Risk Assessment for Railroads

“There is not currently enough available coverage in the commercial insurance market anywhere in the world to cover the worst-case [train derailment] scenario.” — James Beardsley, global rail practice leader for Marsh & McLennan Cos.’ insurance brokerage unit.

The Bakken oil train that derailed and exploded in Lac-Mégantic, Quebec killed 47 people. It also made clear that the oil-by-rail industry is radically underinsured for the risks of shipping volatile Bakken crude. The financial risk falls instead on the taxpayers who would ultimately be expected to pick up the nearly incalculable costs of an oil explosion in an urban area.

The Lac-Mégantic disaster generated an estimated $2 billion in liabilities with the cleanup alone projected at $200 million. The train’s operator, MM&A, a short line railroad transporting the crude from a Canadian Pacific (CP) yard to a refinery in New Brunswick, had just $25 million in liability insurance. Soon after the accident, MM&A filed for bankruptcy protection. So far, the Canadian federal and provincial governments are paying the cleanup costs.

Under Quebec environmental law, the government can order the owner of spilled hazardous material to pay for and manage the cleanup, and the province ordered the US-based oil service companies involved with the crude oil shipment to take over the cleanup. These companies have refused Quebec’s order. They are in court fighting the government, just as they are fighting the wrongful death lawsuits filed on behalf of the town’s residents.

These oil service companies claim that, through the complicated legal structures used to ship oil, they were not technically the owners of the oil at the time of the explosion. The wrongful death lawsuits are not expected to be settled for years. Just so, CP Railway, which hauled the oil from North Dakota before turning it over to MM&A, and Irving Oil, whose refinery was the final destination for the oil, are also resisting legal liability.

Underinsurance is the norm

Tank cars are almost all owned by shippers and leasing corporations, not railroads. Railroads, however, operate under a “common carrier obligation,” which prohibits them from refusing to haul any legally allowable load even if would be inconvenient or unprofitable. In other words, they are actually required by law to transport hazardous materials, including volatile Bakken crude oil, in unsafe legacy DOT-111 tank cars until such time as the federal regulator determines these tank cars are no longer okay to use. And if the railroad hauls it, then they are liable for it.

In January 2014, the Wall Street Journal published an expose on how under-insured the railroads hauling crude oil really are, and how they will be unable to cover the costs of an oil train explosion in an urban area. It found that in the insurance world, the Lac-Mégantic incident, as awful as it was, is not considered a truly catastrophic worst-case accident. That would be something like a derailment in the middle of a heavily populated area, like in downtown Vancouver, Washington where oil trains filled with volatile Bakken crude already pass several times a week (and where many more will be destined if the huge proposed oil terminal is built there). With remarkable candor, industry experts went on record with a WSJ investigative reporter to detail the inadequacy of the insurance railroads carry for such an event.

It’s true even for the big Class 1 railroads, according to the WSJ, such as BNSF, Union Pacific, and CP Rail. And after each ethanol and oil train explosion, the insurance picture for railroads has only gotten worse and worse.

According to the Wall Street Journal story, even if a railroad wanted to buy insurance for a truly catastrophic accident—a 300 foot-tall fireball in downtown Spokane, say—no one would sell it to them. James Beardsley with insurer Marsh & McLennan is quoted saying, “There is not currently enough available coverage in the commercial insurance market anywhere in the world to cover the worst-case [train derailment] scenario.”

At best, Beardsley says, there is only about $1.5 billion in liability insurance available for a Class 1 railroad. It’s an amount that would not even cover the damages in a small town like Lac-Mégantic.

The lack of adequate insurance for catastrophic losses in an accident involving hazardous material is not a new problem. In 2008, the US Surface Transportation Board (STB), held two public hearings on the topic of the railroads’ common carrier obligations and the “ruinous liability” they assumed in case of a major accident involving highly hazardous materials.

In its STB testimony, BNSF, the dominant player in Bakken oil-by-rail shipping, stated that when transporting high risk carloads, “The potential for an accident cannot be fully eliminated” (This is quite a contrast with the talking point the railroad industry rolls out after every oil train explosion, that only a tiny percentage of all rail shipments of hazardous materials result in a release caused by a train accident.)

