The Buried Risks of Construction.
Pollution insurance for underground tanks and contractors' risks has become more affordable as a direct result of the EPA's Resource Conservation and Recovery Act.
Regulations put into effect more than 10 years ago continue to create a regulatory demand for pollution insurance coverage to protect storage tank owners/operators, as well as a genuine need for many related industries. Insurers are responding with improved coverage, competitive premiums, and easier submission processes. Pollution coverage, once available only larger corporation, can now be afforded by even the smallest of companies. All this is a direct result of the Environmental Protection Agency's regulation of the petroleum storage tank population.
In 1986, Congress enacted Subtitle I of the Resource Conservation and Recovery Act (RCRA '80), creating minimum construction standards, leak detection methods, and proof of financial responsibility requirements for owners/operators of underground petroleum storage tanks (USTs). These rules went into effect in 1988 and contained a 10-year compliance window, with the final compliance date of Dec. 22, 1998. These regulations have almost single-handedly revived an environmental industry that had nearly grown dormant.
In the wake of RCRA Subtitle I, the storage tank/leak detection manufacturers have been able to develop new technologies to better comply with the requirements of the regulations; while environmental consultants and contractors have become more adept at assessing environmental damage, leading to corrective action. This has lead to the regulation of aboveground storage tanks, review of waste streams in the manufacturing industry, brownfields redevelopment, and other environmental movements. Related industries, such as waste transporters, treatment storage and disposal facilities (TSDFs), laboratories, landfills, and others have all seen an increase in revenue as a result.
In trying to understand how this has caused an evolution of the insurance industry, one must be familiar with the regulations and the available options for meeting the financial responsibility rules.
Subtitle I of RCRA is essentially divided into two parts; the technical (construction) requirements and the financial responsibility requirements. While the financial requirements clearly establish the minimum protection and coverage limits, which speak directly to the insurance industry, the minimum construction standards dictate both the availability and affordability of such insurance.
The technical regulations require that storage tanks and their associated piping must be of corrosion-resistant construction, equipped with approved leak detection, spill containment, and overfill prevention. Common types of corrosion-resistant tanks and lines include fiberglass, fiberglass-coated steel, cathodically protected steel, or some combination thereof. Available leak detection methods include automatic in-tank monitoring systems, groundwater/vapor monitoring wells, and detailed manual inventory procedures, which must be analyzed or combined with annual precision tank testing performed by a third-party company. Options among these requirements vary depending on the tank size, site characteristics, whether the tanks are of single-or double-wall construction, and many other variables.
The financial responsibility regulations are less complicated, requiring only that tank owners/operators prove their ability to pay for environmental damage in the event their USTs should leak. The amount of proof varies for nonmarketers of petroleum products (car dealerships, contractors, etc.) and marketers of petroleum products (bulk dealers, service stations, etc.). Nonmarketers are required to demonstrate $500,000 per loss with a $1 million aggregate. Marketers must demonstrate $1 million per loss with either a $1 million or $2 million aggregate, depending on the total number of storage tanks owned/operated.
The regulations outline several options one may use in demonstrating this financial responsibility, including approved insurance policies, letters of credits, bonds, or one of many state funding programs that have been developed to assist marketers in compliance with the regulations. It is important to understand that while the regulations establish minimum levels of proof one must demonstrate, they do not limit liability in the event of a loss. Accordingly, companies storing potential contaminants in tanks that are not addressed by these regulations are not exempt from liability in the event their tanks leak, causing environmental impairment.
At one point, 47 states offered programs providing varying degrees of financial assistance to owners and operators of underground storage tanks. But, at this time, the numbers of states with such funds is questionable, as many states are discontinuing programs faced with actuarial deficiencies. The storage tank program in Michigan announced its closing in June 1995. Texas discontinued benefits in conjunction with the December 22nd technical compliance date. Florida's program was discontinued effective Jan.! 1, 1999. The fund in North Carolina announced its closing twice before, only to be revived after pressure from the state's petroleum lobby, and continues to struggle today. There are five other states that have established sunset dates after which they wi11 discontinue benefits under their programs.
Some states, such as West Virginia, offer captive programs. Tank owners may chose coverage from the state or purchase a policy from private insurers. Pennsylvania operates a tank insurance program that requires mandatory participation, giving tank owners no choice in providers. Of the funds that remain, most provide no coverage for defense or for losses that result from above ground storage tanks. Some cover only cleanup and provide no protection for third-party bodily injury and property damage. None are "pay on behalf of" mechanisms, requiring the claimant to first pay for the pollution losses and then seek reimbursement from the state agency. Deductibles range from $5,000 to $200,000, depending on the size of the owner/operators and the protection afforded.
