Owners and operators of underground petroleum storage tanks are a diverse lot—from global juggernauts such as ExxonMobil, Texaco, and Shell Oil to mom-and-pop gas stations. But all underground storage tank (UST) operators must deal with the prospect, if not the consequences, of a leaky tank. Those consequences, in turn, can vary depending on the state in which an operator conducts business.
Like many other states, Texas established a trust fund, the Petroleum Storage Tank Reimbursement (PTSR) fund, to assist tank owners and operators in cleaning up leaks and spills. The state legislature established the PTSR fund in 1989, but then voted in 1995 to sunset it in Sept. 1998. Since then, the Texas Natural Resource Conservation Commission (TNRCC) has required tank owners and operators to maintain financial assurance in the event of leaks or spills through other means—although many of them may not realize it.
To spread the word about the new requirements, the TNRCC began issuing letters to tank operators earlier this year explaining that the commission is conducting a financial assurance compliance evaluation. Upon receipt of these notices, UST owners and operators have 30 days to submit proof of insurance or other means to cover the cost of leaks or spills.
According to TNRCC officials, enforcement is slow in coming simply because of the commission’s limited inspection staff, as well as the state’s size. As the TNRCC makes more of an effort to enforce financial assurance compliance, more and more owners and operators will need to consider their options.
In California, a UST cleanup fund was also established, and it remains the primary resource for cleanup costs incurred by tank owners and operators in that state, according to Allen Patton, UST cleanup fund manager at the California Environmental Protection Agency.
“Right now we have a sunset at the end of 2010 or 2011,” he explained. “If it’s not extended, owners would then have to find their own insurance.”
Patton reported that there are about 20- to 22,000 UST operators in California with about 40,000 tanks, about half of which are owned by major operators. While the fund continues to pay the majority of claims for UST operators in the state, Patton said the overall number of claims seems to be declining. “About 17,200 claims have been filed since 1992, but the rate of new claims has been dropping off from 1,000 to about 500 annually.”
Specialized coverage, carriers
Because coverage for underground storage tanks is highly specialized, there are few major carriers writing it nationwide—two, in fact: AIG and Zurich Environmental.
AIG sells such coverage in Texas through Chamber Business Insurance Agency Services, designated as the administrator for a program launched two months ago for such policies in light of the new regulations. John Sherlock, agency president, noted that typical risks to look out for when it comes to UST coverage include a tank’s age, construction, and safeguards included in installation, as well as whether a certified contractor installed it, and whether testing is conducted for leakage.
Regarding the financial assurance issue now facing Texas tank operators, Sherlock explained, “If you reported a leakage incident prior to September 1998, you have coverage in Texas (for that incident) under the fund set up to reimburse leaking storage tanks. After that point, and if you have done that, the fund has been extended through 2005. That’s not saying that everyone is going to qualify for reimbursement through that fund—in fact, some of the UST owners may not qualify. If they do, does it mean they get 100 percent coverage for the cleanup of the site?
“The fund is drying up, or you may not be able to prove that you qualify for reimbursement,” Sherlock continued, “in which case you’re on your own. You’re either going to be sitting on a contaminated site, or you’re going to have to clean it up on your own … There are approximately 64,000 tank owners and operators in Texas, which represent about 180-200,000 storage tanks. There are existing leaking storage tanks. You have to report that your storage tank is leaking to the TNRCC, and you have to have a remedial plan in place to clean it up. Then you have to apply to the TNRCC if you’ve reported (a leak) prior to Sept. 1998. You have to apply for reimbursement from the fund. If there’s no fund there, or you don’t qualify, you’re either on your own or you have insurance.”
Sherlock continued, “Most recently, the TNRCC has required that you prove financial assurance. In order to prove financial assurance, you can A) be self insured; B) go get yourself a surety bond; or C) purchase an insurance policy. The TNRCC has guidelines out there—how the policy should look, the endorsements, and what needs to be in place.”
Zurich sells UST coverage nationwide through its Zurich Environmental unit. Addressing the Texas situation, Zurich Environmental vice president Roger Brunner said, “Really, the (UST) owners and operators have been required to have the coverage since (Sept. 1998), so it’s really more simply an issue that they may or may not have paid attention to those regulations, and that the TNRCC is not yet enforcing them.”
Sherlock noted that the obscure nature of UST coverage can make it difficult for clients and their agents to obtain. “Most UST owners … operate a service station or some type of facility which requires them to have fuel. If they were to go out on their own to try and find coverage, my guess is it would be very difficult for them, even if they had the time to do it. Most of these people are small business owners. You can go through your insurance broker or agent, but now here’s another problem—if you have an agent or broker who doesn’t have access to a company like AIG or Zurich, they will have to go through a wholesaler, and know the right wholesaler to go through.”
