Professional Documents
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2
William C. Evans, CIC, CRM
1
Senior Vice President, MARSH Global Rail Practice, Washington, DC USA
2
Senior Director-Insurance (retired), Union Pacific Railroad, Omaha, NE USA
SUMMARY
In keeping with the conference theme of Maintaining the Momentum, the author presented a paper at CORE
2014 about reducing the Total Cost of Risk (TCOR) using Safety Management Systems and engaging the
entire railway organisation to proactively embrace SMS techniques . Further analysis of railway risk has
shown historic railway business practices and contracting methods can increase expenses with little risk
reduction or liability mitigation. This paper will examine strategies to obtain benefits from a well-executed
and managed “contractual risk transfer” protocol that many railways incorporate into their terms and
conditions but then neglect to enforce or actively manage. As a result they do not achieve the risk mitigation
and cost savings they seek. Requiring contractors and business partners to maintain certain limits of
insurance irrespective of the specific risk exposure may increase the cost of those services. Likewise,
requiring such coverage and then not verifying and managing policies to assure the coverage limit remains
available to the railway may expose the railway to an unexpected loss. Railways often rely upon broad
indemnification clauses to further protect their operations without regard to the financial capacity of the
indemnifying party; when such clauses are made reciprocal in the interests of “fairness,” the railway may
find itself unavoidably enmeshed in a third party lawsuit. By applying the hazard and risk evaluation
principles of SMS, already adopted by all Australian states and territories, this paper cites some case
histories to illustrate how to make the railway more profitable.
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holistic approach to risk management that
same SMS methods that address physical and
recognized each loss, whether insured or not, was
human factor risks should be used to identify and
a detriment to the financial performance of the
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mitigate business practice risks when establishing
railway business and hence should be minimized
contractual risk transfer.
or eliminated to reduce the total cost of risk
(TCOR). More recent analysis as part of efforts to
reduce TCOR has revealed that railways may
2. NOTATION
initiate or incorporate business practices to
contractually transfer the risk to other parties as a The following abbreviations are used in this paper:
SUPPORTED BY
Author Edit v2.5 2016.04.05
James N. Michel, PE, Hon. Mbr. AREMA1, William C. Evans, CIC, CRM2 CHANGING BUSINESS STRATEGIES TO REDUCE
1
Senior Vice President, MARSH Global Rail Practice, Washington, DC USA THE TOTAL COST OF RISK
2
Senior Director-Insurance (retired), Union Pacific Railroad, Omaha, NE USA
R
Identified gaps can then be bridged by following
the steps illustrated in Figure #2.
To mitigate exposures in the self-insured tier,
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railways create and execute safety and loss
prevention programs in both the operational and CRT “Best Practises” must include other party
occupational areas of their business. Included are insurance requirements that reflect common
third party agreements and contracts that share or insurance industry practices and approaches to
transfer risk to those parties that enter the railway providing insurance coverage. The use of vague
property or perform services for the railway, and antiquated terminology, and ambiguous
SUPPORTED BY
Author Edit v2.5 2016.04.05
James N. Michel, PE, Hon. Mbr. AREMA1, William C. Evans, CIC, CRM2 CHANGING BUSINESS STRATEGIES TO REDUCE
1
Senior Vice President, MARSH Global Rail Practice, Washington, DC USA THE TOTAL COST OF RISK
2
Senior Director-Insurance (retired), Union Pacific Railroad, Omaha, NE USA
language that’s susceptible to more than one Before a problem can be solved it must first be
interpretation or that have no meaning in current defined. Warren Buffet said: “Risk is not knowing
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insurance industry practice is wide spread in the what you’re doing.” Risks of loss will go
railway industry and must be avoided. Other party undetected or overrated, resulting in no mitigation
insurance requirements should also be built upon or over mitigation if not modelled. Modelling
existing case law to avoid unnecessary litigation. defines the problems. Example models include:
Risk Assessment Insurance Limits (RAIL)
Models that identify and value each activity
in a task to be accomplished or a service
to be provided. A sample RAIL Model
would evaluate all applicable key risk
indications (KRIs) that apply, such as
complexity, duration, frequency,
experience, etc. A KRI is a measure that
indicates how risky an activity is. KRI
values can be determined by statistical
analysis, loss history values, or by
expertise.
