AIG offers $1B in insurance coverage for rail accidents

As the amount of oil shipped by rail increases, commercial insurer AIG Inc. has introduced a $1-billion policy to cover catastrophic accidents.

AIG is offering $1 billion per occurrence after a railroad has incurred more than $1.5 billion of costs in an accident such as a derailment, according to Russ Johnston, head of AIGs casualty operations.

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He said this was one of the largest policies offered to Class 1 rail carriers in Canada and the U.S. There is demand in the market for larger rail insurance policies, he added.

Rail companies typically have to buy policies in amounts of $25 million to $50-million from several companies to get up to about $1 billion in coverage.

Shipping crude by rail

As North American oil production continues to outpace pipeline capacity, shipment by rail is increasingly common.

Rail shipments of oil in Canada are rising rapidly. CP said last week it expects to haul as many as 200,000 tank cars of oil in 2015 and it is putting infrastructure in place to handle more crude shipments. The Association of American Railroads estimated North American rails carried 407,761 carloads in 2013.

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The tragic derailment that led to the loss of 47 lives in Lac-Mgantic, Que., focused public attention on rail safety. But there have also been more recent derailments, such as the one in Wadena, Sask., earlier this week that is still being cleaned up.

Railways face costs for cleanup, for loss of life, for injuries and for property damage when there is a derailment. The AIG policy, offered through Lexington Insurance and other AIG affliliates, covers property losses and bodily damage to third parties.

In the case of Lac-Mgantic, rail operator MM&A had insufficient insurance coverage for the scope of the damage and went bankrupt last year.

That prompted Ottawa to suggest railways should have higher levels of insurance coverage, though there are no federal rules yet in place on insurance.

Keith Creel, president and chief operating officer of Canadian Pacific Railway Ltd , testified on the subject to the House of Commons' transport committee, saying he believed shippers should bear part of the liability.

Shippers often own the rail cars used in shipping oil and many have yet to retire the dangerous oil tanker design implicated in the Lac-Megantic tragedy.

A spokesman for CP said therail company is reviewing the AIG announcement. CN said it is reviewing the AIG policy option and has no comment on the matter at this time.