Four recent railway accidents involving shipments of crude oil have raised questions about the safety of mile-long unit trains carrying oil from producing regions, such as the Bakken Field in North Dakota, to refineries, terminals, and ports that might be more than 1,000 miles away.1
The problem has been exacerbated in several cases by fires and explosions that followed derailments, which may indicate that hazards associated with the Bakken crude are not common to other petroleum shipments by rail. It is important to look at these issues as well as consider risk management and insurance protection that may be available when rail accidents occur.
Recent Derailment Incidents
The first of the recent incidents was the derailment of a Canadian Pacific Railway train carrying Canadian crude that occurred in March 2013 in a rural area 150 miles west of Minneapolis. More than 30,000 gallons of oil were spilled but did not ignite. Extremely cold weather made the cleanup more difficult but also prevented migration to surface water and groundwater. There were no injuries, property damage was modest, and the cleanup took less than 2 weeks.
The second derailment was the disastrous runaway train incident in Lac-Mégantic, Quebec, which killed 47 people and leveled the business district of the town of 6,000. The 62 tank cars that derailed released almost 2 million gallons of Bakken crude that exploded into a wall of flames 100 feet high. Oil that did not burn spilled into waterways and lakes. The cleanup of contamination is expected to take 2 years and cost more than $200 million.
The extensive damage to the town has led the provincial government to start a rebuild of the business center at a new location. When faced with a bill for initial cleanup costs, the short-line railroad that was operating the train declared bankruptcy, prompting the Minister of Environment to issue an emergency cleanup order to 10 parties involved. These include shippers, the refinery where the oil was headed, and all of the railroads that carried the crude oil for any portion of the trip.
The third train accident occurred in rural Alabama in November 2013 when 20 tank cars in a Genesee and Wyoming unit train left the tracks in a wetland area, releasing 700,000 gallons of oil. Eleven of the railcars ruptured and exploded, giving off a dense cloud of black smoke. No one was injured, and cleanup operations were reported to have prevented damage to natural resources.
The last of the four incidents occurred on December 30, 2013, when a crude oil train ran into derailed cars from a soybean train near Casselton, North Dakota. Eighteen tank cars left the tracks, and 11 of them exploded, creating flames 90 feet high and emitting a cloud of dense smoke that was visible for more than 15 miles.
Casselton was evacuated when the wind shifted, but no injuries were reported during the derailment or the ensuing fire.
Questions Raised about Safety of Crude Oil Shipments
The four crude oil train derailments in the past 9 months as well as the damage caused by fires associated with these incidents have raised the question of whether unit train shipments of crude oil are inherently more dangerous than shipments of other hazardous commodities. Some critics say the material is too dangerous to ship by rail until better equipment and new safety regulations are in place.
Reviews of the derailments have identified several factors that contributed to the frequency and severity of these incidents, including the following.
Record levels of crude oil are shipped from producing areas in the western United States and Canada, which have overwhelmed the capacity of available pipelines.
The design and maintenance of railroad infrastructure and equipment was not intended to carry mile-long trains with more than 2 million gallons of crude oil, and they have fallen into poor repair in many areas.
Flammability of Bakken crude has a lower flash point than other petroleum shipments and burns with explosive intensity when ignited.
DOT–111 tank cars have a record of punctures and explosions in derailments.
Overworked train crews, some consisting of a single person, made mistakes. This could have been prevented with different crew configurations.
Determining Responsibility for the Damages Caused by Rail Accidents
With respect to property damage and bodily injury caused by derailments, railways should be responsible if the accidents are the result of their negligence. Failure of a railway to maintain tracks or equipment, operating at excessive speeds, employing unqualified employees, and ignoring obviously dangerous situations are all potential sources of negligence for the railroads transporting crude oil. Unfortunately, not all parties making claims against railroads have received satisfactory recoveries for damages caused by negligent acts of the carriers.
In many cases involving derailments in the United States, the negligence of railroads and the consequences of that negligence have been controlled by provisions of the Federal Railroad Safety Act (FRSA). This act may preempt state laws regarding the negligence of railroads and may alter the remedies available to injured parties. Even where railroads accept responsibility for the consequences of a derailment, their resources may not be adequate to compensate everyone for personal injuries, property damage, and cleanup costs where an oil spill occurs.
