Insurance Requirements for Federally Regulated Freight Railway Companies - Implementation guide

Part 1 - Insurance Requirements - Background and Features

1.1 Purpose

The purpose of this guide is to assist stakeholders to understand and comply with the new insurance requirements under the Safe and Accountable Rail Act (SARA) and to inform them about the process that the Canadian Transportation Agency (Agency) initially intends to follow in implementing the new requirements.

It addresses only those parts of the new legislation that relate to obtaining, varying and maintaining certificates of fitness (COF) for federally-regulated, freight-carrying railway companies.

Stakeholders are encouraged to familiarize themselves with all the new requirements in the legislation.

If there are any discrepancies between this document and the SARA, the legislation prevails.

1.2 Overview of change

Federal rail freight carriers

The SARA amended the Canada Transportation Act (CTA) and changed the existing insurance regime for federal rail freight carriers by prescribing minimum insurance coverage requirements based on the type and volume per calendar year of the carriage of certain prescribed goods, (i.e., crude oil, toxic inhalation hazard materials (TIH), and other dangerous goods) included in their operations.

The applicable minimum liability insurance coverage, which includes any self-insurance, is for the operation of a railway that does not relate to a passenger rail service. The amount of self-insurance must not exceed the maximum amount of self-insurance that the person who will be responsible for the proposed operation can sustain, based on their financial capability.

Passenger rail services and railway construction

The insurance requirements applicable to passenger rail services and to the construction of a railway have not changed. See the Agency's Guide to Certificates of Fitness.

1.3 Effective date

The new insurance requirements come into force on June 18, 2016.

1.4 Minimum insurance levels

The legislated minimum liability insurance levels are as follows:

		June 18, 2016^{Footnote *}	June 18, 2017
	Operation of a railway that includes the carriage, per calendar year, of	Amount per occurrence ($ million)
1	None of the situations described below:	$25	$25
2	Less than 4,000 tonnes of TIH materials, less than 100,000 tonnes of crude oil, or at least 40,000 tonnes of other dangerous goods:	$50	$100
3	At least 4,000 tonnes but less than 50,000 tonnes of TIH materials, or at least 100,000 tonnes but less than 1.5 million tonnes of crude oil:	$125	$250
4	At least 50,000 tonnes of TIH materials or at least 1.5 million tonnes of crude oil:	$1,000	$1,000
Note * There is a one-year transition period from the date on which the legislation becomes effective for railway companies carrying dangerous goods, TIH and crude oil amounts in the second and third categories. Railway companies in the second category will initially require liability insurance coverage of $50 million, increasing to $100 million. Railway companies carrying volumes of TIH and crude oil described in the third category will initially be required to maintain minimum liability insurance coverages of $125 million, increasing to $250 million. Return to footnote * referrer

1.5 Covered risks

The minimum liability insurance requirements are stated on a per occurrence basis for liability insurance covering the following risks that may arise out of the operation:

third-party bodily injury or death, including injury or death to passengers;
third-party property damage, excluding damage to goods carried on a shipper’s behalf;
risks that are associated with a leak, pollution or contamination; and,
in the case of a railway accident, as defined in section 152.5 of the CTA, the other losses, damages, costs and expenses described in subsection 153(1) of the CTA.

The special requirements applicable to railway accidents, as mentioned above, are associated with the operation of rolling stock containing goods specifically named as designated goods in the legislation. As of now, crude oil is the only designated good.

1.6 Railway accidents

The special requirements applicable to railway accidents are:

