When the brakes failed on a 72-car oil tanktrain on the Montreal, Maine & Atlantic Railways, Inc. in thesmall village of Nantes, Quebec, about seven miles west ofLac-Mgantic, a string of tank cars rolled downgrade and exploded inthe center of the town, killing as many as 50 people, many in theMusi-Cafe enjoying a 1 a.m. Saturday morning dance. What caused theparked train to run away was under investigation by the railroadand the Canadian government, reported Edward Burkhardt, CEO of theMM&A Railways, a Class II railroad, later that week, but it maytake time to sort out the facts.

This accident underscores a type of disaster claim thatadjusters for both insurers and self-insured industries such asutilities, railroads and pipelines will be presented in increasingnumbers in the next decade. Trains of tanker cars full of crude oilfrom the North Dakota Bakken Oil Shale field (Williston Basin) andsimilar oil fields in Texas and Pennsylvania move the valuablefossil fuel to refineries. The accident is bound to renew debate inWashington and Wall Street over the need to construct the KeystoneXL Oil Pipeline from Hardisty, Alberta to Patoka, Illinois orHouston, Texas. Whether the oil is transported by rail or bypipeline can make a difference in the type of claims that mayresult. Claims adjusters need to be familiar with the laws thatwill affect such transport.

Statistics Show Both Are Hazardous

In the rail versus pipeline dispute the fact that the gallons ofoil per million ton miles spilled by railroads over the past elevenyears is nearly twice that of the number of gallons spilled frompipelines is deceptive. While in 2008 115.86 gallons of oil werespilled per million ton-miles, due to a Minnesota derailment inwhich a 26,000 gallon oil car was ruptured, the average for theother ten years was only .584 gallons per million ton-miles forrailroads verses 5.99 gallons per million ton-miles for oilpipelines. For the same eleven years, reports the Association ofAmerican Railroads, railroads had 129 reported incidents ofspillage, involving 2,268 barrels of oil, an average of 17.6barrels per spill, while pipelines had a reported 1,849 incidentswith spillage of 474,442 barrels of oil, an average of 256.6barrels per spill. By comparison pipelines carried 19,467.8 billionbarrel-miles compared to only 268.3 billion barrel-miles forrailroads. That volume, however, is increasing as ever more oil isshipped by rail.

On July 1, 2011, the ExxonMobil Silvertip Pipeline beneath theYellowstone River ruptured, reported the Billings Gazette,allowing an oil spill to flow 240 miles downstream, with a clean-upcost of more than $135 million.

Economics v. Environmentalism

Rail safety became an issue in the rail v. pipe dispute in May,2013, when Canadian Prime Minister Stephen Harper, speaking to anaudience of New York foreign affairs leaders “unexpectedly backedaway from energy security as the most convincing argument” for theKeystone XL Pipeline and cited rail safety instead, reported DavidThomas, an Alberta business reporter in the August, 2013 issue ofTrains in an article published prior to the Lac-Méganticcatastrophe. Undoubtedly this accident will change the statisticsand pipeline politics.

“The cause of Harper's sudden and uncharacteristic conversion toenvironmentalism became clear at the end of the month whenCalifornia's big oil refiners passed on a deadline to sign up for a$2 billion pipeline from Texas,” Thomas stated. “By opting insteadto get their crude by train, the California refiners have signaledthe end of pipelines' unchallenged economic and strategicsuperiority in moving crude oil across the continent. 'The abilityto receive crude oil by unit train provides our West Coastrefineries with a safe, stable source of domestic crude oil,'Tesoro Corp. Vice President Dan Riley says.”

