Underground Storage Tanks: Word Leaks Out on Cover Enforcement

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.

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. 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. 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 P/C 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.”

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 [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.

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.”

Trust fund troubles?
“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,” explained Brunner.

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.”