Environmental Liability

Tight Rules and Low Funding Challenge Tank Operators

Operators of underground storage tanks favor broad pollution liability and tank-only coverage over surety.
By: | February 20, 2017 • 7 min read

Late last year, Massachusetts Gov. Charlie Baker made almost $100 million in mid-year budget cuts to fill an anticipated shortfall. Of that, he cut $3 million from the program that maintains and inspects underground storage tanks (USTs) for hydrocarbons. The cut was just 3 percent above the overall budget reduction, but as the UST program was only $10 million to start, the cut is a substantial 30 percent of the funding.

Moreover, the timing could hardly be worse: The state mandated that all single-wall tanks be removed by Aug. 7. The actual removal process is only a matter of a few days for most tanks, but contractors must be booked in advance and digging is difficult in frozen ground, so the window for work is only four or five months. Also, double-walled regulatory-compliant replacement tanks must be ordered well in advance from fabricators.

And so it goes around the country. Many states are tightening rules on USTs, and some have reduced the pools of money set aside for remediation. That has thrown operators of all sizes back into the risk-transfer market. Some can put up surety bonds, but more and more are buying insurance-like limited tank-only coverage, or adding tank endorsements to their pollution legal liability (PLL) covers.

UST Coverage Trends

There are about a half-million USTs registered with the Environmental Protection Agency. That translates to an insurance market estimated to be $50 million to 60 million in annual premium, according to underwriters and brokers.

Chubb is one of the major carriers, having increased its share through its merger with ACE. Liberty and AIG are also said to have a presence, among others. Brokers report some turnover among carriers, with Zurich having left the segment in 2012.

“There are three ways to certify financial responsibility,” said Gerry Rojewski, senior vice president and chief underwriting officer for Chubb Environmental. “You can self insure. Or you can rely on state funds. Or you can purchase risk transfer.”

“Not surprisingly, the older tanks had higher rates of failure, but there are lots of variables. Larger operations have more assets to cover, but may be a better risk because they have more resources.”    — Gerry Rojewski, senior vice president, chief underwriting officer, Chubb Environmental

The decision varies with the size of the owner’s operation and the number and age of tanks. “Some owners go through agents and some go direct to the market,” said Chris Smy, environmental practice leader at Marsh. “Our clients run the gamut from a hotel that has a backup generator and a small UST for diesel fuel, to large energy companies with many tanks. The business is not just what you might think of, like a retail gas station. It could be anyone.”

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Even in states that have funds, there are complications.

“State funds have dried up or faced delays in reimbursement,” said Jeffrey Hanneman, managing director at Aon Risk Services Southwest. “Texas and Florida, for example, no longer have state funds. Even in California, which does have a fund, there is a priority for reimbursing in order inverse to size. It is impossible to know if or when an operator will recoup UST expenses or how much. We have some clients who do not ever anticipate recouping.”

As a result of that smallest-first preference, Hanneman said, Aon’s customers tend to be larger operators in contrast to the mom-and-pop retail service centers.

The biggest challenge for USTs is age, said Rojewski.

Gerry Rojewski, senior vice president, chief underwriting officer, Chubb Environmental

“In some cases, the owner/operator may try to keep a UST in service beyond its designed lifecycle of 30 years. Replacing a UST can be a significant investment. Not all owner/operators feel the need to replace the tank at this line of demarcation especially if tightness testing results are positive.”

Rojewski added that Chubb conducted a predictive modeling study on tank exposures. The results showed that the older tanks had a higher probability of leaking, he said, but the study also revealed a host of other variables.

“Large operations with higher exposures versus small operations with less complex risk present a different set of characteristics for an insurance carrier,” he said.

“Larger risks may have more assets and may develop more comprehensive risk management programs as opposed to a smaller company, which may not have those types of resources available.”

Rojewski said that Chubb “has the ability to write tank insurance through an online portal called Tanksafe, or through our underwriting team based in Philadelphia, which can work with clients and brokers.”

Smy at Marsh suggested that the current trend within UST coverage is to broaden pollution policies with tank endorsements.

“Other clients are electing to go with above-ground tanks when they replace USTs,” he added. “And still others that have pollution liability feel comfortable retaining the risk for their tanks. In such cases where regulations mandate a demonstrated financial assurance, most owners make the choice to go with risk transfer by insurance.”

To that point, Smy stressed that broad pollution covers “are not a catch-all for USTs. They have to be scheduled. The only tanks covered without a schedule are so-called phantom tanks, ones that are not known until found.”

Challenges with Aging Tanks

Chris Smy, environmental practice leader, Marsh

Brokers say that while the sector is stable, and even has some growth potential as state funding dwindles, there are challenges.

“The longer you go insuring, the more likely you are to have to pay out,” says Smy.

“Carriers are pushing back on covering tanks of a certain age regardless of whether or not they have passed tests. There is just less and less appetite for aging tanks. Operators are going to have to start replacing them.”

