This article is the second in a three-part series that began with “Off the Tracks: A Data-Driven Analysis of Crude-by-Rail Liability Factors, Exposure, and Potential Solutions,” which was published on December 19, 2015.

In Part One of this series, we analyzed factors that influence liability for crude-by-rail (CBR) incidents. But knowing the liability factors leads to a second question: What is my monetary exposure?

Rail transportation has a strong operational safety record. And the CBR industry—in response to a meteoric rise in crude oil traffic—has leveraged rail’s proven track record to refine risk-management techniques in response to past incidents. Should a CBR incident occur, however, the analysis below provides a benchmark to evaluate potential monetary exposure.

Unit-train scale CBR incidents are a new phenomenon, and there is not yet a statistically meaningful dataset of regulatory fines, settlements, and jury verdicts. For that reason, we have expanded our inquiry to include the consequences of not only CBR incidents, but also those involving other railborne hazardous materials as well as passenger train derailments involving injuries and fatalities. This expanded inquiry better illustrates the extent of potential liability associated with CBR incidents.

CBR incidents could lead to two general categories of monetary exposure: (1) regulatory enforcement (via fines, penalties, capital expenditures, and cleanup costs), and (2) litigation (via trial verdicts and settlements). To give a broad sense of potential liability parameters, Exhibit 1 presents data we have compiled for “minimum total liability,” which accounts for costs imposed both by regulatory penalties and by litigation. “True” numbers are likely higher due to settlements and legal bills that are not consistently disclosed, as well as cleanup and remediation costs.

Exhibit 1: Minimum Total Liability Data for Selected Tank Car Hazmat Incidents, Passenger Derailments, and a Large Urban Explosion and Fire, Million USD

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Source: NTSB, media reports, authors’ analysis

The highest-liability rail derailments in the United States over the past 28 years have involved the “two Fs”: fatalities and fire. When an incident reaches regulatory enforcement or litigation, the type of commodity released, the population density of the incident zone, and the number of injuries and fatalities will have the greatest impact on the CBR operator’s potential monetary exposure.

The bottom line is this: a major incident is a “bet the company” event, with liability implications that ripple through the entire supply chain. The nearly $350 million settlement and the subsequent bankruptcy of the Montreal, Maine & Atlantic Railway after the Lac-Mégantic incident provides a ready example.

REGULATORY MONETARY EXPOSURE

Civil Penalties. The Hazardous Materials Transportation Act (HMTA) authorizes civil penalties for violations of the HMTA or the corresponding Hazardous Materials Regulations (HMRs). For “knowing”[1] violations of the HMTA or HMRs, the Federal Railroad Administration (FRA) or the Pipeline and Hazardous Materials Safety Administration (PHMSA) can levy fines up to $75,000 per violation per day. If the violation involves “death, serious illness, or severe injury to any person or substantial destruction of property,” the potential civil penalty increases to $175,000 per violation per day.[2]

The regulators generally save the maximum amount of civil penalties—if used at all—for the most significant alleged violations. In practice, companies work hard to comply with the HMRs, and the agencies recognize such efforts through decreased settlement amounts for alleged violations.[3] From 2009 through2015, the FRA addressed 14,487 recommended HMR violations that resulted in $28,135,313 of civil penalties—an average of $1,942 per HMR violation.

Exhibit 2: Annual Total FRA Civil Penalties for HMR Violations Between 2009 and 2015, Million USD

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Source: FRA

Exhibit 3: Average FRA Civil Penalties 2009-2015

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Source: FRA

In comparison with the potential impact of litigation-driven costs, judgments, and settlements, civil penalties may seem insignificant. Yet civil penalties can compound an operator’s monetary exposure because during litigation plaintiffs can introduce them as evidence to support common-law claims such as negligence. As such, ensuring compliance with the HMRs can help mitigate regulatory and litigation complications that could drive adverse judgments and higher settlement amounts.

Environmental Mitigation. Through various federal and state statutory and regulatory schemes, CBR players also could face no-fault liability for environmental mitigation costs. From 2007 through February 22, 2016, there have been 109 railborne hazardous material incidents—not limited to crude oil—that have resulted in $92,713,170 of environmental mitigation[4]—an average of $850,580 per incident.[5]

Exhibit 4: Yearly Totals of Environmental Mitigation for Railborne Hazardous Material Incidents 2007-2016, Million USD

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Source: PHMSA

Exhibit 5: Average Environmental Mitigation per Railborne Hazardous Material Incident 2007-2016

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Source: FRA

In addition to general environmental cleanup costs, a CBR incident near a waterway or municipal sewer system also could increase monetary exposure. From 2007 through today, there have been 42 railborne incidents in which the hazardous material entered a waterway or sewer that have resulted in $73,272,295 in damage—an average of $1,744,578 per waterway or sewer incident.

Exhibit 6: Yearly Totals of Waterway or Sewer Damage for Railborne Hazardous Materials Incidents 2007-2016

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Source: PHMSA

Exhibit 7: Average Damage per Waterway or Sewer Contamination Incident 2007-2016

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Source: FRA

Fire. Environmental cleanup costs rise sharply for fires. From 2007 through February 22, 2016, there have been 42 incidents in which the railborne hazardous material ignited, resulting in $89,777,794 of damage—an average of $2,137,567 per hazardous material fire incident.

