# Are railroads underinsured?



## CHamilton (May 19, 2014)

What would happen in a major disaster?



> Tank cars are almost all owned by shippers and leasing corporations, not railroads. Railroads, however, operate under a “common carrier obligation,” which prohibits them from refusing to haul any legally allowable load even if would be inconvenient or unprofitable. In other words, they are actually required by law to transport hazardous materials, including volatile Bakken crude oil, in unsafe legacy DOT-111 tank cars until such time as the federal regulator determines these tank cars are no longer okay to use. And if the railroad hauls it, then they are liable for it.
> 
> In January 2014, the Wall Street Journal published an expose on how under-insured the railroads hauling crude oil really are, and how they will be unable to cover the costs of an oil train explosion in an urban area. It found that in the insurance world, the Lac-Mégantic incident, as awful as it was, is not considered a truly catastrophic worst-case accident. That would be something like a derailment in the middle of a heavily populated area, like in downtown Vancouver, Washington where oil trains filled with volatile Bakken crude already pass several times a week (and where many more will be destined if the huge proposed oil terminal is built there). With remarkable candor, industry experts went on record with a WSJ investigative reporter to detail the inadequacy of the insurance railroads carry for such an event.
> 
> It’s true even for the big Class 1 railroads, according to the WSJ, such as BNSF, Union Pacific, and CP Rail. And after each ethanol and oil train explosion, the insurance picture for railroads has only gotten worse and worse.


From

Risk Assessment for Railroads

How taxpayers will end up paying for the costs of a worst case oil train derailment.


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## Devil's Advocate (May 19, 2014)

> Railroads, however, operate under a “common carrier obligation,” *which prohibits them from refusing to haul any legally allowable load even if would be inconvenient or unprofitable*.


US freight railroads are huge corporations with many well paid lobbyists and lawyers. US freight railroads are not forced to haul unprofitable loads. The moment a given contract is nearing unprofitable status the railroads will simply increase the fuel surcharge or reassess fees based on indirect routing or the like.


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## Anderson (May 20, 2014)

I do question the under-insurance argument with the Class Is, which can generally point to annual profits of $1bn or more (only CP and KCS fall short of this bar). With Class II/III railroads, it is likely that any accidents will simply trigger a bankruptcy, but you'd need a rather massive one to take down Union Pacific or BNSF...and if you get an accident massive enough to knock out one of those two, my guess is that it would be no different than any other sort of catastrophe.

One thought experiment: Assume that a massive, multi-billion dollar accident happened (oil-based or otherwise) and knocked one of the major Class Is into bankruptcy. What would happen if the other Class Is simply said "Law or no law, we will not haul X until we get some protection"? I know that Class Is will refuse to haul occupied PVs, for example, so obviously they have at least some discretion.

Likewise, could a railroad _effectively _ban a product by requiring the customer to shoulder the cost of a major insurance policy for their shipment (i.e. a policy of $50m per car of oil that was being loaded onto a unit train) without refusing to actually ban the shipment?

Edit: And of course, if sabotage was involved, I question what that would do to any lawsuit/settlement. Even assuming non-gross negligence, I suspect that a $20-odd million-per-death settlement would not happen and that the case would get dragged through court for years, if not decades.

Also, the article's question on a massive bond like that is a bit absurd...under the best circumstances, any reasonable bond would be far smaller (at least, in terms of cash put up) and under the worst circumstances you're likely to end up with messily shared liability. A lot of the arguments put forward end up being negotiating positions, after all, and as a result are absurdly hedged to avoid any admissions.


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## jis (May 20, 2014)

What is it that stops railroads from getting some sort of an umbrella policy covering unusual and rare events, like most other businesses do, with outfits like Lloyds or other re-insurers?


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## Ispolkom (May 20, 2014)

jis said:


> What is it that stops railroads from getting some sort of an umbrella policy covering unusual and rare events, like most other businesses do, with outfits like Lloyds or other re-insurers?


Nothing, except the cost. I imagine that it makes more sense from the railroad's point of view to privatize the profits of shipping oil while socializing the possible costs. It's up to government regulation, I think, to redress this.


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## neroden (May 20, 2014)

Since there is (for the most part) no more rate regulation on railroads, railroads in the US can always quote "go away" prices for moving hazardous materials. Effectively they can refuse them. They have basically done so for high-level nuclear waste.


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## Devil's Advocate (May 20, 2014)

Ispolkom said:


> jis said:
> 
> 
> > What is it that stops railroads from getting some sort of an umbrella policy covering unusual and rare events, like most other businesses do, with outfits like Lloyds or other re-insurers?
> ...