Phase One of the Keystone pipeline is already available,avoiding Montana and western parts of North and South Dakota andNebraska, running from Hardisty, Alberta, southward and theneastward across Saskatchewan to a point east of the MissouriValley, then south to Steele City, Nebraska, from which the nextphases will run to Illinois and Texas, if approved by Washington.As the pipeline is not yet in full use, much of the shale oil fromboth the Alberta and Bakken North Dakota Oil Fields is transportedby railroads, with the bulk of it on BNSF and both Canadian Pacificand Canadian National. The Montreal, Maine & Atlantic (Canadiansubsidiary) is a regional line starting in 2003 using formerCanadian Pacific rail across Quebec and Maine, the former route ofCP's Montreal-Halifax line, but including several U.S. lines, andis based in Bangor.

While pipelines tend to be mono-directional, railroads arecompetitive by bringing tools and equipment, as well as the fluidsand fracting sand mined primarily in Wisconsin to the oil fieldsand transporting the oil out. Thus the hazards per rail-mile areincreased, as the fracting fluids are also a polluting contaminantif spilled. Further, while major rail lines such as BNSF or theCanadian lines spend millions of dollars on rail maintenance, whenthe cars are transferred to or from independently-operated shortlines such as the MM&A less money may have been spent onfactors such as maintenance.

Built-in Tank Car Safety

Exactly how and why the oil-filled tank cars caught fire andexploded in Lac-Mgantic is not clear. Tank cars are built towithstand impacts of certain types and a puncture should notnecessarily create an explosive fire. Kathi Kube reported in theSeptember, 2012, issue of Trains, “In early 2007, DowChemical Co. and Union Pacific Railroad joined forces with UnionTank Car Co. as well as representatives from the U.S. and Canadianfederal governments and other organizations to form the NextGeneration Rail Tank Car Project.” She explains, “Existing tankcars have a single shell, insulation, and a jacket that'sone-eighth-inch thick to hold everything in place. Now Union TankCar is building up to 13 tank cars under special permit with thePipeline and Hazardous Materials Administration. They will bebasically the same as existing tank cars, but the jacket will bemore like another shell—sort of a tank within a tank, with theouter structure carrying the train loads, rather than the commoditytank.”

Fred W. Frailey explained in the May, 2012, issue ofTrains (Oil Trains in the Wheat Fields) “Union Tank CarCo. was founded in 1866 expressly to move John D. Rockefeller's oilto market. But the coming of pipelines pushed railroads out of thecrude oil business after World War II. Now two circumstances aredriving oil companies and railroads back into each other's arms, atleast for a while. The first is that pipelines in northwest NorthDakota lack capacity to get all the oil out of the state. Withouttransportation oil has little value.

“The other is that even if capacity were adequate, the pipelinesdon't always reach the right places. Most major pipelines headnorth-south to the Midwest, specifically to Cushing, Oklahoma,where the domestic oil price is set (called the WTI price, for WestTexas Intermediate). A glut of oil in Cushing caused oil recentlyto fetch almost $16 a barrel less than it could at U.S. coastalcities and in world markets.”

Various rail experts have noted the liability exposures torailroads from the vast amount of hazardous materials they haul,ranging from chemicals to ethanol, and are encouraging shippers toassume a greater liability responsibility in the event of ahazmat-related derailment. The railroads have also attempted toreduce exposures by routing trains around major metropolitan areas,but that is often difficult as that is where rail yards aregenerally located, and the detoured trains may be passing throughsmaller towns, such as Nantes, Quebec, on lesser-used rail lineswhere local fire departments may be ill-equipped to handle a majorhazmat incident. In the Lac-Mgantic fire responders came fromacross Southern Quebec and Maine to help extinguish the flames.

Disputed Liability

Exactly what transpired in the Lac-Mgantic situation was notimmediately clear. The Canadian government launched a criminalinvestigation, but focus fell on two possible sources, the MM&Alocomotive engineer for failing to properly set the brakes, and theNantes Fire Department. The oil train, headed for a destination inMaine, was “tied-up” for the night at Nantes, to the west ofLac-Mégantic. This may have been by plan, or it may have beenbecause the engine crew had reached their twelve-hour work limit.The railroad advised news reporters that the engineer had parkedthe train on Friday night and left one locomotive running to ensurethe air brakes worked properly.

