UNDERGROUND STORAGE TANK LIABILITY

Rough Notes, Aug 2004

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 t 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.