Spot on.

Private industry has had all the time in the world to address this and has chosen not to. When the time comes that a truly catastrophic event materializes it will be the taxpayer who bails them out. In some industries this is a de facto setup and it others it is de jure, but in virtually all cases the largest disasters are "insured" by individual taxpayers. The folks who have virtually no chance whatsoever to directly benefit when times are good but are still forced to carry the vast majority of risk when times are bad.



neroden said:


> Since there is (for the most part) no more rate regulation on railroads, railroads in the US can always quote "go away" prices for moving hazardous materials. Effectively they can refuse them. They have basically done so for high-level nuclear waste.


Here in the US "high level" nuclear waste is an arbitrarily applied legal term that refers exclusively to fuel rods. Other sources can be just as harmful and dangerous but are considered "low level" waste for legal reasons and are hauled with far fewer issues. The main reason high level waste is not transported on a regular basis is not because of the shippers refusing so much as the lack of a useful destination.


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## jis (May 20, 2014)

Yep. This is the general model used even by individuals who build their houses on flood plains and San Andreas fault and such. It is the nature of the beast.


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## Devil's Advocate (May 20, 2014)

jis said:


> Yep. This is the general model used even by individuals who build their houses on flood plains and San Andreas fault and such. It is the nature of the beast.


When you build your house on a flood plain you're not insured by anyone (not even individual taxpayers) unless you also buy flood insurance. The government is the only entity that sells flood insurance because the private market has refused to do so. As for building on a fault line I wonder who will pay when one of those hydrolic fracturing companies is suspected of causing a major quake. How much do you think they're insured for?


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## Green Maned Lion (May 20, 2014)

I'd guess that if the CLIs have similar financials to UP they are quite capable of cleaning their own messes. UPs 2013 numbers were $22b in revenue for a 3.9b net, or a 17.7% net margin. For a business so capital, labor, and expense heavy as railroading, that's a damned good margin.

Don't always assume that just because the profits are high, a company is healthy. To whit: ExxonMobile has one of the highest profits of any firm worldwide at $32b a year. On revenues of $420b, that's a 7.6% margin, dangerously low.

Or worse, so called retail monster Wal-Mart, which did 480b in revenue to produce 14b in net or 2.8%. If Walmarts numbers continue on their current trajectory, they will do $540b in revenue in 2020, on a loss of, ahem $32 billion, which will correspond to the company falling into debt as their equity reaches zero. I suspect they will be in chapter 11 by 2025.

Moral? Never assume anything about a company's financial health from just a single end year profit.


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## Devil's Advocate (May 20, 2014)

Exxon Mobile and Walmart are dangerously unhealthy huh? Perhaps someone with a history of barely scraping by is experiencing a bit of confirmation bias.


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## Green Maned Lion (May 20, 2014)

Whatever made you think I have a history of barely scraping by? My current business isn't my first. I've had several, a few of which were wildly successful for a while.

I picked my current business because while I think it's going to eventually make me quite wealthy, and while I am currently comfortable but not wealthy and it's moving slow, it is a steady industry with limited potential for disruption.

And the reason I did that is I got tired of going from broke to wealthy and back again like a yoyo. So please, don't assume such silliness.


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## Ispolkom (May 20, 2014)

Devil's Advocate said:


> jis said:
> 
> 
> > Yep. This is the general model used even by individuals who build their houses on flood plains and San Andreas fault and such. It is the nature of the beast.
> ...


Flood insurance premiums do not cover payouts, so anyone who buys flood insurance is once again socializing risks. When the government in a rare act of sense tried to decrease subsidies for wrong-headed development, there was an outcry about increased premiums. The latest version restores subsidies "by a $25 surcharge for most homeowner policyholders," so I'm paying to keep insurance rates down for some idiot who lives on a barrier island. There's a joke about "cry me a river" in there somewhere.

I'm not sure about earthquakes, but I know that my homeowner's insurance doesn't cover damage from volcanoes. I'm sure, though, that flood claims far exceed those for geological damage.


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## Devil's Advocate (May 20, 2014)

Ispolkom said:


> Devil's Advocate said:
> 
> 
> > jis said:
> ...


I thought the increase was limited to 15% per year for any given home but that beyond the solft landing the eventual goal remained balancing the books.


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## jis (May 20, 2014)

And to whit, everything else is trumped by Congressional relief appropriations upon a disaster of any proportion. That is also socialization of at least some (mind you I am not saying all because there are legitimate disasters affecting people who did not knowingly take on any unusual risk) of the risk taken on due to wrong headed development by individuals or groups of individuals. Ultimately the taxpayer pays. There are many ways to fund these things, insurance premiums being but one means for doing so.


