Protecting Against Property Damage and Liability Claims Arising from the Transportation of Biofuels

Protecting against property damage and liability losses during the transportation of biofuels requires that producers, marketing companies, and transporters fully appreciate not only the different types of liabilities and claims that can arise but the different products and contractual protections that are available. Just as a ship builder must make sure that the ship is 100% watertight before it is launched, producers, marketing companies, and transporters must be assured that they have purchased or contracted complete protection. Failure to have proper insurance in place at any stage of the production and transportation stream can give insurance companies and third parties an opportunity to shift risks back to the producer, marketing company, or transporter.

Insure the product before it leaves the plant.

Ironically, insuring against liability and loss in the transportation of biofuels begins with making sure that there is adequate insurance and liability protection for the biofuel before it even leaves the plant. This is because insurance companies and third parties may seek to deny coverage and liability for any loss that occurs after the product leaves the plant on the basis that it was defective (or “off-spec”) when it left the plant. Also, because many sales and marketing agreements transfer title to product as soon as the biofuel enters the pipeline, train car, or truck who is responsible if there is a disaster during that process? There can be both product loss and liability claims arising from a fire or spill of biofuels during the loading or pumping process. In the event of a catastrophic failure, it may even be difficult to tell how much product was in the tank and how much had been successfully transported. If the producer has insurance policies in place to protect it in either case, then it will be left to the different insurance companies to determine who has liability.

Liability arising from damage to vehicles, property and people during the transportation of the product.

The transportation of biofuels usually requires the use of train cars, barges, or trucks. Liability can arise if a carrier’s vehicles or barges are damaged on the facility grounds. As an example, poor road conditions and unclear signage can contribute to accidents on the facility. Releases of sulfuric acid and methanol (used to refine biofuels) can escalate the size and complexity of the claim. The facility’s management should make sure that it has adequate insurance. Standard property casualty policies may not cover damage to trucks and trains owned by third parties because that property is not owned, controlled or leased by the facility.
Furthermore, standard liability policies frequently exclude incidents involving train derailments or collisions. If the facility owns railroad tank cars, then management should check to make sure that there is insurance in place to cover not only the cost of repair but also any liability or demurrage claims that may arise if an injury or derailment is caused by a defect in the tank car. If coverage for damages to or caused by railroad trains is excluded, then the company should buy a special endorsement or policy.

Liability arising from releases of biofuel

Transportation of finished biofuels and byproducts can also pose a liability risk due to releases during transit. This risk is greatly reduced if the product is being carried by a common carrier’s equipment. Generally, the common carrier will be liable for accidents involving its own equipment and drivers. However, depending on the tariff or contract, the shipper may have a duty to secure the load properly. If the facility owns the trailer or tank car, then any equipment problem that contributes to an accident or release of product can also generate secondary liability, even if it is being transported by a common carrier. Both producers and marketers can be involved in the ownership of trailers and tank cars and both should be careful to make sure that adequate insurance is obtained.
If product is released during transport, there are possible civil, administrative, and criminal penalties that can be assessed by state and federal agencies if the release can be traced back to a failure of the refinery to properly load and secure the product. For releases that are large enough to require removal and remediation, then there may also be liability to state and federal agencies that respond and third parties whose property may be affected. Standard policies may specifically exclude any claims arising from the release of a “pollutant.” Finding environmental insurance that will cover those claims can be very challenging. Lower tier environmental insurance policies contain so many exclusions that they are nearly worthless. There is also no point in buying an environmental insurance policy if it excludes releases that take place during transport or cleanup costs. It is hard to believe that an environmental policy would exclude emergency response and removal costs, but they are out there.

Pursuing the insurance.
The job does not end with the identification of an insurance policy that appears to cover a given claim. There is an old adage that insurance companies are in the business of collecting premiums and not paying claims. If the claim is small, insurance companies reject the claim knowing that the cost of litigation for the insured to recover on the claim will consume any recovery. If the claim is large, they reject the claim knowing that when faced with the prospect of costly and drawn-out litigation the insured may capitulate and take less than the full value of the coverage. In either case, the producer, marketer, or transporter may have to go to court in order to get the coverage that it has paid for.

James Pray is a member of the BrownWinick law firm in Des Moines, Iowa and is chair of both its environmental and energy law practice groups. He is former chair of the Iowa Bar Association’s environmental and administrative law councils. He has been actively litigating railroad, trucking and environmental matters for more than 20 years. He has worked with more than 30 biodiesel and ethanol facilities across the United States.

About James Pray

Attorney with BrownWinick Law Firm in Des Moines, Iowa.
This entry was posted in Articles. Bookmark the permalink.