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Review of Railway Third Party Liability Insurance Coverage Regulations
Table of contents
In August 2013, the Canadian Transportation Agency (Agency) announced that it would undertake a public consultation and review of the adequacy of insurance coverage for the issuance of certificates of fitness required by federal railway companies. Increasing shipments of crude oil and other hazardous materials by rail and the tragic derailment in Lac-Mégantic have highlighted the need to review the current approach to determining the adequacy of railway third party liability coverage and appropriate accountability of federal railway companies for liabilities related to their operations. More specifically, the purpose of this review is to solicit input on possible improvements to the current regulatory framework, as prescribed in the Railway Third Party Liability Insurance Coverage Regulations (Regulations), to meet these objectives.
This Discussion Paper provides background information on the Agency’s role in regulating federal railway companies, railway third party liability insurance and the Agency’s current regulatory requirements for determining the adequacy of third party liability insurance coverage and appropriate accountability for liabilities.
We encourage you to review this information, and submit responses to the key questions highlighted in this document. Based on the input received, the Agency may then propose revisions to the regulatory framework and consult again with stakeholders on any proposed regulatory changes.
Please submit your written responses by January 21, 2014 to the consultation questions posed in this Discussion Paper by email to: firstname.lastname@example.org or by mail to:
Third Party Liability Insurance Coverage Regulations Review
Dispute Resolution Branch
Canadian Transportation Agency
Please note that all submissions will be posted to the Agency’s website in the official language in which it was submitted, along with your name or that of the organization represented.
All railway companies that wish to construct or operate a railway within the legislative authority of Parliament require approval from the Agency before they can begin construction or operations. To this effect, the Canada Transportation Act (Act) prescribes that: “[n]o person shall construct or operate a railway without a certificate of fitness”. Sections 90 to 94 of Part III, Division I and II, of the Act apply to certificates of fitness.
In keeping with the Act, the Agency must issue a certificate of fitness if it is satisfied that there will be adequate liability insurance coverage for the proposed construction or operation of a railway. The third party liability insurance requirements are specified in the Regulations. This insurance includes coverage for:
- third party bodily injury or death, including injury or death to passengers;
- third party property damage, excluding damage to cargo; and
- named perils pollution.
Named perils pollution is defined in the Regulations as risks associated with seepage, pollution or contamination resulting from, for example, collision, overturning, derailment or explosion.
These requirements reflect the principle that railway companies are accountable for compensating for damages caused by their operations to people and to shippers and a polluter-pay principle for damage to the environment.
Currently, there are 30 federal railway companies, comprising some 48,000 kms of track, that hold a certificate of fitness issued by the Agency.
Canada Transportation Act and the Railway Third Party Liability Insurance Coverage Regulations
Adequacy: The Agency, pursuant to the Act and the Regulations, determines whether third party liability insurance coverage is adequate if there is:
- sufficient insurance, including self insurance, to compensate for matters that may arise out of an applicant's proposed construction or operation of a railway;
- a written confirmation that the applicant has fully disclosed to the insurer the nature and extent of the proposed construction or operation of the railway and any associated third party liability risks; and
- full disclosure to the Agency by the applicant of the amount of self insurance and of the third party liability risks that may arise from the proposed construction or operation of the railway.
The Agency determines the adequacy of insurance coverage based, in part, on the risk assessment carried out by the insurance company and the railway company. The Agency assesses adequacy by comparing the amount determined by the insurance company and the railway company with other similar operations currently and historically, as well as with industry practices. It also verifies that both the railway company and the insurance company have the financial capacity to pay claims under the self-insured portion and the insurance policy, respectively.
On a case-by-case basis: The Agency determines whether the third party liability insurance is adequate by confirming that the:
- risks have been fully disclosed by the railway company to the broker and the amounts and nature of the coverage have been specified, based on the Agency’s application form;
- financial capability of the railway company to sustain its self-insurance portion;
- financial strength of the insurance company to pay its contractual coverage; and
- proposed coverage is not out of line with coverage held by similar railway operations.
Insurance limits: Railway operations can vary a great deal in terms of the volume of traffic, commodity mix, scope of operations, whether in rural or urban areas, number of crossings etc. Because of this, the Regulations do not set definite amounts, neither minimum nor maximum.
