Insurance is a universal mechanism to provide businesses with protection against a wide variety of perils, and accidental releases from USTs containing petroleum and other hazardous substances would seem to be precisely the kind of exposure insurance was developed to cover. (Federal UST regulations allow for other FR mechanisms, including financial test, guarantee, letter of credit, trust fund, surety bond, and state fund.)
Why then do insurance policies fall short of compensating O/Os for the cost of cleanup and property damage liability claims made by third parties? One reason offered by EPA’s Office of Underground Storage Tanks (OUST) is not that policies are unsuited to meet FR requirements, but rather that insurance purchasers and sometimes even their insurance agents do not understand precisely what the policies are and are not insuring against.
“Insurance policies are generally difficult for policyholders to read and understand,” states OUST. “Despite renewing and paying premiums on them every year, it is likely that very few people or companies closely examine the language in their insurance policies until they find themselves in need of the coverage under the policies.”
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OUST drew this and other conclusions from a study it conducted to assess the effectiveness of UST insurance as an FR mechanism. The bulk of the study involved an analysis of 25 UST insurance policies purchased by UST O/Os to comply with the federal UST FR regulation. The policies were written by 12 different carriers between 2000 and 2009 and issued to O/Os domiciled in seven states. In addition to reviewing the policies, OUST’s data collection included discussions with four insurance companies, a search to obtain UST insurance claims data, and a review of litigation and O/O anecdotes involving UST insurance.
Claims Made Policies
OUST’s discussions with the insurance carriers yielded no monetary information on premiums or claims payments. But all the carriers agreed that O/Os need to better understand the terms and conditions of their UST pollution insurance policies, and they should view their insurance policies as more than simple requisite purchases for meeting the federal UST FR regulation. Throughout its report, OUST notes reasons UST pollution insurance alone may not be effective in all cases as a FR mechanism.
For example, very few UST insurance policies will respond to each and every release from an insured UST. This is frequently the case because most UST policies – and every one of the 25 policies examined by OUST – are claims-made. A claims-made policy will cover only those releases that are reported while the policy is in effect.
So if a release occurs during the two-year period the policy is in force, but is first reported to the carrier at any point after the policy expires, technically, the carrier is not obligated to provide compensation. The situation is different with occurrence-based policies, which will cover releases reported after the policy expires. But occurrence-based policies are very expensive and are avoided by O/Os who generally believe that claims-made policies will provide all the insurance they need.
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OUST concedes that part of the problem with UST insurance derives from federal requirements indicating the minimum terms the policies must contain. Specifically, the federal UST FR regulations stipulate that insurance must:
- Cover corrective action and third-party compensation both on-site and off-site from sudden and non-sudden accidental releases arising from the operation of petroleum USTs.
- Exclude legal defense costs from the required amount of coverage.
- Provide first-dollar coverage (a mechanism to ensure that disputes between the carrier and the insured about who is responsible for paying amounts within deductible limits will not interfere with prompt corrective action or third party compensation).
- Provide a six-month extended reporting period for claims-made policies.
- Contain an endorsement or certificate that states the amount of coverage provided and the purposes for which the coverage is available.
- Contain additional conditions (e.g., the insurance carrier is not relieved of its obligations under the policy if the insured becomes bankrupt or insolvent; and cancellation or termination of the policy by the carrier will be effective only 60 days after receipt of written notice from the insured, except in cases of nonpayment of premium or misrepresentation by the insured)
- Provide a minimum amount of coverage determined by the amount of gallons handled on a monthly basis and the total number of USTs owned.
Get what you pay for. See tomorrow’s Advisor have a better understanding of the gaps in coverage and other potential problems for policy holders.