TRANSPORT:

Tangled web of liability trails deadly oil-train disaster

Quebec's government last week added rail giant Canadian Pacific Railway Corp. to its list of companies deemed responsible for cleanup costs following last month's deadly oil train derailment.

The railway has vowed to fight the provincial order, setting the stage for a lengthy legal battle as dozens of companies and officials quarrel over who should have to pay for the disaster.

The Calgary, Alberta-based freight operator joins a litany of railways, fuel providers and insurers now tied to the financial fallout from the July 6 crash, in which a runaway Montreal, Maine and Atlantic Railway Ltd. train carrying oil careened off the tracks in Lac-Mégantic, Quebec. Several of the train's 72 crude-laden tanker cars exploded in the center of the small town, claiming 47 lives and spilling roughly 1.5 million gallons of crude.

In the immediate aftermath of the tragedy, all eyes turned to MM&A and its Chicago-based parent company, Rail World Inc. The small freight railroad was accused of failing to take enough precautions when transporting hazardous materials, allowing for the unmanned train to break free from its parking place on an incline 7 miles outside of town. Canada's top rail regulator and its U.S. counterpart have already issued new safety rules in response to the incident.

But while MM&A's Chairman Ed Burkhardt has said the company will do "everything within its capacity" to aid in environmental remediation, both the U.S. and Canadian branches of the railway have filed for bankruptcy protection. According to documents from the Maine District U.S. Bankruptcy Court in Bangor, MM&A's U.S. arm has between $50 million and $100 million in assets.

With cleanup forecast to cost well over $100 million, and the potential for millions of dollars more in lawsuits, MM&A can't afford to foot the entire bill for the disaster. The company carried multimillion-dollar liability insurance with XL Group PLC before the crash, but the Bermuda-based insurer has remained tight-lipped about the details of its client's policy or any possible payouts.

Christine Weirsky, a spokeswoman for XL Group in North America, would not comment on the case. Burkhardt, who also serves as CEO of Rail World, did not respond to requests for comment.

Insurance experts say XL Group, which deployed representatives to the scene after the derailment, will try to demonstrate negligence was involved.

Attorney Dean Hansell, a partner at Hogan Lovells US LLP in Los Angeles, said it would take time for insurance companies to complete their on-the-ground fact gathering and settle the parties' "competing priorities."

The insurance expert and former state and federal prosecutor said the Canadian government had been unusually aggressive in pursuing the case.

Last Tuesday, the federal Canadian Transportation Agency revoked MM&A's operating license on the grounds that the railway hadn't recovered adequate third-party liability insurance since the derailment.

"That creates quite a standard, that I'm not familiar with ever happening in the past," Hansell said, noting that he suspects the railway had been "reasonably diligent" with its insurance coverage but was swamped by a uniquely severe disaster that put political pressure on the government to act.

On Friday, the CTA backpedaled on its license removal, extending MM&A's "certificate of fitness" until Oct. 1 following an appeal by the company. But the regulator said on its website last week that "the tragic derailment in Lac-Mégantic has raised important questions regarding the adequacy of third party liability insurance coverage to deal with catastrophic events, especially for smaller railways," of which there are more than 600 in North America.

CP dispute

Political pressure may have played into the Quebec government's decision Wednesday to add CP to its list of parties responsible for cleanup costs, Hansell said.

The government said CP must bear some of the decontamination costs as the original contractor for the MM&A train, under a provincial provision that holds the original owner or custodian of a hazardous material accountable for spills.

CP has vowed to fight the order.

"As a matter of fact, and law, CP is not responsible for this cleanup," said spokesman Ed Greenberg. "CP will be appealing."

Quebec's Environment Minister Yves-François Blanchet shot back at the rail giant Thursday on Twitter, writing in French that "lawyers will act."

"This is not an idea or a suggestion; it is a legal order," he continued. "It is not optional."

Blanchet also said the owner of the oil, Miami-based World Fuel Services Corp., should shoulder some of the financial burden. The July 29 provincial cleanup order was also amended to include World Fuel last week.

The original legal notice had included two of World Fuel's subsidiaries, which had leased the rail cars involved in the incident and distributed the crude en route to the Irving Oil Ltd. refinery in Saint John, New Brunswick.

World Fuel said it "did not expect to be named in this or any similar government action" after Quebec's order, noting that MM&A had already claimed responsibility for the spill and was managing the cleanup effort with local authorities.

But in a July 31 filing with the SEC, World Fuel acknowledged that "we may be subject to costs and liabilities as a result of the derailment of a train carrying our crude oil and subsequent explosion in Lac-Mégantic, Quebec." The company did not provide an estimate of the potential costs.

Insurance fallout

Canada's Transportation Safety Board is continuing to investigate the July 6 incident, and it will be many months before the agency issues its final conclusions.

Depending on the TSB's findings, the Lac-Mégantic disaster could change how insurance underwriters judge the risk of transporting crude.

"It's probably going to have some impact," said Huhnsik Chung, partner in charge of Edwards Wildman Palmer LLP's New York office and a specialist in complex insurance litigation. "But I don't think it's going to be a big enough loss to change the rating system, because rail transport has been fairly successful over the years."

Chung said he doubted minor adjustments to risk management and underwriting would translate to higher insurance premiums for major rail carriers. Nevertheless, he cautioned that the investigation is far from settled. If the TSB determines that the puncture-prone DOT-111 tank cars involved in the crash played a key role, the rail industry would have to make some costly changes.

But if the primary fault lay in the hands of the MM&A engineer, whose name has now been widely published, the insurance industry won't place too much weight on the tragedy, Chung said.

"Human error can occur pretty much anywhere," he said.

Blame could stretch back to Bakken

For the devastated community of Lac-Mégantic, hope of recovery comes with a steep price tag.

While the 47 lives lost in the disaster can never be replaced, the surviving victims are struggling to find some compensation for their loss.

The tragedy has already spawned lawsuits in both Canada and the United States.

More than 15 Lac-Mégantic individuals and families have filed lawsuits in Chicago rather than Quebec so far, due in part to the potential for bigger settlements. In Canada, provincial laws cap personal injury claims.

According to documents from the Circuit Court of Cook County in Illinois, the defendants in various Lac-Mégantic-related lawsuits range from Rail World to manufacturer Union Tank Car Co.

Experts say new lawsuits will likely rope in CP following Quebec's legal notice.

Lawyers representing class-action suits on behalf of the victims in Quebec have already added CP to their list of targets in legal filings.

Joanne Marceau, spokeswoman for the Ministry of Justice in Quebec, emphasized that the provincial order is not related to civil liability and is solely concerned with environmental cleanup.

However, when asked whether the province's list could be amended again to include more names, Marceau said "anything is possible for the future, as long as it [involves] the owner, or the person who has custody of the oil."

Some have speculated that the cleanup bill could stretch all the way to the original oil drillers in North Dakota's Bakken Shale play. Those companies have not yet been identified, but the Federal Railroad Administration and several pipeline operators have raised concerns about the volatility of oil produced in the region.

"When you're dealing with something like this, inevitably people are trying to cast their net as broadly as possible," said Hansell of Hogan Lovells. "I think that's why there's been this reaction from the [Canadian] government -- because it's a way for them to say to their constituents, 'We're doing something.'"

Canada's TSB has even dispatched investigators to the Bakken Shale, although a spokesman said such on-the-ground activity doesn't necessarily carry any special meaning.

"In any type of accident like this, we certainly take a look to see what was being carried in the train," said TSB spokesman Chris Krepski. "Right now, our investigators are continuing to gather information and pursue the investigation."

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