St Paul International wants part of a key insurance agreement covering the privatised rail industry to be scrapped – otherwise it warned losses for certain rail risks could become uninsurable.

The insurance giant has written to the rail regulator alleging that the industry's Claims Allocation and Handling Agreement (CAHA) is flawed.

St Paul said insurers needed to be able to recover losses for business interruption risks from Railtrack or other third parties when train services were suspended. Liability risks would not be affected.

Martin Hudson, St Paul UK general manager, said the position was rapidly becoming untenable: "When interruption to schedules is caused by a rail crash or a broken rail, which is outside train operators' control, we need to be able to recover the insured outlay from that party."

David Bevan, St Paul deputy general manager, added: "In the worst case scenario, some areas of the rail industry could become uninsurable."

Currently the train operating companies (Tocs) can only secure compensation from Railtrack for limited periods of poor performance.

On Monday, Railtrack announced in its half-yearly results that it would pay the Tocs £250m compensation for periods when access to its rail network was blocked, including the suspension of services after the Hatfield crash.

However, St Paul said Railtrack was not liable to pay any additional compensation under the terms of an emergency timetable it has declared from next week.

St Paul said it expected the chaos stemming from engineering work to check the safety

of broken rails to cost it millions of pounds.

Bevan added: "We have got to find a balance for the industry that is affordable but under the current CAHA we are not able to do this."

The office of the rail regulator confirmed it had received St Paul's letter, which it said "raises important questions which we will assess".

Railtrack said: "The issues raised by St Paul need to be discussed by the whole rail industry and the rail regulator to decide the way forward."

St Paul insures most of the train operating companies, including Great Western and Thames trains which were both involved in last year's Paddington crash.