Onus on the railway company: The Act places the onus on the railway company to notify the Agency in writing, without delay, whenever it cancels or alters its third party liability insurance coverage, or whenever a change in construction or operations may mean that its coverage is no longer adequate.
Suspend or cancel: Pursuant to the Act, the Agency may suspend or cancel a certificate of fitness if it determines that the railway company’s third party liability insurance coverage is no longer adequate.
Liability insurance available to railway companies covers many aspects of their operations and is not limited to third party but also includes protective liability insurance for projects, contingent railroad equipment liability insurance amongst others.
Insurance brokers assist railway companies in building cost efficient insurance packages that meet the needs of their client, given the available capacity in the market.
The rail insurance industry is highly specialized and involves relatively few players. Railway companies have access to approximately 30 to 40 companies that are willing and able to offer railway liability insurance.
Insurance companies use a sophisticated risk management approach and effectively spread their risk by only assuming a share of the liability of a company. As a result, third party liability insurance policies come in discrete values ($5, $10, $20, $50 million, etc.) which are bundled together in liability stacks, typically involving multiple insurers to reach the desired level of protection.
Given the number of players in the rail insurance industry and their risk tolerance, there are practical limits to what railway companies can obtain in the market for third party liability insurance. Rail insurers manage their exposure to risks by requiring detailed disclosure of the risk profile of the applicants at the moment of applying for a policy, and subsequent reporting of certain events and changes in practices.
Third party liability insurance packages available for shortline railway companies, of which there are over 600 in North America, are typically in the $5−$50 million range in aggregate.
Based on the information filed with the Agency in the past ten years, no federal railway company’s claims have exceeded the limits of their third party liability insurance, with the exception of the derailment in Lac-Mégantic.
Below you will find a summary of railway third party liability insurance regimes for other jurisdictions, based on information gathered from a variety of sources.
Provincial Railways within Canada
Railways that reside wholly within the boundaries of a single province, regardless of the length of their tracks, do not fall under federal jurisdiction and are regulated by the laws of the province in which they are located. The majority of the provincial legislation, as supported by related regulations, requires insurance coverage for third party liability.
At the time the Agency examined the provincial regimes, this did not apply in British Columbia, Newfoundland and Labrador or the Yukon where there is no third party liability insurance requirement for provincial railways. Prince Edward Island, as well as Northwest Territories and Nunavut, do not have any railways that operate under their jurisdiction and, therefore, do not have any requirement for liability coverage.
Eight provinces have adopted minimum required amounts for third party liability insurance coverage, ranging from $2M to $25M. Saskatchewan and Quebec, for example, have established their requirements based on the mix of commodities (including dangerous goods) being transported. In addition, four of the eight provincial regulators may accept a reduced amount of third party liability insurance on a case-by-case basis.
- Alberta Railway Regulation Part 3, section 37
- Saskatchewan Railway Act section 18
- Saskatchewan Highway Traffic Board Provincial Railways Guide
- Manitoba Provincial Railways Fitness Criteria and Safety Regulations Part 1, section 3
- Ontario Shortline Railway Act 1995, Ontario Regulation 301/96, paragraph 2(a)
- Québec Division 2, Regulation respecting rail transportation
- New Brunswick Shortline Railway Act
- Nova Scotia Railway Act section 7
Regulatory Framework in the United States
The transportation sector in the United States is largely deregulated as in Canada, but the requirements related to railway third party liability insurance are substantively different. The Surface Transportation Board (Board), which is the economic regulator of interstate surface transportation in the United States, has jurisdiction, among other things, over the construction, acquisition, operation and abandonment of railways, and issues Certificates of Public Convenience and Necessity. The Board’s jurisdiction is exclusive and pre-empts that of state and local authorities, even when the service is located entirely within one state.
Unlike the Agency, the Board does not, for the most part, require or review liability insurance coverage of the applicant railway companies. While new applicants and operating railway companies do not have to satisfy the Board in respect of meeting a third party liability insurance requirement (as in Canada), the Board becomes involved when negotiations between the railway companies are stalled or when Amtrak appeals to the Board to resolve disputes on its liability and indemnification arrangements with the host freight railway companies.
