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The Association of American Railroads says crude shipped by large North American railways rose to 407,000 cars in 2013, up from 9,500 in 2008.JIM WILSON/The New York Times

As crude-by-rail shipments soar, insurance company American International Group Inc. (AIG) is offering rail companies a $1-billion (U.S.) cushion against catastrophic derailments.

The casualty-liability policy offered by the New York-based company is believed to be the largest available, and is a sign of the perceived risks involved in the burgeoning business of moving oil by train.

The amount of crude shipped by large North American railways rose to 407,000 rail cars in 2013, up from 9,500 in 2008, according to the Association of American Railroads.

Both major Canadian railways – Canadian National Railway Co. and Canadian Pacific Railway Ltd. – have been opening oil terminals and expanding their networks to serve new facilities built by energy companies eager to ship oil to customers and regions not served by pipelines. The amount of crude carried by CP is up about 15 per cent this year and the railway said last week it expects to haul as many as 200,000 tank cars of oil in 2015.

The major "railroads are seeing strong growth and a resulting increase in risks they need to cover," said Russell Johnston, president of AIG's casualty division.

Rail companies assemble a so-called tower of liability insurance, buying policies in amounts of $25-million or $50-million from several companies to get up to about $1-billion. In Canada, railways are required to show the Canadian Transportation Agency they have adequate liability insurance, but there is no minimum requirement.

The $1-billion AIG policy would only kick in once the rail company exceeded $1.5-billion in claims. Until now, AIG's largest railroad casualty policy was worth $100,000.

Ottawa said last year it might require railways to carry more insurance to deal with unforeseen disasters, but the government recently indicated it was softening this position. Ottawa is now reportedly considering bowing to railway demands by requiring oil companies and brokers to carry more insurance to share the burden, and is looking into setting up a special fund to deal with large oil-by-rail incidents.

Keith Creel, CP's chief operating officer, has said the railway cannot purchase any more insurance and that it wants customers who ship dangerous goods to be required to carry liability insurance to make up the possible shortfall if a catastrophe occurred.

"I would say that there's potential for certain accidents that would exceed the value of the insurance that we have. That's why we're so compelled, and we're such strong advocates that the only other people who can buy additional insurance would be the shippers of the products," Mr. Creel told a parliamentary committee in April.

Rail safety and the rise in the amount of crude oil travelling by train has been in the public spotlight since the July 6, 2013, fatal explosion of a Montreal, Maine and Atlantic Railway train in Lac-Mégantic, Que. The unattended train carrying highly volatile oil from the U.S. Bakken region rolled down a hill, derailed and exploded, killing 47 people and destroying much of the town's centre.

Last year, in filings seeking court protection from creditors, MM&A said it was insured for $25-million, far short of the estimated cleanup cost.

CP, which carried the 72-car train to Montreal from North Dakota has been named in a class-action lawsuit over the deaths and loss of property. The Quebec government also ordered CP to pay for part of the town's cleanup, which could exceed $400-million.

The Calgary-based rail company said in its latest financial reports that any potential liability stemming from Lac-Mégantic cannot be determined.

"Nevertheless, CP denies liability for MM&A's derailment and will vigorously defend itself in both proceedings or any proceeding that may be commenced in the future," the company said.

There have been at least nine freight train derailments in Canada this year, including two in which rail cars carrying petroleum products caught fire, according to the Transportation Safety Board of Canada. The latest occurred in Saskatchewan this week.

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