Event Tree Models that show a chain of
cause-and-effects for a range of events.
Scenario Risk Assessment Models that
analyse possible future events by
considering alternative possible outcomes.
Decision Tree Models that show possible
consequences for each decision.
Why is determining exposure to risk of loss,
appropriate limits of insurance, and transferring
risk of loss by contract is problematic.
Because a large uninsured loss can result
in business failure.
Because insurance limits that are too high
or too low waste dollars due to arbitrary
benchmarking or industry bias.
Figure 2 – GAP Analysis Because in the absence of adequate
insurance, claimants and plaintiffs will
expand their search for “deep pockets” to
Best Practices must include a methodology that enhance their opportunities for financial
identifies exposures to risk of loss based upon recovery.
modelling so that bias is avoided. Being able to
Modelling is one of the methods used in SMSP
recall and assess the relative frequency and
development and implementation.
severity of events lies at the heart of intuitive
analysis. However, in the absence of modelling 4.2 Compliance by Other Parties to Insurance
which allows comprehensive analysis, some Requirements
events will be given undue emphasis. Events that
Commercial insurance policies represent a
are fresh in our mind, for example, tend to
railway’s best chance of recovery for liabilities
dominate our assessments. A bad experience with
falling within the indemnity provisions of its
a type of operation may intuitively suggest to us a
contracts. Verifying that required other party
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high likelihood that all (or most) of our experiences
coverage is in force and monitoring on-going
will be bad, so we end up making a decision based
compliance are critical steps in transferring risks of
on a very small sample. Modelling exposures to
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loss by contract. The most common method of
risk of loss helps mitigate this bias. Modelling
verifying compliance is to require other parties to
drives analysis that leads to comprehensive
furnish a certificate of insurance and to assure that
understanding of the risks to be mitigated.
the insurer automatically notifies the railway of any
4.1 Modelling Exposure to Risk of Loss change that affects the coverage. Verifying
compliance with insurance requirements using
SUPPORTED BY
Author Edit v2.5 2016.04.05
James N. Michel, PE, Hon. Mbr. AREMA1, William C. Evans, CIC, CRM2 CHANGING BUSINESS STRATEGIES TO REDUCE
1
Senior Vice President, MARSH Global Rail Practice, Washington, DC USA THE TOTAL COST OF RISK
2
Senior Director-Insurance (retired), Union Pacific Railroad, Omaha, NE USA
certificates of insurance can be a difficult and performing some task, the loss would not have
labour-intensive task if done manually. Therefore, occurred, hence all losses regardless of which
a system is needed to monitor the other party's party caused the loss, the invitee is fully
compliance with your requirements and to allow responsible to make the railway whole.
easy retrieval of documentation that they are
Such one-way, all-inclusive indemnifications that
compliant, or what steps have been taken to
are not capped are problematic if the third-party
enforce compliance. A system also allows
lacks adequate liability insurance, the corporate
liability policy includes a railroad exclusion, or the
limits have been used for prior claims and not
Example A reinstated. A public agency may have a statutory
cap which makes it unable to indemnify the railway
A large North American railroad had less
except for the smallest of losses. In North America,
than 20% compliance with the insurance railways require such third-parties to purchase a
coverage and limits it required of other project dedicated Railroad Protective Liability
parties to help ensure they could fund the
Insurance to be the primary coverage where the
indemnity portion of their contracts and railway is the insured.
agreements.