For example, when the cleanup contractors hired by the railroad responsible for the Lac-Mégantic disaster were not paid, they walked off the site. The town, with the assistance of the provincial government, agreed to pay them and billed the railroad, which then declared bankruptcy. In the face of enormous damage to ecosystems, the environmental minister of Quebec issued an emergency cleanup order naming 10 entities, including shippers and railways, as responsible parties. This order is being challenged, but it demonstrates that the liability for serious rail accidents may go beyond the railroads themselves, even where their negligence is clearly the primary cause of the incident.
US laws affecting recoveries in the event of a railway incident may also leave claimants without satisfactory recourse in the event of a serious accident. The Oil Pollution Act (OPA) of 1990 applies to oil spills that enter navigable waters. Since railways often run along rivers, liability for the environmental consequences of a derailment may be governed by the OPA.
For other spills, normal tort law would be expected to apply, but state laws may be preempted by the FRSA where it has regulations that apply to the circumstances of a particular event. FRSA regulations are relatively weak and may leave claimants with no effective remedy despite negligent operations by the rail companies.
Where claims for bodily injury, property damage, environmental damage, and cleanup costs do leave claimants uncompensated, other parties involved in rail shipments may be swept into litigation, especially if they are financially able to bear the significant costs that may be involved in serious train incidents. Responsible parties may include shippers, owners of crude oil, refineries where the material is headed, and anyone else that caused or contributed to the loss (i.e., motorists who collide with trains, third parties that are involved in track or railcar maintenance, engineers who set switches in the wrong positions, etc.).
Insurance Coverages for the Consequences of Derailments
Another factor that may impact the recoveries of injured parties when a train goes off the tracks is the financial viability of potentially responsible parties. For smaller railroads and other responsible parties, the ability to pay for liability claims is often a function of the amount of liability insurance they maintain. Applicable coverages may include the following.
Physical damage insurance for damage to the railroad companies' locomotives and rolling stock
Cargo insurance for losses involving the crude oil or other commodities being transported
Broad forms of general liability insurance maintained by railroads that pay for bodily injury, property damage, environmental damage, and even cleanup costs for spilled contaminants
More conventional commercial general liability and excess liability insurance maintained by other parties that pay for bodily injury and property damage but often exclude costs associated with claims for environmental damage and cleanup
Environmental insurance that pays for bodily injury, property damage, environmental damage, and cleanup costs associated with a release of pollutants from an insured entity's operations or insured facility
If these types of insurance are available, the amounts recovered by claimants will depend on the applicability of the policies to the specific claims and the limits available for the various categories of losses that may occur. In some cases, the limits of liability available will be inadequate to address the financial consequences of a serious incident.
Since there are no specific limits of liability required to operate railroads, small systems may have limits of $10 million or less for all claims arising out of their operations. Larger railroads may have limits of $1 billion or more on primary and excess liability insurance policies. Other parties that may be found legally liable for losses may have limits that range from $1 million to as much as $1 billion, depending on their size and risk management philosophies.
When it declared bankruptcy after the Lac-Mégantic disaster, the Montreal, Maine & Atlantic Railroad showed $25 million of liability insurance as an asset. This is a fraction of the costs that will be associated with bodily injury, property damage, environmental damage, and cleanup of spilled crude oil that resulted from the derailment of its crude oil unit train. If recoveries are sought from other responsible parties involved in the incident, it may take years of litigation to win judgments, and then limits available may fall short of what is required to pay for all losses.
These recent derailment incidents involving shipments of crude oil have caught the attention of the media and are now raising issues with respect to the safety of the people who live along railways where unit trains carrying hazardous petroleum travel. Natural resources, including drinking water supplies, may also be impacted. Since these routes are not all in rural areas, the chance of a more serious disaster is clearly a concern to people in larger cities where crude shipments are routed to refineries and port facilities.
It is important for all parties involved in these shipments to look to their risk management and insurance programs to make certain they are protected from liability to the maximum extent possible if they are deemed responsible for the costs of damages or cleanups when an oil spill occurs.
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1 The information contained in this article is furnished as a matter of information for your convenience. It only summarizes the certain statutes, regulations, and policy wordings; is not intended to reflect all the terms and conditions of same; and is not intended to provide individualized business or legal advice. The information contained herein was compiled from sources that Aon considers reliable; however, Aon does not warrant the accuracy or completeness of any information herein. Should you have any questions regarding how the subject matter of this article may impact you, please contact your appropriate legal or business advisers.