Rates are reasonable
Sherlock and Brunner pointed out that unlike most property and casualty lines, rates for UST coverage have not drastically risen, yet.
“In this program, you’ve got a minimum premium of $500,” said Sherlock. “That’s if you have one tank. If for some reason you have 25 tanks, premiums can range from $400 to, depending on age and construction of the tanks, $3,000—relatively an inexpensive line of coverage. You consider maybe they’re going to throw out $1 million in limits, with a $5,000 deductible. There’s a rating structure in place. They’re not going to be feeling the pressures that most of the rest of the market is going to feel. That’s not to say that rates may not go up at some point, but I don’t think you’re seeing in this particular segment a drastic increase in premiums … I have a very set schedule of premiums here, as long as they qualify for the program in terms of testing and monitoring. It’s really pretty basic stuff—this isn’t rocket science underwriting.”
Brunner explained, “In Texas, we might expect that a policy would average between $1,300 and $1,600 per customer—that’s an across-the-country number. Again, that’s based on the fact that most customers purchasing this really are small customers. They don’t have that many tanks. We insure folks that have maybe one tank, and then we insure lots of folks that may have a chain of 1,000 tanks or more. The pricing would be commensurate with the risks involved. If you’ve only got one tank, you might only pay the minimum premium of $350 per year. But if you’ve got 1,000 or more tanks, then you might pay well over $100,000.”
Penalties are not
Violating the new TNRCC regulations could have dire consequences. “You can get penalties of up to $11,000 a day,” explained Sherlock. “They (the TNRCC) can stop fuel deliveries from coming to your site. So, they’ve got the punch if they want to give it to you. The question is, how tough are they gonna be on enforcement? That’s where I’m unclear.
“They’re doing mailings,” Sherlock continued, “5,000 letters a quarter, going out to owners and operators of underground storage tanks. It’s going to say, ‘Someone may show up at your door and say: we need your proof of financial responsibility.’ If I were a business owner, I’d get myself an insurance policy.”
But lack of coverage can result in more than just fines. “Forget about the fines,” Sherlock said. “What’s even worse is if your tank starts leaking, and you’ve got to clean it up. Then you’re sitting on a property that’s dirty. You can’t get rid of it, you can’t sell it. You’ve got to clean this up—which can put you out of business.”
Agents at risk
Insurance agents representing UST clients could also face trouble, according to Sherlock. “If agents have customers in this situation, they have an obligation to their customers to know that they’re in this situation,” he said. “If an agent renews a customer’s policy, and there was nothing in there that addressed storage tank exposure, next month the TNRCC asks where the client’s insurance program is—and there’s nothing in the policy about underground storage tanks. Does the agent have an E&O exposure? If a customer is getting fined $11,000 per day and business gets shut down, an astute plaintiff attorney might be looking at the agent. The agents and brokers out there should be looking for avenues through which to get to companies like Zurich or AIG.”
New customers: more trickle than torrent
UST owners and operators aren’t yet scrambling to find coverage. Neither AIG nor Zurich has yet noticed a significant surge for demand in Texas.
“We just launched this program two months ago because of the new regulations …,” Sherlock said. “We’ve gotten 10 or 12 requests from tank owners—this is not a stellar response. We’ve got about 25 tanks being quoted right now. Is the TNRCC really going to throw the hammer down? If yes, interest is going to peak. Or, business owners could go obtain quotes for coverage to fend off TNRCC fines and penalties. In other states, such as Pennsylvania where funds dried out, customers bought coverage pretty quickly once new regulations began to be enforced.”
Brunner presented a similar picture. “I wouldn’t say that we’ve noticed a significant increase in business lately, no. We certainly continue to get an increase in business, but we have always had a significant stream of business in terms of new customers from Texas. It’s not a huge, immediate surge, but certainly there’s good focus on the coverage—and the need for the coverage—in Texas.”
Trust fund troubles?
“California and Texas are nice states for contrast and comparison,” Zurich’s Brunner explained. “In California, there is a state trust fund, which meets the federal and state financial responsibility requirements. Therefore, the tank owners are not required to have insurance for this exposure in order to stay in business. There’s a state program, essentially a taxpayer-funded program, that does all that.”
But that doesn’t mean there’s no market for UST coverage in California. Brunner noted, “We still sell a significant amount of coverage in California, and the key reason we do that is, if you review the financials of the state trust fund, it is bankrupt. With state trust fund programs like that, there are obviously a variety of ways you can do the accounting, but if you just review the trust fund finances, they kind of lay out how much they’re in the red, and how long it would take in terms of a revenue stream for them to catch up to the payouts that are outstanding… We have a significant customer base for this coverage in California because they think it’s important to feel secure in their risk transfer.”
Brunner made one major distinction between the California and Texas markets: “The major thing that would be different would be in terms of earthquake territorial zones. Those customers would pay a bit more due to higher risk.”
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