Guidebook for Intercity Passenger Rail Service and Development (2016)

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A-1 Liability, indemnification, and insurance issues are some of the most difficult to resolve when a line of railroad is shared by both freight and passenger trains. When a new passenger service is being proposed for operation over an existing freight railroad, the owner of the facilities often takes the position that it must be indemnified and defended for any and all incidents that would not have occurred “but for” the presence of the passenger service. Even in the event that the accident was caused by the freight railroad’s own negligence (e.g., a derailment due to a track defect) the passenger agency would be required to absorb the costs of judgments and settlements for personal injury, property damage, and death. While some view this as unfair, many freight operators believe this is part of the price that must be paid for the use of their railroad for an operation not part of the mission or normal business of the owner. Moreover, they contend, the stockholders should not have to assume or share in any such risk. The approaches to liability and indemnification issues range from full and complete indem- nification of the owning railroad regardless of cause to a no-fault arrangement where each operator assumes responsibility for its own employees, equipment, and passengers with some apportionment of third-party liability. Freight/Passenger Agreements Throughout the United States numerous methods have been devised to handle these issues, often dependent on the bargaining power of the parties, the local situation, and laws of the state in which the service is to be operated. For example, a freight railroad might be willing to lease or sell a line with relatively light traffic to a public agency to remove it from the tax rolls or to obtain the benefit of publicly financed capital improvements while retaining some passenger liability as part of the bargain. Sometimes the desire to eliminate passenger service deficits have made freight railroads more willing to assume some passenger liability in order to make a deal to transfer the deficits to a public agency. This was of some significance when such entities as Penn Central, Boston & Maine, and CSX had legal obligations to operate passenger service, but it is largely of historical interest today. Most agreements between freight carriers and the sponsors of passenger service contain no-fault provisions for at least a portion of the liability. This arrangement avoids protracted argument and potential litigation over which entity caused a particular accident and establishes responsibility for defending lawsuits brought by third parties. The situation of a passenger and freight operator each seeking to blame the other before a jury in a lawsuit brought by an injured third party is undesirable and should be avoided if at all possible. A p p e n d i x A Liability/Insurance Requirements Relating to Intercity Rail Passenger Service

A-2 Guidebook for intercity passenger Rail Service and development Federal Legislation In 1997, Congress developed a partial solution to the conflicts related to liability insurance by enacting a provision for limitations on rail passenger transportation liability (see 49 U.S.C. § 28103). This provision mandates that the total allowable award to all rail passengers for all claims arising from a single accident is limited to $200 million. Punitive damages are restricted and any that might be allowed are to be included within the $200 million ceiling. The statute is broad and applies to all rail passenger services, even including excursion or museum train operators and owners of private rail cars. It mandates that Amtrak maintain self-insurance and/or insurance coverage of at least $200 million per accident or incident. This mandate applies only to Amtrak and does not extend to any other passenger rail operators. The statute also specifically authorizes passenger rail service operators to make agreements for the allocation of claims responsibility. The referenced statute begins, “Notwithstanding any other statutory or common law or public policy . . . ,” thereby preempting state tort laws that would enable a greater recovery. While it does not cover liability to railroad employees or to third parties (e.g., trespassers or persons injured in a grade crossing accident), the limitation on passenger liability should assist rail operators in the event of a disaster. However, plaintiffs in the 2008 head-on collision between a Metrolink passenger train and a Union Pacific freight train in Chatsworth, California, have argued that the liability ceiling is grossly inadequate. Metrolink and Connex Railroad (Metrolink’s operator at the time) have offered the $200 million in full settlement of all passenger claims. The litigation is still pending, so the final outcome will not be known for some time. Given that Amtrak is required to carry insurance coverage up to the maximum limitation, this together with Amtrak’s rights to use rail lines based on avoidable costing, enhances the attractiveness of Amtrak as operator for a new service. An agency proposing to have service operated by an entity other than Amtrak cannot use the Amtrak insurance program and so must look to other options. During late November 2015, Congress enacted the Fixing America’s Surface Transportation (FAST) Act—a new multiyear transportation funding authorization act—this act was signed into law on December 4, 2015. Section 11415 of this statute increases the ceiling for damages arising from an Amtrak accident in Philadelphia on May 15, 2015, from $200 million to $295 million. The law also provides that the Secretary of Transportation is to adjust the $200 million cap for inflation from a base beginning date of December 2, 1997. Accordingly, aside from the May 2015 accident, the amount of the cap applicable at any point in time since that date is was unknown when NCRRP Report 6 was completed. This is likely to create confusion in determining the amounts of insurance needed as well as the costs of coverage in the future as the exact claim ceiling will increase or decrease with inflation. One possible way to obtain insurance coverage is for the passenger service to be included in the freight railroad’s liability insurance program in situations where the freight railroad operates the passenger service. The freight railroad’s premiums would be allocated based on an agreed- on formula. Such an arrangement was used in the original agreements among Penn Central, New York’s Metropolitan Transportation Authority (MTA), and the State of Connecticut for operation of service on the New Haven Line and the subsequent agreement between MTA and Penn Central for Grand Central Terminal and the Harlem–Hudson Lines, and it has been used in other situations. However, the trend is for freight railroads to request separate insurance coverage for the two services. The clearest way to resolve the insurance issue is for the passenger entity to obtain the amount of insurance requested by the owning railroad. Since that can be up to $200 million (or now higher) of coverage, this often is impossible. Short of that, the public agency can use whatever bargaining power it may have to negotiate a lower acceptable level of coverage, something that may be possible depending on the parties involved and the nature of the operation. Other insurance-type solu- tions are explored in the separate insurance discussion later.

