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Ohio derailment puts focus on railroad insurance, risk management

As investigations continue into the cause of the Feb. 3 derailment and chemical spill involving a freight train carrying hazardous materials operated by Norfolk Southern Corp. in East Palestine, Ohio, the incident is likely to trigger claims on a growing network of property and liability insurance policies. politics, say experts.

The incident will have significant risk management and safety implications, and railroads and related companies can expect greater scrutiny from insurers in the coming months, they said.

Several lawsuits seeking class-action lawsuits have already been filed against the Atlanta-based railroad holding company and unit Norfolk Southern Railway Co. on behalf of businesses and residents, alleging negligence and seeking millions of dollars in damages.

A class-action lawsuit filed Friday seeks to compel Norfolk Southern to establish new testing and cleanup protocols and to create a fund for medical monitoring, in addition to punitive damages to be paid to affected businesses and residents within a 30-mile radius of the derailment. Claims against directors and officers could also follow, multiple sources said.

Thirty-eight railroad cars derailed and 1

2 more were damaged by fire in the derailment. Eleven of the cars that derailed had hazardous substances, including 115,580 liters of vinyl chloride. Authorities later conducted a controlled burn of hazardous material out of concern that rising temperatures inside one of the cars would cause an explosion.

The US Environmental Protection Agency last week ordered Norfolk Southern to carry out and pay for all cleanup measures related to the derailment or face a fine of triple the costs.

Municipal drinking water tests continue to show water quality problems, and there is no indication that the air is unsafe, according to the EPA.

Insurance impact

The insured loss will most likely exceed $50 million and could exceed $100 million, said Robert Hartwig, clinical associate professor of economics and director, Risk and Uncertainty Management Center, at the University of South Carolina’s Darla Moore School of Business.

Property damage will be significant, but the potential environmental loss is “harder to get a handle on,” Hartwig said.

Norfolk Southern will likely penetrate its insurance and exceed its self-insured retention, but it will take time for litigation against the company to be consolidated by the courts and for cases to proceed, he said.

The accident and its aftermath have been heavily politicized, which will drive up settlement costs, Hartwig said. Congressional hearings are likely, according to multiple news reports.

Norfolk Southern has two separate policies that cover third party liability and first party property loss. Coverage under each tower provides excess of two separate $75 million self-insured retentions.

“Our liability policy covers losses in excess of $75 million and up to $800 million, or up to $1.1 billion for specific types of pollution releases. It is intended to protect against legal liability for bodily injury and property damage to third parties,” said Norfolk Southern Chief Financial Officer Mark George during a presentation at the Barclays Industry Select Conference in Miami on February 22, which was published on the railway company’s website.

Its property policy is intended to cover loss or damage to property owned by the company or in its custody or control as well as certain types of lost income and extra expenses. It covers about 82% of covered losses above the $75 million anchor point up to $275 million, he said.

“As you would expect with any discussion of insurance, there are many qualifiers, including our insurers’ reservation of their right to further investigate and dispute coverage, express limitations and sublimits of coverage, and various insurance exclusions, including those for government fines and penalties,” Mr. George said.

Large transportation companies tend to be self-funded and are used to dealing with environmental remediation as part of their day-to-day operations, said Tim Donnellon, Charleston, South Carolina-based senior broker, environment, with Burns & Wilcox Ltd.

Over time, Norfolk Southern has paid out hundreds of millions of dollars in damages including environmental or cleanup costs, Mr. Donnellon.

“This is not a new thing for them,” based on the company’s 10K financial statements, he said.

Because of the bodily injury, property damage, contamination and pollution conditions surrounding the loss, many of the claims will likely fall on pollution coverage, said Jim Hamilton, Philadelphia-based environmental practice group leader and senior broker at CRC Insurance Services LLC.

“All general liability policies contain a pollution exclusion of one form or another, so given the emission, release, escape and migration of pollutants from the railcars, it will fall squarely on pollution liability,” Hamilton said.

General liability, whether it’s railroad general liability or commercial general liability, may or may not respond, he said.

Other companies, such as the owners, lessees and lessees of the rail cars and manufacturers of the freight and hazardous materials being transported, could also be on the hook for damages related to the event, sources said.

If the railroad were to blow through its insurance limits, there’s the potential for the manufacturers of the chemicals to be sued, said Daniel Drennen, national environmental manager at Amwins Group Inc. in Atlanta.

“Whoever made the rail car could have a product contamination claim if for some reason a lawyer made a case that the valve wasn’t working properly,” Drennan said.

The insurance market for rail risks tends to be limited because of their risky nature and the severity of derailments, he said.

Coverage issues

The cause of the derailment is still under investigation, but in a preliminary report issued last week, the National Transportation Safety Board pointed to an overheated wheel bearing, among other factors.

There are many different variables that come into play in rail accidents and that play into insurance coverage, says Rhonda Orin, Washington-based managing partner at Anderson Kill PC

“There are trains and there are tracks. An incident can come from the train, the track, and from a third-party problem like someone on the track or something that’s on the track that’s not supposed to be there, Orin says.

Who owns the track, who owns the train and who was responsible for the object that caused something to happen are other variables, she said.

There will be “significant questions” about whether insurance coverage will respond based on initial reports of causation and whether a contamination exclusion will preclude coverage, said Michael Miguel, a Los Angeles-based principal at McKool Smith.

As with other catastrophic events, insurance companies that pay out for first-party claims from local businesses and homeowners will likely step in for Norfolk Southern’s insurers, Mr. Miguel.

“The potential liabilities will likely come in waves,” and they won’t manifest in the next few weeks or next month, Mr. Miguel.

In a Feb. 23 briefing, NTSB Chair Jennifer Homendy said the derailment was “100% preventable.”

“We call things an accident. It’s not an accident. Every single incident that we investigate is preventable,” Homendy said.

The NTSB had not identified any operational problems with the wayside detectors — ground-based devices that can detect rising temperatures or other problems with streetcar parts — or track failures, but it remains under investigation.

The NTSB will hold an investigative hearing in East Palestine in the spring, she said.

Risk management and security

In the wake of the derailment, safety issues such as regulations surrounding the transport of hazardous materials and staffing levels on trains will come under greater scrutiny, experts said.

Fred Millar, an independent transportation consultant based in Alexandria, Virginia, said the incident raises questions about trains carrying dangerous goods through major cities.

“What if this had happened in Chicago or Toronto, or Pittsburgh or St. Louis?” said mr. Miller.

Railroads have successfully resisted efforts to limit train lengths, he said. The Federal Railroad Administration, the agency responsible for regulating railroad industry safety, does not set limits on train lengths, according to news reports.

The derailed train, which was traveling from Madison, Illinois, to Conway, Pennsylvania, had 149 railcars and three crews.

The incident also raises questions about Precision Scheduled Railroading, a cost-cutting initiative adopted by nearly every Class 1 railroad that has led to longer trains, he said.

“Railroads play a high-risk game and sometimes they lose, and they have to pay out big settlements, but their insurers have to think about whether they’re collecting enough premiums to make it a reasonable proposition,” Millar said.

About 99.9% of all hazardous material shipments reach their destination safely without a release caused by a train accident, according to the Washington-based Association of American Railroads.

In 2013, a train carrying more than 70 tank cars of Bakken crude derailed and exploded, destroying the Quebec town of Lac Megantic and leaving 47 dead. That disaster led to new guidelines for tankers, among other things.

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