Exhibit 8: Damage Caused by Railborne Hazardous Materials Fire Incidents 2007-2016, Million USD

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Source: PHMSA

Exhibit 9: Average Fire Damage per Hazardous Material Ignition Incident 2007-2016

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Source: PHMSA

Explosions. Explosions—although rare—can potentially double the monetary exposure of a fire incident. From 2007 through February 22, 2016, there have been nine incidents in which railborne hazardous materials exploded, resulting in $49,711,695 in damage. Such a small number of incidents is a testament to the industry’s safety record and makes any average a poor predictive indicator, but PHMSA data reflect that an average explosion costs the operator $5,523,521 in damage.

LITIGATION MONETARY EXPOSURE

While regulatory actions can lead to painful fines, litigation can create significant monetary risks for CBR operators. The highest-end litigation exposure arises in cases involving fires and fatalities.

Fatalities. The recently approved settlement of $446 million Canadian dollars (approximately $350 million USD) for Lac Mégantic victims provides a sense of how much liability a similar incident in the United States could create.[6] Other incidents causing significant numbers of fatalities also buttress the Lac Mégantic settlement figure, suggesting that liabilities of at least $200 million are likely if an oil release involves multiple fatalities and significant secondary damage to structures.

In January 2005, an improperly lined switch in Graniteville, South Carolina, shunted a moving freight train onto a siding where it collided with a parked train, derailed, and leaked a substantial quantity of chlorine gas. Nine people died, and more than 550 sought hospital treatment for chlorine inhalation. The rail carrier faced total liabilities of at least $182 million from the incident—a total that does not include confidential settlements that may have pushed the final toll higher.

On the passenger rail side, a September 2008 collision between a commuter train and a freight train near Chatsworth, California, killed 25 people and injured more than 100, according to the NTSB. The incident created damages and settlement liability of at least $200 million. Of course, federal law (49 U.S.C. § 28103) caps liability for passenger rail accidents at $200 million.

A Major Fire or Release in a Dense Urban Area. Railcar chemical fires with no injuries or fatalities can still result in significant liabilities. In 1987, a railcar containing butadiene—a toxic, carcinogenic, and highly flammable industrial precursor—leaked and subsequently ignited in a New Orleans, Louisiana, railyard. The fire burned for 36 hours and forced the evacuation of thousands of nearby residents.

Plaintiffs brought a class-action suit, and the jury returned a verdict of $2.5 billion in compensatory and punitive damages against the rail operator, which the trial court reduced to $850 million. The $850 million punitive judgment was upheld on appeal, with the Louisiana Fourth Circuit Court of Appeals suggesting that it might have upheld even higher punitive damages: “Indeed, the potential harm in this case could cause a reasonable trier of fact to award, and a reasonable court to approve, a sum more than $850 million.”[7] Similarly, a freight train that derailed and caught fire near Eunice, Louisiana, in 2000 created damages and settlement liabilities of at least $100 million, according to NTSB data.

Worst-Case Scenario: Derailment, Fire, and Fatalities in a Major Urban Area. From a liability perspective, this scenario is the one that keeps executives up at night. Such an incident would almost certainly exceed the limited amount of liability insurance coverage currently available to Class I railroads, not to mention short line and terminal operators. In a January 2014 Wall Street Journal analysis, a prominent insurance executive noted that at that point in time, roughly $1.5 billion in liability insurance was available for a Class I North American railroad; the executive further opined that a serious urban accident would be worth “multiples of that.”[8] There are now “excess” liability policies available to railroads from AIG, which would cover an additional $1 billion once the railroad incurred $1.5 billion in liabilities from a catastrophic incident.[9]

Yet even coverage in the $2.5 billion range would likely be insufficient for a derailment and fire in a major city. For a comparative example, consider that the San Bruno gas pipeline explosion near San Francisco in 2010 has cost the pipeline owner at least $2.8 billion in fines, settlements, and other costs, according to the company’s financial reports. The San Bruno explosion destroyed 38 homes, damaged another 70, and caused eight deaths and 66 injuries, according to the NTSB. A derailment and fire closer to an urban core would exact a much higher toll in terms of property damage and, if it occurred during a workday or other times of high occupancy, could also cause much higher numbers of casualties.

Conclusion

CBR operations are overwhelmingly executed to high safety standards, and serious accidents are very rare relative to the large quantities of oil now moved by rail. Nonetheless, the monetary liability that operators, shippers, and railroads may face when things go wrong are significant. Settlements in the hundreds of millions of dollars—like in Lac Mégantic, Quebec, and Graniteville, South Carolina, for example—strongly suggest that a major derailment or other problem with a unit train hauling crude oil near populated areas could pose material financial risks to the company’s health and, in some cases, could become a “bet the company” legal event.

Our third article in this series will pinpoint specific strategies that CBR operators can take to help anticipate and mitigate the highest-impact CBR liability factors.

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