Testing is part of all state regulatory requirements.

“Even self-insureds have to pass their tank tests,” said Hanneman at Aon.

He added that there are tanks that can pass the structural test, but small operators that struggle to demonstrate financial responsibility, and also the reverse.

“Because there is a strong correlation between age and loss, owners have to test every year. And most underwriters want to see those integrity test results. The age and condition of tanks, or anticipated replacement costs, are often figured into the price of any sale of assets.”

It bears mentioning that while most retail fuel operations have national brand names, only about 3 percent of the gas stations are actually owned by the big oil companies.

The other 97 percent are owned either by the operator, or are franchises of a regional or national chain. There is a slow but steady cycle of stations being sold both to and from larger and smaller owners.

“Most policies have a $1 million limit with $2 million aggregate,” said Hanneman. “A simple leak cleanup will run in that range, $1 million to $2 million. If the leak gets into the ground water it can be more.”

Given that oil floats on water, the water table in the region and the permeability of soil are big factors. That is why southern states tend to see more spill migration than do northern states, even with their freeze-thaw cycles.

Research from the EPA also implicates metal corrosion as a growing problem with USTs. A 2016 study of 42 operational diesel tanks concluded that 35 of them, or 83 percent, exhibited moderate or severe corrosion.

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While this can lead to vapors escaping into the surrounding soil, corrosion can also lead to equipment failure, including the failure of release and detection systems. While the issue is not widespread among non-diesel tanks, the likelihood of corrosion increases with age and presents another factor to consider.

Brokers also note that larger clients tend to keep tanks on their policies even after sites have been sold. For them the incremental costs of a few more tanks on the schedule is not daunting.

And even though buyers become owners with full responsibility, with indemnification for sellers, that does not stop lawsuits from being filed if current owners go bankrupt and lawyers follow the deed back. &

Gregory DL Morris is an independent business journalist based in New York with 25 years’ experience in industry, energy, finance and transportation. He can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

High Net Worth

High Net Worth Clients Live in CAT Zones. Here’s What Their Resiliency Plan Should Include

Having a resiliency plan and practicing it can make all the difference in a disaster.
By: | September 14, 2018 • 7 min read

Packed with state-of-the-art electronics, priceless collections and high-end furnishings, and situated in scenic, often remote locations, the dwellings of high net worth individuals and families pose particular challenges when it comes to disaster resiliency. But help is on the way.

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Armed with loss data, innovative new programs, technological advances, and a growing army of niche service-providers aimed at addressing an astonishingly diverse set of risks, insurers are increasingly determined to not just insure against their high net worth clients’ losses, but to prevent them.

Insurers have long been proactive in risk mitigation, but increasingly, after the recent surge in wildfire and storm losses, insureds are now, too.

“Before, insurance was considered the only step in risk management. Now, our client families realize it is one of the many imperative steps in an effective risk management strategy,” said Laura Sherman, founding partner at Baldwin Krystyn Sherman Partners.

And especially in the high net worth space, preventing that loss is vastly preferable to a payout, for insurers and insureds alike.

“If insurers can preserve even one house that’s 10 or 20 or 40 million dollars … whatever they have spent in a year is money well spent. Plus they’ve saved this important asset for the client,” said Bruce Gendelman, chairman and founder Bruce Gendelman Insurance Services.

High Net Worth Vulnerabilities

Laura Sherman, founding partner, Baldwin Krystyn Sherman Partners

As the number and size of luxury homes built in vulnerable areas has increased, so has the frequency and magnitude of extreme weather events, including hurricanes, harsh cold and winter storms, and wildfires.

“There is a growing desire to inhabit this riskier terrain,” said Jason Metzger, SVP Risk Management, PURE group of insurance companies. “In the western states alone, a little over a million homes are highly vulnerable to wildfires because of their proximity to forests that are fuller of fuel than they have been in years past.”

Such homes are often filled with expensive artwork and collections, from fine wine to rare books to couture to automobiles, each presenting unique challenges. The homes themselves present other vulnerabilities.

“Larger, more sophisticated homes are bristling with more technology than ever,” said Stephen Poux, SVP and head of Risk Management Services and Loss Prevention for AIG’s Private Client Group.

“A lightning strike can trash every electronic in the home.”

Niche Service Providers

A variety of niche service providers are stepping forward to help.

Secure facilities provide hurricane-proof, wildfire-proof off-site storage for artwork, antiques, and all manner of collectibles for seasonal or rotating storage, as well as ahead of impending disasters.

Other companies help manage such collections — a substantial challenge anytime, but especially during a crisis.

“Knowing where it is, is a huge part of mitigating the risk,” said Eric Kahan, founder of Collector Systems, a cloud-based collection management company that allows collectors to monitor their collections during loans to museums, transit between homes, or evacuation to secure storage.

