AIG Boosts Railroad Excess Liability Coverage to $1 Billion

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American International Group Inc., the largest commercial insurer in the U.S. and Canada, introduced a policy to help railroads handle losses from catastrophic accidents as more crude oil is shipped by trains.

The insurer is offering $1 billion per occurrence of coverage to take effect after a railroad has already incurred $1.5 billion of costs in an accident such as a derailment, said Russ Johnston, who leads the New York-based insurer’s casualty operation in the Americas. The biggest railroads typically buy about $1 billion of coverage now and there’s demand for more, Johnston said.

The coverage, being offered to Class 1 railroads in the U.S. and Canada, is provided by Lexington Insurance Co. and other affiliated AIG companies. Lexington is the largest domestic excess and surplus lines carrier in the U.S.

The policy would pay for property losses and bodily damage to third parties, a risk that’s mounting as railroads ship more hazardous materials. The amount of oil hauled by trains in the U.S. rose more than 40-fold to 407,761 carloads in 2013 from five years earlier, the Association of American Railroads said.

“When we look at the increased use of rail for a number of different commodities over the last few years and into the future, our view is that there’s an unmet need,” Johnston said yesterday by phone. “This is an entirely new amount of capacity being delivered.”

According to AIG, this is is one of the largest capacities offered to the rail industry by a single insurer. Railroads previously had to obtain a similar amount of insurance in pieces from multiple firms. AIG participated in those groups and typically offered a maximum of about $100 million in coverage, Johnston said.

A derailment last year in Lac-Megantic, Quebec, caused an explosion that killed 47 people and incinerated the town’s center. Montreal, Maine & Atlantic Railway Ltd. filed for bankruptcy last year as a result of the disaster.

President Barack Obama’s administration proposed in July that thousands of older tank cars should be idled within two years and speed limits should be reduced. The government is set to require improved braking systems and thicker tanker walls.

Berkshire Hathaway Inc.’s BNSF Railway has committed to buying oil tank cars with improved safety standards, such as thicker walls. BNSF is one of the seven largest U.S. and Canadian freight railroads, a group that also includes operations by CSX Corp. and Canadian Pacific Railway Ltd.

Insurance Journal contributed to this report.

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