Shattering the Storage Myths.

RISK & INSURANCE

July 2001 | Joseph A. Valenza

Small and midsize businesses often are underinsured for their environmental risks. An industry leader discusses real issues associated with insuring underground storage tanks.

Picture this scenario: Three double-walled underground storage tanks were installed five years ago at a corner gas station. Although the tanks are double-walled, have a working automatic tank monitoring system, and are cathodically protected, the tanks are still not impervious to leaks. It is a fact that more releases occur from associated piping and contractor error than from any other cause. Even though the business owner recently spent thousands of dollars upgrading the tanks, a leak detection system may not pick up a very slow leak 100 yards into a pipe run. The designer of the monitoring system would be very hard-pressed to pay for cleaning up contaminated soil. The burden of the cleanup would rest with the business owner.

Under a different scenario, improper electric current is being impressed from a cathodic protection system, causing premature corrosion. A false sense of security would exist and the business owner would unknowingly assume more risk than ever desired. Improper strength of current is not the only thing that may cause premature corrosion. If a piece of copper, even a copper penny, were buried, in soil near a tank, the copper can divert the cathodic protection away from the tanks and toward itself, thus exposing the steel to a greater probability of corrosion. (Steel is more corrosive than copper in the galvanic series, meaning that steel will corrode before copper.) Corrosion rates differ based on geographic location. If a tank has magnesium sacrificial anodes and those anodes have decomposed, only then would the tank become the sacrificial anode and corrode before the copper penny.

Leaks from underground storage tanks are one of the most common pollution incidents that occur at facilities with raw material and/or product storage as their main environmental exposure. But business owners should be aware that other environmental exposures exist and should not be ignored.

There are a little less than one million active storage tanks in the United States today. Aside from environmental exposures associated with underground storage tanks (USTs), a business is still susceptible to experiencing severe financial loss from pollution releases resulting from otherwise unidentified exposures.

These unidentified exposures, however, are generally not covered by what has now become the traditional UST policy.

Consider other environmental exposures that may also exist with the small business operations, including warehousing of possible pollutants such as antifreeze, solvents, fluids and even car batteries. These exposures, in addition to oil water separators and hydraulic lifts, have never been covered by the traditional underground storage tank policy.

Coverage Misconceptions

Uncommon types of insurance such as environmental insurance frequently arouse skepticism. Therefore, misconceptions about environmental insurance are commonplace. Here are some comments about the topic:

• Environmental insurance is too expensive
• Insurance is too difficult to acquire. So why bother.
• My state fund provides all the protection I need.

We want to allay the potential misconceptions associated with these statements.

Environmental insurance for gas stations and convenience stores is necessary, similar to the need to carry personal auto insurance. Due to advanced technology and increased competition in the insurance marketplace, industrywide premiums for better classes of tanks have dropped quite dramatically. For example, an underground storage tank policy with $1 million in limits can be purchased today for as low as $250. So, UST policy premiums in and of themselves can cost less than personal auto insurance policies.

The best way to obtain a quote for environmental insurance is to call your local insurance agent. Binding coverage is simple as well. Less and less information is being required but there will be times when additional information will be required to bind coverage.

The requirement to submit this information is no different from the requirement of auto insurers for physical inspections. Basically, environmental insurance carriers may require proof that there are no current losses being experienced at the location. Such evidence may come in the form of:

• Previously performed integrity tests;
• Previously completed incident reports from past contamination incidents; and
• “No Further Action” letters tendered by each state when a prior remediation has been closed.

State Fund Coverage

State funds differ in many ways. When effectively and efficiently run, a state fund can be the best tool to protect businesses from the costs of underground storage tank leaks. Some state funds currently in place do just that. But keep in mind that no state UST fund covers cleanup or liability from non-UST-related exposures to which a business is subject, including losses from:

• Oil water separators;
• Drum, solvent and antifreeze storage areas;
• Leaking hydraulic lifts;
• And many other scenarios

In addition, some state funds do not cover:

• Financial loss experienced in defending one in court when sued by a neighbor;
• Costs for cleanup and liability due to above ground storage tank leaks;
• Third-party property damage; and
• Business interruption losses experienced due to leaking tanks.