Like in Canada, in the United States, Class I freight railway companies own the majority of existing infrastructure, including the track and the right-of-way. This is why Amtrak and commuter rail agencies must negotiate with freight railway companies the amount of compensation for purchase, lease, or access to the track and right-of-way. Commuter rail agencies generally also negotiate the amount of compensation with Amtrak for the use of Amtrak-owned infrastructure.
The Amtrak Reform and Accountability Act (ARAA) was enacted in response to concerns from freight railway companies, commuter rail agencies, and Amtrak about the liability and indemnity issues, as well as the difficulties the parties were having in negotiating the shared use of infrastructure. This legislation authorizes the providers of passenger rail transportation to enter into contracts allocating financial responsibility for claims.
Liability limitations for passenger rail operators were also enacted as part of the ARAA of 1997, capping the aggregate allowable awards to all passengers against all defendants for all claims arising from a single accident to $200M. The required level of insurance in existing commuter rail agency and freight agreements appears to range from $75M to $500M.
The ARAA, however, does not address other third party claims. As such, to address the fact that the ARAA does not cover liability claims resulting from third parties affected such as by a hazardous materials spill, an agreement between the shipper and the railway company would have to be structured in a way to address potential claims.
At the state level, the requirements for liability coverage vary. For example, North Carolina set its liability cap at $200M for passenger rail to mirror the amount in the ARAA, while in Massachusetts the limit for commuter rail operators is set at $75M.
Recently, the Board undertook a study of liability insurance issues surrounding agreements between passenger rail operators and freight rail carriers. One of the conclusions reached was that a rail carrier cannot be indemnified for its own negligence, recklessness or willful misconduct, as that would be contrary to public policy in encouraging safe rail operations.
Regulatory Framework in Australia
The railway system in Australia is a complex network of 41,461 kms of track. Each jurisdiction (state) enacted its own legislation. Currently, there is no national law governing rail or rail safety in Australia but steps were taken to develop a national model law and establish a single national rail safety regulator. The National Rail Safety Guideline for Accreditation outlines the general principles and requirements for being an accredited rail operator in Australia, and is intended for rail infrastructure managers or rolling stock operators in one or more of Australian States or Territories. An applicant must demonstrate that it has the financial capacity or public risk insurance arrangements to meet reasonable potential accident liabilities. In each state or territory, each applicant is required to submit the name of its insurer, the policy value and policy number for any third party property insurance or public liability insurance it has. No specific amounts or limits for insurance coverage have been established.
Regulatory Framework in Great Britain
The Office of Rail Regulation (Office), an independent economic and safety regulator for Britain’s rail industry, carries out the regulatory functions of the Railways Act 1993 which include granting railway licences and licence exemptions, approving licence modifications and approving third party liability insurance arrangements that railway operators are required to carry.
In Britain, all licensed railway operators are required to hold and maintain third party liability insurance on terms approved by the Office. The insurance requirements that must be met by the Office are set out in guidance material. The Office initiated an insurance review in November 2006 and as a result concluded that that the standard minimum level of coverage would remain at £155M per incident.
To assist the Office in determining that a railway operator is adequately insured, applicants must provide the Office with certificates of insurance. The certificate of insurance must identify each insurer and the proportion of coverage each has taken, must indicate the period of the policy, summarize the scope of the policy and its exclusions, and must state the governing law under which the policy is to be interpreted.
In order to demonstrate adequate third party liability insurance, each railway operator’s policy must meet the following requirements:
- Provide cover of no less than £155M in respect of all liabilities;
- Ensure that any exclusion of damage to property in the care of the operator shall not apply to personal luggage;
- Provide coverage for any difference between its contractors or sub-contractors third party liability coverage and the required level of coverage;
- Ensure coverage is on an ‘occurrence’ basis;
- Ensure that where an aggregate limit of indemnity applies, the limit will be reinstated at least once if the limit is exhausted.
Other points for the applicant to consider are as follows:
- must have a reasonable expectation of meeting the self-insurance liabilities;
- insurance must be taken out with regulated insurers of good repute; and
- insurance cover must apply at all times that operations are undertaken.
