Risk Assessment for Railroads

How taxpayers will end up paying for the costs of a worst case oil train derailment.
This post is 34 in the series: The Northwest's Pipeline on Rails
“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.

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  1. Phil Brooke says:

    Washington State law requires transporters of petroleum products to demonstrate they have the resources & insurance to take financial responsbility for their mishaps (RCW 88.40).

    Clearly they do NOT & by approving any of the crude-by-rail schemes, Washington State & Ecology are turning a blind eye to the requirements of our laws.

    As a taxpayer, I oppose paying for crude-by-rail’s accidents & negligence, especially when they are set up as limited liability corporations using leased equipment. It’s offensive that all of this risk local communities are being asked to ‘host’ will likely be creating refinery jobs in places like China.

    The solution would be to fully insure these beasts & require ‘shared liability’ for all owners & movers of this highly flammable product. Since insurance is not available, one more good reason to deny the terminal proposals!

    • portrait Rich Feldman says:

      Phil, great point. As I read the RCW it specifically excludes oil by rail. 88.40.020 7(b) “A facility does not include any: (i) Railroad car, motor vehicle, or other rolling stock while transporting oil over the highways or rail lines of this state…” You have identified an important loophole that is there because of federal preemption or other reason. We will check it out.

      • Phil Brooke says:

        Yes. Perhaps the terminal is the point at which financial responsibility should be demonstrated. It’s certainly something EIS scoping should consider.

  2. G. Galamba says:

    Fascinating article. In my opinion, as a nation, we should develop a Manhattan type project to keep fossil fuels sequestered in the ground and develop renewables. In the near future, though, that is not going to happen, and continuing to depend on imports is not a viable option. I am not an expert by any means, but I suspect that the safest way to transport oil is by pipeline. But we environmentalists have pretty effectively blocked that. Now if we block transport by rail, the next option will be trucks, which would be even more dangerous. At some point, we need to come up with viable compromises.

    • Marcia Denison says:

      I disagree. Pipelines blow out and leak. The safest way to transport is by truck. It’s ridiculous to haul crude oil all over the place, leaking methane, hexane and benzine along the route and derailing. It should be refined in North Dakota, then transported by trained, certified drivers only who could be killed if they don’t handle their load with great care. Trucks are designed for carrying oil products. Trains are only in boxes and barrels, DOT regulations. Trucks are inspected. Trains are not. DOT-111 cars and their replacement are designed to haul cooking oil, not explosive gasses. The center of gravity is too high and they roll off the axles that are merely set on top of them in peg holes with no lashing at all. Round cars, when loaded on flat cars, and transported on trucks, are placed inside a square frame for handling and stability. What we have now will never work, especially with rotten ties and worn out rail beds. Our railways can’t handle it, we don’t need it, it’s being exported to our financial and military enemies and it will destroy the climate. Leave the oil in the soil!! There’s nothing in it for us but spills and disaster.

  3. Peter Marshall says:

    I missed this article back in May. It has a lot of good information on the issue of insurance. It points out how oil producers and transporters have effectively externalized one of the major costs of getting their commodity to market.

    The Governor’s December 1st “Preliminary Report on Marine and Rail Oil Transportation” perpetuates the myth that “the polluter pays” in case of an oil-related accident. It did not identify or explore the liability limitations your article so correctly described. The issue was reiterated in public testimony at their Olympia public hearing in November. Nevertheless, it was not mentioned in the longer (presumably finalized} version of the report available on line after December 1st.

    This is an unresolved fatal flaw of the whole oil transportation scheme. Please follow up as the state report becomes part of the discussion during the coming legislative session.

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