Commuter Rail: Many Factors Influence Liability and Indemnity Provisions, and Options Exist to Facilitate Negotiations
Released: 2009-03-26T00:00:00

Letter

Background

Most commuter rail agencies use rights-of-way that are owned by Amtrak or freight railroads for at least some portion of their operations. Specifically, 9 commuter rail agencies operate over Amtrak-owned rights- of-way. Twelve commuter rail agencies operate over rights-of-way owned by freight railroads. In addition, most commuter rail agencies rely on Amtrak and freight railroads for some level and type of service, including the operation of commuter trains; maintenance of equipment (i.e., locomotives and train cars); maintenance of way (i.e., track and related infrastructure); and train dispatching. Specifically, 13 commuter rail agencies rely on Amtrak for some type of service. Fourteen commuter rail agencies rely on freight railroads for some type of service. (See figs. 1 and 2 for an overview of these relationships.)

Liability and Indemnity Provisions in Agreements Differ, but Commuter Rail Agencies Generally Assume Most of the Financial Risk for Their Operations

Liability and indemnity provisions in agreements between commuter rail agencies and freight railroads differ, but commuter rail agencies generally assume most of the financial risk for commuter operations. For example, most liability and indemnity provisions assign liability to an entity regardless of fault—that is, a commuter rail agency could be responsible for paying for certain claims associated with an accident caused by a freight railroad. The reverse is also true—freight railroads are sometimes responsible for certain claims associated with accidents caused by commuter rail agencies. These types of agreements are referred to as no- fault agreements. In addition, about one-third of these no-fault agreements exclude certain types of conduct, such as gross negligence, recklessness, or willful misconduct, from the agreements. Some of the remaining no- fault agreements specifically allow for such conduct, that is, the commuter rail agency is still responsible for certain claims caused by, for example, the gross negligence or recklessness of a freight railroad. The liability and indemnity provisions also require that commuter rail agencies carry certain levels of insurance to guarantee their ability to pay for the entire allocation of damages.

Liability and Indemnity Provisions of Passenger Rail Agreements Differ in their Allocation of Financial Responsibility

Although liability and indemnity provisions in agreements between commuter rail agencies and freight railroads differ, commuter rail agencies generally assume most of the financial risk for commuter operations. With two exceptions, liability and indemnity agreements between commuter rail agencies and freight railroads are primarily no-fault arrangements—that is, responsibility for specific liability in any incident is assigned to a particular entity, regardless of fault. For example, in a no- fault agreement, a commuter rail agency might indemnify a freight railroad by assuming liability for commuter equipment damage and passenger injury in a derailment, regardless of whether the freight railroad’s maintenance of the tracks could be blamed for a given incident. Similarly, a freight railroad could indemnify a commuter rail agency by assuming liability for freight rail equipment and track maintenance, even if the commuter rail agency was solely responsible for causing an accident. In contrast, a fault-based agreement assigns responsibility for an incident to the party that caused the incident. Of the 33 commuter rail agency and freight railroad agreements we reviewed, 21 were no fault, 10 contained a combination of no-fault and fault provisions, and 2 were premised on a fault-based allocation of risk.

Although most of the agreements between commuter rail agencies freight railroads are no-fault arrangements, the liability and indemnity provisions vary regarding the type of conduct allowed. For example, 9 of the 31 agreements with all or some no-fault provisions explicitly exclude certain types of conduct from the no-fault arrangement. conduct is any type of conduct specifically identified in the agreement as conduct beyond simple negligence and can be defined in a number of ways, including willful and wanton misconduct, gross negligence, or conduct that might result in punitive damages. For example, 1 agreem ent specifically excludes conduct that is taken with conscious disregard for or indifference to the property or safety or welfare of others. Another 10 of the 31 agreements with all or some no-fault provisions, in contrast, explicitly include conduct that exceeds simple negligence as covered under the no-fault provisions. For example, 1 agreement explicitly states that the indemnification agreement includes coverage for punitive damages, or damages that are caused by the reckless or willful acts of a party, while another explicitly states that the parties agree to indemnify each other even if a train engineer in an incident is using alcohol or d Finally, the remaining 12 agreements are silent on excluded conduct, and discuss indemnification of negligence without explicit regard to its degr Often, in these cases, the degree of negligence will depend on state law, rugs. ee.

This includes an agreement in which the liability and indemnity provisions exclude certain conduct for liability up to $5 million and include it for liability above $5 million. and a determination concerning the enforceability of the provision may require litigation.

Freight railroads often set a requirement for a certain level of indemnification in the agreements and corresponding insurance requirements to ensure that the commuter rail agency will have the resources to pay for claims. The required level of insurance in existing commuter rail agency and freight railroad agreements ranges from $ 75 million to $500 million. Agreements vary on the exact requirements for insurance, such as what level of liability can be absorbed by the comm rail agency—referred to as a self-insured retention—before the railroa must use commercial insurance. For example, some agreements that we analyzed set the level at which the commuter rail agency must purchase insurance for risk at above $5 million, while other agreements set the leve at $1 million. Twelve of the 33 agreements between commuter rail agencies and freight railroads are silent on the exact level of insurance required. Appendix II contains a table summarizing the apportionment of liability in commuter and freight rail agreements.

Similar to the agreements with freight railroads, commuter rail agencies’ agreements with Amtrak also are generally no fault. Specifically, 14 of the 17 agreements we reviewed between commuter rail agencies and Amtrak allocate liability on a no-fault basis, while 2 contain a combination of fault- based and no-fault provisions. The remaining agreement is fault-based. Regarding excluded conduct, 8 of the 17 agreements explicitly exclude certain conduct; the remaining agreements are silent concerning whether any conduct is excluded. Amtrak also sometimes requires certain levels of indemnification and corresponding levels of insurance to ensure that the commuter rail agency will have the resources to pay for claims. Append III contains a table summarizing the apportionment of liability in commuter rail agency and Amtrak agreements.

Amtrak’s agreements with Class I freight railroads are also genera fault arrangements. In addition, these agreements are generally silent on excluded conduct. Furthermore, all of Amtrak’s agreements with freight railroads are silent on the amount of insurance Amtrak must carry to use freight-owned rights-of-way. ARAA requires Amtrak to maintain a minimum coverage for claims through insurance or self-insurance of least $200 million per accident. However, Amtrak officials stated that Amtrak carries more insurance than is required by this statute.

Freight railroad, commuter rail agency, and Amtrak officials told us that ause no-fault agreements are the easiest way to settle liability claims bec they avoid the need for additional litigation to try to ascertain blame. Officials in Florida, for example, said a fault-based agreement would be ecause of the costs of much more expensive than a no-fault agreement b investigating accidents. These officials said that a no-fault agreement was the best way to compensate litigants quickly. Furthermore, officials at a freight railroad said that an accident can have multiple causes and an investigation may not settle which party was at fault; therefore, a fault- based approach can result in disputes between commuter rail agencies and freight railroads over which party is responsible for paying for claim These officials also said that contrary to some views, passenger and frei railroads have strong incentives to operate safely, even if they may not be liable for some accidents that they cause. Finally, Amtrak and freight railroad officials noted that no-fault agreements are fairly standard across the industry, and that these agreements are similar to agreements freight railroads use for access to each other’s infrastructure.

Liability and Indemnity Provisions Have Cost Implications for Commuter Rail Agencies and Taxpayers

The liability and indemnity provisions in commuter rail agency agreements with freight railroads have cost implications because premiums vary with the levels of insurance required. Eleven commut paying from $700,000 to $5 million in insurance premiums, representing less than 1 percent and up to about 15 percent of commuter rail agencies operating budgets. Newer and smaller (as defined by ridership) commuter rail agencies typically spend more of their operating budgets o insurance premiums, in part because they do not have an established claims record, which factors into the premiums that a commuter ra agency must pay to cover its potential risk. Officials at proposed commuter rail agencies told us that they anticipated spending a substantia portion of their operating budgets on insurance. For exa proposed commuter rail agency anticipated spending more than 20 percent of their operating budget on insurance premiums. However, these premiums could decrease once the commuter rail agency has an established claims record, particularly if the commuter rail agency has no accidents over several years of service. Because commuter rail agencies o are publicly subsidized, the premium costs for commuter rail agencies alsl mple, officials at a represent a cost to taxpayers. Furthermore, the potential for high premium r costs may impede or stop the development of new or expanded commute rail services, according to commuter rail agency officials.

According to commuter rail agencies officials, certain liability and indemnity provisions expose commuter rail agencies to significant risks and, therefore, to potential costs. Although no-fault liability agreements are the norm, most assign more liability to commuter rail agencies than to freight railroads. Specifically, of the 31 agreements with all or some no- fault provisions we analyzed, 13 assign all liability for passengers to the commuter rail agencies and 7 assign all liability for passengers, as well as all liability for freight equipment, employees, and third parties, to the commuter rail agencies. In the remaining 11 agreements, freight railroads could be responsible for assuming some liability for passenger claims resulting from a collision.

