A recent decision from the Canadian Supreme Court in the Redwater case has significant implications in Canada, especially when it comes to environmental liability, according to an insurance expert.
In January, the Supreme Court ruled that a bankrupt oil and gas company has to fulfil provincial environmental obligations, which include responsibilities to plug and cap oil wells to prevent leaks, along with dismantling surface structures and restoring surfaces to their previous conditions, before paying anyone that it owes money to.
“When oil prices went down a few years ago, many of the companies started to get short on cash, and in order to be able to pay back some of their lenders, a lot of them were defaulting or claiming bankruptcy and in that process, one of the many outcomes of that was they were finding a way to avoid having to go through the expensive process of properly abandoning these wells,” said Miles Foxworth (pictured), environmental underwriter at Beazley. “Those costs ended up falling on to certain parts of the Alberta government and essentially became the taxpayers’ cost.”
The new ruling states that oil and gas companies can’t avoid their environmental obligations by claiming bankruptcy, and will now have to deal with those first before paying back their creditors, added Foxworth, though companies in the energy sector aren’t the only ones this ruling potentially impacts.
“The ruling isn’t limited to the oil and gas industry or to environmental obligations. It’s very broad in that it says you now have to address any sort of regulatory obligations before paying back any sort of creditors. It really has far-reaching impacts,” he said.
It’s the lenders and creditors providing funds to property owners and contractors for projects who are going to be most affected by this ruling. These are also the individuals who are expected to push for the purchasing of environmental insurance because they now have a higher risk of not getting their money back in case of a bankruptcy.
“It’s now more likely that they will work into those contracts or into those agreement requirements for the borrowers to actually buy coverage for either environmental liability for sites or for their contracting operations, so that if something does happen or there is a situation where they have to address some sort of environmental obligations, the creditors are not taking on the risk that they may not get their investment back,” explained Foxworth.
Meanwhile, Beazley has announced enhancements to its environmental liability insurance policy ECLIPSE in both Canada and the US, which is updated every few years to make it as broad as possible. However, the even timelier product release has been a new lender-focused offering, called site lender environmental asset protection (SLEAP) cover.
“In the case that there is a default and an environmental issue, they have full coverage for either the lesser of the full clean-up cost or the outstanding balance from a loan,” said Foxworth. “We expect the more common outcome to be that creditors are actually requiring the borrowers to buy coverage, but the alternative in situations where that’s not possible is the lender policy.”
While the ruling is only a few months old, the impacts of it are likely to be far flung across industries.
“There are many other industries that have environmental exposures and don’t realize it, and as they start to see these requirements in contracts and start to talk to their brokers about why this is a new requirement for their loans, I think [industries] as a whole will be made more aware of the exposures that they actually face,” said Foxworth.
