Transport Committee on April 30th, 2015

[The Chair, Conservative, Larry Miller]

Mr. Kellway.

[Matthew Kellway, NDP, Beaches—East York, ON]

I'm curious about the billion dollars. Clearly, the railways do their own risk assessments, and I guess that's proprietary. It hasn't been shared with us, blah, blah, blah. But the testimony was that their insurance coverage exceeds what's in the act by $500 million, so the question went to the minister when she was here: what is the department's risk assessment that would get us to a lower amount?

Can you unpack that for us and tell us what went into your risk assessment? What are the numbers? What's the math that brought you to the conclusion that a billion dollars was sufficient?

[Lenore Duff]

I can comment generally on it and say that what the numbers were based on was historical accident data. I can say that there have not been a great number of rail accidents with significant damages. So the data is limited to some extent, and obviously that's a positive thing, but it's based on the cost of actual accidents that have occurred and what the payouts were for them. That's how we came to the billion dollars.

I guess I'd just make another comment with respect to that. These are minimum requirements, so if class 1 railways choose to ensure their operations for more than a billion dollars, they are certainly free to do that. In terms of what their insurance levels are now or what the market supports, those things vary somewhat over time, but the billion dollars was arrived at by looking at historical accident data and what has actually been paid out, and what we understand this billion dollars would cover.

[The Chair, Conservative, Larry Miller]

Do you have another question?

[Matthew Kellway, NDP, Beaches—East York, ON]

I do.

[The Chair, Conservative, Larry Miller]

Continue, then.

[Matthew Kellway, NDP, Beaches—East York, ON]

Do you know or do you understand how your risk assessment differs from the one done by the railways? You're looking strictly at historical data. One of my concerns was that we know specifically with respect to oil by rail that it's been increasing at quite a dramatic rate over the last six years or so.

Historical data is going to be of limited use, it seems to me, if the probabilities of an accident are going to go up because you have more cars carrying oil across this country. Is that possibly what the railway is looking at? Is the railway looking at it prospectively and saying that these are the trends and they need to account for higher probabilities because of the growth in oil by rail?

How does your risk assessment differ from theirs? Do you know that? Do you have that kind of information?

[Lenore Duff]

No. I don't have the information with respect to the railways' risk assessment and how they determine business decisions.

[Matthew Kellway, NDP, Beaches—East York, ON]

Their methodology...? You don't look into it?

[Lenore Duff]

No. I don't have access to that methodology.

With respect to your specific comment about increasing volumes of oil, I agree that it potentially may increase the potential for accidents, but the billion dollars in insurance is per occurrence, so it would still have sufficient coverage for each accident that could potentially occur. The additional amount of oil being transported would be accounted for by the billion dollars per occurrence. It doesn't necessarily increase the cost of an accident.

[Matthew Kellway, NDP, Beaches—East York, ON]

Well, at the risk of being argumentative, except that if there's more oil by rail, it's more oil passing through bigger cities. The one accident we've had that has been quite catastrophic and expensive was in a small town. I guess we don't know exactly what the total cost of all that was, but it was up in the hundreds of millions. I think everybody understand that.

In the context of a big city such as Toronto, where we have a lot of oil going by rail in communities of literally 10,000 people a stone's throw away from rail track, clearly there's an increased probability of an accident in a dense urban community that's going to cost well in excess of what's happened in Lac-Mégantic for a few hundred million dollars. I would have thought that those are the kinds of things that would have been taken into account in the risk assessment.

If yours is different from theirs, and you don't know how they came up with theirs, is there not an industry standard for determining liability that you would have employed?

[Lenore Duff]

When you say “an industry standard”, I expect that there would be an insurance industry standard about how they advise on liability, and they do that with actuarial assessments. Our work was based on risk assessments, I expect in the same manner; I can't confirm that because I don't know exactly what the railways do or what insurance companies do. But we believe the methodology we used has provided for the amount of liability insurance that would cover the accidents that could potentially occur.

[Matthew Kellway, NDP, Beaches—East York, ON]

In your process of arriving at a billion dollars, you didn't go out to the insurance industry and ask what those guys do to assess risk, costs, and all the rest of that kind of stuff that would have gone into this?

[Lenore Duff]

Yes, we did go to insurance companies and did have those discussions with them, both with respect to what would be a reasonable amount of insurance for liability.... In the case of these accidents, we dealt with both Marsh, which was before the committee here, and Aon, both on whether the assumptions we used were the right ones and for whether the market could bear the amount of insurance that we had proposed.

[Matthew Kellway, NDP, Beaches—East York, ON]

I'm struggling to reconcile the answers I'm getting to this. You've told me that you don't know what the differences were, and yet you consulted and adopted their methodology. How am I to reconcile those?

[Lenore Duff]

I think you asked me what the difference was between our methodology and their methodology with respect to the class 1 railways. I said that I don't know what that methodology is. Then you asked me if I consulted with insurance companies with respect to confirming our approach, and I said, yes, we had. I don't think those two things are inconsistent.

We used a methodology and consulted with insurance companies with respect to the amounts we proposed for this legislation and had confirmation from them that these seem like the appropriate amounts, but I don't know what methodology they specifically use with class 1 railways and where they determine insurance levels for them.

[The Chair, Conservative, Larry Miller]

Before we go to Mr. Mai, somebody's phone is beeping. I think it's over there.

Could you shut it down, please?

Mr. Mai.

[Hoang Mai, NDP, Brossard—La Prairie, QC]

Thank you very much.

Quickly, also regarding the risk assessments, when you looked at previous accidents, did you look at what happened here in Canada or was it more in North America or other countries?

[Lenore Duff]

We looked at what happened in North America. The majority of the significant accidents were in the United States.

[Hoang Mai, NDP, Brossard—La Prairie, QC]

Thank you.

[The Chair, Conservative, Larry Miller]

Mr. Watson.

[Jeff Watson, Conservative, Essex, ON]

Thanks, Chair.

I'm hoping I can bring some clarity to this.

In the government's assessment, checked with the insurance industry and based on data, I think that as the minister herself testified, something like the 99th percentile is covered under the $1 billion, which would be, first of all, strict liability. You wouldn't have to prove a claim in court now. You would assume the fault of the rail company on a per incident basis. Anything, presumably, for the 100th percentile, or if there were a theoretical 120th percentile, would be covered by the supplemental fund, backstopped by the CRF, and repayable by shippers through the levy. Again, anything for the 100th percentile and above, anything exceeding the $1 billion, in other words, would be shipper covered. Is that right?

[Lenore Duff]

That's right.

[Jeff Watson, Conservative, Essex, ON]

Okay—

[Lenore Duff]

[Inaudible—Editor]