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## Anderson (May 20, 2014)

Green Maned Lion said:


> I'd guess that if the CLIs have similar financials to UP they are quite capable of cleaning their own messes. UPs 2013 numbers were $22b in revenue for a 3.9b net, or a 17.7% net margin. For a business so capital, labor, and expense heavy as railroading, that's a damned good margin.
> 
> Don't always assume that just because the profits are high, a company is healthy. To whit: ExxonMobile has one of the highest profits of any firm worldwide at $32b a year. On revenues of $420b, that's a 7.6% margin, dangerously low.
> 
> ...


True, but there are a lot of businesses that tend to have inherently low margins. Oil and gas exploration on a macro scale ends up there...Exxon, for example, has another $17bn in depreciation (against $33bn in capital expenditure) weighing down before you get to that $32bn, and the $420bn was for last year (with bigger profits).

If you go to EBITDA, Exxon's margins are far, far higher but there's a lot of capex weighing against them. Remember, if there were a big accident, the railroad would be able to deduct that judgment against their corporate income tax (not unlike BP did, which is why the oil spill lawsuit a few years ago gave the British government such heartburn...it threatened to wipe out BP's income tax payments for quite a while (they were able to acquire something like $5bn in deferred income tax losses as a result of the spill from the lawsuit).


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## Green Maned Lion (May 20, 2014)

Not properly adjudging ones tax expenses, interest costs and losses, and depreciation of assets is false accounting. It's like me saying that the ~ $2500 a year I currently spend on IT hardware is irrelevant to my bottom line because it's a capital expense. Well, we use a cloud iOS/OSX based system. iPhones have a two year service life, iPads a three year service life, and the computers a four year service life. If I don't account for that expense (which as you can see is considerable) I am understating the cost of my businesses operation.


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## Anderson (May 21, 2014)

Green Maned Lion said:


> Not properly adjudging ones tax expenses, interest costs and losses, and depreciation of assets is false accounting. It's like me saying that the ~ $2500 a year I currently spend on IT hardware is irrelevant to my bottom line because it's a capital expense. Well, we use a cloud iOS/OSX based system. iPhones have a two year service life, iPads a three year service life, and the computers a four year service life. If I don't account for that expense (which as you can see is considerable) I am understating the cost of my businesses operation.


Tax expenses here _are_ relevant in terms of the ability of a company to withstand a lawsuit, however, since that lawsuit would in turn reduce the company's tax liability and tax bill.


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## FriskyFL (May 21, 2014)

Does the phrase "too big to fail" come to mind?


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## George Harris (May 22, 2014)

Not all tax costs are related to ability to pay. You are thinking about income tax. Property tax, for example is completely unrelated to the ability of the owner to pay. There are many farmers that have been driven out of business because as development approaches the county/city reappraises all land values to the point that it becomes economically impossible to keep the farm going. Inheritance taxes have also driven multi-generational farms out of business because the children were unable to pay the inheritance tax without selling the farm. Any tax on anything that is value based rather than income based has the ability to kill a business.

GML has it exactly right on depreciation. Worse, even with depreciation being properly accounted, during inflationary periods properly accruing for preplacement of worn out assets does not give you the funds necessary to replace it.

There are some business that are inherently thin margin businesses. Almost everything involving food is there.

In the past at least, some railroad companies had insurance against catastrophic events. Think in terms of auto insurance with a high deductable. The one quoted to me as the company having at the time was $10,000,000, and that was in the late 1960's.

People and the press like to quote boxcar size numbers without context. GML has it on Walmart. It is a very thin margin business they are in. Old Walton himself never allowed overhead to get high for that reason. I have no idea what the current management/owners are doing. If you see a company with lavish headquarter facilities, invest your money elsewhere. Fancy offices are cash drains not profit centers.


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## Just-Thinking-51 (May 24, 2014)

Back to the OP. My last trucking employer was self insured. There was a management company but the bill was payed by my employer. When I start we had 325 truck, left at 1200 trucks. Some point in the middle everything became self insured. Of course we did not haul Hazmat so only need 1 million in coverage.

I would think the Class 1 railroads would be doing the same. Your going to pay, but why give it away. Have a management service or a in house team doing the claims.


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## jis (May 25, 2014)

Usually companies get a very high deductible catastrophic insurance from one of the reinsurers to cover for those rare occasions. But the cheapo ones try to avoid that cost and palm that off to the taxpayers if they can manage to get away with it.

Sent from my iPhone using Amtrak Forum


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