Risks in the Rail Yard.

Railroads that are facing environmental claims have begun to pursue their insurers.

An old saying warns that the light at the end of the tunnel may be an oncoming train. For environmental lawyers, that's definitely the case.

It seems that new attention has turned toward trains- more specifically, to the polychlorinated biphenyls (PCBs), creosote and other regulated chemicals used in rail yards. As illustrated by some recent lawsuits, plaintiffs and regulators are now focusing on these rail yards.

In one case, Union Pacific is embroiled in a dispute as to whether a lake near a May 2000 derailment is usable for recreational purposes. In another, New York-based Long Island Rail Road was ordered to pay a $1.8 million cleanup. That initial spill, however, was caused when vandals tried to break into a stolen safe by putting it on the train tracks.

Perhaps most importantly, in June 2001 , Amtrak agreed to audit 51 facilities. Amtrak also agreed to restore wetlands and reduce PCBs, as well as take certain other measures.

Conrail, Penn Central successors and other railroads also have been targeted in environmental claims.

And so, environmental regulators are devoting a lot of attention to railroads. All roads may lead to Rome, but railroads will surely lead to insurers: Railroads facing environmental claims will pursue their insurers.

The issues in these claims will mirror those encountered in other environmental matters and will generate a host of questions: Were these problems caused intentionally? If so, questions will arise as to whether these claims are insurable. Are these problems confined to property owned by railroads? If so, questions will arise concerning owned property exclusions.

The trigger questions encountered in all environmental claims and other latent injury matters also apply to the rail-yard claims: When did these problems take place and what rule controls this question? Also relevant are the answers to these questions: Does any "pollution exclusion" apply? If a matter is covered, how is the coverage allocated among the various policies and retentions and are there possible gaps in coverage?

To date, the courts have not yet developed a body of case law addressing insurance coverage in the railroad context. This case law will probably develop after the environmental regulators push and complete the cleanup actions. One case, however, is worth noting--Norfolk Southern Corp. vs. Cigna Specialty Insurance Co. -- a matter being litigated in state court in Louisiana.

In the Norfolk litigation, several railroads sued their insurers for coverage arising from alleged pollution at many different sites. It seems that the railroads had conducted many of the processes common to the industry that are alleged to cause pollution. They had used creosote in wood-treating operations. They also had manufactured an asphalt sealer. These processes allegedly caused pollution, regulators sought cleanups, and the railroads demanded insurance coverage.

In several different decisions, a jury and the court found coverage for the railroads for several of the sites. Additionally, earlier this year, a judge addressed the question of how certain covered losses should be allocated. The court's rulings on allocation favor policyholders. The court ruled that the insureds "are entitled to full indemnification in any triggered policy period chosen by the plaintiffs, subject only to those policies' applicable coverage limits and payment by plaintiffs of a single retention for that period."

In plain English, the court said that if several policies apply, the insured could select the policy that it would pursue.

The option to select a policy is important to policyholders and insurers in the pollution context. Pollution matters often involve circumstances that took place over long periods of time. The coverage may well vary over that time.

Limits and deductibles may have changed dramatically, particularly under circumstances where there are many years between the first and last policy. The terms of the policies also may vary; some policies may exclude items that are covered under other policies. Consequently, policyholders often will fight for the option to choose or target a policy.

While railroads won this battle in the Norfolk trial court decision, the proverbial war is far from over. There may be an appeal. Plus, the decisions are mixed on this issue in environmental coverage disputes outside of the railroad context.

Ultimately, railroad claims should be resolved like other claims: The specific facts and insurance-policy language should control.

Alan S Rutkin, a Best's Review columnist, is a partner in Rivkin Radler LLP, Uniondale, N.Y.