A railway company that operates a railway that is involved in a railway accident is liable for the following losses, damages, costs and expenses up to the amount of the minimum liability insurance coverage that the company is required to maintain for the operation of the railway:
- all actual loss or damage incurred by any person, other than by a railway company that is also liable, as a result of the railway accident or as a result of any action or measures taken in relation to the accident. “Actual loss or damage” includes loss of income, including future income, and, with respect to any Aboriginal peoples of Canada, loss of hunting, fishing and gathering opportunities. "Actual loss or damage" does not include:
  - any loss or damage incurred by a person who operates a railway that is not within the legislative authority of Parliament and who is involved in the railway accident, in respect of the portion of the operation that does not relate to a passenger rail service;
  - any loss of or damage to goods being carried by the railway company or by the person referred to in the previous paragraph; or,
  - any loss of income that is recoverable under subsection 42(3) of the Fisheries Act.
the costs and expenses reasonably incurred by Her Majesty in right of Canada or a province or any other person in taking any action or measures in relation to the railway accident; and,
all loss of non-use value relating to a public resource that is affected by the railway accident or as a result of any action or measures taken in relation to the accident.
If more than one railway company is liable, the companies are jointly and severally liable, each up to the amount of the minimum liability insurance coverage that applies to it.
Liability is limited to the amount of the minimum liability insurance coverage that the company is required to maintain unless it is proven that the railway accident resulted from any act or omission of that company that was committed either with intent to cause the accident or recklessly and with the knowledge that the accident would probably result, and/or unless the company is liable for a greater amount under any other Act.
A railway company is not liable if it establishes that the railway accident resulted from an act of war, hostilities, civil war or insurrection; or, any other defense that might be set out in regulations.
A railway company’s liability related to accidents involving the carriage of designated goods (i.e., crude oil) does not depend on proof of fault or negligence.
Coverage must be such that it can satisfy claims instituted within a period of three years beginning on the day on which the losses, damages, costs and expenses were incurred, but not after a period of six years beginning on the day on which the railway accident occurred.

1.7 Responsibilities of federally-regulated, freight railway companies

All federally-regulated railway companies are required to have a COF issued by the Agency to construct or operate a railway in Canada.

Under the new regime, freight-carrying COF holders must maintain at all times:

The minimum applicable liability insurance coverage;
Insurance that covers the prescribed risks; and,
Where the insured has self-insurance, sufficient financial capacity to sustain the amount of self-insurance held.

COF holders must notify the Agency without delay

If the liability insurance coverage is cancelled or altered; or,
If there are any changes to the construction or operation that may affect the liability insurance coverage.

1.8 Agency responsibilities

Once the new insurance provisions under the SARA come into effect, for federally-regulated, freight-carrying railway companies, the Agency will:

Suspend or cancel a COF, if it determines that:
- The COF holder does not have the minimum applicable insurance coverage;
- The insurance coverage does not cover the prescribed risks; or,
- The amount of self-insurance exceeds what the COF holder (or the person responsible for the payment of the self-insurance through an indemnity agreement) can sustain based on its financial capability.

Under the SARA, the Agency has the explicit authority to inquire and determine whether a COF holder complies with the requirements.

Agency designated enforcement officers will have the authority to issue administrative monetary penalties of up to $100,000 per violation if it is found that the COF holder:

Has not kept the prescribed insurance at all times; or,
Has failed to notify the Agency in a timely manner that the insurance was cancelled or altered or of a change to the construction or operation that may affect the liability insurance coverage.

Part 2 – Framework for Implementing the New Requirements

2.1 Goals/objectives

Until the new insurance requirements come into effect, the current insurance regime continues to apply. COFs issued under the current regime will be deemed to have been issued under the new regime until cancelled by the Agency once the SARA's insurance provisions come into force.

While all existing, valid certificates of fitness remain valid until cancelled by the Agency, railway companies are required, as of June 18, 2016, to comply with the new provisions and to be prepared to demonstrate their compliance to the Agency by that date.

2.2 Implementation

To facilitate a smooth transition to the new railway insurance regime, railway companies involved in the carriage of freight have been requested to make submissions to the Agency to demonstrate that they are compliant with the new requirements.

Upon receipt of these submissions the Agency will conduct a systematic review of each railway company to assess compliance.

2.3 Confidentiality

Third party confidential information filed with the Agency, as described in section 20 of the Access to Information Act, will not be disclosed publicly unless the company provides consent or otherwise in accordance with the law.

2.4 New and modified forms

In support of the implementation of the new regime, the Agency requires all of the information requested in the following new or modified forms:

Details regarding the Agency's proposed process and how it intends to deal with certain elements related to the new requirements follow in Part 3.

