Oil train derailments—and the catastrophic fires that often
result—are distressingly common features of contemporary North American
life. No fewer than 10 crude oil-bearing trains have derailed and exploded
since the summer of 2013. The risks to life and limb are plain enough.
Less understood is the risk that these oil trains pose to taxpayers,
governments, and public budgets.
No railroad in North America carries anywhere close to a level of
insurance proportional to the financial risks of hauling oil. It’s a
problem that is most pronounced with the small and regional railroads
that often transport oil on the last leg of its journey from well to
terminal. And it’s a problem that is acute in the Pacific Northwest,
where a radically under-insured company called Genesee & Wyoming (G&W) aspires to enlarge its already significant role in crude oil movements.
G&W’s huge insurance gap poses a direct financial risk to taxpayers.
G&W’s Portland & Western line is permitted to haul 12 trains
worth of oil per week through Columbia County, Oregon, to a terminal on
the Columbia River near Clatskanie. Plus, if Washington regulators
approve three proposed oil terminals in Hoquiam, Washington, the firm’s
Puget Sound & Pacific line could haul roughly 17 trains weekly
through Grays Harbor County to the port.
Yet G&W is severely under-insured against the threat of oil train
derailments and fires. Officials estimate that the total cost for
rebuilding and cleaning up Lac-Mégantic, Quebec—a small town of only
about 6,000 residents that was hit by a major oil train fire in 2013—is a
staggering $3 billion over the next decade.
G&W carries at most $500 million in liability insurance to cover
its entire suite of railroad holdings—of which the two Northwest lines
comprise only a small fraction. In fact, even liquidating the firm’s total net worth of $2.1 billion in bankruptcy to pay for damages might not be sufficient to cover the cost of a mishap.
G&W’s huge insurance gap therefore poses a direct financial risk to taxpayers—especially those in Northwest communities such as Grays Harbor County, Washington, and Columbia County, Oregon.
Oil train derailment and river contamination, Aliceville, AL (2). Photo by John L. Wathen, used with permission.
Adding insult to injury, G&W refuses to disclose its insurance
coverage levels to the public or government regulators. Decision-makers
therefore have no way to evaluate the financial risks posed by the
construction and operation of oil train facilities, such as the three
proposed for the Port of Grays Harbor.
Not only are insurance levels wildly inadequate to the risks, but the
industry obstructs public understanding of even basic information about
railway liability exposure.
In the course of studying railroad insurance shortfalls, Sightline
Institute contacted G&W’s corporate offices directly. A
representative of the firm told us that they would not disclose
information about their insurance coverage for major catastrophes.
Sightline also attempted to contact the Environmental Manager of the
Columbia Pacific Bio-Refinery in Columbia County, Oregon, a facility
that currently receives crude-by-rail from G&W, but we received no
response to multiple emails and phone calls.
We examined published documents about the railroad. As a publicly
traded company, G&W must disclose certain kinds of financial
information to the US Securities and Exchange Commission (SEC).
Sightline reviewed G&W’s SEC filings and other legally required disclosures,
but we were unable to identify to identify any relevant disclosures
that would shed light on railroad liability insurance levels.2
Sightline reviewed dozens of publicly-available materials, including
regulatory proceedings, testimony to Congress and federal agencies,
government research reports, legal briefs, media accounts, and more. We
conclude that large “class 1” railroads like BNSF—North America’s
dominant rail hauler of crude oil—may have somewhere in the range of $1
to $1.5 billion in insurance coverage while smaller railroads like
G&W almost certainly have much less. For example, a 2009 report from
the US Department of Transportation that examines insurance, security,
and safety costs for railroads quotes representatives of the American
Short Line and Regional Railroad Association saying, “Class II and III
railroads… only maintain $10 to $100 million in coverage.”3
G&W may have more coverage than most small railroads: as much as $500 million worth, according to one industry media account
in 2013. Yet Sightline was unable to corroborate this figure, and based
on our research, we believe it likely represents an upper-end estimate
of the firm’s coverage.
The acute lack of information is a serious problem for an industry
hauling explosive crude oil through cities and towns. It means that
communities are blind to financial risks that could bankrupt them, risks
that are foisted upon them by railroads.
In its 2014 Draft Regulatory Impact Assessment,
a study prompted by the spate of alarming oil train explosions, federal
regulators characterized insurance limitations as a “market failure.”
Yet more than a year later, there are still no plans to correct it.
Railroad expert Fred Millar contributed research and analysis to this article.
1 Sightline’s estimates of railroad accident costs may
be far too low. In 2013, Union Pacific petitioned the Surface
Transportation Board for a declaratory order requiring shippers of
Toxic-by-Inhalation-Hazardous material to indemnify UP against all
liabilities, other than those resulting from UP’s negligence or fault.
The petition was eventually rejected, but Assistant Vice President for
Finance and Insurance Warren B. Beach gave testimony regarding the
difficulty railroads face in insuring hazardous cargo: “UP had
commercial liability insurance totaling $1 billion as of 2008,” and that
although typical maximums are around $1 billion, “in 2012 UP was able
to purchase $1.2 billion of commercial liability insurance… the
potential loss from a single terrorist attack involving release of
hazardous materials in a heavily populated area can reach hundreds of
billions of dollars. Thus, even if UP could double or triple its
coverage, it would not come close to covering the potential loss for a
truly catastrophic event.”
2 The nearest information pertains to self-insured
retentions and casualties and insurance coverage, an unrelated (and much
smaller) type of policy that railway companies carry. According to
G&W’s SEC filings in 2014, the firm’s liability policies had
self-insured retentions of up to $2.5 million per occurrence. (A
self-insured retention is an amount that must be paid by the insured
party to the claimant before the insurance coverage begins. Since it is
paid to the claimant, it differs slightly from a deductible.) We also
know that G&W paid $41.5 million in 2013 and $38.5 million in 2013
for Casualties and Insurance coverage. Unfortunately, insurance experts
like Daniel Roddy at HMBD Insurance Services assured us that there is no
way of estimating total insurance coverage based on monthly payments or
self-insured retentions without much more information and the help of
3 The report states that “while $1 billion is more
than sufficient to cover losses from ‘routine’ [Toxic Inhalation
Related]-related incidents, it is well short of the $5 to $6 billion
that Class I railroads estimate would be necessary in a ‘nightmare
scenario.” Estimated costs from a catastrophic crude oil train
derailment in an urban area are similar. Representatives from ASLRRA
also explained that “small railroads cannot afford premiums for
‘meaningful’ amounts of insurance coverage… Class II railroads would
likely be content with $200 million in coverage and Class III carriers
would likely be satisfied with $100 million in coverage…While there is
sufficient capacity within the rail insurance market to satisfy this
demand, many short line haulers simply do not have the cash-flow to pay
for such insurance coverage.”
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