When accidents do occur, commuter rail agencies use both their self- insured retention and commercial insurance to pay for claims. Similar to the deductible on individual insurance policies, the self-insured retention is the amount specified in the liability insurance policy that the commute rail agency must pay before the insurance company pays for claims. For example, a commuter rail agency with a $2 million self-insured re tention must pay for all claims that are $2 million or less, while claims above $2 million would be covered by the insurance company. In most cases, th e self-insured retention is per incident, that is, a commuter rail agency would pay each time a claim fell within the self-insured retention, can be costly if there are many such claims in a given period. However, in most cases, these types of claims are fairly predictable for commuter rail agencies that have an established loss record, allowing the agencies to better plan and budget for costs they are likely to incur. Although most commuter rail agencies have commercial insurance policies to co claims from a potentially catastrophic incident, most commuter rail agencies stated that they had never exceeded their self-insured retention and, thus, had never filed a claim with an insurer.

Federal Statutes, STB Decisions, and Federal Court Decisions Are Instructive in Interpreting Liability and Indemnity Provisions, but Questions Remain

ARAA Addresses Many Liability Concerns, but Railroad Officials Question the Applicability of the Statute’s Liability Cap

ARAA introduced tort reform measures that limit the overall damage passenger claims to $200 million, including punitive damages to the exten permitted by state law, against all defendants arising from a single accident or incident. ARAA also authorizes providers of passenger rail transportation to enter into contracts allocating financial responsibility fo claims. Congress introduced these measures in 1997 in response to concerns from freight railroads, commuter rail agencies, and Amtrak about the difficulties the parties were having in negotiating the use of freight railroads’ rights-of-way by Amtrak and the commuter rail agen These concerns were heightened after a 1988 district court decision put in doubt the enforceability of contractually negotiated indemnity provisions. Amtrak train and a Conrail train in Chase, Maryland, that resulted in 16 deaths and over 350 injuries. A Conrail engineer admitted, among other things, that the Conrail crew had recently used marijuana, was speedin and was operating a train in which an audible warning device had bee intentionally disabled. The engineer pleaded guilty to manslaughter and was given the maximum penalty. The plaintiffs in m brought against Conrail and Amtrak alleged that Conrail or Amtrak, or b and asserted entitlement to compensatory as well as punitive damages. Amtrak brought an action before the trial court seeking a declaration of the rights and obligations of the parties concerning the indemnification agreement, which required that Amtrak defend and indemnify Conrail fo r any claims and damages arising out of the Chase accident. The trial court held that Amtrak was not required to indemnify Conrail where ther e were allegations and a showing of gross negligenc wanton misconduct, intentional misconduct, or conduct so serious that it w arranted the imposition of punitive damages. The court found that public policy would not allow the enforcement of indemnification provisions that a ppear to cover such extreme misconduct, because serious and significant disincentives to railroad safety would ensue. cies.

National Railroad Passenger Corp. v. Consolidated Rail Corp., 698 F. Supp. 951 (D.D.C. 1988), vacated on other grounds, 892 F.2d 1066 (D.C. Cir. 1990).

We have previously concluded that the $200 million cap on passenger claims arising from a single rail accident applies to all commuter rail operators as well as to Amtrak, based on the plain language of the statute. The act creates a $200 million cap for passenger injuries arisin g “in connection with any rail passenger transportation operations over or rail passenger transportation use of right-of-way or facilities owned, leased, or maintained by any high-speed railroad authority or operator commuter authority or operator, any rail carrier, or any State.” Additionally, the act defines a claim, in part, as “a claim made against Amtrak, any high-speed railroad authority or operator, any commuter authority or operator, any rail carrier, or any State.” We also co that the cap does not apply to third-party claims—that is, claims by partie other than passengers. Some commuter rail agencies, however, have expressed uncertainty regarding whether the cap applies to them. In addition, some freight railroad officials have stated that although they believe the cap does apply to commuter rail agencies, they will not rely o the cap in determining the level of insurance that a commuter rail agency must carry until the cap’s applicability to commuter rail agencies has tested in a court of law. No courts have decided whether the cap applie commuter rail agencies.

Questions Remain Regarding Indemnification for Gross Negligence and Willful Misconduct

49 U.S.C. § 28103(a)(1).

The Second Circuit consists of all federal courts within Connecticut, New York, and Vermont.

While the Court of Appeals stated in the O&G Industries opinion that it was the intent of Congress to permit indemnity agreements regarding any claims against Amtrak, STB, when setting the terms of agreements between Amtrak and freight railroads, has held that it is against public policy to indemnify an entity against its own gross negligence or willful For example, in a 2006 decision, STB held that an indemnity misconduct. provision could not be used to indemnify a freight railroad against its own gross negligence or willful misconduct, since such an interpretation w “contravene well-established precedent that disfavors such indemnification provisions” and would be contrary to provisions in the federal government’s rail transportation policy that requires STB to “promote a safe and efficient transportation system” and “operate facilities and equipment without detriment to the public health and safety.” ST staff told us that they could not speak for the board, but because the O&G Industries opinion involved preemption of a state statute, they were not sure that the opinion would have any effect on future STB decisions.

Various Factors, Such as Financial Conditions and Federal and State Laws, Influence Negotiations of Liability and Indemnity Provisions

The Rail Passenger Service Act of 1970 provides that Amtrak and the freight railroads may contract for Amtrak’s use of the facilities owned by the freight railroads. If the parties cannot agree on a contract, STB may order access and prescribe the terms and conditions of the contract, including compensation. reported as having little effect on negotiations of liability and indemnity provisions.

Several Factors Influence Negotiations of Liability and Indemnity Provisions

Freight railroads’ business perspective. In negotiations between commuter rail agencies and freight railroads, the freight railroads’ business perspective influences their starting position for negotiations of liability and indemnity provisions. Commuter rail agencies do not have statutory access to freight-owned rights-of-way. Rather, as o infrastructure, freight railroads can decide whether to allow commuter r agencies to use their rights-of-way. Officials from freight railroads told that they are willing to share their infrastructure with commuter rail agencies when sharing makes business sense and does not impinge on their freight operations. From the freight railroads’ perspective, commuter rail agencies’ compensation offers for the use of freight-owned rights-of- way are often inadequate, and when they are not compensated for all of the costs incurred from hosting a commuter rail train, the result is that the fr eight railroads subsidize the commuter rail service. In addition, freight service is the freight railroads’ core business, and their ability to efficient move freight through their systems must be protected. As a result, freig railroad officials said they are unwilling to assume any additional risk fro allowing commuter rail agencies to use their rights-of-way.

Understandably, freight railroads want to minimize their exposure to liability from any potentially large damage awards and associated costs that may result when they allow commuter rail agencies to operate on their rights-of-way. As a result, freight railroads have adopted what is referred to as the “but for” philosophy—that is, but for the presence of th commuter rail service, the freight railroad would not be exposed to cert risks; therefore, the freight railroad should be held harmless. Freight railroad officials stated that they must take this position to protect their businesses and shareholders from potential lawsuits that could financially ruin their company.

To protect themselves from additional liability, freight railroads typically require that commuter railroads purchase liability insurance that covers both parties. Officials from several commuter rail agencies told us that they recognize and understand the freight railroads’ viewpoint. Nearly half of commuter rail agency officials acknowledged insurance as a cost of doing business, and eight mentioned that they would purchase the amount that they currently carry even if the freight railroad did not require them to do so. Officials from five commuter rail agencies said they purchase more insurance than is required in their agreements because they recognize that potential claims may exceed the amounts stated in their agreements.