According to an article in the Toronto Star July 8,“The Nantes fire service told Reuters it had put out an engine firein one of the locomotives late on Friday. Andre Gendron, 38, liveson a wooded property next to the rail yard in Nantes. He said hewas burning a campfire outside his trailer on Friday night when heheard the fire truck. “About five minutes after the firemen left, Ifelt the vibration of a train moving down the track. I then saw thetrain move by without its lights on.”

It is the locomotive that holds the air brakes for the entiretrain, and when not in operation, the diesel engine is leftrunning. This is necessary to keep the air pumped up to hold thebrakes; if the locomotive's diesel engine is turned off, thebraking system disengages and releases the brakes. Somehow, theengine was turned off.

The Star reported, “Nantes Fire Chief Patrick Lambertsaid his crew had switched off the locomotive late Friday as theyextinguished a 'good-sized' blaze in the motor, probably caused bya fuel or oil line break in the engine. 'We shut down the enginebefore fighting the fire,' he told Reuters in an interview. 'Ourprotocol calls for us to shut down an engine because it is the onlyway to stop the fuel from circulating into the fire.' The(MM&A's) company chairman told the Toronto Star thebrakes will not work if a train is switched off. 'If the operatinglocomotive is shut down, there's nothing left to keep the brakescharged up, and the brake pressure will drop finally to the pointwhere they can't be held in place any longer,' Ed Burkhardtsaid.”

The Star article continued, “(Fire Chief) Lambert saidonce the blaze was out, the Nantes fire service contacted Montreal,Maine & Atlantic Railway. 'We told them what we did and how wedid it,' he said. Asked whether there had been any discussion aboutthe brakes, he replied, “There was no discussion of the brakes atthat time. We were there for the train fire. As for the inspectionof the train after the fire, that was up to them.'”

The Toronto Globe & Mail reported that this mayhave been “a track repair worker who was called to the scene of the[Nantes] fire and was still there after the firefighters left. 'Hewas the last one to see the train.'” A track maintenance workerwould not necessarily be familiar with the braking system on adiesel locomotive, if this was the parties referred to by FireChief Lambert. There is no mention in the news stories of thelocomotive's engineer being contacted or going to the locomotive.Normally, once the air is released, it will take the locomotive'sengine a considerable number of minutes to build up the airpressure for the brakes.

Denial of Liability

While some Quebec fingers pointed toward the railroad and itsengineer for improperly setting the brakes, the NationalPost reported that the fire chief had angrily denied anysuggestion of his fire department's having caused the disaster.Chief Lambert told this newspaper that two railway employees weredispatched to the scene and “inspected the train with us.” Thesemen said “everything was OK, the fire was out, everything wassecure, you guys (the fire department) can leave.” The NationalPost continues, “Within minutes of the firefighters pullingaway, however, the train had broken loose.”

It will take time to determine not only whether the brakes wereset (which issue the Nantes fire chief says was the railroad'sresponsibility) or whether some other factor caused the engine toshut down or fail to properly reactivate the brake air linescausing the brakes to release, allowing the train to run sevenmiles (11 kilometers) downgrade into Lac-Mégantic and derail. Also,it is not clear why the train derailed in the town center ratherthan simply rolling through the town and out the other side. Thatalso must be investigated. Further, why did the tank cars ruptureand explode when they are designed to withstand impact andderailment? Another issue is the original fire on the locomotive;none of the stories indicate where the train had originated, orwhere the involved locomotives had been added to the train. Nantesis about 165 miles east of West Montreal, where the MM&A,according to a Trains map of regional rail lines, may havebegan the journey.

