PF&M AT A GLANCE
Since the 1920s, Americans have been in love with the automobile. But in the 1970s and early 1980s a serious threat to health and safety became apparent. Refineries, petroleum distributors and gasoline stations had filled our land with underground storage tanks. As those tanks aged, they began to leak and threaten our water sources. Not only had we built tanks that were not protected against leaking as they aged, we had failed to create provisions to monitor or test those tanks. Clearly a massive effort was necessary to identify those tanks, test them, retrofit or abandon them, and clean up the damage already done to our groundwater systems. The problem, which crossed state borders, had to be handled nationally. The federal government empowered the Environmental Protection Agency (EPA) to oversee the solution.
The Resource Conservation and Recovery Act of 1976 (RCRA) first authorized the EPA to protect health and human environment by regulating the storage of hazardous materials. In 1984 that act was amended to specifically deal with underground storage tanks. That legislation, titled the Hazardous and Solid Waste Amendment, created eight categories of regulation. The owner or operator of an Underground Storage Tank (UST), as defined in the act, must: notify the EPA or a cooperating state agency (the implementing agency) of the existence of any tank that qualifies under the act, take steps to detect leaks, keep records of regular maintenance, report any release of material from within a tank, take specific corrective action in case of a problem, close unfit tanks, and prove financial responsibility for the damage that may occur and the corrective action required should a tank leak. Last, the regulations provide performance standards for new tanks.
In 1980, Congress passed the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), also known as "Superfund." Superfund operates independently of the RCRA, but it influences the regulations published by the EPA in the Code of Federal Regulations (40 CFR 280 UST). The CFR is the publication established for federal agencies to publish up-to-date regulations promulgated in response to federal legislation.
This article discusses only the requirement that an owner or operator prove financial responsibility. Either the tank owner or operator may provide a Letter of Credit from a qualifying institution, find an acceptable guarantor, purchase a bond from a Treasury Department-recognized surety, qualify as a self-insurer, or purchase an insurance policy. The guarantor or self-insurer must have a net worth exceeding $10 million. In the early years, the insurance industry was slow to respond to the need. A number of states established state funds and/or allowed groups such as the Petroleum Marketers to set up captives or risk retention groups. Those entities filled much of the void. We will discuss only the insurance alternative. Since 1998, most states have been phasing out their UST-related funds and have been transferring the burden to the private sector. However, the captives are still major competition for privately owned insurers.
Almost every commercial property owner or operator of an underground storage tank containing petroleum products is required to prove financial responsibility in connection with those USTs. Although small tanks servicing farms and homes are exempt, there are very few other exceptions. For example, there are none of the usual exemptions or immunities for governmental entities, Indian tribes, or small owners/operators with as few as one tank. The need for an insurance product to provide compliance is extensive.
The legislation applies not only to the obvious property owners that have retail or wholesale gas, fuel oil, or other petroleum product sales or distribution but also includes many other operations that have an underground petroleum tank.
Owners or operators of USTs containing petroleum products must show proof they are financially able to pay both the cost of third-party liability in case of leakage, and the cost of any corrective action required by the EPA to repair or clean up after leakage.
The UST Program was developed for owners and operators of underground storage tanks containing petroleum products that are involved in petroleum marketing, production, or refining; however, it is not limited only to this category but is available to any owner or operator of an UST for petroleum products.
The Program is a monoline, self-contained, claims-made, liability coverage. It covers tanks either owned or operated by the insured. Each tank to be covered must be listed in the Declarations. As with any claims-made coverage, a retroactive date is stated.
The UST Program has two coverage parts. Coverage A provides Bodily Injury and Property Damage Liability coverage for damage caused by a UST incident. The policy defines a UST incident as a release (further defined as any spilling, leaking, emitting, discharging, escaping, leaching, or disposing of petroleum from a UST into ground or surface water, or subsurface soils) from a covered tank. A continuous or repeated release from the same covered tank is considered to be a single incident.
Coverage B is for corrective action costs the insured will incur under the regulations because of a UST incident. The UST incident must be confirmed and reported to the insurer and/or the EPA. A very important and favorable coverage consideration is that incidents on the premises are covered, not just off-site cleanup operations.
Two limits are declared in the policy. The first is the UST Incident Limit, similar to an Each Occurrence Limit in a general liability policy. The second is an Aggregate Limit, the total that will be paid for the sum of all UST incidents during the policy period. A third separate limit, perhaps unique to this program, is the Defense Expense. It involves an interesting twist on the cost of defense. A specific amount or cap is set for the total amount of Defense Expense that will be provided by the insurer in any one policy period, regardless of how many incidents, claims, or suits may be made.
Once the Defense Expense Amount is exhausted, the insurer's obligation to defend ends, even though the insurer may still be obligated to reimburse for settlement amounts or corrective action costs. Any additional defense expense from that point has to be handled by the insured. This limit or cap on Defense Expense is allowed by and provided for in the EPA regulations. The insurer's obligation to defend also ends if the applicable UST Incident Limit or Aggregate Limit is exhausted. The policy conditions explain, in depth, how the duties of defense will be transferred to the insured when the Defense Expense Amount or the Limits of Insurance are spent.
Premiums in the early years were about $1,000 per tank. Minimum premiums have dropped to around $400 for "good" tanks (those with double protection). Charges will vary, based on the construction of the individual tank, its age, and the number of gallons of petroleum products that the tank will hold.
ISO developed the UST Program to respond to the need created by Congress. EPA regulations dictated the terms of the UST Program. As with any new program, especially one that responds to a relatively new threat, there was no credible prior history to assist an insurer in determining underwriting expenses, claims expenses, and cost of claims. Many insurers were hesitant to provide the UST policy, with good reason. However, there are quite a few specialty insurers including Lloyd's, Zurich, AIG, and ACE that routinely provide UST coverage. Many Web sites make it easy to apply and get quotes, and the EPA publishes and updates a list of insurers on its Web site. The cost has become more measurable as society has addressed the underlying problem. Premiums have become reasonable. The cost of noncompliance, up to $11,000 a day, has not.
Agents, brokers, and risk managers must be careful to ask about and evaluate this exposure when reviewing their client's risk management and insurance programs.
Please note that this is only an overview of this coverage. A thorough discussion of this coverage form may be found in the PF&M Analysis from The Rough Notes Company.
Agency OnLine subscribers, please refer to PF&M Section 276.4-2 UST Coverage Form Analysis for a more in-depth discussion on this coverage part and PF&M Section 276.6-6, UST Program Turns 20 for a highlight of recent changes. *