Financial conditions at the time of negotiations. Officials from several commuter ra of the freight railroads at the time of their negotiations affected the li ability and indemnity provisions. For example, officials from one commuter rail agency said they were able to secure favorable liabi indemnity provisions by providing revenue to two freight railroads were struggling financially in the early and mid-1990s. Officials from another commuter rail agency said that the terms of their agreements th at originated from freight railroad bankruptcies in 1983 are more favorable to the commuter rail agency than the agreements they have subsequently negotiated with other freight railroads. Over the last 25 years, freight rail try traffic has significantly increased and the financial health of the indus has improved. As a result, hosting commuter rail service is not a significant source of revenue for freight railroads. For example, officials from one freight railroad said that revenue from commuter rail agencies does not compensate for the associated capacity loss. Furthermore, officials from another freight railroad said that no amount of revenue from commuter rail agencies could sufficiently compensate them for the risk in assuming liability for passenger claims. il agencies and freight railroads said that the financial health Increased awareness or concern about liability and insurance requirements. Eight commuter rail agency and freight railro also said that the level of awareness or concern about liability issues has grown over time. For example, one commuter rail agency official said negotiations have become more difficult, in part, because both freight railroads and commuter rail agencies are more knowledgeable about liability issues—that is, freight railroads are now more precise in the te they require, and commuter rail agencies are more aware of the implications of these agreements. Officials from four of the five freight railroads that host commuter rail operations said that they now would agree to some terms that they had agreed to in the past. In some cases, these railroads are trying to renegotiate the liability and indemnity provisions in existing concern about changes in how courts interpret gross negligence and about the application of punitive damages. In particular, freight railroads expressed concern that what juries once viewed as normal negligence, they may now view as gross negligence; therefore, they want commuter rail agencies to indemnify them against both negligence and gross negligence. For example, one freight railroad views a new project as a “nonstarter” if the commuter rail agency refuses to indemnify the freight railroad for incidents involving gross negligence. Additionally, if a railroad is found guilty of gross negligence, a jury may award punitive damages; therefore, one freight railroad is trying to renegotiate its insurance agreements. Freight railroads also expressed provisions in a 25-year-old agreement to include coverage for punitive damages.

Additionally, views on sufficient amounts of insurance have change d over time. Specifically, freight railroads are requiring more insurance coverage for new commuter rail projects than what they had required in some pas agreements. For example, officials from one freight railroad said that million seemed sufficient when the railroad signed an agreement with a commuter rail agency in 1992. However, these same officials stated that they now seek much higher levels of coverage to use their rights-of-way , citing concerns about potential lawsuits and large settlements awarded by juries. Similarly, officials from other freight railroads told us that, to the extent possible, they seek between $200 million and $500 million insurance when negotiating new agreements or renewing existing ones. Officials from two proposed commuter rail agencies noted that they anticipate it could be challenging and costly to obtain insurance cove for the amount of insurance the freight railroads are requiring them to obtain. Officials from freight railroads and commuter rail agencies also questioned how claims from the recent M a example, officials from one commuter rail agency stated that the Metrolink accident and current economic conditions could cause their insurance premiums to spike, and they are, therefore, exploring options to stabilize their insurance costs. etrolink accident will affect the mount of insurance required and the accessibility of insurance. For Federal and state laws. While ARAA has addressed many major liabili concerns, some freight railroads and commuter rail agencies are reluctant to rely on some of its provisions. We have previously reported th commuter rail authorities or operators, as well as Amtrak, are covered b the $200 million cap on awards for claims by or on behalf of rail passengers resulting from an individual rail accident. However, althoug a majority of the freight railroads and commuter rail agencies with w we spoke told us that the liability cap applies to commuter rail agen majority of freight railroads and a few commuter rail agencies expressed concern because the statute has not been tested in court. One freigh railroad has addressed this concern by including a clause in its agreeme that would reopen negotiations if the ARAA cap were overturned by a court or amended. Other freight railroads seek higher levels of insu coverage to mitigate their concerns about the ARAA cap. Officials from one commuter rail agency told us that the freight railroad wants to rance 500 million, which has been a sticking point in renegotiating e agreement. Officials from this freight railroad told us they are seeking increase the level of insurance in their existing agreement from $250 million to $ th $500 million in insurance, in part, because the cap has not been tested in court and because the cap does not cover third-party claims. For example, as we have reported, claims from third parties affected by a hazardous material release that might occur as a result of a commuter-freight collision would not be capped at $200 million. Officials from several freight railroads and commuter rail agencies said that the applicability ofthe $200 million liability cap to commuter rail agencies will likely be teste in court as a result of the recent Metrolink accident.

Amtrak’s statutory rights influence the negotiations of liability and indemnity provisions in agreements between Amtrak and freight railroads as well as between Amtrak and commuter rail agencies. For example, because Amtrak has statutory access rights to freight rail infrastructure, Amtrak and freight railroads must reach an agreement for the shared use of freight-owned infrastructure, or, in the event of an impasse, STB will resolve the outstanding issues. Although the provisions in agreements between Amtrak and freight railroads vary, freight railroad officials said that their negotiation processes were fairly standardized as a result of Amtrak’s statutory access rights. In addition, Amtrak officials noted that Amtrak is prohibited from cross-subsidizing commuter rail agencies and freight railroads on the NEC for some costs. According to Amtrak officials, these statutes influence their negotiations with freight railroads and commuter rail agencies, and Amtrak cannot assume any additional liability for these parties in its agreements for the shared use of infrastructure. Specifically, Amtrak officials stated that Amtrak cannot assume liability for commuter rail agencies when allowing commuter rail agencies to use Amtrak’s infrastructure. As a result, Amtrak’s negotiations with commuter rail agencies generally result in no-fault liability and indemnity provisions in which the commuter rail agency assumes most of the liability.

Commuter rail agency, freight railroad, and Amtrak officials also identified various types of state laws that influence negotiations of liability and indemnity provisions. The following information briefly describes examples of the different types of state laws that can influence negotiations. See table 1 for examples of these types of laws.

Liability caps for railroads or transit agencies. Some state laws limit commuter rail agencies’ liability exposure for accidents.

Sovereign immunity laws or tort caps. These laws limit the types o f claims that may be filed against public agencies and limit the amount liability to which a public agency can be exposed. te entities. Some Prohibition against public indemnification of priva state laws prohibit a public commuter rail agency from agreeing to any indemnification provisions.

Prohibition against indemnification for negligence or gross negligen Some state laws prohibit indemnification of an entity against its own negligence or gross negligence. ce.

State laws addressing punitive damages. Some state laws prohibit insuring against punitive damages. Additionally, in some states, commute re rail agencies are immune from paying punitive damages because they a public entities.

Other Factors Generally Have Little Effect on Negotiations of Liability and Indemnity Provisions

Several factors that might be considered influential, such as commuter rail ow ving litt nership of shared-use infrastructure, were generally reported as ha le effect on liability and indemnity negotiations. age ter rail rail rail liab cur ser doe Off pur the one wit bill agr railmuter rail agencies’ ownership of infrastructure. Commuter rail ncies that own their infrastructure are not necessarily able to set th ms of their agreements with freight railroads. A majority of commute agencies that own their infrastructure purchased it from freight roads. In general, as a condition of the sale of infrastructure, freight roads maintain rights for continued freight use and require specific ility and indemnity provisions. For example, a commuter rail agency rently seeking to purchase a segment of freight track to expand its vice, but negotiations have stalled because the commuter rail agenc s not want to agree to certain liability and indemnity provision icials from one freight railroad said that in negotiations for the chase of rail lines, the liability terms are a trade-off for a lower c ost for infrastructure. For example, in this freight railroad’s negotiations with commuter rail agency, the price for purchasing the right-of-way hout attached liability and indemnity provisions would have been $1.3 ion; rather, the parties settled on a price of $150 million, with an eement for continued freight operations that included the freig road’s required liability and indemnity provisions. s. tent of use. The extent of a tenant commuter rail agency’s use of the host freight railroad’s infrastructure, which can be measured by such metrics as the number of trains or ridership, does not generally influence the off reli agreement. However, two of the insurance brokers with whom we spoke said that such metrics may be used to help calculate insurance premiums. According to one broker, however, a change in one of these metrics may n example, an increase from 100,000 to 200,000 daily passengers. liability and indemnity provisions. For example, one freight railroad icial said that the number of planned commuter trains is not specificall ed upon in determining the amount of insurance required in the ot affect the insurance premium unless the change is significant—for Funding of improvements on freight-owned infrastructure. Commuter rail agencies’ funding of infrastructure improvements, such as track upgrades, on freight infrastructure does not generally affect liability and indemnity provisions. Officials from one freight railroad said that such improvements do not compensate for the liability risks associated with a funding for infrastructure improvements may have other effects, such as influencing freight railroads’ initial willingness to enter into overall llowing passenger railroads to use freight infrastructure. However, negotiations for shared use or securing priority dispatching for commuter trains.

Advanced safety technologies. Employing advanced safety technologies does not necessarily affect negotiations over liability and indemnity provisions. Although improved safety may not influence the liability and indemnity provisions, officials from three freight railroads or commuter rail agencies mentioned that improved safety could reduce insurance premiums. Similarly, two of the insurance brokers with whom we spoke said that a railroad’s safety program can influence the calculation of insurance premiums because improved safety reduces the likelihood of accidents and, therefore, decreases the likelihood that the insurance company will suffer a loss. However, according to Amtrak officials, although such technologies may reduce the incidents of smaller claims that fall within the self-insured retention, they may not reduce premiums for liability insurance until the long-term loss history for the rail agency improves.