Liability/insurance Requirements Relating to intercity Rail passenger Service A-3 State Legislation Depending on the location and the state, legislation can provide a remedy. Some states have laws prohibiting indemnification of a private entity (e.g., a freight railroad) from negligence. Given that negligence usually is the basis for lawsuits arising from accidents, any private railroad faced with such a statute would be most reluctant to undertake a passenger operation. If the public is to obtain rail passenger service in a state having such a law, the legislature will have to consent to enact changes to enable the operation. Although it could be argued that such laws are preempted by 49 U.S.C. §28103, this is not clear given that that statute is intended to protect passenger rail sponsors by imposing a ceiling on liability and does not create new rights to be the basis of recovery by plaintiffs. Moreover, as noted below, Minnesota and Florida have not seen fit to rely on the argument that Section 28103 preempts state sovereign immunity laws. The laws of some states give a partial “sovereign immunity” to operations by or for state agencies. New York, Minnesota, and Florida recently have enacted laws to create a more favorable climate for freight railroads involved with commuter train operations. New York New York’s law governing the MTA, the LIRR, and the Metro-North Railroad provides an example of special conditions based on the concept of sovereign immunity. The statute provides that “as a condition to the consent of the state to such suits against the authority,” the action must be commenced within 1 year and 90 days from the date of the accident (see New York Public Authorities Law §1276), a much shorter statute of limitations than the 3-year statute of limitations for tort claims that otherwise would be applicable (see NY CPLR §214). Florida To facilitate operation of the new SunRail commuter service in the Orlando area, Florida enacted a series of laws to authorize its DOT to enter into agreements to protect, defend, indem- nify, and hold harmless the freight rail carrier from any liability cost and expense, including that of commuter rail passengers, regardless of whether the damage was caused by the negligence of the freight rail operator (see Florida Statutes § 341.302). A somewhat similar provision accords protection to Amtrak. The statute contains complex provisions as to which operations are covered and how the statute will apply under various scenarios (e.g., if there should be a collision between a commuter train and a freight train). The purchase of insurance and establishment of a self-insurance fund to cover the risks are authorized. The law covers two territories that the state purchased from CSX Transportation, namely (1) Miami to West Palm Beach, used for the Tri-Rail operation; and (2) the Sanford to Poinciana area used for the SunRail service. One para- graph provides that the assumption of liability or the purchase of insurance or establishment of self-insurance funds shall not constitute a waiver of any defense of sovereign immunity for torts and that such defense shall continue to be available for the state or any other entity operating on such a rail corridor (see Florida Statutes § 341.302[17]). Minnesota During 2013, the Minnesota Legislature enacted a law authorizing the State Commissioner of Transportation to enter into contracts with railroads for passenger service. It further provides: Notwithstanding any law to the contrary, a contract with a Class I railroad for any passenger rail service . . . may also provide for the allocation of financial responsibility, indemnification and the procurement of insurance for the parties for all types of claims or damages. (Minnesota Statutes § 174.636)

