On July 1, 2011, the ExxonMobil Silvertip Pipeline beneath the Yellowstone River ruptured, reported the Billings Gazette, allowing an oil spill to flow 240 miles downstream, with a clean-up cost 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 an audience of New York foreign affairs leaders “unexpectedly backed away from energy security as the most convincing argument” for the Keystone XL Pipeline and cited rail safety instead, reported David Thomas, an Alberta business reporter in the August, 2013 issue of Trains in an article published prior to the Lac-Mégantic catastrophe. Undoubtedly this accident will change the statistics and pipeline politics.

“The cause of Harper's sudden and uncharacteristic conversion to environmentalism became clear at the end of the month when California's big oil refiners passed on a deadline to sign up for a $2 billion pipeline from Texas,” Thomas stated. “By opting instead to get their crude by train, the California refiners have signaled the end of pipelines' unchallenged economic and strategic superiority in moving crude oil across the continent. 'The ability to receive crude oil by unit train provides our West Coast refineries 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 and Nebraska, running from Hardisty, Alberta, southward and then eastward across Saskatchewan to a point east of the Missouri Valley, then south to Steele City, Nebraska, from which the next phases will run to Illinois and Texas, if approved by Washington. As the pipeline is not yet in full use, much of the shale oil from both the Alberta and Bakken North Dakota Oil Fields is transported by railroads, with the bulk of it on BNSF and both Canadian Pacific and Canadian National. The Montreal, Maine & Atlantic (Canadian subsidiary) is a regional line starting in 2003 using former Canadian Pacific rail across Quebec and Maine, the former route of CP's Montreal-Halifax line, but including several U.S. lines, and is based in Bangor.

While pipelines tend to be mono-directional, railroads are competitive by bringing tools and equipment, as well as the fluids and fracting sand mined primarily in Wisconsin to the oil fields and transporting the oil out. Thus the hazards per rail-mile are increased, as the fracting fluids are also a polluting contaminant if spilled. Further, while major rail lines such as BNSF or the Canadian lines spend millions of dollars on rail maintenance, when the cars are transferred to or from independently-operated short lines such as the MM&A less money may have been spent on factors such as maintenance.

Built-in Tank Car Safety

Exactly how and why the oil-filled tank cars caught fire and exploded in Lac-Mgantic is not clear. Tank cars are built to withstand impacts of certain types and a puncture should not necessarily create an explosive fire. Kathi Kube reported in the September, 2012, issue of Trains, “In early 2007, Dow Chemical Co. and Union Pacific Railroad joined forces with Union Tank Car Co. as well as representatives from the U.S. and Canadian federal governments and other organizations to form the Next Generation Rail Tank Car Project.” She explains, “Existing tank cars have a single shell, insulation, and a jacket that's one-eighth-inch thick to hold everything in place. Now Union Tank Car is building up to 13 tank cars under special permit with the Pipeline and Hazardous Materials Administration. They will be basically the same as existing tank cars, but the jacket will be more like another shell—sort of a tank within a tank, with the outer structure carrying the train loads, rather than the commodity tank.”

Fred W. Frailey explained in the May, 2012, issue of Trains (Oil Trains in the Wheat Fields) “Union Tank Car Co. was founded in 1866 expressly to move John D. Rockefeller's oil to market. But the coming of pipelines pushed railroads out of the crude oil business after World War II. Now two circumstances are driving oil companies and railroads back into each other's arms, at least for a while. The first is that pipelines in northwest North Dakota lack capacity to get all the oil out of the state. Without transportation oil has little value.

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

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

Disputed Liability

Exactly what transpired in the Lac-Mgantic situation was not immediately clear. The Canadian government launched a criminal investigation, but focus fell on two possible sources, the MM&A locomotive engineer for failing to properly set the brakes, and the Nantes Fire Department. The oil train, headed for a destination in Maine, was “tied-up” for the night at Nantes, to the west of Lac-Mégantic. This may have been by plan, or it may have been because the engine crew had reached their twelve-hour work limit. The railroad advised news reporters that the engineer had parked the train on Friday night and left one locomotive running to ensure the 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 fire in one of the locomotives late on Friday. Andre Gendron, 38, lives on a wooded property next to the rail yard in Nantes. He said he was burning a campfire outside his trailer on Friday night when he heard the fire truck. “About five minutes after the firemen left, I felt the vibration of a train moving down the track. I then saw the train move by without its lights on.”

It is the locomotive that holds the air brakes for the entire train, and when not in operation, the diesel engine is left running. This is necessary to keep the air pumped up to hold the brakes; if the locomotive's diesel engine is turned off, the braking system disengages and releases the brakes. Somehow, the engine was turned off.