The Office recognizes self-insurance to be the financial capability of a railway operator to meet any liability to a third party for which it doesn’t have insurance coverage, including any excess or deductible in policies.
Regulatory Framework in the European Union
Within the European Union, the requirements and limits of liability coverage vary but most members have adopted minimum amounts for third party liability coverage. These range from approximately $2M in Finland to $43M in Sweden, $16M in Netherlands, $78M in Belgium and Denmark, $19M in Germany and $15M in Portugal.
Seeking Input on Key Issues
The Agency has identified the following key issues for your consideration in its review of the Regulations. You may wish to review the Railway Third Party Liability Insurance Coverage Regulations prior to answering the questions.
Topic: Requirements specified in the Regulations
The Regulations currently state that the Agency will examine the risks associated with the proposed construction or operation of a railway based on these ten factors:
- passenger ridership,
- passenger and freight train miles,
- volume of railway traffic,
- class and volume of dangerous goods transported by rail,
- types of population areas served,
- number of level crossings,
- speed of trains,
- train crew training,
- method of train control, and
- overall safety record of the applicant.
- Q1. Are those factors sufficient or should the Agency expand the list to better assess the risks and why?
- Q2. What factors, if any, should be removed and why?
- Q3. Should there be additional and/or different third party liability insurance requirements related to the transportation of certain commodities, such as dangerous goods? If so, why?
- Q4. Should there be additional and/or different third party liability insurance requirements related to the transportation of passengers? If so, why?
Topic: Minimum requirements
Railway operations can vary a great deal in terms of the volume of traffic, commodity mix, scope of operations, whether in rural or urban areas, number of crossings, etc. Because of this, the current federal Regulations do not set definite amounts, neither minimum nor maximum.
- Q5A. Should the Regulations be revised to establish minimum requirements? If so, why?
- Q5B. If so, should there be a distinction made between general commodities and dangerous goods? Please provide your reasons.
- Q6. Should there be separate minimum requirements for Class I railway companies and for shortline railway companies? Please provide your reasons.
- Q7. If you think minimum requirements should apply, what should they be and what approach should the Agency use to establish a minimum requirement?
Topic: Federal railway companies obligations to inform
Legislation places the onus on the railway company to notify the Agency in writing, without delay, whenever it cancels or alters its third party liability insurance coverage, or whenever a change in construction or operation may mean that its coverage is no longer adequate.
- Q8. What mechanisms should be established in the Regulations to ensure that railway companies notify the Agency of all substantive changes on a timely basis?
- Q9. In the case of non-compliance, would administrative monetary penalties be an appropriate mechanism? Are there better ones? Please provide your reasons.
- Q10. What, if any, mechanisms should be established in the Regulations to ensure that railway companies notify their insurer of all substantive changes on a timely basis?
Topic: Assessment of financial capacity
The Regulations state that the Agency will assess the financial capability of the applicant to sustain any level of self-insurance, whether it is a deductible or self-insured amount. For this purpose, the Agency examines the railway company’s audited financial statements for the three most recent complete fiscal years.
- Q11. Should the Agency continue with this practice, or should the Agency establish additional requirements?
If, for any reason, the Agency believes that the insurance company may not have the financial ability to pay its contractual level of insurance coverage, the railway company may be required to provide the Agency with the last three years of the insurance company's audited financial statements and/or the insurance company's solvency rating, as determined by recognized rating agencies.
- Q12. Should the Agency continue to assess the financial strength of the insurance company to pay its contractual level of insurance coverage?
Currently, all documents filed with the Agency become part of the public record and may be made available for public viewing. However, in accordance with the Agency's General Rules, a claim for confidentiality can be made. In practice, railway companies tend to claim as commercially confidential all its financial information, including information related to the amounts of insurance coverage.
- Q13. What information submitted in an application for, or a variance to, a certificate of fitness should be made public and what should remain confidential? Please provide your reasons.
- Q14. Should the amount of third party liability insurance and the self-insured retention amount be made public? Please provide your reasons.
Topic: Other Issues
If you wish to provide your views on other third party liability insurance coverage or accountability related issues, or express any opinions related to the Agency’s current regulatory regime, please feel free to provide them.