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Judy Greenwald

Derailment risks and liability issues expand as oil shipments boom

High-profile accidents raise safety, liability issues for shippers, railroads

March 2, 2014 - 6:00am



While only a tiny percentage of trains carrying crude oil are likely to derail, the risk of derailment and catastrophic losses have increased significantly with the growing number of tank cars carrying the fuel.

The most dramatic example is last year's accident in Lac-Mégantic, Quebec, which killed at least 42 people and destroyed much of the town.

“It's just sheer volume,” said Fadel Gheit, an oil analyst at Oppenheim & Co. in New York. Railroads “have never experienced this kind of traffic before.”

U.S. railroads transported an estimated 400,000 carloads of crude oil in 2013 compared with just 9,500 carloads in 2008, according to the Washington-based Association of American Railroads.

Underwriters say they are particularly concerned about the volatility of the fuel being extracted from the Bakken oil deposits in North Dakota.

“We've seen an unprecedented level of losses that have made headline news, and we're not sure if this is a trend or just a freakish thing that will pass,” said David Adamczyk, vice president in the railroad department at Liberty International Underwriters, a unit of Liberty Mutual Holding Co. Inc., in Hunt Valley, Md.

“Certainly, one of the exposures that can't be denied is that more crude oil is being transported, and some of that crude oil is coming from parts of the country where that crude oil is more volatile ... so we're monitoring that closely,” he said.

“This is a potentially significant increased risk due to the increase in petroleum carloads and the emerging concerns that petroleum from the Bakken reserves in North Dakota may have inherent chemical properties not fully known, including lower flash points,” said Nick Bayliss, assistant vice president with Gemini Transportation Underwriters, a Boston-based unit of W. R. Berkley Corp.

“Underwriters' eyes are wide open” to the potential exposure, said Daniel Bancroft, New York-based senior vice president and transportation practice leader with Willis North America Inc.

In response, some insurers have left that class of business, some have reduced their liabilities and others are trying to carve out pollution risks on liability policies, he said

Insurers “are creating a new underwriting paradigm, new filters” and raising new questions on this issue, Mr. Bancroft said. Insurance applications are going to get “even more granular and specific as to what they'll underwrite” and the limits offered, he said.

Coverage for smaller railroads is of particular concern. Having as few as five miles of track, smaller railroads may have no more than $10 million insurance coverage, Mr. Bancroft said.

Another issue is the prevalence of DOT-111 tank cars, which observers say are more prone to rupture than newer versions.

“A lot of people have known for 20 years the tankers were inadequate,” said Fred Millar, an Arlington, Va.-based independent transportation consultant.

According to the Association of American Railroads, there are roughly 92,000 DOT-111s that transport inflammable liquids, such as crude oil and ethanol, with only about 14,000 built to the latest industry safety standards.

Tankers built since 2011, when higher standards were introduced, are less prone to rupture, but there is no deadline for the older cars' replacement and they may be used for decades.

On Feb. 17, Saint John, New Brunswick-based Irving Oil Ltd. announced it was voluntarily removing its DOT-111 railcars from service and would complete the conversion of its fleet of crude oil railcars to newer models by April 30.

Meanwhile, both Calgary, Alberta-based Canadian Pacific Railway Ltd. and Montreal-based Canadian National Railway Co. are introducing surcharges on customers that transport crude oil using the older rail cars, according to spokesmen for both companies.

In addition, although tank cars generally are owned by companies that lease them to others, not the railroads themselves, Fort Worth, Texas-based BNSF Railway Co. said it had asked major manufacturers to submit bids for 5,000 up-to-date railcars that it would own.

Another issue is the extent to which railroads can reasonably be expected to be able to divert dangerous loads away from heavily populated areas. In January, the Transportation Safety Board of Canada and the U.S. National Transportation Safety Board jointly recommended requiring expanded hazardous materials route planning for railroads to avoid “populated and other sensitive areas.”

But many observers doubt that is feasible.

Traditionally, tracks were built to be near industry and populated areas, said Justin Russo, senior vice president of safety and loss prevention at Peabody, Mass.-based risk management firm Energi Insurance Services Inc. Even in rural areas, tracks were intended to be in the downtown areas of small towns, said Dave Tiedgen, Energi's senior vice president of research and development.

While the railroads themselves are taking a hard look at this issue, routes “can't be completely altered,” said Bill Anderson, president of Rail Services Inc., a railroad safety and claims consultant in Boise, Idaho.

Railroads also are required to introduce by 2015 “positive train control,” which integrates command, control, communications and information systems to control train movements safely and efficiently. Under the Rail Safety Improvement Act of 2008, the Federal Railroad Administration mandated that certain rail lines put in place these systems by 2015, but many question whether the railroad industry will be able to comply with the deadline.

The deadline is unrealistic for a highly complicated industry with tens of thousands of miles of track, said Paul Burgess, a regulatory specialist with Chicago-based Labelmaster, a hazardous materials transporter unit of American Labelmark Co.

Meanwhile, some experts say derailment risks have been exaggerated.

Defense attorney Michael B. Flynn, president and chief trial attorney at Flynn Wirkus Young P.C. in Quincy, Mass., said the rail industry “from time to time finds itself perhaps, by pure coincidence, with incidents that just kind of happen to bundle together and raise the consciousness of the public.”

“Incidents involving derailments of tank cars carrying crude oil of any sort ... historically are, frankly, de minimus,” said Don Denbo, CEO of broker Commercial Insurance Associates L.L.C. in Brentwood, Tenn.

“This is just a condition of the rail business that occasionally there are derailments,” said James R. Beardsley, managing director and global rail practice leader at Marsh L.L.C. in Washington.

 



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