The Star reported, “Nantes Fire Chief Patrick Lambert said his crew had switched off the locomotive late Friday as they extinguished a 'good-sized' blaze in the motor, probably caused by a fuel or oil line break in the engine. 'We shut down the engine before fighting the fire,' he told Reuters in an interview. 'Our protocol calls for us to shut down an engine because it is the only way to stop the fuel from circulating into the fire.' The (MM&A's) company chairman told the Toronto Star the brakes will not work if a train is switched off. 'If the operating locomotive is shut down, there's nothing left to keep the brakes charged up, and the brake pressure will drop finally to the point where they can't be held in place any longer,' Ed Burkhardt said.”

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

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

Denial of Liability

While some Quebec fingers pointed toward the railroad and its engineer for improperly setting the brakes, the National Post reported that the fire chief had angrily denied any suggestion of his fire department's having caused the disaster. Chief Lambert told this newspaper that two railway employees were dispatched to the scene and “inspected the train with us.” These men said “everything was OK, the fire was out, everything was secure, you guys (the fire department) can leave.” The National Post continues, “Within minutes of the firefighters pulling away, however, the train had broken loose.”

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

Adjusting Oil, Train or Pipeline Claims

Handling a railroad or pipeline oil spill claim depends on a number of factors including location, jurisdiction, and the circumstances. In the Lac-Mgantic cataclysm local fire departments were directly involved, but Transport Canada, the Canadian equivalent of the NTSB, will probably conduct the primary investigation along with the railroad. Adjusters at the scene representing the railroad need to be cautious about commitments until the liability issues can be resolved, but the determination of damages, both property and for the many fatalities, can proceed until that determination is complete. One of the major loss factors will be indirect loss, both to the railroad, the oil shipper and consignee, and to the businesses in Lac-Mgantic that suffered fire damage.

Oil spills—as well as any other hazardous material spillage—can be catastrophic whether or not fire or explosion is involved. Such a loss occurring in a large urban area may involve evacuation of thousands of people and the closing of hundreds of businesses until the hazmat or oil spill is stabilized. The question for the adjuster often is, “Who is in charge?” It is usually a governmental agency, either federal or state, that will be immediately in charge of the spill. If the loss occurs on land, the state and federal Environmental Protection Agencies (EPA) may be the primary party in control; for a loss on navigable water, it will be the U.S. Coast Guard.

While not in charge, the spiller (the railroad, pipeline operator or trucker) and its claims adjusters must maintain control. This may initially involve making direct and frequent contact with the governmental agency in charge to determine what clean-up will be required, and who will do it. Often the governmental agency will be aware of qualified environmental protection and clean-up firms that can be brought in quickly to maintain and minimize a spill. While the spiller may have little right to demand a particular firm, an experienced environmental claims adjuster may have recommendations and should discuss these with the on-the-scene agents in charge. The adjuster must also monitor what is being ordered by the agency in charge, and be certain that it is not only adequate, but that it does not demand more than is necessary in expensive clean-up, as the spiller will be the party having to pay for whatever work is ordered.

The general rule in environmental pollution claims is that all of the spilled material—oil, chemicals, gasoline or whatever—must be removed, and the area of removal restored to its prior condition. If the spillage seeps into the ground and into the aquifer, then it must all be pumped out via wells drilled and monitored. The spiller must determine precisely how much of the hazardous material was spilled, for that same amount must be recovered, if at all possible. Additionally, the spiller will generally be fined for causing the spill and will also be fined for any residual pollution that cannot be removed by digging or pumping.

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

If liability is immediately clear and coverage is adequate, then the adjuster can consider proceeding with settlement discussions with claimants. However, caution is absolutely required prior to any settlements, for the coverage—either self-insured assets or primary, umbrella and excess liability insurance—may be insufficient in a major loss. Settling some claims and then having inadequate assets for other claims could expose the adjuster to professional liability claims. A hazmat loss could easily bankrupt a spiller that has inadequate assets or insufficient excess insurance.

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

In some cases it may be best to allow claimants who have sufficient first-party direct and indirect loss coverage make claims under their own insurance if delay either in determining coverage adequacy or liability is involved. When there is both adequate insurance and clear liability, however, the sooner the adjusters negotiate settlements with legitimate claimants the less likelihood those claimants will join in the class action. When claimants hear that a neighbor received $X quickly, but that by joining in the class action it may be months or years before any payment will be received, word can spread quickly.

Handling a hazmat disaster, such as the Lac-Mgantic oil fire, is not easy, but like any catastrophic loss, be it a tornado, hurricane, airliner crash or forest fire, when taken claimant by claimant, complete resolution will eventually occur.