Railway Age, Passenger Trains on Freight Railroads. Negotiating Insurance and Liability Issues: Constructive Solutions. October 21-22, 2008

Transcription

1 Railway Age, Passenger Trains on Freight Railroads Negotiating Insurance and Liability Issues: Constructive Solutions October 21-22, 2008 Kevin M. Sheys 1 My topic today is Constructive Solutions for Negotiating Insurance and Liability Issues. While I am going to touch upon several insurance and liability points, with Bill s permission, I am also going to offer up some suggestions of other areas where the interests of passenger rail operators and freight railroads are aligned and on which, I believe, we can all work constructively. First, let me make some simplifying assumptions. I will make my comments in the context of negotiation of an operating agreement in a situation where a freight railroad is selling a line to a conventional commuter rail operator and retaining trackage rights for continuing freight operations. Also, when I say liability you should hear liability and indemnification. There is really no such thing as a liability allocation without a contractual commitment by both parties to back up the liabilities they have agreed to assume. Finally, the bulk of the shared use agreements are between Class I railroads and passenger rail operators. There are few regional railroads and short line railroads involved in shared use and most of them have the same positions as Class I s on liability 1 K&L Gates LLP; DC v1

2 and insurance issues. However, I am going to limit my comments today to what I see as the liability and insurance issues in Class I deals. The first element of a constructive negotiation is to recognize the freight railroad s inherent advantage. A freight railroad seller almost never has an alternative buyer at the same price; the commuter rail buyer almost never has a viable alternative alignment within the project corridor. Which party can most easily live with a failure to reach agreement? From the perspective of the freight railroad seller, if an agreement cannot be reached on liability and insurance issues, the alternative to a sale is to make no deal. Ordinarily, the freight railroad is very comfortable with making no deal because freight railroads have a very long term view. Every major freight railroad has had the experience of not reaching agreement on a line sale only to reach an agreement years later, usually at a substantially higher price. On the other hand, unless the passenger rail buyer is in the lucky and rare position of having an alternative alignment within the project corridor, the no deal alternative is politically and otherwise unacceptable. Sometimes the passenger rail operator faced with the possibility of no deal is in a position to put some political pressure on the freight railroad on price or some other terms but no amount of political pressure is going to get the freight railroad to make a bad deal on liability provisions. Overall, the freight railroad starts with an advantage. The second element of a constructive negotiation is acceptance of but for liability. I think everyone here knows what I mean, but just in case: but for liability is the freight railroad s requirement that the passenger rail operator must bear all losses of any party (freight operator, itself or third-parties) that would not have occurred if the passenger rail operator had never arrived on the property. A passenger rail operator s - 2 -

3 willingness to accept the concept of but for liability is now a uniform condition to any serious negotiations. Many of you have seen agreements where the passenger operator assumes responsibility for something less than but for liability. I have a vast collection of somewhat older agreements where passenger rail operators assume much less than but for liability. Some of these agreements are still operative, but none of them will help anyone negotiate to avoid but for liability in a new deal. Although but for liability is now the standard, there are still variances on fringe issues. For example, parties still debate whether passenger rail stations are attractive nuisances and therefore negotiate about who is responsible for losses arising from trespasser incidents near commuter rail stations. Since freight railroads standing alone have trespasser issues, there are probably good arguments on both sides with respect to this particular issue. Here is another example if a freight railroad suffers a derailment due an installation defect on a segment that was upgraded for passenger rail service, where the track was installed and is maintained by the freight railroad and the freight railroad is operating at a higher speed due to the upgrade, is that derailment the responsibility of the passenger rail operator under but for logic? Again, there are probably arguments on both sides. The track was upgraded for the passenger rail service and the accident would not have occurred but for the upgrade. On the other hand, if a freight railroad improperly installed the track and availed itself of the higher authorized speed, what is the cause of the derailment? - 3 -

4 The third element in a constructive negotiation is to not get consumed by the enumerable hypotheticals related to but for liability. The deals that close are the deals where the parties spend a certain amount of time ironing out the liability allocation issues, cover a few key fringe issues, and then move on. The fourth element in a constructive negotiation is to recognize that allocation of liability and provision of insurance are two sides of the same coin. Risk can be reduced but it cannot be eliminated and therefore a liability allocation (with indemnity) acceptable to both parties is no good if the parties do not also agree on insurance coverage. This is an easy one and everyone now gets it, but one of the emerging great challenges on insurance is the ever-increasing aggregate limits demanded by freight railroads. Alarm bells started to go off when we first saw the aggregate limit demands go to $500 million. Some more recent agreements and discussions have involved aggregate limits in the range of $750-$800 million. In terms of constructive solutions, you might ask what about the Amtrak liability cap? As many of you know, the Amtrak Reform and Accountability Act of 1997 established an aggregate award cap of $200 million to all rail passengers, against all defendants, for all claims (including claims for punitive damages) arising from a single accident or incident. 2 The Amtrak cap covers passenger claims against Amtrak, highspeed railroads, commuter authorities, freight railroads, excursion trains, States, and their operators, employees, etc. It does reduce premiums and, although not yet tested in the courts, it does appear to pre-empt state law limits on indemnification against punitive 2 49 U.S.C