“Before, insurance was considered the only step in risk management. Now, our client families realize it is one of the many imperative steps in an effective risk management strategy.” — Laura Sherman, founding partner, Baldwin Krystyn Sherman Partners

Insurers also employ specialists in-house. AIG employs four art curators who advise clients on how to protect and preserve their art collections.

Perhaps the best known and most striking example of this kind of direct insurer involvement are the fire teams insurers retain or employ to monitor fires and even spray retardant or water on threatened properties.

High-Level Service for High Net Worth

All high net worth carriers have programs that leverage expertise, loss data, and relationships with vendors to help clients avoid and recover from losses, employing the highest levels of customer service to accomplish this as unobtrusively as possible.

“What allows you to do your job best is when you develop that relationship with a client, where it’s the same people that are interacting with them on every front for their risk management,” said Steve Bitterman, chief risk services officer for Vault Insurance.

Site visits are an essential first step, allowing insurers to assess risks, make recommendations to reduce them, and establish plans in the event of a disaster.

“When you’re in a catastrophic situation, it’s high stress, time is of the essence, and people forget things,” said Sherman. “Having a written plan in place is paramount to success.”

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Another important component is knowing who will execute that plan in homes that are often unoccupied.

Domestic staff may lack the knowledge or authority to protect the homeowner’s assets, and during a disaster may be distracted dealing with threats to their own homes and families. Adequate planning includes ensuring that whoever is responsible has the training and authority to execute the plan.

Evaluating New Technology

Insurers use technologies like GPS and satellite imagery to determine which homes are directly threatened by storms or wildfires. They also assess and vet technologies that can be implemented by homeowners, from impact glass to alarm and monitoring systems, to more obscure but potentially more important options.

AIG’s Poux recommends two types of vents that mitigate important, and unexpected risks.

“There’s a fantastic technology called Smart Vent, which allows water to flow in and out of the foundation,” Poux said. “… The weight of water outside a foundation can push a foundation wall in. If you equalize that water inside and out at the same level, you negate that.”

Another wildfire risk — embers getting sucked into the attic — is, according to Poux, “typically the greatest cause of the destruction of homes.” But, he said, “Special ember-resisting venting, like Brandguard Vents, can remove that exposure altogether.”

Building Smart

Many disaster resiliency technologies can be applied at any time, but often the cost is fractional if implemented during initial construction. AIG’s Smart Build is a free program for new or remodeled homes that evolved out of AIG’s construction insurance programs.

Previously available only to homes valued at $5 million and up, Smart Build recently expanded to include homes of $1 million and up. Roughly 100 homes are enrolled, with an average value of $13 million.

“In the high net worth space, sometimes it takes longer potentially to recover, simply because there are limited contractors available to do specialty work.” — Curt Goetsch, head of underwriting, Private Client Group, Ironshore

“We know what goes wrong in high net worth homes,” said Poux, citing AIG’s decades of loss data.

“We’re incenting our client and by proxy their builder, their architects and their broker, to give us a seat at the design table. … That enables us to help tweak the architectural plans in ways that are very easy to do with a pencil, as opposed to after a home is built.”

Poux cites a remote ranch property in Texas.

Curt Goetsch, head of underwriting, Private Client Group, Ironshore

“The client was rebuilding a home but also installing new roads and grading and driveways. … The property was very far from the fire department and there wasn’t any available water on the property.”

Poux’s team was able to recommend underground water storage tanks, something that would have been prohibitively expensive after construction.

“But if the ground is open and you’ve got heavy equipment, it’s a relatively minor additional expense.”

Homes that graduate from the Smart Build program may be eligible for preferred pricing due to their added resilience, Poux said.

Recovery from Loss

A major component of disaster resiliency is still recovery from loss, and preparation is key to the prompt service expected by homeowners paying six- or seven-figure premiums.

Before Irma, PURE sent contact information for pre-assigned claim adjusters to insureds in the storm’s direct path.

“In the high net worth space, sometimes it takes longer potentially to recover, simply because there are limited contractors available to do specialty work,” said Curt Goetsch, head of underwriting for Ironshore’s Private Client Group.

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“If you’ve got custom construction or imported materials in your house, you’re not going to go down the street and just find somebody that can do that kind of work, or has those materials in stock.”

In the wake of disaster, even basic services can be scarce.

“Our claims and risk management departments have to work together in advance of the storm,” said Bitterman, “to have contractors and restoration companies and tarp and board services that are going to respond to our company’s clients, that will commit resources to us.”

And while local agents’ connections can be invaluable, Goetsch sees insurers taking more of that responsibility from the agent, to at least get the claim started.

“When there is a disaster, the agency’s staff may have to deal with personal losses,” Goetsch said. &

Jon McGoran is a novelist and magazine editor based outside of Philadelphia. He can be reached at [email protected]