmental damage,” Natural Resources Minister Greg Rickford said in September when he tabled the bill for third reading in the Commons. “It will also extend the limitation period for submitting compensation claims for bodily injury from 10 years to 30 years” in order to address latent illnesses.

The Commons passed Bill C-22 in November and sent it to the Senate, which could amend the bill after the committee returns it for third reading.

If passed into law, Bill C-22 would “substantially change the premiums in the insurance market for the operators,” said Jeff Labonté, director general for energy safety and security at Natural Resources Canada, during hearings earlier this year before the House of Commons Standing Committee on Natural Resources.

With Bill C-22, the ruling Conservatives are also proposing to increase the absolute liability limits – for some offshore petroleum producers – to $1 billion, for damages arising from spills.

The current limit of absolute liability is “about $30 million in the Atlantic offshore area and $40 million in the Arctic,” Liberal Senator Grant Mitchell told the Senate Dec. 4. “No fault has to be proven. The companies that would be involved in a spill or a blowout in those regions would be responsible, no questions asked, for $1 billion, and they are required to put up assets to cover that.”

Rickford told the Commons earlier this year the government wants to “ensure that companies operating in the offshore have the financial capacity” to meet the proposed absolute liability requirement.

“Before any offshore drilling or production activity can take place, companies must prove that they can cover the financial liabilities that may result from a spill,” Rickford said at the time. “Typically, the financial capacity requirements can range from $250 million to $500 million, with $30 million to be held as a deposit to work in the Atlantic offshore and $40 million to work in the Arctic. This deposit is held in trust by the offshore regulator as a letter of credit, guarantee or bond.”

With Bill C-22, Rickford added, the “minimum financial capacity would be raised to $1 billion, in line with operator’s absolute liability.”

The petroleum industry “would like to see some flexibility in some of the financial instruments that are available in the financial market today, such as insurance and parental guarantees, which would be acceptable in order to demonstrate financial capability or capacity,” said Paul Barnes, manager for Atlantic Canada and Arctic at the Canadian Association of Petroleum Producers, last June before the House of Commons natural resources committee.

At the time, Barnes told the committee that the “vast majority” of CAPP members “who are active in the offshore tend to be large multinational companies that have the ability to carry large amounts of insurance or even to self-insure, such that in the event of a major or any incident, they have the financial capacity to respond and to clean up the incident.”

Barnes added at the time there may a “challenge” for small companies wanting to explore and develop in some areas, such as off the shore of Newfoundland.

Those firms “may find that the financial insurance instruments, such as insurance or other letters of credit or other financial instruments are more of a challenge for them than they would be for the majority of companies that work in the offshore,” Barnes told the committee in reply to a question from Conservative MP Brad Trost.

As for nuclear liability, once the $1 billion in absolute liability takes effect, nuclear operators will want “greater competition” in insurance, said John Barrett, president and chief executive officer of the Canadian Nuclear Association, said during the Commons committee hearings.

The changes to offshore petroleum liability would be in the form of amendments to the Canada Oil and Gas Operations Act, the Canada Petroleum Resources Act, the Canada-Newfoundland Atlantic Accord Implementation Act and the Canada-Nova Scotia Offshore Petroleum Resources Accord Implementation Act.