Commuter Rail Agency, Amtrak, and Freight Railroad Officials Identified Several Options for Facilitating Negotiations

Commuter rail agency, Amtrak, and freight railroad officials identified several options for facilitating negotiations of liability and indemnity provisions, including amending ARAA, establishing alternatives to commercial insurance, increasing commuter rail agencies’ leverage in negotiations with freight railroads, and separating passenger and freight rail infrastructure. While each of the options could facilitate negotiations on liability and indemnity provisions, each option has advantages and disadvantages to consider. The discussion that follows is not intended to endorse any potential option, but instead to describe some potential ways to facilitate negotiations.

Commuter Rail Agency, Amtrak, and Freight Railroad Officials Suggested Amending ARAA to Address Concerns

Officials from commuter rail agencies, Amtrak, and freight railroads cited amending ARAA as an option for facilitating negotiations on liability and indemnity provisions. In particular, officials from commuter rail agencies and freight railroads stated that the statute should be amended to make it clear that the liability cap applies to commuter rail agencies, and officials from commuter rail agencies, freight railroads, as well as Amtrak, stated that the statute should be amended to include nonpassenger claims.

Officials from commuter rail agencies, Amtrak, and freight railroads cited several advantages to amending ARAA. First, clarifying that the statute applies to commuter rail agencies would eliminate the uncertainty about its applicability in the absence of a court decision. In addition, such a clarification, along with the inclusion of nonpassenger claims in the liability cap, could lower costs for commuter rail agencies by limiting the amount of insurance that freight railroads require commuter rail agenciesto carry. For example, officials from one commuter rail agency stated thato make it clear that it applied to commuter rail gencies and covered nonpassenger claims, freight railroads would be less if ARAA were amended t a likely to seek insurance beyond the $200 million liability cap to cover claims to which the cap does not apply. Similarly, Amtrak officials state that including nonpassenger claims under the liability cap could reduc e freight Amtrak’s need for excess liability insurance. Officials from several ns railroads also noted that such changes could facilitate future negotiatio with commuter rail agencies. Officials from freight railroads also stated that a clear federal cap on liability for commuter rail agencies could eliminate the need to adapt to various state laws that can affect liability and indemnity negotiations. For example, according to officials from two freight railroads, a uniform, standardized cap that applies to all commuter rail agencies would preem damages for commuter rail claims at an amount lower than $200 million. pt some state laws, such as those that cap Commuter rail agency and freight railroad officials also cited several disadvantages to amending ARAA. Officials from one freight railroad stated that ARAA already applies to commuter rail agencies and limits the amount of liability insurance commuter rail agencies are required to obtain to $200 million. According to these officials, although there is some lack of clarity about the statute’s applicability to commuter rail agencies and the statute does not cover all types of claims, these issues can be addressed by requiring the commuter rail agency to obtain comprehensive insurance coverage or through other provisions in the agreements. For example, adequate insurance coverage can mitigate the issues that may arise from various and conflicting state laws by providing protection for various kinds of liabi lities. Similarly, although ARAA does not cover liability claims resulting from a hazardous materials spill, an agreement can be structured in such a way that these claims are covered. According to these freight railroad officials, the provisions in ARAA provide adequate protections for negotiating railroad liability and indemnity provisions. Furthermore, these officials told us it may be difficult to make some changes to the statute without opening up its entire liability section to reexamination. Finally, some commuter rail agency officials stated that amending ARAA could cause them to have less favorable liability provisions than they currently enjoy. For example, officials from several commuter rail agencies told us that they carry less insurance than the $2 million cap. According to officials from one commuter rail agency, amending ARAA to clarify that the $200 million liability cap applies to all commuter rail agencies could result in higher levels of insurance and increased costs for this commuter rail agency.

Commuter Rail Agency, Amtrak, and Freight Railroad Officials Identified Alternatives to Traditional Commercial Insurance

Commuter rail agency, Amtrak, and freight railroad officials and representatives from the insurance industry identified the following three alternatives to traditional commercial insurance options that could increase the availability and affordability of liability insurance coverage: Insurance pool. A group of organizations with similar characteristics, such as a group of commuter rail agencies, pool their assets to obtain a single commercial insurance policy, rather than obtaining individual commercial insurance policies.

Captive insurance. A privately held insurance company that issues policies, collects premiums, and pays claims for its owners, but does not offer insurance to the public. This company may be either a single-parent captive, which is owned by a single entity that insures the risks of its parent company, or a group captive, which is owned by multiple entities and the owners are also the policyholders. Usually, the owners of a group captive are fairly homogenous and have similar risks, such as a group of commuter rail agencies, although this is not a requirement of a captive. A captive would allow a commuter rail agency or a group of commuter rail agencies to self-insure for liability or provide liability insurance for its members outside of the traditional commercial insurance market.

Risk retention group. Similar businesses with similar risk exposures create their own liability insurance company to self-insure their risks as a group. Risk retention groups were established through the Product Liability Risk Retention Act of 1981, as amended by the Liability Risk Retention Act of 1986, which partially preempts state insurance laws by allowing risk retention groups to operate in states in which they are not domiciled. Commuter rail agencies, therefore, could form a risk retentio group without having to consider the various state laws that could affect their liability negotiations with freight railroads.

Commuter rail agencies’ insurance coverage is usually structured in layers of $25 m illion beyond the self-insured retention, up to the total amount of insurance coverage (e.g., $200 million). The lower layers are typically more expensive because claims are likely to fall inthese layers, rather than the layers covering the upper limits of the insurance coverage. oversight of each state outside of their state of domicile. Although no commuter rail agency or freight railroad currently participates in an insurance pool with other commuter rail agencies or freight railroads, some commuter rail agency officials told us they are interested in exploring this option for facilitating negotiations. In addition, officials from two freight railroads said they would consider joining an insurance pool as a way to pool their risk with other railroads, and several freight railroad officials also stated they would accept pooled insurance from commuter rail agencies as a valid option for providing liability coverage.

Commuter rail agency, Amtrak, and freight railroad officials also identif several disadvantages to the various alternatives to traditional commercia insurance options identified. First, some commuter rail agency officials stated that their commuter operations were already very safe; therefore, they would not benefit from an insurance pool with other commuter rail agencies. Similarly, according to an insurance broker, larger commuter rail agencies, or those with a better risk profile, may not join a pool or might leave the pool if they could obtain cheaper insurance coverage on the commercial insurance market. Their decision not to participate in the poo would lead to adverse selection, with only smaller or riskier commuter rail agencies remaining in the pool, which could reduce some of the advantages that a pool would provide. Second, some commuter rail agenc officials stated that they have not had problems obtaining insurance because of the soft, or competitive, insurance market. According to an insurance broker, pooling insurance during a soft market is likely more expensive than obtaining individual commercial insurance policies because of the administrative and capital costs of maintaining an insurance captive or risk retention group. In addition, some commuter rail agency officials stated that insurance pools can be difficult to administer and require decisions about who will participate, whether participation will be voluntary or mandatory, and what should be done if claims exceed y the pool’s reserves. However, if the insurance market became less competitive, pooling might provide a more affordable option, particularly for new or smaller commuter rail agencies that could have difficulty obtaining coverage.l For example, Florida set up an insurance poo because of a severe shortage of catastrophe property reinsurance capacity, stricter policy terms and conditions, and sharp increases in property catastrophe cover rates following Hurricane Andrew. Finally, one commuter rail agency official stated that it could be difficult for participating agencies to reenter the commercial insurance market if, for example, an insurance pool falls apart because it is undercapitalized—that is, there is a risk for commuter rail agencies in ending their current insurance policies to join a pool. Amtrak officials also stated that these pooled insurance options are unlikely to be viable without federal financial backing or verifiable commercial reinsurance. Furthermore, officials from two freight railroads noted they would not likely join an insurance pool with commuter rail agencies because it is not in their business interests to help pay for claims involving passenger rail.

Commuter rail agency, Amtrak, and freight railroad officials also identified several federal insurance options that could facilitate negotiations of liability and indemnity provisions. Specifically, several commuter freight railroad officials identified catastrophic incident insurance programs as potential models for providing railroad liability insuranc e. These insurance programs exist to cover risks that the private sector ha been unable or unwilling to provide by itself. Commuter rail agency and freight railroad officials most frequently identified the Price-Anderso as a model for providing railroad liability insurance. Under this m odel, commuter rail agencies would obtain primary insurance up to a certain amount and could pool their assets to obtain secondary insurance coverage for incidents with claims that exceed the primary insurance amount. The federal government could also be called upon to provide additional funding if an incident’s claims exceeded both the primary and secondary insurance coverage. Officials from one freight railroad stated that a Price-Anderson type of insurance program could address current n Act limitations in the railroad insurance market because the act contem appropriations if additional funding is needed, among other benefits. Similarly, insurance coverage provided under other federal government programs, such as terrorism insurance, also was cited as a potential m for providing railroad liability insurance coverage. For example, officials from one freight railroad stated that the fund established to compensate victims from the September 11, 2001, terrorism attacks could be us considering how to compensate victims of a catastrophic railroad incident.