These various programs are generally funded either by a fuel tax ranging from 2 cents to 24 cents per gallon sales, an annual tank fee ranging from $25 to $400 per tank, or some combination of the two. As expected, these taxes and fees may be levied on gross sales, wholesale or retail sales, all tanks, etc., and will vary with each state's program. Each state's program has its own coverage benefits and nuances, such as reimbursement limits for certain remediation procedures, exclusions, and funding shortfalls. It is again important to understand that most of these programs, because they function as a trust and not an insurance policy, provide no guarantee of payment. If the fund is discontinued, there is no legal obligation on the part of the state to make payment for any losses. In short, the fund is there to assist in cleanup of the state's environment and not to keep the tank owner/operator in business.
Because insurance policies exclude loss from incidents that occur prior to inception or retroactive date, there was concern about the potential clean-up costs a tank owner might face in having to examine tanks/sites for the first time. Wisconsin's Petroleum Environmental Cleanup Fund Act (PECFA) was designed to assist tank owners with these historical pollution losses and let the insurance industry pay for future losses in accordance with the principal of indemnity. Once a site's storage tanks were brought up to the 1998 compliance standards, and the site was deemed to be "clean," it was no longer eligible for coverage under PECFA and therefore had to be covered under an insurance policy. During the 10-year compliance period, marketers with multiple sites maintained insurance coverage, and simply rolled these "compliance sites" from PECFA onto their policy. This gave the tank owners protection that insurance could not and provided for some finality for PECFA. Other state programs were not so well-planned.
The EPA has outlined exactly what insurance policies must cover in order to meet the financial responsibility regulations. A policy's limits of liability must be dedicated to storage tank pollution losses and can not be shared with any other exposures. In keeping with this rule, coverage for defense must be provided in addition to the limits of liability, so as not to erode the protection required by the EPA. Some risk managers have attempted to package this pollution coverage with other pollution exposures (warehouse storage, manufacturing, transportation, etc.). But, tank owners must be careful to stay in compliance with the EPA's rules, while trying to expand their policy coverage.
Approved polices must pay first-dollar coverage to avoid any delay in responding to a loss and then seek reimbursement for the insured's deductible. Definitions of pollution, cleanup, etc., have been established in the regulations. Approved policies must pay for loading and unloading of underground storage tanks. But, such coverage for above ground tanks is optional and may or may not be provided for ASTs.
With the passing of the December '98 standards, the cost for UST coverage has become very affordable, as the insurance industry continues to evolve along with the underground storage tank population. New storage tank systems with advanced leak detection can be written for less than $300 per tank. Older upgraded systems, still relying on manual inventory for their leak detection, may rate in the $500 to $600 range. Minimum policy premiums begin as low as $750. Compared with the tax costs for the various state funds, insurance has proven to be much more cost-effective, while providing superior protection for the tank owner.
According to many major petroleum trade associations, nearly 50 percent of the nation's regulated USTs are still not in compliance with RCRA Subtitle I. Alabama (79.7 percent) and New York (78 percent) are among the states with the highest percentage of noncompliant tanks, with states like Rhode Island (17 percent) and Iowa (12 percent) being among the lowest.
Many tank owners/operators have waited to upgrade their tanks, some expecting the deadline to be extended, others possibly due just to human nature. As storage tanks are upgraded, states will begin to experience more shortfalls with struggling storage tank funds. As tank owners have begun to recognize both the competitive cost and protection advantages insurance provides, support for these programs has been diminishing. Competitive energy industries, such as natural gas, propane, and electric utilities, have raised opposition to the funds because they view them as an "unfair subsidy" of a select industry.
Environmental consultants, storage tank contractors, and suppliers are reporting steady increases in the number and size of their contracts. Some are experiencing up to a six-month delay in beginning work on new contracts, so it is important that risk managers be proactive about scheduling their system upgrades.
Because many new contracting firms are being formed just to handle the increase in the amount of work, it is important that risk managers verify that these companies have general liability, pollution and professional liability insurance, depending on the type of work being performed.
In addition to the storage tank-related work, many of these same companies are now being sought to perform due diligence and remediation for lenders and developers of new properties that present possible environmental liabilities. The rippling effect of these regulations will continue to be felt well into the new millennium.
The pollution insurance market continues to grow along with the environmental industry. Lower minimum premiums, combined with shorter, easier applications and non-auditable policies, have made coverage available to even the smallest of companies. Insurers and their environmental wholesale brokers are prepared for the increase in storage tank-related business, as well as from brownfields development, increased regulation of the dry cleaning industry, and others with inherent pollution exposures.
But the best insurance continues to be the advice of a qualified broker experienced in the different types of environmental policies and the companies offering such coverage. Just as the quality of an environmental audit is dependent on the experience and qualifications of the consultant performing the study, quality insurance protection depends on the same level of your insurance broker's expertise. Identify an environmental insurance specialist to assist you with these very special protection needs.