Part 3 – Agency Process

3.1 Overview

The Agency process for determining a freight carrying COF holder's eligibility for a COF under the new insurance regime will include the following tasks:

Determining what insurance category the railway company is in based on the volume of prescribed commodities involved in its operation;
Confirming that the railway company has the mandatory minimum liability insurance coverage for that insurance category;
Confirming that the railway company or other responsible party has the financial capability to sustain the amount of self-insurance claimed; and,
Monitoring the compliance of COF holders with the statutory requirements on an ongoing basis.

3.2 Determining insurance category – volume reporting

3.2.1 Volume reporting requirements

The SARA calls for specific levels of insurance coverage for specified volumes of crude oil, TIH and other dangerous goods carried. Railway companies will be asked on or before the effective date of the SARA, and on an annual basis, to provide the name, classification and volume (in tonnes) of these commodities involved in their operations in Canada.

The legislation identifies the prescribed commodities using United Nations (UN) codes, whereas, the rail industry identifies the commodities carried using Hazardous Material Response Codes (HAZMAT codes).

Volume reporting should be done using the UN codes specified in the SARA. If that is not currently possible, the classification structure using HAZMAT codes may be submitted, during the interim period only (1 year period).

In addition to the summary report incorporated into the application and compliance forms, a detailed report by hazardous goods code will also be required. See the link to view this form - detailed reporting form. On a case-by-case basis, railway companies may also be required to submit source data to support these reports.

A railway company that declares itself to be in insurance category 4 (the category with the highest minimum requirement) will not be required to submit a volume report.

3.2.2 Calendar year

The SARA identifies insurance categories based on the tonnages of prescribed goods moved in a calendar year (January 1st to December 31st).

The Agency will require railway companies to provide historical, current and forecast traffic volumes (in tonnes) per calendar year for TIH, crude oil and other dangerous goods, as follows:

Tonnage involved in the operation for the two most recently completed calendar years (to provide historical context);
Tonnage carried current year-to-date and forecast to be carried for the current uncompleted calendar year; and,
Forecast tonnage to be carried in the operation for the nearest upcoming calendar year in which the existing or proposed insurance policy applies.

In the event a railway company's insurance policy does not renew on January 1 of any given year, the Agency will determine a railway company's insurance category based on whichever is the highest between the volumes reported for the current calendar year and the forecast calendar year. The railway company's insurance coverage must meet the minimum requirement for that insurance category, even if the policy is in effect during a calendar year with a lower volume.

3.2.3 Traffic to be counted

The SARA's prescribed insurance requirements are based on the "operation of a railway that includes the carriage of…". The Agency notes that the legislation uses the expression: "that includes the carriage of…" rather than "that carries".

The term "operation" is a derivative of "operate", which is defined in the CTA as "with respect to a railway, as any act necessary for the maintenance of the railway or the operation of a train".

Under the SARA, railway companies are jointly and severally liable without proof of fault or negligence for any railway accident that involves the carriage of crude oil, even railway accidents or incidents that are caused by a person or persons other than a railway company. Furthermore, railway companies are exposed to the responsibility of increased volumes when they host other railway companies that carry TIH or other dangerous goods on their tracks.

Accordingly, the Agency is of the view that, in determining a railway company's volume of TIH, crude oil or other dangerous goods, the Agency will include:

the volumes that a railway company carries on its own or any other railway anywhere in Canada; and,
the volumes that are being carried on any railway under a host railway company's care by any other railway company (federal or provincial) or any person other than a railway company.
- To avoid double counting, these volumes should include only the estimated volumes that are carried over the host railway company's tracks by a railway company or a person other than a railway company, that are not also interchanged with and transported by the host railway company.

3.3 Confirming insurance coverage

3.3.1 Policy types and coverage

Eligibility for a COF is dependent on a railway company demonstrating that it has insurance coverage that:

meets the minimum liability insurance requirements for railway companies specified under the SARA (described earlier); and,
ensures that the required level of protection is continuously available.

This pertains to maintaining insurance that can, at all times, meet the minimum applicable amount of per-occurrence insurance coverage, cover the prescribed risks and meet the claims requirements, as they are set out in the legislation.

All of these essential factors should be taken into account when choosing an insurance policy type and negotiating the terms and conditions of coverage.

