Growing rail freight transportation industry meets growing risks

Railroads, lenders, investors, manufacturers, contractors and others face environmental liability exposures

The demand for freight transportation by rail has grown steadily in recent years after a prolonged period of excess capacity. The increased demand was fueled by a generally growing U.S. economy, expanding imports from Asia, and strains on roadway and waterway infrastructure as well as other factors.

Today, the nation’s railroads support approximately 47 percent of the inter-city freight traffic as measured in ton-miles by the Department of Transportation’s Bureau of Transportation Statistics. Rail freight transport is particularly important to the coal, chemical, and food and kindred goods industries. For some bulk commodities, rail is clearly the most efficient means of shipment. Moreover freight rail traffic is projected to continue this increase as the economy grows and policy considerations such as fuel efficiency, safety, and energy security point to the benefits of a thriving rail system.

For example, by 2020 coal and chemical traffic are projected to grow by 28.5 percent and 75.5 percent respectively, according to the “Freight Analysis Framework” by Federal Highway Administration, published in October 2002.

To accommodate this volume, there are many hands involved in getting raw materials, intermediary products, and finished goods to their final destinations. Environmental considerations are surely playing a role in expanding demand for rail transport, but this comes at a cost.

Railway to exposure
What can happen along the way resulting in an environmental exposure?

Take chlorine for example. Although chlorine is best known as a disinfectant for drinking water, it also is used in the manufacturing of 93 percent of all pharmaceuticals, and is used in many other products and industries. In fact, chlorine products, including their derivatives, contribute to 45 percent of the nation’s Gross Domestic Product. Moreover 85 percent of the distance chlorine products travel to their end users is by rail tanker car, according to The Chlorine Institute.

One loss scenario would be derailment or collision resulting in a chlorine release.

The Federal Railroad Safety Administration Office of Safety Analysis reports there were 2,127 train derailments of all types and 196 rail collisions of all types during 2006. Emergency responders and other professionals would contain the release and conduct any necessary cleanup. Depending on the incident location and timing, other rail traffic may be interrupted, roads may be closed, an evacuation may be ordered, and members of the general public may be exposed to the released chemical.

Rail cars not in transport also pose potential liabilities. Contents of a reactive nature can weaken the rail tank hull resulting in a breach. Materials not typically considered reactive can also be leaked if the tank car integrity is not fully in tact. There could be spills during loading and unloading. And cleaning rail cars requiring a “wash down” between uses may result in an overspray exposure or problems could result from the collection and disposal of the wastewater.

Who faces allegations of liability?
The answer includes the tank car owner and lessee if the car is leased, parties conducting railroad operations, loading and unloading operations, track maintenance and tank car maintenance, the manufacturer, and even municipal-related entities involved in the response. The liability faced may be direct or contingent. In some cases, service providers in the chain may require information from the owner shipping hazardous cargo.

Who incurs costs and suffers damages?
Here the possibilities abound. The chlorine purchaser lost its shipment and may face production obstacles. Members of the general public may have been exposed resulting in bodily injury, medical costs, lost wages and pain and suffering. Business may suffer economic loss due to an evacuation, road closures and interrupted rail traffic.

Moreover, lenders and investors to any party facing potential liability or potentially incurring costs and damages may be wary of the impact business interruption or potential liability can have on the stability of their investment or loan.

Liability coverages for the rail industry may not fully address these fact patterns, either by excluding the loss scenario altogether or by limiting the coverage provided. Many include a “total” pollution exclusion that would preclude all coverage. Some require an “accident” such as derailment, overturning or collision to trigger any environmental coverage that may be provided. Some also provide additional environmental coverage where an “Act of God,” vandalism, or loading or unloading by the insured is involved, but only if rail equipment is damaged by the incident. And when coverage is provided, it may only be for potential third-party claims for bodily injury or property damage but not for potential cleanup costs. Coverage may have sub-limits, other restrictions or simply be exhausted by the magnitude of a loss.

When applied to the fact patterns above, questions arise about the protections afforded by standard liability coverages. There may not be coverage for releases during loading and unloading if the tank car is not first damaged in some manner, or where the loading or unloading is performed by someone other than the insured. However, more importantly from a cost standpoint, there may not be coverage for bodily injury and property damage claims brought by third-party members of the general public and businesses.

The unique facts of each incident and the particular coverages purchased would prevail in determining any given outcome. Certainly specialized insurers may offer products that can help address many of these scenarios. But railroads, rail car lessors, lenders, investors, manufacturers, end-users, municipalities and contractors may all face liability or incur losses if an event were to occur. Whatever the scenario and whatever your connection to the rail industry, the increased use of rail transport suggests these issues should be closely examined by all involved.

Helen Eichmann is vice president and William McElroy is senior vice president for Liberty International Underwriters Environmental Liability.