U.S. Rail Sectors Work to Mitigate Capacity and Pricing Risk Issues
U.S. freight and commuter rail industries are facing excess liability and property issues for different reasons. These railroads are critical to infrastructure and vital to the economy, yet finding effective solutions remains complex.
U.S. freight and commuter rail industries are facing excess liability and property issues for different reasons. These railroads are critical to infrastructure and vital to the economy, yet finding effective solutions remains complex.
Long-considered critical infrastructure in the U.S., freight and passenger railroads provide vital supply chain and commuter transportation links that are instrumental to the domestic and global economies. However, overarching risk capacity issues manifest differently in the freight and commuter sectors.
- Freight: The 2023 derailment of a train hauling hazardous materials in East Palestine, Ohio, put additional attention on freight railroad safety. The $600 million settlement agreement and the threat of future nuclear verdicts in the industry have made global insurers that write rail liability nervous. This is despite declining railroad accident rates. Further, rising natural catastrophes are causing business interruption and property losses, with flooding identified as the primary concern.
- Commuter: A lack of excess liability capacity worldwide is impacting commuter services as third parties are requiring them to purchase cover up to their limits. The situation could worsen in 2026 when the U.S. Congress increases limits.
U.S. freight railroads annually haul more than 1.6 billion tons of raw materials, serving as a key link in a complex and often-fragile global supply chain. Meanwhile, in most major metropolitan areas, 32 commuter rail agencies provided 316 million trips in 2023.
“Freight and passenger have their own risk concerns that differ from each other. There are common property risks, however, liability concerns are uniquely profound and challenging for each.”
Challenges Facing Freight Rail
News reports of large train derailments, combined with a litigious U.S. tort system and the potential for nuclear verdicts that underwriters have difficulty quantifying, are creating a liability risk challenge for U.S. freight railroads.
Beyond liability risk concerns, property and business interruption losses are mounting as climate change increases the frequency and severity of natural catastrophes.
“The concern with the larger railroads is the business interruption exposure related to floods. They must move all of their assets away from where storms are occurring and reposition them strategically. But doing so typically interrupts the network activity and may potentially generate BI losses.”
Natural catastrophes also hinder rail globally. In the UK, weather-related incidents caused more than 322,000 delay events between 2006 and 2021. Canadian heatwaves and wildfires forced trains to run slower, contributing to a 26 percent revenue reduction for the Canadian National Railway.
Wildfires in Canada, the western U.S., and Europe lead to track damage, which contributes to derailments, power and communication disruption and increased soil erosion. New Canadian rules require railroads to commit additional capacity to detect, monitor and suppress fires during the midyear wildfire season. To improve resilience, the rail industry is turning to technology, including satellite imagery, to monitor vegetation growth near tracks. Further, fire trains are being deployed by North American railroads to combat wildfires that can destroy tracks, bridges and other assets.7
With just six class 1 freight railroads operating in the U.S., the risk pool is diminished. Increasingly, larger railroads are choosing to self-insure and reduce the amount of risk transferred to traditional markets.
“They are getting comfortable with this approach, which makes it less likely they will come back to the risk transfer markets. Every year, underwriters tell us that the pool of risk is more concentrated than ever. Insurers don’t have the luxury of the spread of risk because there are only six class 1 freight operators. Thirty years ago, there were more than 30.”
Concerns over nuclear liability verdicts and the rising frequency and severity of natural catastrophes have led to insurance market constriction. Most rail insurers are concentrated in Bermuda and the UK. Capacity is retracting and causing difficulties. Pricing is also a challenge, as excess liability premiums have increased at each layer, but especially at the top of the risk tower.
“There’s a big fear of the runaway jury verdicts in the U.S., so in general, insurance companies are more tentative, especially where you are dealing with heavy industrial targets.”
Risk Insights to Consider
- Build a risk assessment: A strategic risk assessment helps rail risk managers navigate risk volatility by driving deliberation and action around risk uncertainties and untapped opportunities that can impact an organization’s strategic execution. After identifying risks, the next step is to define the risk minimization actions. Risk assessments are not always easy and may require firms to work with their broker for guidance through the necessary steps.
- Communications with insurers: Meeting with an underwriter frequently to discuss the risk profile, their risk concerns and what information they need, is critical. Underwriters will use this open dialogue, preferably in-person, to help them better understand the railroad’s risk and safety characteristics.
- Conduct a talent assessment to predict safety, retention and performance outcomes: Talent assessments are extremely predictive in helping select and retain employees who will work safer, stay longer, perform better and ultimately help lower loss costs. Talent assessments come in many shapes and sizes, and can measure candidates on the critical skills and competencies needed to build a safer work culture.
Liability Issues in Commuter Rail
The 32 commuter rail agencies in the U.S. are caught between a rock and a hard place in their pending efforts to purchase excess liability cover:
- The Fixing America’s Surface Transportation (FAST) Act of 2015 imposed a liability insurance cap, which would be adjusted for inflation every five years. The cap is currently at $323 million.
- While there is no federal mandate requiring the commuter rail agencies to purchase coverage to that limit, they must do so to comply with third-party vendor requirements — freight railroads they share tracks with, along with other vendors, to avoid a breach of contract and a potential suspension of operations.
- The cap is scheduled to be adjusted for inflation in 2026, when it is expected to be increased by $70 million.
- This would require all the agencies to update their coverage limits within 30 days to meet third-party agreements. However, there is not enough worldwide capacity in an already hard and shrinking market that primarily relies on markets outside the U.S.
During the last cap increase, the agencies approached the excess marketplace at the same time; this approach will likely be unsuccessful in the future due to lack of capacity. The results could see suspension of train services, upset commuters and consequential business disruption in 2026.
Risk Insights to Consider
The solution may be relief from the U.S. government. In April 2024, five U.S. commuter rail leaders testified before the House Transportation and Infrastructure Subcommittee on Railroads, Pipelines and Hazardous Materials to address issues facing commuter rail, including the pending excess liability crisis.8
“We know we must search for an alternative. We are asking Congress to work with us to support alternatives, including a national commuter rail liability pool.”
The commuter rails also asked to extend the 30-day implementation window to 365 days to ensure they have time to secure the additional cover.
“We are clear-eyed as to the hurdles of establishing an industry insurance pool. A multi-state agreement to share liability is no small undertaking, especially when navigating varying state liability caps and tort immunity protections. We are actively discussing these options and ask Congress to assist us by supporting studies and, potentially, federally supported loans needed for capitalizing a commuter rail industry liability pool”
The U.S. freight and commuter rail industries are essential components of the U.S. economy, yet they face escalating risks that threaten their operational viability. The challenges are different, and each requires a distinct approach to risk mitigation to ensure the future reliability of two essential service entities.
This article was originally published by Aon.