Adjusting Oil, Train or Pipeline Claims

Handling a railroad or pipeline oil spill claim depends on anumber of factors including location, jurisdiction, and thecircumstances. In the Lac-Mgantic cataclysm local fire departmentswere directly involved, but Transport Canada, the Canadianequivalent of the NTSB, will probably conduct the primaryinvestigation along with the railroad. Adjusters at the scenerepresenting the railroad need to be cautious about commitmentsuntil the liability issues can be resolved, but the determinationof damages, both property and for the many fatalities, can proceeduntil that determination is complete. One of the major loss factorswill be indirect loss, both to the railroad, the oil shipper andconsignee, and to the businesses in Lac-Mgantic that suffered firedamage.

Oil spills—as well as any other hazardous material spillage—canbe catastrophic whether or not fire or explosion is involved. Sucha loss occurring in a large urban area may involve evacuation ofthousands of people and the closing of hundreds of businesses untilthe hazmat or oil spill is stabilized. The question for theadjuster often is, “Who is in charge?” It is usually a governmentalagency, either federal or state, that will be immediately in chargeof the spill. If the loss occurs on land, the state and federalEnvironmental Protection Agencies (EPA) may be the primary party incontrol; for a loss on navigable water, it will be the U.S. CoastGuard.

While not in charge, the spiller (the railroad, pipelineoperator or trucker) and its claims adjusters must maintaincontrol. This may initially involve making direct and frequentcontact with the governmental agency in charge to determine whatclean-up will be required, and who will do it. Often thegovernmental agency will be aware of qualified environmentalprotection and clean-up firms that can be brought in quickly tomaintain and minimize a spill. While the spiller may have littleright to demand a particular firm, an experienced environmentalclaims adjuster may have recommendations and should discuss thesewith the on-the-scene agents in charge. The adjuster must alsomonitor what is being ordered by the agency in charge, and becertain that it is not only adequate, but that it does not demandmore than is necessary in expensive clean-up, as the spiller willbe the party having to pay for whatever work is ordered.

The general rule in environmental pollution claims is that allof the spilled material—oil, chemicals, gasoline or whatever—mustbe removed, and the area of removal restored to its priorcondition. If the spillage seeps into the ground and into theaquifer, then it must all be pumped out via wells drilled andmonitored. The spiller must determine precisely how much of thehazardous material was spilled, for that same amount must berecovered, if at all possible. Additionally, the spiller willgenerally be fined for causing the spill and will also be fined forany residual pollution that cannot be removed by digging orpumping.

The adjuster must also monitor where the agency instructs theclean-up firm to dispose of the hazardous material removed from thescene. In some cases the material might be recyclable, but that israrely the case. It is hazardous, and cannot simply be dumped inthe city dump. That would only contribute to a further pollutionclaim.

If liability is immediately clear and coverage is adequate, thenthe adjuster can consider proceeding with settlement discussionswith claimants. However, caution is absolutely required prior toany settlements, for the coverage—either self-insured assets orprimary, umbrella and excess liability insurance—may beinsufficient in a major loss. Settling some claims and then havinginadequate assets for other claims could expose the adjuster toprofessional liability claims. A hazmat loss could easily bankrupta spiller that has inadequate assets or insufficient excessinsurance.

The adjuster must carefully evaluate not only the direct costsof loss, but also indirect loss. It is very likely that by the timethe adjusters reach the scene, attorneys ready to sign up claimantsfor a class action will also be on the scene. Every step of theadjuster's investigation, evaluation and disposition must becarefully documented, as it may become evidence in a courtdispute.

In some cases it may be best to allow claimants who havesufficient first-party direct and indirect loss coverage makeclaims under their own insurance if delay either in determiningcoverage adequacy or liability is involved. When there is bothadequate insurance and clear liability, however, the sooner theadjusters negotiate settlements with legitimate claimants the lesslikelihood those claimants will join in the class action. Whenclaimants hear that a neighbor received $X quickly, but that byjoining in the class action it may be months or years before anypayment will be received, word can spread quickly.

Handling a hazmat disaster, such as the Lac-Mgantic oil fire, isnot easy, but like any catastrophic loss, be it a tornado,hurricane, airliner crash or forest fire, when taken claimant byclaimant, complete resolution will eventually occur.