Rail Risk

Exposures in the rail industry can lead to catastrophic losses in the form of pollution and passenger injury. Additionally, these losses can have a direct impact on a client’s available capacity and renewal pricing, even if the client has not experienced a loss. This is because the insurance market is limited.

“A catastrophic loss suffered by one railroad may impact the others, since they are for the most part insured by the same carriers,” says Evan Garner, vice president of Marsh Canada’s Rail Practice. “As such, renewal pricing and capacity can be dependent on the record of the rail industry as a whole.”

According to Garner, major rail liabilities include pollution from derailments–specifically toxic inhalation hazard materials, third party property damage and bodily injury from derailments, and level crossing accidents.

“Additionally, third party lawsuits alleging property damage and/or bodily injury or death have been a notable concern for rail operators,” he says. “Other concerns include flooding and damage to rail infrastructure (including tracks and bridges), along with collisions and overturning of railroad vehicles.”

Because large rail carriers operate throughout North America, in the US they must purchase workers’ compensation coverage for US employees. In Canada, the government handles this exposure, but in the United States it is a separate type of insurance.

Michael Wills, president and CEO of Ironshore Canada, says the nature of some of these exposures often leads to high loss situations. There is no such thing as a small rail loss and claims from $10 to $30 million are quite probable, he says. For example, the industry has seen a crossing accident loss in excess of $50 million, and another $134 million loss from a fuel spill.

“Every time you have a large rail incident, it hits the press and it’s pretty big,” he says.

Liability Limits

The Canadian rail insurance market has generally remained stable in terms of participants, according to Garner. However, in the last two years there has been some new capacity. Pricing generally reflects each client’s specific exposure profile and individual loss record.

“The rail casualty policy is a basic liability policy, amended to include certain coverage required by the industry,” says Garner. “These include hazardous material spillage, derailment, and natural catastrophe coverage.”

According to Wills, the amount of liability insurance a freight carrier is expected to carry depends on the type of operation (e.g. passenger versus freight). Also, liability for bodily injury or property damage may depend on additional items such as contractual arrangements or tort law. Liability limits can vary from $10 million for short line railroads up to over $1 billion for Class 1 operations.

Also, there has not been much movement in limits, but with inflation and loss costs increasing there is an expectation for carriers to increase policy limits, he says.

Brokers working in this market must have an in-depth understanding of not only the industry but also the client’s operations–they should know what railroad class their client belongs to. For example, US Class 1 Railroads are line haul freight railroads with operating revenue in 2009 of $378.8 million or more, according to the US Surface Transportation Board.

And Garner says that generally, most of the insurers (with a few exceptions) that are willing to insure the Class 1 railroads are already participating in their respective insurance programs.

For Marsh, the company’s global reach, transactional and consulting skills and commitment to delivering the best results possible for their clients are all key contributors to its position as a leader in rail, according to Garner.

Meanwhile, Wills says Ironshore’s success in the market is due to its risk appetite and expertise throughout North America. The company recently launched a specialty casualty division to handle complex corporate risks, including rail liability.

“We’ve built a best practice around it with a team in the US,” he says.

More on transportation: For our guide to trucking, click here. For our guide to marine, click here.

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Copyright 2011 Rogers Publishing Ltd. This article first appeared in the April 2011 edition of Canadian Insurance Top Broker magazine.

This story was originally published by Canadian Insurance Top Broker.