3.3.2 Occurrence-reported and claims-made policy types

Currently, federal railway companies typically have either occurrence based (i.e. occurrence-reported) or claims-made types of policies.

Occurrence-reported policies generally offer protection from any covered incident that occurs and is reported during the term of the policy, regardless of when a claim is filed, i.e., even after the policy is no longer in force.

Claims-made policies provide protection from any covered incident that occurs during the term of the insurance policy, if a claim relative to that incident is filed against the insured during the policy period. This type of policy will not respond to a claim after the policy is expired, unless some form of extended reporting coverage is in place.

Depending on the type of policy, railway companies will need to provide confirmation and certain details about how the policy will be able to satisfy claims filed within the time frames permitted by the SARA, the occurrence reporting status of the policy and if the policy has been or will be affected by claims or pending claims.

3.3.3 Umbrella coverage

In some instances, a federal railway company (usually a subsidiary of a larger parent company) is insured through an umbrella-type arrangement, under a policy that also covers the parent company and some or all of its subsidiaries.

The Agency has previously determined that umbrella coverage can be an acceptable means of insuring a specific railway company's operations.

The Agency notes that when an insurance policy covers many railway companies, the claims of all these railway companies could have the effect of eroding the policy aggregate to the point that the per-occurrence limit of the applicable policy was impaired.

A railway company covered by an umbrella policy must be mindful of this possibility and manage its exposure to this risk accordingly to ensure that its per-occurrence minimum can be met at all times, as well as to provide the Agency with details as to how these risks are being mitigated.

3.3.4 Coverage for railway accidents involving the carriage of crude oil

With respect to railway accidents involving the carriage of crude oil, the SARA prescribes that coverage is required for:

specific additional risks (see section 1.6);
liability without proof of fault or negligence;
joint and several liability; and,
a six year availability for satisfying claims

A railway company whose operation involves the carriage of crude oil or is forecast to involve the carriage of crude oil during a policy period will have to demonstrate to the Agency that, in addition to the requirements applicable to all freight-carrying railway companies, its insurance coverage meets these additional requirements for accidents involving the carriage of crude oil.

3.3.5 Certification

To enable it to confirm that the legislated insurance requirements have been met, the Agency requires that both the railway company and its insurance agent or broker provide the following certifications.

The application and continued compliance forms provide details about the nature of the railway company's operation, and include, as a mandatory requirement, a signed statement from an authorized officer of the railway company, attesting to the truth, accuracy and completeness of the information provided.

Another Agency requirement is submission of the Agency's COI form, which is completed by both the insurance agent/broker and the railway company. The COI contains information such as the named insured, policy number and type, limits of coverage, the underwriting insurance company(ies) and coverage period. It provides verification and attests to the insurer's knowledge of the risks disclosed by the railway company and the existence of the insurance policy, as described in the form. To certify this information, the COI must be signed by an authorized insurance agent or broker and also by an authorized officer of the railway company.

It should be noted that under subsection 173(1) of the CTA, no person shall knowingly make any false or misleading statement or knowingly provide false or misleading information to the Agency or the Minister of Transport or to any person acting on behalf of the Agency or the Minister in connection with any matter under the CTA. Pursuant to section 174 of the CTA, every person who contravenes a provision of this Act or a regulation or order made under this Act, other than an order made under section 47, is guilty of an offence punishable on summary conviction and liable to a fine.

3.3.6 Assessment of insurers

To assess whether the insurer has the financial ability to pay its contractual level of insurance coverage described in the COI, the Agency will require railway companies to provide the financial rating of their insurers, including captive insurers if applicable, as determined by one of the recognized sources (or an acceptable alternative) indicated below:

The Office of the Superintendent of Financial Institutions (OSFI)
- OSFI publishes a list of the insurance companies subject to its oversight. It is an independent agency of the Government of Canada, reporting to the Minister of Finance, that regulates, supervises and conducts extensive reviews of federally-regulated insurance companies, others, to determine whether these companies and their subsidiaries are in sound financial condition.
Rating reports issued by a credit rating agency, such as A.M. Best Company (a global service credit agency specializing exclusively on the insurance industry).
- In the past, insurance companies that were not under the OSFI's oversight were deemed acceptable by the Agency if these companies received a credit rating of A- or better issued by a credit rating agency.

