Risk transference is ubiquitous in the railroad industry. Railroad losses traditionally can be catastrophic and expensive. Most railroads are self insured by using a captive. Once this self insurance is exhausted, the Class I railroads will have a very high self insured retention that does not kick in until losses exceed the multi millions. For this reason a railroad will transfer, a potential risk for future ability onto a contractor or vendor who agrees to do work for the railroad. The cost of such risk transference is ostensibly included in the amount the contractor charges for his services.
To accomplish this, the railroad’s standard agreement will typically include a contractual clause that requires three things:
- That the contractor hold the railroad harmless for any liability arising out of the relationship or work; and
- That the contractor will indemnify and defend the railroad against any claims that arise as a result of the relationship or work; and
- That the contractor provides insurance coverage for the railroad.
The most essential element here is proper insurance coverage for the loss. The parties can agree to transfer the risk, but very few contractors can afford to reimburse railroad losses out of their own pockets without sufficient backing from a financial source. Therefore purchasing the right kind of insurance is essential for both the railroad and the contractor.