A-4 Guidebook for intercity passenger Rail Service and development Although the immediate reason for the enactment of this statute was to cover the Northstar commuter rail service, the language would enable the state to enter into a contract with any Class I railroad to enable intercity passenger service in Minnesota. Examination of Federal-Level Indemnification A federal approach somewhat different from Section 21803 could be the enactment by Congress of a law similar to the Price-Anderson Act, which can limit the liability of nuclear power plant operators (see 42 USC § 2210[c]). Under certain conditions, the Nuclear Regulatory Commission is authorized to indemnify its licensees for public liability for nuclear accidents in excess of the required insurance coverage. The aggregate indemnity for all persons indemnified cannot exceed $500 million per incident. A further complication is presented when there are allegations of gross negligence or willful misconduct by one of the parties. State laws differ, but courts have been reluctant to impose liability on public agencies or Amtrak when the misconduct of a freight railroad reaches the level of gross negligence. This type of argument was presented in the litigation arising from the tragic collision between Amtrak and Conrail trains at Chase, Maryland, on January 4, 1987, which, along with the sub- sequent Chatsworth, California, accident, was one of the worst rail passenger accidents in modern history. Sixteen people were killed and more than 350 injured in that accident that occurred when three Conrail freight locomotives entered the path of a high-speed Amtrak passenger train. The Conrail crew had ignored numerous safety rules, decommissioned safety devices, ignored signals, and had recently used marijuana; indeed, the Conrail engineer had pled guilty to manslaughter by locomotive in the Maryland courts and had been sentenced to 5 years’ imprison- ment. Amtrak brought a declaratory judgment action against Conrail seeking a determination that Amtrak was not required to indemnify Conrail for the reckless, wanton, willful, or grossly negligent acts involved, nor for punitive damages. After taking testimony regarding the history and drafting of the Amtrak-Conrail agreement, the U.S. District Court for the District of Columbia found that the parties did not manifest a clear intent to cover indemnification for accidents caused by gross negligence, recklessness, or wanton and willful misconduct, and accordingly that the language that otherwise would have required Amtrak to indemnify Conrail is unenforceable because of public policy (see National R. R. Passenger Corp. v. Consolidated Rail Corp., 698 F.Supp. 951, 972 [D.D.C. 1988]). Conrail appealed to the U.S. Court of Appeals for the DC Circuit, which set aside the declaratory judgment on the grounds that the dispute first should have been submitted to arbitration pursuant to the contract’s arbitration clause that the lower court had declined to enforce (see National Railroad Passenger Corporation v. Consolidated Rail Corporation, 892 F.2d 1066 [DC Cir. 1990]). The matter later was settled with Conrail paying some $94 million. The lesson here is that if gross negligence is to be covered by an indemnification provision there must be clear and specific language to that effect. In one of the proceedings involving Amtrak’s institution of passenger rail service between Boston, Massachusetts, and Portland, Maine, the STB, citing the Conrail cases, held that Amtrak cannot be required to indemnify the owning freight railroad for its own gross negligence or willful or wanton misconduct as that would be contrary to public policy that should encourage safe rail- road operations. The opinion also stated that the public policy against such indemnification is well grounded in our statutory framework and general insurance law precedent (see Application of the National Railroad Passenger Corp. under 49 U.S.C. 24308(a)—Springfield Terminal Railway Company, Boston and Maine Corporation and Portland Terminal Company, Finance Docket No. 33381 [STB served May 29, 1998]).

Liability/insurance Requirements Relating to intercity Rail passenger Service A-5 Insurance Railroad insurance programs generally employ a relatively high self-insured retention (deductible) on the theory that low-level claims can be handled as operating costs but insurance coverage is needed for catastrophic-type accidents that could materially affect the entity. The matter of adequacy of coverage depends on the nature and extent of the operation (i.e., the risk involved). An agency having strong financial resources can afford a higher self-insured retention than a financially weaker agency. “First-dollar coverage” (i.e., with no self-insured retention) tends to be quite expensive but does offer the advantage of the insurance carrier’s investigation, settlement, and defense services. Railroad insurance programs are established with layers of coverage so as to minimize the risk to any insurance carrier or group. For example, a program not using first-dollar coverage could look like this: • $0 to $5,000,000—Self-insured retention. • $5,000,001 to $15,000,000—Commercial insurance market. • $15,000,001 to $85,000,000—Coverage through its own insurance entity (i.e., a captive). • $85,000,001 to $200,000,000—Lloyds Bank and commercial market in several layers. A large operation could establish its own insurance “captive” to handle catastrophic risks. Smaller rail services could join together to establish a captive or pooling arrangement to handle their high limit needs. Historically, captives were based off shore (e.g., in Bermuda), but today they are permitted under the laws of some states. Determination of the premiums for passenger rail transportation insurance is based on many factors and depends on the individual characteristics of the operation. These factors can include • Frequency, speed, and other operating characteristics of train operations. • Nature of other operations on the same trackage. • Number of passengers handled daily, weekly, monthly, and yearly. • Details of the physical plant, often verified by underwriters’ inspection. • Details of the railroad’s safety program and employee training. • Loss experience and claim reserves during the past years. • “Layer” of coverage involved (i.e., the higher layers have less exposure because claims are unlikely to reach such levels). • Trends of jury verdicts for accident cases in the area. • Extent to which the sponsoring agency enjoys some type of “sovereign immunity.” • Federal or state laws authorizing or limiting punitive damages in tort cases. • Number of highway-rail grade crossings and descriptions of the nature of traffic and crossing protection devices at each one. Summary Responsibility for liability, indemnification, and insurance are some of the most vexing prob- lems where two types of rail services share the same trackage and facilities. Although these issues have prevented the establishment of some services, the problems usually are resolved by a no-fault type of agreement backed by agreed-on insurance coverage that can include a pooling arrange- ment and partial self-insurance. Congress has assisted in resolving this matter by limiting liabil- ity to all passengers arising out of one accident to a maximum $200 million. Likewise, some states have enacted laws to cover their individual situation and the rail passenger services they desire to support. There is no one-size-fits-all solution. Finally, if the subject of gross negligence is to be included within the purview of an indemnity, the language must be carefully drafted to specifically cover it and the indemnity must be permitted under the applicable state laws.