Tuesday, June 09, 2015

Liability shouldn’t threaten survival

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Liability shouldn’t threaten survival

Violent clashes often occur at the intersection of liability, ability to pay and the law. They follow train accidents that send victims and railroads to court as adversaries.

Absent a railroad possessing sufficient financial reserves and adequate liability insurance, every catastrophic accident portends financial destruction for the carrier and less than equitable settlements for innocent victims.

Short line Montreal, Maine & Atlantic went bankrupt in 2013 following its fiery Lac-Mégantic runaway tank car disaster that killed 47, injured scores, leveled 40 buildings and contaminated a river with crude oil. Claims exceeded $200 million, but the railroad could afford just $25 million in liability insurance and had only $300,000 in cash reserves. Having shut down, it later was sold at auction for less than $16 million.

A 2008 head-on collision in Chatsworth, Calif.(photo), caused by a commuter train operated by Veolia Transportation under contract to Los Angeles Metrolink, killed 25 and injured more than 130. Claims well exceeded payouts owing to a $200 million liability cap imposed by Congress in 1997 for benefit of state-owned passenger railroads and Amtrak.

A 2005 Norfolk Southern accident that released deadly chlorine gas at Graniteville, S.C., killed nine, injured more than 500, allegedly caused a textile mill to fail and resulted in tens of millions of dollars in claims settled out-of-court. While Class I railroads carry $1.5 billion in liability insurance—said to be the maximum available—their cash reserves are all that stand between an unthinkable calamity and insolvency as privately owned railroads have no liability cap. “Every time we pick up [hazardous materials], we’re placing a bet on the company,” NS CEO Wick Moorman said.

Claims from the May 2015 Amtrak derailment likely will exceed it $200 million liability cap. A self-insurance reserve will pay the first $50 million; and if Amtrak’s $150 million insurance policy can be renewed, its annual premium likely will climb another $5 million to $25 million. Unless Congress increases Amtrak’s subsidy—a difficult sell in that the Republican controlled House voted to slash Amtrak’s current subsidy by some 20%—service reductions will occur or crucial Northeast Corridor infrastructure projects, already billions of dollars short of needed funds, may have to be delayed longer.

As Amtrak was created as a for-profit corporation that can sue and be sued (although it has never earned a profit), it cannot invoke sovereign immunity —a legal concept that “a king can do no wrong”—to shield itself from lawsuits as can governments and their agencies. So Congress provided Amtrak a $200 million liability cap, and extended it to state-owned passenger railroads in response to courts chipping away at the sovereign immunity defense.

Following the Chatsworth accident, and now the Philadelphia Amtrak derailment, some in Congress, out of understandable concern for innocent victims, advocated increasing the liability cap from $200 million to $500 million. They don’t comprehend that the additional liability coverage could be cost prohibitive to subsidy-dependent public transit agencies and even Amtrak. Unknown is if substantially higher liability coverage for passenger operations can be found at any price. Innocent victims are entitled to adequate compensation. But when compensation threatens the financial survival of a passenger or freight railroad, there emerges an equally valid imperative that society not be deprived of rail service, or that innocent rail employees not lose jobs.

Risk cannot be eliminated, but can be mitigated. One alternative in our increasingly litigious society is for Congress to create for public and privately owned railroads a liability cap, minimum insurance requirements attuned to size and budget, and mandated contributions to a captive insurance pool to pay excess claims on a no-fault basis, much as the Price-Anderson Act protects nuclear power facilities. Had the Graniteville disaster occurred in a more populated area, the $1.5 billion in liability insurance—said to be the most available from commercial insurers—would not have begun to cover the claims and NS would have faced liquidation.

Already embedded in the Railway Labor Act is an awareness that railroads are too essential to cease service. Catastrophic accidents fit that awareness.

Frank N. Wilner, Contributing Editor

Frank N. Wilner is author of six books, including, Amtrak: Past, Present, Future; Understanding the Railway Labor Act; and, Railroad Mergers: History, Analysis, Insight. He earned undergraduate and graduate degrees in economics and labor relations from Virginia Tech. He has been assistant vice president, policy, for the Association of American Railroads; a White House appointed chief of staff at the Surface Transportation Board; and director of public relations for the United Transportation Union. He is a past president of the Association of Transportation Law Professionals. Wilner drafted the railroad section of the Heritage Foundation’s Mandate for Change (Volumes I and II), which were policy blueprints for the two Reagan Administrations; and was a guest columnist for the Cato Institute’s Regulation magazine.

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