If the insurer is not monitored by the OSFI or by a credit rating agency and the financial rating of an insurer cannot be provided, it may be necessary for the Agency to examine the financial records of the insurance company to assess the insurer's financial condition and capacity to insure a specific railway company.

3.4 Confirming capability to self-insure

3.4.1 Self-insurance

Under the SARA, the amount of self-insurance carried by a railway company must not exceed the maximum amount of self-insurance that the person who will be responsible for the proposed operation can sustain based on that person’s financial capability.

Self-insurance is defined under the Railway Third Party Liability Insurance Coverage Regulations (RTPLICR) to mean "self-insured retention" and "deductible", which are in turn defined as:

Self-insured retention is defined as "the amount of risk for which an applicant takes financial responsibility, outside of an insurance contract."
Deductible is defined as "the amount of risk of risk for which an applicant retains financial responsibility under an insurance contract."

In assessing a railway company's capability to self-insure, the Agency must consider both self-insured retention amounts and deductibles that the railway company is responsible for.

Consistent with subsection 4(b) of the RTPLICR, this requires that a railway company provide evidence of its financial capability to sustain the level of self-insurance, most reliably in the form of audited financial statements for the three most recent complete fiscal years.

Consistent with its existing practices, the Agency will continue to assess the impacts of the weighted average of a range of potential impacts to five key financial metrics, examine the financial ratios of the railway company and consider other factors to confirm whether the railway company has the capacity to self-insure at the level proposed.

3.4.2 Indemnity agreements

Under certain circumstances, an entity other than the railway company, usually a parent company, can assume responsibility for the railway company's self-insurance through an indemnity agreement.

If there is such an indemnity agreement in place, it is the financial capability of the indemnifier to sustain the amount of self-insurance involved that will be assessed by the Agency.

Evidence confirming the existence between the two parties of an indemnity agreement, in which the self-insurance component will be endorsed by the indemnifier, must be provided, as well as evidence of the indemnifier's financial capability to sustain the level of self-insurance, most reliably in the form of audited financial statements for the three most recent complete fiscal years.

3.5 Maintaining and monitoring continued compliance

3.5.1 Compliance

Under the SARA a railway company holding a COF must “at all times” maintain insurance coverage that meets the applicable minimum per-occurrence amounts, the prescribed risks and the claims requirements, as they are set out in the legislation. COF holders have an ongoing responsibility to monitor their own particular situation and circumstances in order to maintain constant compliance with the requirements.

The Agency has the authority to inquire and determine whether the COF holder has complied with the insurance requirements, and the legislation stipulates that the Agency must cancel or suspend the COF if it finds that the COF holder does not comply with the insurance requirements.

In addition, Agency designated enforcement officers will have the authority to issue administrative monetary penalties of up to $100,000 per violation if it is found that the COF holder:

has not kept the prescribed insurance at all times; or,
has failed to notify the Agency in a timely manner that its insurance was cancelled or altered, or of a change to the construction or operation that may affect the COF holder's liability insurance coverage.

3.5.2 Responsibility to report changes

In accordance with section 94 of the CTA, the holder of a certificate of fitness must notify the Agency in writing without delay:

if the liability insurance coverage is cancelled or altered; or,
if there are any changes to the operation or construction that may affect the liability insurance coverage.

In light of these legislative requirements, the Agency considers that railway companies have to report to the Agency in the following circumstances, where:

the COF holder's traffic volumes of crude oil, TIH or other dangerous goods has changed or could change in a manner that might result in the requirement to obtain additional insurance coverage;
new persons carrying prescribed commodities are intended (or are anticipated) to use the tracks of the COF holder and at what volumes;
as a result of claims filed or paid, or other circumstances that might cause diminishment or exhaustion of policy limits, the COF holder's per-occurrence insurance limit or total policy aggregate limit may no longer be fully available;
other railway companies are to be covered by the insurance policy of the COF holder;
the legal name(s) of the COF holder or its indemonitor is changed or proposed to be changed;
the COF holder's financial situation has changed or could change in a manner that might result in the failure of the COF holder to pay its insurance premiums or in its inability to cover the self-insurance portion of its coverage (in the case of an indemnity agreement provided by an affiliated company, the same would apply if the financial situation of the affiliated company were to change);
the COF holder is planning to become involved in the transportation of passengers;
the termini and routes of railway appearing on the COF holder's certificate of fitness are intended (or are anticipated) to change; and,
there are any other circumstances that might result in the COF holder failing to comply with the insurance requirements of the CTA.