None of this means state funds should not be relied upon to protect against UST leaks. But if the fund is the sole protecting mechanism for a business, gaps most likely exist. There are ways to combine protection, such as relying on the state fund for UST protection and the private insurance market for all other environmental coverages. In the end, the businessowner must decide what level of protection is appropriate. A local insurance agent can help weigh all the options.

Coverage Musts

If basic UST insurance is appropriate, be sure the following are included in the basic cost of insurance at no additional premium:

• A separate limit of liability for UST-related defense costs;
• First dollar (no deductible) coverage for defending UST claims;
• An automatic 180-day extended reporting period for UST claims (Tail Coverage); and
• A 24-hour claim reporting hotline.
• Premises-based coverage, under a separate limit, for non-storage tank related losses;

Be sure the following options are available when purchasing enhanced coverage:

• Business interruption and extra expense protection for covered storage tank pollution incidences;
• Coverage for loading and unloading operations; and
• Automatic UST coverage for newly acquired sites (usually subject to underwriting).

First and foremost, business owners must obtain a means to comply with the EPA’s financial responsibility requirements. Adherence to these laws can save a tank owner up to a maximum of $10,000 per tank, per day in fines alone.

The reality of a tank cleanup depends on two factors:

• Finding a reputable consultant to oversee the cleanup; and
• Detecting and stopping leaks quickly.

An inexperienced consultant could needlessly drive costs into the millions of dollars, for example, when a pump-and-treat remediation system is used in place of the more effective, less costly option of bioremediation.

Preventive care can also reduce the cost of a cleanup. Although leak detection does not eliminate the probability of experiencing a catastrophic loss, it does substantially minimize the risk of paying unnecessary cleanup costs. Through a good relationship with an insurer, the insured’s insurance representative may be able to gain some insight on the most popular and successful leak detection systems available in the marketplace today.

Accordingly, the latest industry news can be passed along to the insurance agent without the need for hours of homework on the part of the insured to find out the same information. It is also important for the insurance representative to accurately convey specifics on the quality of the preventive care system to the company underwriters, so that the premium can be adjusted accordingly.

Obtaining the Best Price

Several insurance companies currently offer basic UST coverage. Prices often don’t vary greatly from one carrier to the next. Coverages, however, can and do differ.

Regardless of the carrier chosen, here are some helpful tips that will assist in receiving the best price and coverage:

• Submit as complete a submission as possible; and
• Submit any additional information or fact sheets about the tanks, property and overall operation.

The more information an insurance company possesses about the risk, the better position they are in to evaluate and effectively quote the risk. When an underwriter has doubt about any aspect of a business, the cost of the policy inevitably goes up. So eliminating the doubt should be favorably reflected in the premium.

Be sure the submission is as organized and appropriately labeled as possible. An organized submission not only assists the insurance company by reducing the time needed to sort through the information, but it also suggests that the insured implements sound management practices in all areas of their business.

In Conclusion

Federal, state and local governments require some environmental coverage; but not all environmental exposures are regulated. State programs generally do not offer options to cover unregulated exposures.

Gradual pollution from a variety of sources is a very real phenomenon and can financially impact a business with UST exposures, as well as the lives of many that surround them.

Consequently, the social responsibility factor associated with such businesses is extremely high and therefore may prompt an owner to feel an additional obligation to protect not only those around them, but also themselves and future business ventures.

Insurance can not only fill coverage gaps, but it can also protect the financial security of many businesses against the consequences of an undetected leak from tanks or pollution losses from other daily operations. Insurance also more comprehensively assists businesses to meet their social responsibility.

Written by: Joseph A. Valenza