March/April 2014

MAC Economic Commentary

Reducing railways’ liability not the right path to rail safety

By Brendan Marshall

With Canadians still reeling from the devastating tragedy in Lac-Mégantic last summer, the federal government is contemplating improvements to the transportation of dangerous goods by rail. As possible solutions are being studied, and consultations are ongoing, one option could see liability transferred from rail companies to the shippers, and this could actually result in a reduction of rail safety.

Following the Lac-Mégantic disaster last July, the federal government highlighted the issue of rail safety in its October 2013 throne speech, stating that railway companies must be able to bear the cost of their actions. MM&A, the company whose train derailed in Lac-Mégantic, was grossly underinsured to pay for the damages resulting from the explosion that killed 47 people and razed the centre of the southern Quebec town. That MM&A is now insolvent creates uncertainty as to who will pay for the damages, potentially leaving it to the government to compensate individuals and businesses affected by the disaster. As a result, the government has indicated it will require both shippers and railways to carry additional insurance to ensure they are held accountable should accidents occur in the future.

Although it remains uncertain as to the exact approach being considered, there has been much chatter of a “shared-liability” regime between shippers and railways. While the mining industry respects the federal government’s responsibility to protect taxpayers’ dollars, it is critical that any shared liability policy changes being contemplated not unintentionally reduce the safety of rail operations, inadvertently placing citizens’ lives at greater risk.

The mining industry recognizes it has an important role to play in ensuring the accurate classification and stewardship of its products. Rail cars are in a miner’s custody during product loading, and mining companies have the responsibility to inspect the cars and make sure that mineral products are securely loaded. Once rail cars leave their custody, responsibility for the safety and security of the transportation of freight belongs to the company contracted and entrusted for safe shipment. After all, transportation companies are the experts in the movement of freight including the safety, security and reliability of their equipment and physical and non-physical infrastructures.

Reducing liability for the railways may present a moral hazard – a situation whereby a party is likely to take greater risks because the costs that could result from an accident would not be sufficiently steep to dissuade them from doing so. Mitigating a railway’s liability, even if transferred onto another party, has the potential to reduce rail safety.

Similar conclusions were found in a 2010 review of liability issues conducted by the Surface Transportation Board of the United States. In reviewing precedent on liability issues, the board determined that “a rail carrier cannot be indemnified for its own gross negligence, recklessness, willful or wanton misconduct, as that would be contrary to public policy in encouraging safe rail operations.”

Another challenge is the impracticality of having shippers participate in liability sharing with railroads to a degree not commensurate with their level of accountability for the movement of their goods. Once the goods are on the train, and the train has departed a shipper’s operation, the railway operator has care, custody and control of the train and the product. An underwriter will likely be unwilling to offer greater levels of coverage to a shipper because the shipper has limited influence over what happens in transit and so cannot manage the risk.

Railways are responsible for the safe transport of goods when the cars are in their custody, and liability insurance serves as an incentive to ensure maximum precautions are undertaken to prevent accidents. And the incentive is working. Transportation Safety Board of Canada Statistics indicate that 1,011 rail accidents were reported in 2012, down 10 per cent from the 2007–11 average of 1,128. In 2012, 118 accidents involving dangerous goods were reported, down from the five-year average of 147. According to the Railway Association of Canada, millions of carloads of dangerous goods move by rail every year and more than 99.9 per cent of them are delivered without incident.

While there is always room to improve safety, the current system motivates railways to safety, and this motivation should not be underestimated. While the government does have the duty to act as stewards of taxpayers’ dollars, it is also responsible for ensuring the safety and security of Canadians. Any changes being considered to the current rail liability framework must unequivocally put the safety and security of Canadians first.

Brendan Marshall is director of economic affairs at MAC. He works to advance the mining industry’s interests and understanding of key economic issues such as taxation, international trade and investment, transportation, energy and climate change, and innovation.




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