3.5.3 Annual filing requirements

The "Annual Certificate of Compliance for Railway Operations in Canada" must be filed by a COF holder, along with the required supporting documentation, as soon as practical prior to the expiry date of the insurance coverage on record with the Agency, and no less than once a year.

In all cases, the required supporting documentation will include an up-to-date COI and volume report, and may also include traffic source data, financial statements or indemnity agreements, as applicable on a case-by-case basis.

Subsequent to these submissions, the Agency may be in further contact, should additional information or clarification be required to assess continued compliance. In addition to this, should the circumstances warrant, targeted monitoring of individual COF holders could occur.

In addition to the information to be filed by railway companies and their brokers, the Agency may also verify volume reporting through access to other relevant and reliable data sources, where available and if possible.

3.5.4 Moving to a new volume threshold

The SARA requires that railway companies maintain the appropriate minimum level of insurance at all times, based on the volume of the prescribed commodities involved in their operations in a calendar year.

Railway companies that do not carry any of the prescribed commodities or that operate at a level that is far from the next insurance volume threshold would likely have stable insurance requirements between compliance reporting periods and over their current policy term.

However, if a railway company reaches the next insurance volume threshold between compliance reporting periods and during its current policy term, and volumes within that threshold have not been reflected in its previously submitted volume forecasts, it must notify the Agency and adjust its insurance to provide coverage to the minimum for that threshold.

As the projected volume of prescribed commodities involved in a railway company's operation approaches, while not exceeding the next volume threshold, the railway company should carefully weigh the risks of not increasing its insurance coverage to the next minimum requirement, in the event that its forecasts prove to have been understated. A railway company would be in violation of the CTA if it were transporting prescribed commodities above the next minimum insurance volume threshold without having first met the minimum insurance requirements, and its operations may need to halt.

3.5.5 Insurance depletion

The prescribed insurance coverage required at all times is specified as an amount per occurrence. Insurance policies commonly contain provisions limiting the maximum liability of an insurer for a series of losses in a given time period. An aggregate limit might apply for all or certain insured risks.

As claims are paid out, the per-occurrence insurance coverage may no longer be fully available, given such aggregate limits. In cases where the per-occurrence limit is subject to an aggregate limit of the same amount, any claims paid above the self-insurance component could result in the erosion of the insurance policy below the prescribed amount.

If a railway company does not take appropriate measures (e.g., have a policy that automatically restores itself to maintain the per-occurrence minimum regardless of claims against or has aggregate limits sufficiently in excess of the per-occurrence minimum), it risks a situation where the per-occurrence minimum would no longer be available. Railway companies should be prepared to provide details about how their policies will be able to respond to policy limits that have been impaired to the point at which they no longer meet the minimum per-occurrence requirements.

If the Agency were to determine that a railway company no longer has access to its required per-occurrence minimum amount of coverage, it would be required to suspend or cancel the railway company's COF.

3.5.6 Changes to the capability to self-insure

The legislation specifies that the amount of self-insurance carried by a railway company must not exceed the maximum amount of self-insurance that the person who will be responsible for the proposed operation can sustain, based on that person’s financial capability. Railway companies should bear this in mind when deciding on the amount of self-insurance to undertake, or when faced with circumstances that may affect their ongoing capability to sustain that amount.

If the Agency determined that a COF holder no longer had the financial capability to sustain the level of self-insurance it had undertaken and was unable to make alternative arrangements either with respect to the amount of self-insurance or indemnification, the Agency would be required to suspend or cancel the railway company's COF.

Date modified:: 2016-06-15