Commuter rail agency and freight railroad officials identified several advantages of a federally backed insurance program for railroads. For example, some of these officials stated that such programs could reduce insurance premiums, could spread out risk among participating rai and would ensure that claims could be paid to those affected by a high - cost, or catastrophic, incident. However, as we have previously reporte such programs also could crowd out private insurers and reduce the private market’s ability and willingness to provide coverage. a federal insurance program would expose the federal government to potentially significant claims on future resources, which could ultimately result in costs to taxpayers.

Commuter Rail Agencies Identified Options That Would Increase Their Leverage in Negotiating Liability and Indemnity Provisions

GAO, Natural Disasters: Public Policy Options for Changing the Federal Role in Natural Catastrophe Insurance, GAO-08-7 (Washington, D.C.: Nov. 26, 2007). incentives that encourage freight railroads to cooperate with commuter rail agencies, such as tax incentives or service expansions in other are could do more to facilitate negotiations, according to these officials.

Officials from a few commuter rail agencies also stated that having an independent entity mediate liability and indemnity negotiations between commuter rail agencies and freight railroads could be helpful if the parties reached an impasse. For example, officials from one commuter rail agency stated that a mediating body could facilitate negotiations by requiring the freight railroad to consider the commuter rail agency’s position. A provision in the Passenger Rail Investment and Improvement Act of 2008 recently extended STB’s role to mediate disputes between public authorities, including commuter rail agencies and host carriers. However, the mediation is nonbinding—that is, if the dispute cannot be resolved, there are no additional mechanisms in place to compel a resolution.

Commuter Rail Agency and Freight Railroad Officials Suggested Separating Passenger and Freight Traffic as an Ideal but Costly, Option

ommuter rail agencies and freight railroads operating at different times of A few commuter rail agency and freight railroad officials identified separating passenger and freight traffic as an ideal, but cost-prohibitive, option for facilitating negotia tions on liability and indemnity provisions. Commuter and freight traffic could be separated temporally, with c the day, or physically, with commuter rail agencies and freight railroad operating on separate tracks either in the same corridor or in separate corridors. For example, the Utah Transit Authority purchased rights-of- way from Union Pacific and built new tracks in a parallel alignment with Union Pacific tracks. As a result, the commuter and freight operations do not share the same track, with a small exception, limiting the potent a collision. Similarly, officials from one freight railroad stated that in negotiations with an existing and new commuter rail agency, they are working to shift some of the freight operations onto different routes to minimize the interaction between commuter and freight trains. Sep passenger and freight infrastructure also could lower insurance cos commuter rail agencies because the potential for a catastrophic inc would be significantly reduced. According to officials from a few frei railroads, the potential for a catastrophic incident, although small, drives the indemnification provisions and insurance requirements of passenger and freight rail agreements. Although the Utah Transit Authority wa to purchase rights-of-way from Union Pacific, in most cases, purchasing arating ts for ident ght s able rights-of-way or constructing new tracks is cost-prohibitive and time- consuming for commuter rail agencies. For example, officials from one commuter rail agency examined whether to build new tracks for initiating its service, but the costs were much higher than the costs of buying the tracks and sharing them with the freight railroad and paying the associ insurance costs. In addition, capacity constraints, whether they are based on future growth projections or geographic limitations, make it difficult to separate passenger and freight traffic—through either temporal or physical separation. For example, officials from one commuter rail agency stated that the geography surrounding their commuter service makes capacity expansions very difficult and costly.

Concluding Observations

The expeditious flow of people and goods through our transportation system is vital to the economic well-being of the nation. The moveme people and goods by rail is an important part of the nation’s transportation ystem and is likely to play an even greater role in the future as companies s ractive and communities look for ways to avoid highway congestion. An att feature of both commuter rail and intercity passenger rail is that they can operate on the same infrastructure as freight railroads. However, mixing passenger and freight traffic entails a certain level of risk. Fortunat accidents are rare, undoubtedly due in part to the safety focus of passenger and freight rail operators, but they can be deadly, as evidenced by the September 2008 Metrolink accident.

As owners of most of the rail infrastructure in the United States, freight railroads determine whether to allow commuter rail operations on their infrastructure and set the terms and conditions, including the liability and indemnity provisions, of this access. To protect their business and shareholders, freight railroads understandably seek to shift the risks associated with allowing passenger traffic on freight-owned infrastructu to the commuter rail agencies. By accepting some of the liability and re indemnity provisions demanded by freight railroads, commuter rail agencies expose themselves, and ultimately taxpayers, to significant costs. s, Rejecting the liability and indemnity provisions sought by freight railroad however, can cause negotiations to stall or fail, meaning that new commuter rail systems or expansions may not be realized. Different options exist to help facilitate negotiations over liability and indemnity. All y of these options have advantages and disadvantages that must be carefull considered so that one form of rail does not succeed at the expense of the other.

Agency Comments

We provided a draft of this report to DOT, STB, and Amtrak for their review and comment prior to finalizing the report. Amtrak provided technical comments, which we incorporated where appropriate. DOT and STB had no comments on the draft report.

As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from report date. At that time, we will send copies to other interested congressional committees; the Secretary of the Department of Transportation; the President and CEO of Amt Surface Transportation Board; and other parties. The report is also a vailable at no charge on the GAO Web site at http://www.gao.gov. rak; the Chief of Staff of the If you or your staffs have any questions about this report, please contact me at (202) 512-4431 or flemings@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix V.

Appendix I: Scope and Methodology

To gather information pertaining to our objectives, we cond semistructured interviews with officials from all identified existing commuter rail agen railroads, Amtrak, and state departments about the liability and indemnity provisions between railroads, the cies, proposed commuter rail agencies, Class I freight of transportation. We asked financial impact of these provisions, how the courts had interpreted these provisions, the factors that had influenced negotiations, and ways to facilitate negotiations.

We conducted site visits to three existing commuter rail agencies, two proposed commuter rail agencies, and two Class I freight railroads. We selected existing commuter rail agencies that had agreements for access to rights-of-way, maintenance-of-way, and maintenance-of-equipment or operations with a Class I freight railroad and also had contracts with Amtrak. We also selected existing commuter rail agencies that had agreements with different freight railroads to de rmine if agreements te varied Class I freight ra across Class I freight railroads. (Becauseilroads generally own infrastructure in particular region of the country, we also s found that this criterion gave us geographic diversity for our site visits.) In addition, we selected existing commuter rail agencies on the basis of their ridership levels to ensure that we visited at least one commuter rail agency in the top third of ridership, middle third of ride ridership. We sele cted proposed commuter rail planning to the next 5 years. In addi visit at least one commuter rail agency that prop freight tracks and at least one commuter rail age freight tracks. Finally, we chose to visit Class I freight railroads with the highest number of contracts with commuter rail agencies. rship, and bot agencies to visit that are enter into contracts with different Class I freight railroads in tion, we selected sites to oses to purcha ncy that propos To ide comtrak and the resulting mmuter rail agencies, freight railroads, and A implications of those provisions, we requested and analyzed the liability and indemniommuter rail agencies ty sections of agreements between c and Class I freight railroads, commucies and Amtrak, and ter rail agen Amtrak and freight railroads. We analyzed and organized the provisions in these contracts and excluded commuter rail agencies that did not have agreements with either a Class I freight railroad or Amtrak. In addition, we included agreements from two proposed commuter rail agencies in our analysis because their agreements with freight railroads were final. However, we did not include information from the other proposed commuter rail agencies because they either did not have an agreement with a Class I freight railroad or Amtrak or because the agreements were still preliminary and subject to change. To ensure the reliability of the information we obtained, we corroborated information provided by commuter rail agencies, Amtrak, and Class I freight railroads. For example, we compared agreements received from a commuter rail agenc with agreements received from the freight railroad to ensure that the agreements were consistent. ntify liability and indemnity provisions in agreements among We conducted legislative research to identify federal statutes, federal an tate court cases, and STB decisions that related to contractual liability sand indemnity provisions of passenger and freight railroad agreements.

We also asked Amtrak, STB, the commuter rail agencies, and the freight railroads for assistance in identifying these types of cases. In addition, we asked commuter rail agencies and state departments of transportation for state statutes that had an impact on the negotiation of contractual liabilityand indemnity provisions. We then synthesized and summarized the information that we obtained.