6. INTEGRATING SMS SAFETY PROGRAMS
The railroad implemented a Certificate of INTO RISK MANAGEMENT AND CRT
Insurance monitoring system to manage 6
The SMS Guidelines of Transport Canada ask
compliance with its required insurance
five basic questions when identifying and analysing
coverage and limits. Compliance began
hazards and risks:
increasing immediately, and as
improvements to the process were made What is the nature of business or task?
the rate of compliance accelerated,
reaching 100% in just a few years. The What could go wrong?
result: The railroad received from How bad is it or could it be?
commercial insurers over $50 million
dollars it would otherwise not have What can be done about it?
recovered. How effective are the corrective or
mitigating actions?
By using these basic questions, it is possible to
analyse specific contract or agreement provisions
measurement of performance. Where
and how they will interact. Creating multiple “what
performance is measured, performance improves,
if” scenarios can predict how the various insurance
and where performance is measured and reported,
policies will perform and when insurance coverage
the rate of improvement accelerates.
is no longer available, how the indemnifications
and the indemnifier’s insurance will provide
recovery. This process should also highlight when
5. INDEMNIFICATION CLAUSES
the SIR of either party will be the only resource and
Contracts routinely contain indemnification clauses whether the responsible party has adequate
that require a party causing damages to make the resources to self-insure without risking business
other party whole, including legal costs. failure. Also the role of SMS in CRT is presenting
Indemnifications can be bilateral where each party the railway’s risk profile in its finest light when
assumes responsibility for its own actions and negotiating premiums with the insurance markets.
losses as is found in many track access
agreements. In the absence of gross negligence,
each party assumes their own losses and 7. CONCLUSION
cooperates in resolving shared losses as
All loss payments exclusive of insurance or third-
prescribed in the agreements. When the injured is
party recovery affect the railway’s bottom line of
a third-party, care must be taken if the contractual
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financial performance. If the railway is a publicly
parties have grossly unequal assets and
traded company, the shareholders ultimately feel
capabilities to indemnify as the richest party,
the impact. For every dollar paid out in claims,
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usually the railroad, could be ordered in a court
additional revenue must be generated to maintain
judgement to make the injured whole.
the status quo. In a government owned or non-
In situations where a railway must invite a third profit entity, these payments cause restatement of
party on the property, it may be a one-way budgets and elimination of line items that provide
indemnification invoking the “but for” argument; but for increased efficiency, growth, quality of service,
for the fact that the third-party was present and and levels of staffing. Reducing TCOR by
SUPPORTED BY
Author Edit v2.5 2016.04.05
James N. Michel, PE, Hon. Mbr. AREMA1, William C. Evans, CIC, CRM2 CHANGING BUSINESS STRATEGIES TO REDUCE
1
Senior Vice President, MARSH Global Rail Practice, Washington, DC USA THE TOTAL COST OF RISK
2
Senior Director-Insurance (retired), Union Pacific Railroad, Omaha, NE USA
Always specify the limits to be provide d as References are shown in the endnotes.
a floor; i.e. "Not less than $X". This makes
all limits (primary and excess or
secondary) available to both parties.
http://www.brianyquote.com/quotes/quotes/w/ warre
1 nbuff138173.html
Michel, James and Gardiner, Robert; 2014 6
Transport Canada Railway Safety Management
“Reducing the Total Cost of Risk Across the
System Guidelines, publication TC-10004043,
Railway Organisation.”RTSA, CORE 2014,
Section 2.2-Overview, published November 2010.
Adelaide, SA.
2
Rail Safety National Law (SA) Act, Division 6,
January 2013
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3
Queensland to Join ONRSR, RAIL EXPRESS,
11/27/2015
4
Evans, William C. 2015. “Building Better
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Relations among Freight and Passenger Carriers,”
RAILWAY AGE Passenger Trains on Freight
Railroads Conference, Washington DC USA
5
Warren Buffet. (n.d.). BrainyQuote.com.
Retrieved December 11, 2015 from
BrainyQuote.com website:
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