BNSF admitted, “Insurance is not commercially available to sufficiently protect us against catastrophic loss.”

One solution regulators explored at the hearing was for the federal government to establish a similar insurance scheme as has been set up for the nuclear industry: it caps liability for industry and has the federal government cover accident costs above the limit. The idea hasn’t gone anywhere though, as the Wall Street bailouts during the Great Recession made the public and Congress wary of shouldering another taxpayer-backed corporate support program.

Another idea was for the entities which source or own the hazardous material to share in the liability costs. But, as is being demonstrated in the Lac-Mégantic incident, figuring out how such a scheme would apply to an oil train—where it is not clear who is responsible for what—is devilishly complex. Consider that oil in the train that exploded at Lac-Mégantic came from no fewer than 11 different suppliers. In court filings, one of the oil service companies involved in the oil’s transport claims it never owned the oil that exploded, despite having its name on shipping documents. Another of the oil service companies told the court that it too wasn’t the owner—it was just receiving the bill for transportation costs. Irving Oil, which owns the refinery that was the intended destination for MM&A load, also disclaims ownership and responsibility for the Bakken crude that exploded. So shared liability is not likely a workable solution.

A catastrophic accident would make railroad bankruptcy inevitable

Without adequate insurance, a catastrophic accident would inevitably lead to a railroad, even a Class 1 railroad, filing bankruptcy to sort out claims from existing creditors alongside claims from accident victims.

The past can be a guide. A 2005 derailment in Graniteville, South Carolina caused the rupture of a single tank car of chlorine that “killed nine, injured 554 and cost $178 million, excluding cleanup and a legal settlement.” If the accident had not occurred in the middle of night when few people were around, it “would’ve potentially bankrupted the safest [best insured] railroad in the country.”

How much would a truly catastrophic accident cost? The railroads can probably estimate the amount, but it is not something they want discussed publicly. The chief executive of Canadian Pacific railroad told the WSJ, “Your worst nightmare is sabotage of a train carrying a toxic substance in a heavily populated area. The estimates of the lives and the damage—I don’t even want to repeat what it would be.”

We can, however, at least ballpark the cost of a Bakken oil train accident in a heavily populated area based on prior accidents and settlements. For example, the family of Zoila Tellez who died at the scene of a 2009 ethanol train explosion in Cherry Valley, Illinois, settled a lawsuit with Canadian National in which they received $22.5 million for her life. An accident in a major metro area with, say, 1,000 deaths (a rather modest figure given the magnitude of the explosions from Bakken derailments) might therefore cost $22.5 billion just for the lives lost. Injuries, property damage, and business losses would add billions more—a total surely far in excess of available liability insurance.

As a consequence, each and every rail shipment of Bakken crude oil is now effectively traveling uninsured against the losses that could be caused by a catastrophic accident in any of the many major metro areas along its route—Spokane, Vancouver, Portland, Tacoma, Seattle, and on and on. Bankruptcy of the underinsured railroad involved, and years of litigation for the people and businesses harmed, would probably follow such an incident, just as it is playing out for the residents of Lac-Mégantic. Likely, only pennies on the dollar could eventually be recovered for the victims.

Taxpayers are implicitly backing oil train risk

Would the US government really allow a Class 1 railroad to go bankrupt and out of business after such an accident? It seems unlikely.

Railroads are vital to the economy, and the free flow of millions of tons of goods and materials that railroads carry is essential.

So are the Class 1 railroads really just “too big to fail”? And is the industry implicitly counting on local, state, and federal taxpayers picking up the costs in the case of a worst-case scenario accident? It sure seems like it.

The Northwest should ask some hard questions about insurance before permitting more than 800,000 barrels a day in oil-by-rail shipments. In the case of a catastrophic accident, who will pay for the lives lost and damage done? Will the oil companies like Tesoro that are putting our communities at risk be willing to put up a $20 billion bond in advance? Or will they look to the example of Irving Oil and claim after a catastrophic accident that they had nothing to do with it?

Every state in the nation has laws that require drivers to carry minimum levels of insurance for collisions. It’s too bad these laws apply only to cars and trucks with rubber wheels that run on roads, but not tank cars with steel wheels on railroad tracks.