To identify factors that affect negotiations of liability and indemnity provisions among passenger and freight railroads, we conducted a conten analysis of the information we collected from our semistructured interviews and site visits. This content analysis captured the extent to which representatives from existing and proposed commuter rail ag freight railroads, and Amtrak identified particular factors that affected their negotiations and the associated effects. In addition to determining the factors that were most commonly cited, this analysis enabled us to determine whether certain factors reportedly had little effect on the negotiations. We also interviewed four state departments of transportation, referred to us by commuter rail agencies, about state law that apply to liability and indemnity provisions and the effects of such laws on liability and indemnity provisions.

To identify potential options for facilitating negotiations of liability indemnity provisions among passenger and freight railroads, we conducted a content analysis of the information we collected from our semistructured interviews and site visits. This content analysis captured potential options mentioned by the entities we interviewed, the assoc advantages and disadvantages from the perspectives of the entities interviewed, and the change in the federal role needed to execute the options. We also asked FRA and FTA officials and STB staff about the federal role in railroad negotiations and the potential impact of some of the options identified on the federal role. Furthermore, we interviewed three insurance brokers who represented commuter rail agencies in obtaining liability insurance to provide context for the process of securin insurance, the process of calculating premium costs, and alternative insurance mechanisms that could be applied to the railroad industry. We g also reviewed prior GAO reports on insurance markets for catastrophic incidents to identify comparable models for railroad liability insurance.

Appendix II: Summary of Liability and Indemnity Provisions in Commuter Rail Agency and Freight Railroad Agreements

Class I railroad O

Is contract fault- based or no- fault?

What are provisions for freight- commuter collision?

Are specific types of conduct excluded or explicitly included?

No fault: each covers own (third parties shared)

No fault: each covers own (third parties fault- based)

No fault: commuter covers all liability No fault: each covers own (third parties and passengers are fault-based)

No fault: commuter covers all liability No fault: each covers own (third parties shared)

W provisions for freight- commuter collision?

Is contract fault- based or no- fault?

Are specific pes of ty conduct excluded or explicitly included?

Canadian Pacific Commuter Railway (CP)

No fault: eac covers own parties shared)

No fault: each covers own (third parties shared)

No fault: each covers own ( parties s hared)

No fault: each covers own (third parties fault- based)

No fault: ea covers own (thi parties and passengers fault-based)

No fault: each covers own equipment (passengers shared)

No fault: freight covers own and 50 percent of other liability No fault: each covers own (third parties shared)

No fault: each covers own (third parties shared)

Is contract fault- based or no- fault?

What are provisions for freight- commuter collision?

Are specific types of conduct excluded or explicitly included?

No fault: each covers own (third parties and passengers are fault-based)

No fault: each covers own (thi parties and passengers are fault-based)

No fault: each covers own (th parties shared)

Fault-based (third parties shared)

Fault-bas parties shared)

No fault: each covers own (third parties shared)

Commuter (continge legislative approval)

No fault: each covers own (thi parties shared) of commuter and freight rail lia s. h row of this table represents this relationship. If the liability a relationship, althoug and indemn h there may be more than one contract ity provisions are the same, the contracts are not r liability levels up to $25 mi llion and fault-based for liability negligent. .5 miles. On the rest o tracks.

CSX and MB TA all other persons take liability , including p for their ow assengers, n employees and is assigned on the b perty, regard sis of fault. less of fault, but liabili ded only for CSX prop n the case of gross negligence.

Provisions are generally no fault except in collision, but Metra covers all liability in excess of $2 million. ituations and could also result in allo is of fault. t in collision.

Metrolink’s agreements with UP are no ls up to $25 million and fault-based in excess of $25 million up to $100 mill ion or $125 m illion depending on the tra cks. cumstances.

Conrail.

The New Mexico Department of Transportation is the owner. unt. roperty, regardless of fault, but liability d on the basis of fault. n employee is assigned on the b ess of fault, but liabilit asis of fault. ssengers, and UP indemnifies TRE for crossings.

T). FDOT and CSX have an agreement e approval, as part of an agreement to additional tracks for the Central Fl mmuter Rail, described in note y.

ES) in Oregon. However, the enger Program and CATS did not have ts for liability and indemnity, and WES had a contract with a non-Class I railroad. s.

Appendix III: Summary of Liability and Indemnity Provisions in Commuter Rail Agency and Amtrak Agreements

Owners

Is contract fault- based or no fault?

What are provisions for Amtrak- commuter collision?

Are specific types of conduct excluded or explicitly included?

No fault: equipmen shared, all other liability Amtrak except residual damage o fault: commuter covers all liability Excluded No fault under covers all liability except Amtrak employees and intercity trains No fault: liability shared equally No fault: commuter covers all liability Excluded except Amtrak commuter employees No fault: commuter covers all liability Excluded except Amtrak employees and Amtrak intercity operations No fault: Amtrak cove No fault: commuter covers own equipment, employees and passengers and other damage, all other liabil No fault: each covers own, commuter Excluded covers third parties No fault: each covers own (third parties covered by Metro-North)

Silent uipment, and property. illful or wanton misconduct explicitly men ed in contract.

OT indemnifies bility above $300,000. lorida on which Tri-Rail and Amtrak operate.

Amtrak is responsible for all liability above $75 million to $200 million. MBTA assumes liability for its employeessengers, except when an incident is the pment, and paresult of As, euis sole mtrak’ ence or omission. eglig f track around Chicago Union Station e Amtrak-owned and has a fault-based contract for track, excluded conduct is ut. ich Rail Runner and Amtrak operate. e for the Rhode Island Public Rail Corporation on Amtra k-owned lines.

Appendix IV: Summary of Key Case Law Addressing Liability and Indemnity Provisions

Federal Cases Addressing Enforceability of Liability and Indemnity Provisions

National Railroad Passenger Corp. v. Consolidated Rail Corp., 69 F. Supp. 951 (D.D.C. 1988), vacated on other grounds, 892 F.2d 1066 (D.C Cir. 1990)

8 . onclusion: A U.S. District Court ruled that the indemnification provisions C in an operating agreement between Amtrak and Conrail could not be enforced where there were allegations and a showing of gross negligence, recklessness, willful and wanton misconduct, intentiona conduct so serious as to warrant the imposition of punitive damages. ed the segment of the Northeast Corridor that runs etween Washington, D.C., and New York. Conrail used the Northeast Facts: Amtrak own b Corridor pursuant to a freight operating agreement.

In January 1987, an Amtrak train collided with thre locomotives that had entered the path of the high-speed Amtrak passenger train. The accident resulted in 16 deaths and more than 350 injuries. Just before crossing over onto the track being used by the Amtrak train, the Conrail engineer and brakeman in control of the Conrail locomotives had failed to heed a series of slow and stop signals at or before a track juncture near Chase, Maryland. The Conrail engineer admitted to the following: that the Conrail crew had recently used marijuana, was speeding, was operating a train in which the cab signal had been rendered inoperative because the light bulb had been removed from it, and was operating a train in which an audible warning device had been intentionally disabled. He also admitted that he had failed to call signals to his brakeman, as required by applicable safety regulations, that he had failed to maintain a proper lookout, and that he had not adhered to the cab signals or the wayside signals. The engineer pleaded guilty to manslaughter and was given the maximum penalty for manslaughter, 5 years imprisonment and $1,000 in fines. The plaintiffs in many of the cases brought against Conrail and Amtrak alleged that Conrail or Amtrak or both committed reckless, wanton, willful, or grossly negligent acts and asserted entitlement to compensatory as well as punitive damages.

Amtrak brought this action before the court seeking a declaration of the rights and obligations of the parties with respect to the indemnifications of the freight operating agreement. “Amtrak agrees to indemnify and save harmless Conrail and Conrail Employees, irrespective of any negligence or fault of Conrail or Conrail Employees, or howsoever the same shall occur or be caused, from any and all liability for injury to or death of any Amtrak Employee, or for loss of, damage to, or destruction of the property of any suc Amtrak Employee. “Amtrak agrees to indemnify and save harmless Conrail and Conrail Employees, irrespective of any negligence or fault of Conrail or Conrail Employees, or howsoever the same shall occur or be caused, from any and all liability for injuries to or death of any Amtrak Passenger and for loss of, damage to, or destruction of any property of any suc passenger.”

The issue presented in the case was “whether Amtrak must indemnif Conrail for any damages—compensatory, punitive or exemplary—arising out of the Chase accident that are founded upon reckless, wanton, willful, or grossly negligent acts by Conrail.”

The court found that the parties did not clearly manifest a mutual in the time they executed the freight operating agreement, or any previous agreement between the parties, for the indemnification provisions to accidents caused by gross negligence, recklessness, or wanton and willful misconduct warranting the imposition of punitive damages. In addition, the court found that public policy would not allow enf of indemnification provisions that appear to cover such extreme misconduct because serious and significant disincentives to railroad saf would ensue. Under District of Columbia law, contractual provisions may ingly, the be invalidated when they are contrary to public policy. Accord court ruled that Amtrak was not required to indemnify Conrail where th were allegations and a showing of gross negligence, recklessness, willful and wanton misconduct, intentional misconduct, or conduct so serious as to warrant the imposition of punitive damages.

