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The Buck Stops Where? The Risks of Absolute and Strict Liability

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Absolute and Strict Liability

In December 2008, a Kawartha couple did what many Canadians do when winter approaches—they hired a company to refill the fuel oil tanks at their home in Kawartha Lakes, Ontario. After the tanks were refilled by a local fuel company, the couple eventually noticed that the oil was leaking from their basement and called their insurance company to begin the remediation process. The insurance company quickly hired a remediation contractor, but before the spill could be fully contained and cleaned, the insurance coverage ran out. By then the spill had spread to an adjacent property owned by the City of Kawartha Lakes.

When the Ontario Ministry of Environment was warned that remediation work had ended without the spill being fully contained, they stepped in and ordered the city to take whatever steps were necessary to prevent contamination of nearby Sturgeon Lake. The city objected to the order, but after years of legal battles, the courts ultimately sided with the Ministry of Environment and ruled that the city had to cover the cost of the clean-up.

In July 2013, a train carrying tankers of crude oil derailed in the town of Lac Mégantic, which led to an explosion that killed more than 40 people, destroyed the town’s core and polluted the land and waterways surrounding the accident. Montreal, Maine and Atlantic Railway, the train’s owner, quickly exhausted the $25 million limit on their environmental insurance, which covered only a small portion of the estimated $200 million in damages caused by the wreck and has since declared bankruptcy. The Quebec government initially ordered the shipper, World Fuel Services, to pay for the clean-up, even though it played no role in the accident. World Fuel Services was shipping crude oil on behalf of Irving Oil, and the Quebec government and Transport Canada may now pursue Irving Oil for clean-up costs.

The above stories illustrate the concept of absolute and strict liability. Absolute and strict liability occurs when a person or legal entity is held liable regardless of fault or negligence. The City of Kawartha was responsible for the land that oil flowed through, an example of absolute liability. World Fuel Services and Irving Oil were responsible for the crude oil they transported/owned, an example of strict liability. They may not have been responsible for the event that caused environmental damage but they are responsible for the land and products they own.

While many people will find the idea of being forced to pay for remediation of an event you had no role in causing unfair, these examples demonstrate that is difficult to avoid being drawn into absolute and strict liability situations entirely. If people and companies can be held liable for events they had no control over, how can people and companies protect themselves.

The first line of defense against such suits is to fully assess and understand the risk to which you or your company is actually exposed. Since absolute and strict liability extend beyond your own actions, it is important to review the practices of business partners such as transport companies, subcontractors, and distributors. In particular you should investigate the level of insurance coverage your partners carry—if they aren’t adequately covered, you could be left holding the bag. You should also be aware of your neighbors’ risk profile. As in the Kawartha Lakes example, you could be held liable for the accidents, negligence and poor planning of others.

Once you’ve adequately assessed risk, you can begin managing it. Work with business partners to ensure that they have good practices and processes in place, especially when they deal with dangerous goods. Review your business partners’ insurance programs with your registered insurance broker. If you are purchasing land, understand the historical site use and the operations of your neighbor. This can be accomplished by performing a Phase I Environmental Site Assessment prior to purchase.

Finally, look into purchasing a more robust insurance package. Standalone Commercial General Liability policies often have pollution exclusions. Therefore, if a company owns, operates or is responsible for inherently dangerous materials that may cause environmental damage it is essential to purchase a separate Environmental Liability policy. For example, the City of Kawartha Lakes would have been protected had they purchased site-specific Premises Pollution Liability coverage on a blanket basis for all properties. World Fuel Services and Irving Oil would benefit from having Contractors Pollution Liability coverage in place. In the end, every company’s needs are different and it’s important to consult with an insurance specialist to ensure risk is properly mitigated.

Absolute and strict liability present risks that many people and companies may not know exist. It is important they perform a full analysis of their exposure to risk and implement procedures that reduce that exposure. Companies should also talk to their registered insurance broker about their insurance package to ensure that they are fully covered in the event disaster strikes.

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