Railroad Subrogation And Third Party Recoveries - "Getting Back On Track"

October, 2006

by Michael S. Errera and Dean S. Rauchwerger

Railroads ship many commodities, including agriculture, coal, chemicals, and domestic and foreign products.¹ Given the considerable volume of daily rail traffic, there is a large potential for train accidents and derailments. Depending upon the underlying circumstances and causal factors in play, significant subrogation and third-party recovery opportunities may be available.

Railroad Groups

Various rail companies operate in the U.S. – varying in size by number of trains operated, locations serviced, and volume of freight handled. As of 2005, 556 rail companies were operating in the U.S, comprising:

Class I: Seven railroads with revenue of more than $289.4 million.
Regional Railroads: 31 railroads, covering at least 350 miles of track and/or having gross revenue of $40 million to $289.3 million each year.
Local Linehaul: 314 rail operators, covering less than 350 miles of track with gross revenue of under $40 million.
Switching and Terminal: 204 rail operators, involved in pickup and delivery services within the regions for linehaul companies.

Accident Frequency

In 2005, rail carriers suffered 3,345 accidents, resulting in damage claims of more than $347,000,000. Of these accidents, 37.5% were due to equipment or track failures and resulted in derailment and damage claims of more than $247,000,000. In 2005, more than 100 different rail companies traveled more than 790,000,000 track miles. When a railroad suffers an accident or derailment, potential damages include product losses, damages to track and railcars, and lost profit/business interruption as well as losses from environmental releases or spills.

Potential Subrogation and/or Third Party Recovery Scenarios

A variety of scenarios exist for which third party liability may be pursued:

I. Track Maintenance

Economic Impact: In 2005, there were 1,039 accidents due to track problems. Of these, there were 991 derailment incidents, resulting in damage claims of $127,136,453.

Improper or substandard maintenance by third party vendors afford significant recovery opportunities.
Inadequate track inspections may result in derailments because of track irregularities, including:

Deteriorated track components for fatigue or overloading,
Wide gauge due to spike conditions, cross tie conditions, general construction, or load carrying capability,
Track misalignment,
Missing or broken track components, such as crossties, welds, or rails, and
Unstable roadbed due to poor construction or maintenance.

II. Equipment Failure

Economic Impact: In 2005, 352 accidents were due to equipment failure. Of these, 262 derailments resulted in damage claims of $51,524,057.

Railroads rely upon equipment manufacturers to provide quality products for use in ferrying freight. However, equipment manufactured and sold to railroads is not always properly made or serviced. Types of equipment failure include: Broken or worn equipment, such as flanges, gears, side frames, or rims, and failures from operating conditions, such as journal failures due to overheating of roller bearings.

III. “Mother Nature” Conditions

Economic Impact: For all railroads in 2005, 471 accidents were due to miscellaneous causes. Of these, 86 accidents, or 18.3% of the overall total, were due to “Mother Nature’s” involvement. Of these, 35 derailment incidents resulted in damage claims of $19,349,270.

A significant “Mother Nature” condition is out-of-control vegetation along a rail line. Vegetation that is not properly managed near rail tracks may potentially lead to adverse conditions: sight distances can be obstructed and overgrown or fallen vegetation may lead to improper functioning of equipment signals, communication lines, or tracks due to interference or impediment.

IV. Defective Equipment

Premature deterioration of hopper cars due to defective or inadequate materials of construction, such as bolsters, side frames, castings, or other structural components - may lead to release of cargo or derailment. Additionally, safety devices, like pressure relief systems, may fail because of defect or otherwise, resulting in a catastrophic incident that may have been avoided or mitigated.

V. Potential Shipper Liability

Where losses occur due to improperly placarding, marking, describing or specifying of the physical properties of materials being transported and their hazards on the shipping manifest, certified contents profile or other required shipping documents, the shipper faces potential liability under a variety of legal theories, including violation of governmental regulations and good practice standards. Inaccurate and incomplete information about the contents being shipped and the adequacy of special instructions or procedures for loading and/or unloading may trigger liability. Further exposure exists for use of inadequate packaging or containers being provided to the rail carrier, as well as tank cars and containers not properly maintained or placarded.

VI. Conclusion

Railroads are an essential component of North American freight transportation, carrying more than 60 percent of all freight, and operate over 173,000 miles of track. When accidents occur, significant recovery opportunities may be available against third parties for inadequate track maintenance, defective equipment, inadequate vendor services, foreseeable “Mother Nature” conditions not properly controlled, and shipper liabilities.

As in all recovery investigations, counsel should be retained immediately to ensure evidence preservation, notice to interested parties, and appropriate development of the factual, technical and liability case theories. Third-party liabilities are obviously large in the railroad context and ensuring close coordination between counsel and client is imperative to maximize the recovery potential.

¹ The data referenced herein is based on various publicly available industry and governmental sources.

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