Apfelbaum v. National Railroad Passenger Corp., No. 00-178, 2002 WL 32342481, 2002 U.S. Dist. Lexis 20321 (E.D. Pa. 2002)

Conclusion: The Southeastern Pe (SEPTA) entered into a contract in which it indemnified Amtrak against any and all liability arising from the use of 30th Street Station in Philadelphia. Under Pennsylvania law, a party may bring a claim against the Commonwealth of Pennsylvania only if the basis for the claim falls within one of the exceptions to immunity enumerated in the Pennsylvania nnsylvania Transportation Authority Sovereign Immunity Act. The U.S. District Court for the Eastern District of Pennsylvania found that the claim by the plaintiff did not fall within one of the statutory exceptions to immunity. Accordingly, the court found that the contractually negotiated indemnity agreement was unenforceable, stating that a Commonwealth agency could not waive its sovereign immunity by any procedural device, including a contract, and expose itself to liability prevented by the legislature.

Facts: An individual alleged that she slipped and fell in the 30th Str Station in Philadelphia, Pennsylvania. The 30th Street Station is owned by Amtrak and a portion is leased to SEPTA through a lease agreement. As part of the lease agreement, SEPTA agreed to indemnify Amtrak against any and all occupation of 30th Street Station. The plaintiff named several defendants, ible including SEPTA, Amtrak, and the cleaning service companies respons liability arising from or in connection with the use or for maintaining the station. SEPTA moved for summary judgment claiming sovereign immunity. The other defendants argued that SEPTA waived its sovereign immunity when it agreed to Pennsylvania law, the Commonwealth of Pennsylvania enjoys immunity from suit except when the General Assembly has, by statute, expressly s waived the immunity. The court found that because the alleged dangerou condition resulting in injury was not caused by a defect in the property owned by Pennsylvania, the claim did not fall within any of the nine exceptions to immunity enumerated in the Pennsylvania Sovereign Immunity Act. Accordingly, the court found that the indemnity agreement was unenforceable.

Maryland Transit Admin. v. National Railroad Passenger Corp., 372 F. Supp. 2d 478 (D. Md. 2005)

Conclusion: Pursuant to an operating agreement between the Maryland Transit Administration (MTA) and Amtrak, MTA had agreed to indemnify Amtrak for any liability except that which was c negligence of Amtrak. An arbitration panel found Amtrak’s actions to be grossly negligent. The court, however, upheld a second arbitration panel’s h the insurance ruling that MTA was responsible for providing Amtrak wit coverage specified in the agreement notwithstanding the first arbitration panel’s finding that Amtrak was grossly negligent.

Facts: An Amtrak passenger train proceeded through a stop indic collided with a commuter train, causing significant damage. An arbitratio panel found that an Amtrak engineer was guilty of gross negligence in causing the collision, and on the basis of language of the operating ation and n agreement, determined that MTA was relieved of any responsibility to indemnify Amtrak. The agreement essentially provided that MTA agreed to indemnify Amtrak for any liability that would not have arisen but for the existence of the commuter rail service, except for any liability that was caused by the gross negligence of Amtrak.

A second arbitration panel independentl for providing insurance coverage to Amtrak notwithstanding the fact that Amtrak was found to be grossly negligent by the first arbitration panel. y found that MTA was responsible Amtrak sought confirmation from the United States District Court that MTA was required to provide insurance coverage to Amtrak notwithstanding the Amtrak engineer’s gross negligence, and MTA petitioned to vacate this award.

The court confirmed the arbitration panel’s finding regarding MTA’s responsibility to provide insurance to Amtrak.

O&G Industries v. National Railroad Passenger Corp., 537 F.3d 15 (2d Cir. 2008), petition for cert. filed (U.S. Jan. 14, 2009) (No. 08-895)

Conclusion: The United States Court of Appeals for the Second Circuit held that a Connecticut statute that nullifies indemnity agreements insulating a party from its own negligence was preempted to the ext that it conflicted with 49 U.S.C. § 28103 (the provision of the Amtrak Reform and Accountability Act of 1997 that states that a provider of passenger rail transportation may enter into contracts that allocate financial responsibility for claims).

The jury in the lower-court case found that Amtrak’s conduct was not reckless and Amtrak was not required to pay punitive damages, but the court held that even if the jury had found Amtrak’s conduct to be reckless, O&G Industries (O&G) would still be required to indemnify Amtrak. The court stated that it was the intent of Congress to allow Amtrak to enter into indemnity agreements with respect to any claims against Amtrak. The court also held that Amtrak could be indemnified against third party as well as passenger claims.

Facts: O&G, a commercial construction company, contracted with the Connecticut Department of Transportation to perform work related to I-95 as it passed over Amtrak’s tracks in East Haven. Amtrak and O&G entered into a contract that permitted O&G to enter onto Amtrak property to perform the work. In the contract, O&G agreed to indemnify Amtrak. The indemnity agreement stated essentially that O&G would indemnify Amt rak irrespective of its negligence or fault from any and all losses and liabilities “arising out of in any degree directly or indirectly caused by or resulting from activities of or work performed by .” The agreement also stated that O&G would not indemnify Amtr fault of Amtrak was the sole causal fault of Amtrak, except for injury or death of employees of Amtrak and its contractors. ak where the negligence or An Amtrak train struck and killed an O&G employee who was working o the bridge.

Amtrak brought a suit against O&G for indemnification. O&G Amtrak’s claim for contractual indemnification was barred by Connecticut General Statute § 52-572k and Connecticut public policy. The statute, based on public policy considerations, bars indemnification agreements in construction contracts that shield a party from its own negligence. Amtrak responded that 49 U.S.C. § 28103, which permits Amtrak to enter into indemnification agreements, preempted the Connecticut statute.

The jury found that Amtrak was not reckless and so only had to pay compensatory damages and not punitive damages. The jury also found, however, that Amtrak had breached a material term of the contract by failing to safely operate its train in the area of the work site, relievin from an obligation to indemnify Amtrak.

Amtrak moved for a judgment as a matter of law that O&G must inde it. Amtrak stated that notwithstanding the jury verdict, the facts of th accident fell within the wording of th that O&G was legally obligated to indemnify Amtrak. The lower court agreed and required O&G to indemnify Amtrak. mnify e e indemnification agreement, and O&G appealed its case to the United States Court of Appeals for the Second Circuit. The court held that the Connecticut statute that nullified indemnity agreements that insulated a party from its own negligence was preempted to the extent that it conflicted with federal law, and the facts of the accident fell within the wording of the indemnification agreement so that O&G was legally obligated to indemnify Amtrak. “As Judge Dorsey correctly noted in granting summary judgment to Amtrak, it was precisely the doubts cast by the Conrail decision over the validity of indemnity agreements by railroad parties that prompted Congress to enact § 28103(b) . . . . The broad, unqua language in § 28103(b) leaves no doubt as to the specific intent of Congress to sanction indemnity arrangements between Amtrak ‘and other parties’ with respect to any clai against Amtrak. See S.Rep. No. 105-85, at 5 (1997).”

Deweese v. National Railroad Passenger Corp., 2009 WL 222986, 2009 U.S. Dist. LEXIS 6451 (E.D. Pa. 2009) (Memorandum of Decision) the Commonwealth had been preempted by 49 U.S.C. § 28103(b). The court agreed with Amtrak and against SEPTA.

Facts: The plaintiff, Deweese, went to the Crum Lynne train station Ridley Park, Pennsylvania to board a SEPTA train bound for Philadelphia. When he arrived at the station, he learned that he had to board the train from the tracks on the opposite side of where he had entered the station. He attempted to cross the tracks and was struck by an Amtrak train, resulting in serious injuries. Amtrak owned the Crum Lynne station and SEPTA leased the station from Amtrak. The railroad tracks at the were owned by Amtrak as well. As part of the lease agreement between Amtrak and SEPTA, SEPTA agreed to indemnify Amtrak for all liabilit y which would not have occurred but for the existence of the commuter service provided by SEPTA. The agreement for access to the ra tracks contained a similar provision.

State Cases Addressing Enforceability of Liability and Indemnity Provisions

Mass Transit Administration v. CSX Transportation Inc., 708 A.2d 298 (Md. 1998)

Conclusion: The Court of Appeals of Maryl statute (which provides that an indemnification in a contract pertaining to construction is void and against public policy if the party indemnified isand held that a Maryland negligent) applies only to construction contracts, not to indemnificationprovisions in procurement contracts. Accordingly, the Mass Transit Administration (now the Maryland Transit Administration) was required to indemnify CSX Transportation (CSX).