5 damages. However, in its present form, the Amtrak cap will not motivate freight railroads to reduce their aggregate insurance requirements, because it does not apply to non-passenger claims, such as those of motor vehicle drivers and passengers involved grade crossing accidents. So, broadening the topic a bit, what constructive solutions might there be for all of us, working either on the freight side or on the passenger side on shared use projects? What about renewing efforts to amend the Amtrak cap to cover third party claims? I would suggest that this is in our collective interest. Coverage of third party claims under the Amtrak cap could have a significant and rapid downward effect on premium levels, which would free up money for more service or for capital expenditures. There is a lot of talk today in the context of the financial crisis about the moral hazard of changes in law the idea that government should not act in a way that causes people to take risks because they believe that the government will bail them out. Whatever you might think about the moral hazard problem in connection with the financial crisis, it would be beyond absurdity to block a liability cap on third party claims for fear of a moral hazard. This is a constructive solution we can all work on together. We are faced with a number of other new challenges that will require constructive solutions. The tragic Metrolink train crash in Chatsworth pushed the Railroad Safety Improvement Act of 2008 to passage. It probably would have passed eventually in some form even if the tragic crash had not occurred, but probably not with all the new provisions we have. There is so much in this new law that it is hard to know - 5 -

6 where to begin, but there are a number of things on the horizon from the new law that all of us involved in shared use projects, can work on constructively together. The number of action items is staggering. Here is my informal count: New regs (large and small)...32 Amended regs...7 Plan requirements on operators...8 Reports from FRA...11 Studies by/from FRA...8 Pilot programs...4 Model statutes for States...3 Guidance from FRA...2 Throw in a new audit requirement, an education program, a task force and a website update and the total is 79, plus eleven optional items. A total of about 90 action items. Without even attempting to cover everything, let me offer five examples of places where we can work together: First, within the next four years, the FRA will develop a regulation requiring Class I railroads, Amtrak and commuter railroads to develop a railroad safety risk reduction program. There is a fair amount of systematic risk assessment already going on in the industry. However, the new requirements are comprehensive. Among many other things, the new risk reduction program will require a fatigue management plan. The fatigue management plan musts cover a whole host of elements including: employee education and training on the causes of fatigue; strategies to reduce fatigue; identification - 6 -

7 and treatment of sleep disorders; the effects of fatigue on employee reactions to emergency situations; scheduling and duty call practices; work and rest cycles; and alertness strategies, including policies on napping. This is just the tip of the iceberg. Freight and passenger interests, both management and labor, can and should work together to ensure that the FRA regulations lead to an effective risk reduction program and does not turn into a check list document and process that consumes time and money and then sits on a shelf. Second, the new law mandates positive train control. As I am sure you all know, Class I railroads, Amtrak and commuter railroads are now under statutory mandate to implement a positive train control system by December 31, 2015 on main lines over which Amtrak or commuter rail service is provided and over main lines where poison or toxic-by-inhalation hazardous materials are moved. In eighteen months, Class I railroads, Amtrak and commuter railroads must submit to FRA a plan to meet these requirements. One essential element of the plan and of the eventual PTC systems is interoperability. For the few of you who may not know what that is, interoperability means the PTC systems adopted by any one railroad must work on the entire network of lines covered by the PTC mandate. Union Pacific, BNSF, Norfolk Southern and CSXT have already announced their intention to establish interoperability standards for PTC. This is a significant milestone. Another key element of the plan and of the eventual PTC systems is that they be implemented in a manner that addresses the areas of greatest risk before areas of lesser - 7 -

8 risk. Passenger and freight interests can work together to access the areas of greatest risk and roll out PTC accordingly. The Safety Act also calls for regulations to implement the PTC mandate. These regulations will be very important for several reasons. Although the statute defines the lines on which PTC will be required, the regulations will refine this definition and the geographic scope of the PTC mandate. Second, the Safety Act gives the FRA authority to mandate PTC on other categories of track, which effectively means FRA can broaden the geographic scope of the mandate and even the railroads involved. In addition, it appears that FRA has the authority to shorten the implementation schedule and the ultimate deadline for PTC. Obviously, PTC implementation is a huge, complicated and expensive proposition. I would suggest it is essential that all parties involved in shared use operations work together on all aspects of PTC system roll out. The Safety Act authorizes $50 million for each of fiscal years 2009 through We need to work together to fully fund this authorization. We need to work as a broad coalition for other sources of funding for PTC, both federal and state. In times when state budgets are in deficit and federal funding for programs other than defense, social security and (I must now add) the financial crisis will be difficult, we need to work as a broad coalition. We also need to work together toward practical solutions for the technical and substantive implementation of PTC. Third, reading between the lines on the Safety Act, I am afraid the RSAC process and any other form of consensus-based standard-making is under intense scrutiny. RSAC - 8 -

9 is, in my view, one of the most practical and constructive concepts in government regulation. I am not espousing a political philosophy; I am espousing a process where all stakeholders have an opportunity for input. To survive, the RSAC process will need to move more quickly and it will need to cover a broader range of subjects. We need to work hard together to demonstrate the merits of RSAC and not let a politicized reaction to a tragic train accident bring the demise of an effective and constructive method of safety regulation. Fourth, Hours of Service. The freight railroads have new hours of service rules, including a phase out of limbo time allowances. Amtrak and commuter railroad do not yet have new hours of service rules but will get them through regulation within the next three years. As the freight railroads grapple with the new requirements, the commuter railroads and Amtrak will look to the freight railroads for guidance on which aspects the new hours of service requirements actually improve safety and also guidance on whether and to what extent different requirements ought to govern commuter rail operations and Amtrak. Fifth, Craft and Class Certification. Within 18 months, FRA must prescribe regulations to certify train conductors. Even before that, within the next six months, FRA will issue a report to Congress about whether certification of numerous other crafts and classes is necessary to reduce accidents and improve safety. That report must address potential crafts/classes certifications for car repair/maintenance; on-board workers other than conductors; rail welders; dispatchers; signal repair and maintenance employees and any another crafts or classes of employees that FRA deems appropriate. Again, this is an - 9 -

10 area where we might work together to ensure that to the extent new certification requirements are adopted, they contribute to safety