Beware third-party rail exposures or expect problems down the line

Many business development opportunities arise adjacent to or over existing rail lines, giving rise to quite specific third party exposure issues. Risk managers need to be aware of the risk and insurance problems that can arise, as Andrew Birt from JLT Specialty explains.

Notable recent examples of developments close to rail lines have included the Shard building next to London Bridge and the extensive development works being undertaken around Kings Cross. But if many other developments also have significant third party exposure, why is rail a special case?

Network Rail Costs

Network Rail agrees track access arrangements with Train Operating Companies and Freight Operating Companies so that if the track is not available they will need to refund these parties under a set formula as set out in their Network Code.  These refunds can be referred to variously as Schedule 4 or Schedule 8 costs. 

On busy lines, the costs can be huge, with daily sums exceeding £5 million.  Clearly, if the stoppage is due to development works adjacent to the line, Network Rail will attempt to hold the responsible party liable for recovery of such costs as well as for any damage to the infrastructure itself.

Crucially, some standard developer policies will not be set up to deal with this type or scale of exposure.

Asset Protection Agreements

Developers’ lives are made more difficult by the requirement to sign up to indemnities if they work near to rail lines.  For works which are within the “zone of influence” of Network Rail infrastructure, these include a wide range of issues including injury, damage to infrastructure and disruption to the railway. These can be caused by damage or by other issues which are not damage-related. This contractual indemnity will include Schedule 4 and 8 costs mentioned above.

Limit Required

For major works near rail assets, Network Rail would normally stipulate that liability cover up to £155 million is purchased.  This limit is not a cap on liability but merely a minimum insurance requirement.

Insurance Policy Cover

There is a potential gap in standard liability cover available for contractual financial loss, which does not arise from damage to third party infrastructure. 

One of the more notable cases where this became an issue was the Tesco Stores Ltd v D A Constable (2007).  There was an Asset Protection Agreement in place, but one point at issue was the claim directly from a train operator, Chiltern Railways.  As part of the commercial deal, Tesco agreed a separate Deed with Chiltern to the effect that they would indemnify them for any losses arising out of the works.  Chiltern claimed directly against Tesco, although none of their property (i.e. their rolling stock) had in fact been damaged. Tesco were contractually liable under the Deed, but their claim against their public liability insurers failed.

Even if there are no complications of third party agreements, as happened in the Tesco case, there remains a gap in cover for disruption to the Network which is not due to damage to the Network Rail Infrastructure itself.

Examples of this include:

• a fire on site (not affecting Network Rail infrastructure directly) resulting in an unsafe building adjacent to or over the rail;
• a storm causing a tower crane structural damage, which necessitates removal or repair before a rail line can operate;
• cracking of slabs over operational lines.

Developers are rightly wary of rail exposures. Understanding the contractual issues and obtaining informed insurance advice is a key issue for any development near rail assets. 

Risk managers must review their insurance cover and ensure that the possible gaps are filled. This can then be used by developers to protect both their investment return and balance sheet.

Andrew Birt is partner at JLT Specialty. Download the full whitepaper, Rail Exposures for Developers, here. 

Andrew Birt, JLT Specialty