Facts: A Maryland Rail Commuter (MARC) train operated by CSX str backhoe that was performing maintenance on the track. The operator of the backhoe was a CSX contractor. No one was injured. The backhoe operator sued CSX for the value of the backhoe, and the parties se ttled. CSX then claimed indemnification from MTA, of which MARC is a part. MTA argued that the indemnification provision in the commuter rail passenger service agreement between CSX and MTA was void based on the Maryland statute that provides that an indemnification in a contract pertaining to the construction, alteration, repair, or maintenance of a building, structure, appurtenance, or appliance for damages arising from the negligence of the party indemnified is against public policy and is void and unenforceable.

The Court of Appeals of Maryland held that MTA was required to indemnify C SX. The court stated that the Maryland statute applies only to construction contracts, not to indemnification provisions in procureme contracts, and the contract did not become a construction contract because of the collision between a train and a backhoe.

Pacific Insurance Co. v. Liberty Mutual Insurance Co., 956 A.2d 1246 (Del. 2008)

Conclusion: The Supreme Court of Delaware held that the insurance policy providing Conrail with coverage would not violate a Delaware statute providing that public policy precludes contractual indemnification d for a party’s own negligence. The court held that the insurance purchaseto protect Conrail, once issued, could not be held unenforceable against Conrail. this case, but the case is relevant in onduct, insurance provisions still must be honored if this type of conduct Facts: Conrail is the only rail entity in that it holds if a state law prohibits indemnification for certain types of c occurs. This case involved an insurance coverage dispute that arose from fatal accidents t during a road construction project carried out by the Delaware Department of Transportation. Two wrongful death actions were file result. These actions were settled, but a dispute over coverage under two insurance policies remained. One of the insurance companies argued, among other things, that it was not required to provide the contractual coverage because of a state statute that precluded contractual indemnification for a party’s own negligence. The court held that the , once issued, could not be held insurance purchased to protect Conrail unenforceable against the indemnified party, even where the party was found to be negligent. hat occurred on a railroad crossing owned by Conrail Massachusetts Bay Transportation Authority and Massachus Bay Commuter Railroad Co. v. CSX Transportation Inc. and Cohenno Inc. (Super. Ct. Civ. Action 2008-1762-BLS1) (Memorandum and Order on Defendant CSX Transportation, Inc.’s Motions to Dismiss)

Conclusion: The Business Litigation Session of the Massachusetts Superi e Court held that provisions that indemnify CSX are unenforceable on th basis of the Massachusetts common law to the extent that the contractual provisions indemnify CSX against its own gross negligence or reckless or intentional conduct.

Facts: In March 2008, a freight car that had been delivered by CSX to a shipping depot rolled down the siding at the top of a hill, where it cr into a commuter train with roughly 300 passengers, injuring many.

The 1985 trackage rights agreement between the Massachusetts Bay Transportation A indemnify CSX “irrespective of any negligence or fault . . . from any and all liability, damage, or expense of any kind” arising out of damages or in to any MBTA employee or other contractor of MBTA or out of damage MBTA property. MBTA, and its contractor MBCR, filed a lawsuit with the Business Litigation Session of the Massachusetts Superior Court seeking a declaration that CSX was liable for the damages arising from the accident . CSX filed uthority (MBTA) and CSX states that MBTA will a motion to dismiss for failure to state a claim.

Surface Transportation Board Decisions Addressing Enforceability of Liability and Indemnity Provisions

The Rail Passenger Service Act of 1970 provides that Amtrak and freigh railroads may contract for Amtrak’s use of the freight railroads’ facilities. If the parties cannot agree upon a contract, the Surface Transportation Board (STB) may order access and prescribe the terms and conditions of the contract, including compensation.

Application of the National Railroad Passenger Corp. under 49 U.S.C. 24309(a) — Springfield Terminal Railway Co., Boston and Maine Corp. and Portland Terminal Co., 3 S.T.B. 157 (1998)

Conclusion: Amtrak petitioned STB to set terms and compensation for Amtrak’s use of track owned by the freight railroads in the Guilford Rail System. Amtrak agreed to indemnify the freight railroads for certain standard risks. STB determined that other residual damages arising out of Amtrak’s operations were an incremental cost for which Guilford was entitled to compensation. In addition, STB refused to require Amtrak to reimburse the freight carriers from damages due to the freight carriers’ gross negligence, recklessness, or wanton or willful conduct.

Facts: Amtrak petitioned STB to set the terms and compensation for Amtrak’s use of freight carriers’ lines to provide passenger service between Boston and Portland, Maine.

Amtrak asked STB, in prescribing the terms and conditions, to adopt Amtrak’s standard liability agreement with freight railroads, known as section 7.2. This section essentially allocates liability on a no-fault basis, that is, Amtrak agrees to indemnify the host railroad against liability resulting from any damages that occur to Amtrak employees, equipment, and passengers, regardless of fault, and the host railroad agrees to indemnify Amtrak against any liability resulting from damages to the host railroad’s employees or equipment, regardless of fault.

In the proposed agreement at issue in this case, Amtrak agreed to assume full responsibility for the following types of damages: (1) injury or death to Amtrak employees or damage to their property, (2) injuries or death to Amtrak passengers and damage to their property, (3) damage to Amtrak equipment or property, and (4) injuries or death to any person or damage to property (other than property of Guilford and of its employees) proximately caused as a result of a collision of a vehicle or a person with an Amtrak train at a grade crossing.

Amtrak proposed that the freight carriers assume liability for the followin types of damages that could occur because of Amtrak’s presence on the tracks, in return for a payment of approximately $17,000 per year: injury to trespassers and licensees; general indirect damages, such as environmental damage to houses near the tracks; and injuries or death to Guilford employees or damage to their property or to the property of Guilford.

STB found that the liability for these “residual damages” arising out of Amtrak operations was an incremental cost for which the carriers were entitled to compensation. STB directed Amtrak to either fully indemnify the freight railroad for the residual damage categories, a had agreed to do for other damage categories; purchase insurance to cover the freight carrier’s assumption of liability for all such costs (i.e., without deductibles or low caps, even if that required the purchase of more than one policy); or combine the first two methods (by, e.g., purchasing insurance with a deductible or low cap, but agreeing to indemnify the freight railroads f damages that were subject to the deductible or cap).

In addition, STB would not require Amtrak to reimburse the freight carriers from damages due to the freight carriers’ gross negligence, recklessness, or wanton or willful conduct. STB stated that statute requires that compensation levels reflect safety considerations, and thus the freight carriers should be encouraged to conduct th It also stated that public policy generally disfavors requiring one party to be responsible for another’s gross negligence or willful and wanton misconduct. e operations safely.

Boston and Maine Corp. and Springfield Terminal Railway Co. v. New England Central Railroad, STB Finance Docket No. 34612 (2006)

Conclusion: STB held that the indemnity provision in the operating agreement between Boston and Maine (B&M) and the New England Central Railroad (NECR) could not be used to indemnify NECR, which had been found to be grossly negligent, since such an interpretation woul “contravene well-established precedent that disfavors such indemnification provisions” and would be contrary to the rail transportation policy, which requires STB to “promote a safe and efficient transportation system” and “operate facilities and equipment without detriment to the public health and safety.”

Facts: Pursuant to a previous Interstate Commerce Commission (ICC) order, B&M conveyed its “Connecticut River Line” to Amtrak subject to Amtrak’s granting B&M trackage rights on the line. Amtrak transferred the line to the Central Vermont Railway, which subsequently was purchased by NECR. NECR also took over the trackage agreement.

A B&M train operating over the Connecticut River Line derailed. B&M sued NECR for breach of contract and tortuous injury due to gross negligence, recklessness, and willful misconduct concerning NECR’s alleged failure to maintain the line. NECR responded that any claims b on the condition of the track were barred by section 7.1 of the trackage rights order issued by ICC. B&M argued that NECR’s interpretation of section 7.1 was contrary to public policy because it would apportion all responsibility for the derailment to B&M even if the derailment was caused solely by grossly negligent, reckless, or willful misconduct by NECR. STB was called upon to determine whether ICC intended sec 7.1 to indemnify for gross negligence. tion STB held that section 7.1 should not be construed to absolve NECR of gross negligence since such an interpretation would “contravene well- established precedent that disfavors such indemnification provisions” and would be contrary to provisions in the federal government’s rail transportation policy that require STB to “promote a safe and efficient transportation system” and “operate facilities and equipment without detriment to the public health and safety.”

Appendix V: GAO Contact and Staff Acknowledgments

GAO Contact

Staff Acknowledgments

In addition to the contact named above, Nikki Clowers, Assistant Alana Finley; Brandon Haller; Hannah Laufe; Nancy Lueke; and Aron Szapiro made key contributions to this report.