2013 Was a Record Year For Oil-Train Accidents, and Insurers Are Wary

Spurred by the shale drilling rush that has progressed at breakneck speed, the railroad industry has moved fast to help drillers transport petroleum and its byproducts to consumers. Last year, trains hauled over 400,000 carloads of crude oil, up from just 9,500 carloads in 2008, according to railroad industry estimates.  Each carload represents roughly 30,000 gallons of flammable liquids, and some trains haul over 100 oil cars at a time.

But with this fast expansion has come some astounding risks — risks that have insurance companies and underwriters increasingly concerned.

A string of oil train explosions have highlighted the potential for harm. A train hauling 2.9 million gallons of Bakken oil derailed and exploded on November 8 in Aliceville, Alabama, and the oil that leaked but did not burn continues to foul the wetlands in the area.

On December 30th, a train collision in Casselton, North Dakota 20 miles outside of Fargo, prompted a mass evacuation of over half the town’s residents after 18 cars exploded into fireballs visible for miles. 400,000 gallons of oil spilled after that accident, which involved two trains traveling well below local speed limits.

“Those crashes are all on the radar of the insurance industry,” attorney Dean Hansell recently told Law360.

All told, railcar accidents spilled more than 1.15 million gallons of crude oil in 2013, federal data shows, compared with an average of just 22,000 gallons a year from 1975 through 2012 — a fifty-fold spike.

Bakken oil train explosions have mostly been far from populated areas. But around 1AM on July 5, 2013, over 60 oil cars exploded after a runaway train derailed in Lac-Megantic, a Canadian town near the Maine border, leveling dozens of buildings and killing 47 of the town’s roughly 6,000 residents.

The railroad company, Montreal, Maine and Atlantic Railway, went belly up, leaving behind clean-up costs estimated at over $180 million. Canadian regulators discovered the company carried only $25 million in liability insurance. Legal battles over clean-up costs and lawsuits from survivors are expected to take at least a decade to resolve — and for the time being, taxpayers are picking up the tab.

That tragic accident took place in a small town. An explosion in a major city could represent a far larger calamity. But neither oil and gas companies nor railroads carry enough insurance to cover the kind of catastrophe at risk when shipping crude by rail.

"There is not currently enough available coverage in the commercial insurance market anywhere in the world to cover the worst-case scenario," James Beardsley, an executive with Marsh & McLennan Cos.' Marsh Inc. insurance brokerage unit, told the Wall Street Journal in January.

Bakken Crude: A Hazard on the Rails

It’s not just that more oil is moving by train, it’s also that Bakken shale oil seems to be particularly dangerous, according to federal regulators.

On January 2nd, the Pipeline and Hazardous Materials Safety Administration (PHMSA) issued a rare safety alert, saying “recent derailments and resulting fires indicate that the type of crude oil being transported from the Bakken region may be more flammable than traditional heavy crude oil.”

A few weeks later, the National Transportation Safety Board (NTSB) and its Canadian counterpart, the Transportation Safety Board of Canada warned that an oil train accident could result in a “major loss of life” as they called for hazardous material shipping rules to apply to crude oil trains.

“The large-scale shipments of crude oil by rail simply didn’t exist 10 years ago, and our safety regulations need to catch up with this new reality,” said NTSB Chairman Deborah Hersman.

Railroad officials say that they’ve already taken voluntary steps to reduce the danger.  Maximum speeds for trains with oil cars have been reduced, and where possible, trains are routed outside of major cities and highly populated corridors.

But some refineries handling Bakken crude are located directly inside major cities — like the major refinery in Philadelphia, where a train recently derailed over the Schuylkill river, just yards from a major highway underpass.

Every month, railcars carrying five million barrels of Bakken crude roll through the core of Philadelphia, heading to a refinery formerly owned by Sunoco and now run by a company called Philadelphia Energy Solutions, according to local press reports.

Oil trains also pass through New York City, Chicago, the Pacific Northwest and the Gulf Coast.

Insurers Nervous

Over the past few years, many of the risks associated with fracking have drawn increased attention from insurers and insurance underwriters.

Increasingly, insurers are taking steps to insulate themselves against liability when fracking pollutes air and water or leads to accidents.  A standard homeowner’s insurance policy won’t cover harm from fracking pollution, and insurance companies have so far declined to offer special policies that would cover fracking risks.  Nationwide Insurance, for example, announced that its homeowners’ policies would not cover damage from fracking, saying the risks “are too great to ignore.”

When insurance runs out, companies can still be sued for the harm they do — but if they don’t have enough money to cover the claim, the people hurt may be out of luck.

“If the full net worth of the company (in addition to insurance coverage) is insufficient to cover the costs associated with an event, those costs will be borne by those who have suffered property damage or injuries,” the McMillian group, an actuarial consulting firmed wrote in a June 2012 note, explaining that drillers’ use of shell corporations to shield assets made that “a very real possibility.”

Ruinous Liability

Railroads may find themselves in a similar bind.

Only few dozen insurance companies offer liability insurance to railroads, and coverage is often limited to less than $50 million per policy, meaning that the highest level of coverage available, if a company maxes out available policies, is $1.5 billion. Major railroads commonly “self-insure” against accidents over a certain threshold, meaning that a big enough accident could wipe out all of a company’s assets.

So without enough insurance, hauling that crude represents a major gamble.

"A railroad moving hazardous shipments faces exposure to potentially ruinous liability," the Association of American Railroads told the Canadian Transportation Agency. "While incidents involving highly hazardous materials on railroads are exceedingly rare, railroads could be subjected to multi-billion dollar claims solely because of the unusual characteristics of the commodities themselves."

Adequately protecting against oil train explosions would be expensive, raising the costs of delivering oil to consumers.  But if shippers and railroads do not carry insurance, an explosion could bankrupt the companies involved, leaving the people rebuilding in the lurch.

As the Obama administration considered the Keystone XL’s pipeline application, it decided it was unnecessary to take all of the impacts of tar sands extraction into account, reasoning that the oil would find other ways to market. The bitumen, they said, would be shipped by train if it was not pumped through pipelines, so construction would have little impact on how quickly or pervasively tar sands oil was extracted.

“Cross-border pipeline constraints have a limited impact on crude flows and prices,” the State Department report said. “If new east-west and cross-border pipelines were both completely constrained, oil sands crude could reach U.S. and Canadian refineries by rail.”

But the growing concerns from the insurance industry undermine that assumption. Shipping by rail already costs between $2 and $22 per barrel more than shipping by pipeline, and upgrading rail cars, training first responders in case of a catastrophe, and rebuilding aging rail lines will all add enormous additional expenses.

A plan endorsed by the mayors of several major U.S. cities, including Philadelphia and Chicago, calls for fees on train shipments to cover these costs.

The issue "starts to revolve around the dollar sign," Canadian Pacific Railway CEO E. Hunter Harrison told the Wall Street Journal. "Can we do this safer? Yes. But who's going to pay? If you decide this commodity must be moved in the public interest, then I think all of us have to pay."

The question is, are those costs worth paying, especially when renewable energy sources grow more viable every year?

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