DM#x0026;E; insurer predicts a safer railroad

By Edward Felker

WASHINGTON -- The insurance broker for the Dakota, Minnesota &; Eastern Railroad predicts the company's safety record will improve and its insurance rates will drop if the company's $6 billion expansion plans proceed.

James O'Hara, senior vice president for Aon Risk Services of Illinois Inc., in Chicago, made the prediction in written comments to the Federal Railroad Administration, which is evaluating a $2.3 billion construction loan application by the railroad. The loan would help finance the company's plans to extend its lines to Wyoming's coal fields and upgrade 600 miles of track in Minnesota, including through downtown Rochester, and South Dakota.

O'Hara also said the project likely would not increase hazardous shipments through Rochester.


DM&E; CEO Kevin V. Schieffer says the project will boost safety, but the Mayo Clinic and its allies in the Rochester Coalition say that downtown Rochester will be put at risk by longer, faster, more frequent trains carrying hazardous materials.

O'Hara also revealed the DM&E; has an insured property asset value of more than $1 billion, a total that he said is likely to rise to more than $4 billion after the project. The asset total is far more than the $373 million estimated by the Rochester Coalition in a study it issued earlier this year, in which it said the company was a poor credit risk.

Financial data has been closely guarded by the privately held DM&E,; based in Sioux Falls, S.D. It has provided detailed information to the FRA as part of its loan application, but that process has been deemed proprietary and kept shielded from the public and Congress.

O'Hara's comments were among 112 written submissions to the FRA through this week. The comment period runs until Oct. 10, after which the agency staff is to make a final recommendation on the loan. FRA Administrator Joseph Boardman will then have 90 days, by law, to approve or deny the loan.

O'Hara, a 22-year veteran with Aon and an insurance broker for the DM&E,; said underwriters would expect the risk of a derailment in Rochester to decrease if the project goes forward. In Rochester, he wrote, "We expect no material increase in hazardous material shipments as a result of the PRB project," referring to Powder River Basin coal area in Wyoming. He noted that Rochester has some of the oldest track in the DM&E; system with some of the highest defect rates.

"Replacing that rail will be viewed by the underwriting community as greatly reducing the prospects of a hazardous material derailment in the Rochester area," he said.

O'Hara said the DM&E's; property and liability insurance rates have fallen in the past four years as it has upgraded track and facilities, and added the Illinois, Chicago &; Eastern Railroad to its holdings. Increases in capital spending from $16 million annually to $60 million will skyrocket to $1 billion a year for three years during the upgrade project.

The company's total insured value for property of $700 million in 2002 has grown to more than $1 billion, but its property insurance rates have fallen 66 percent due to reduced claims.


O'Hara predicted the company's property value will increase "dramatically," if it expands, adding new track, shops, bridges, and equipment, to a total that "will be well in excess of $4 billion."

Meanwhile, DM&E's; liability insurance rates have fallen 42 percent in the past four years, he said, noting that liability costs are primarily driven by employee injury claims. The company's insurance rates should continue to fall as it upgrades its track and facilities, assuming the FRA loan goes through, he said.

O'Hara's views were first compiled for Rep. Gil Gutknecht, Republican from Rochester, who wanted to learn more about the financial viability of the company, Gutknecht spokesman Bryan Anderson said. O'Hara copied his FRA comments to the South Dakota and Minnesota congressional delegations, both states' governors, and both states' departments of transportation.

It was unclear, however, why O'Hara submitted them to the FRA, where it became a public document. DM&E; spokesman Jafar Karim declined initial comment, and O'Hara could not be reached. Anderson declined additional comment on Gutknecht's reaction.

A spokesman for Sen. Norm Coleman, a Republican from Minnesota, said the senator was to be briefed on the O'Hara letter, but also had no immediate comment. Gutknecht and Coleman have sought to broker a solution to Rochester's concerns and have said they will ultimately oppose the project if local safety issues are not addressed.

Coleman told reporters Thursday that he personally pressed President Bush's nominee to head the Transportation Department, Mary Peters, to make good on his and Gutknecht's request that the department come up with an acceptable Rochester mitigation plan.

"If there isn't a sufficient mitigation plan on the table, I'm going to fight very, very hard to make sure this project doesn't go forward," Coleman said.

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