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

Risk Management

The Profession

As risk manager for a cloud computing and software company, Laurie LeLack knows that the interconnected economy and cyber security remain top risks.
By: | December 14, 2017 • 4 min read

R&I: What was your first job?

One of my first jobs was actually at a local insurance agency when I was a high school student, before I had any idea I was going to get into insurance. After college, I was a claims analyst at Sunbeam.

R&I: How did you come to work in risk management?

I fell into it after college, where I studied international business. I had a stack of resumes, and Sunbeam came to Florida from Rhode Island, so I applied. I interviewed with the director of risk management and just stuck with it and worked my way up.

R&I: What is the risk management community doing right?

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Getting a holistic view of risk. Risk managers are understanding how to get all stakeholders together, so we understand how each risk is aligned. In my view, that’s the only way to properly protect and serve our organizations.

R&I: What could the risk management community do better?

We’ve come a long way, but we still have to continue breaking down silos at organizations. You also have to make sure you really understand your business model and your story so you can communicate that effectively to your broker or carrier. Without full understanding of your business, you can’t assess your exposures.

R&I: What was the best location and year for the RIMS conference and why?

Being on the East Coast, I like Philadelphia.

Laurie LeLack, Senior Director, Corporate Risk and Americas Real Estate, Citrix Systems Inc.

R&I: What’s been the biggest change in the risk management and insurance industry since you’ve been in it?

Organizations understanding their cyber risk exposures and how this line of insurance can best protect them. Five to ten years ago, people shrugged it off as something just for technologies companies. But you can really see the trend ticking up as a must-have. It was always something that was needed, but people came to their own defining moments as we got more involved in electronic content and social media globally. Cyber risk is inherent in the way we do business today.

R&I: What emerging commercial risk most concerns you?

The advent of security and contractual obligations. These are concerns as we all play a part in this big web of a global economy. There’s that downstream effect — who’s going to be best insulated at the end of the day should something transpire, and did we set the right expectations?

R&I: Is the contingent commission controversy overblown?

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I think so. At the end of the day, it’s all about the transparency you’re getting from the people you work with. I think some best practices in transparency came out of the situation, but we were working on a fee basis, so it wasn’t as much of an issue for us as it may have been for other companies.

R&I: Are you optimistic about the U.S. economy or pessimistic and why?

I’m cautiously optimistic. We seem to be stable in terms of growth, and I’m hoping that the efficiencies and the economies of scale we achieve through technology will benefit us. But I’m also worried about the impact that could have on the number of jobs globally.

R&I: Who is your mentor and why?

Robert O’Connor, my former director when I was first on-boarded at Sunbeam, gave me so many valuable tidbits. I’ll call him to this day if I have an idea I want to bounce off him. He’s a good source of comfort and guidance.

R&I: Of what accomplishment are you most proud?

I have two very empathetic, healthy and happy boys. Eleven and soon-to-be 14.

On the professional side, there were a lot of moments during my career at Citrix where we were running a very lean organization, so I had the opportunity to get involved in many different projects that I probably wouldn’t have had in other larger organizations.

R&I: What is your favorite book or movie?

My favorite movie is Raiders of the Lost Ark.

R&I: What’s the best restaurant you’ve ever eaten at?

A place in Santa Barbara called Bouchon.

R&I: What is the most unusual/interesting place you have ever visited?

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Caverns in Gatlinburg, Tennessee. They were interesting. It was cool to see these stalagmites and stalactites that have been growing for millions of years, and then just above ground there are homes from the 1950s.

R&I: What is the riskiest activity in which you’ve ever engaged?

Riding on the back of my husband’s Harley.

R&I: What about this work do you find the most fulfilling or rewarding?

I like educating people and helping them find their ‘aha’ moment when you highlight areas of risk they may not have thought about. It allows people to broaden their horizons a little bit when we talk about risk and try to explore it from a different angle. I try not to be the person who always says “No” because it’s too risky, but find solutions that everyone is comfortable with given a risk profile.

R&I: What do your friends and family think you do?

I tell my kids I protect people and property and sometimes the things you can’t feel or touch.




Katie Dwyer is an associate editor at Risk & Insurance®. She can be reached at [email protected]