Financial Responsibility Assistance for Underground Storage Tanks: Can Washington State Run a Pollution Reinsurance Company?
| Publication year | 1990 |
| Citation | Vol. 14 No. 01 |
I. Introduction
In 1986, Congress passed the Superfund Amendments and Reauthorization Act (SARA).(fn1) In part, Congress directed the Environmental Protection Agency (EPA) to adopt regulations requiring owners or operators of petroleum underground storage tanks (USTs) to maintain financial responsibility for "taking corrective action and compensating third parties for bodily injury and property damage caused by sudden and nonsudden accidental releases from operating an underground storage tank."(fn2) In other words, owners or operators of USTs must demonstrate that they have an EPA approved source of funds to pay clean-up costs and to compensate third parties for petroleum leaks.
Owners and operators of USTs can meet these financial responsibility requirements through a variety of methods: "insurance, guarantee, surety bond, letter of credit, qualification as a self-insurer,"(fn3) or participation in an EPA approved state financial responsibility program.(fn4) In addition, the different methods may be used in combination to meet financial responsibility requirements. Whatever method is used, the minimum level of financial responsibility is set at one million dollars per occurrence, per release or leak. The EPA may set lower limits of financial responsibility, however, for owners and operators of tanks without large capacity who are not engaged in producing, refining, or marketing petroleum products.(fn5)
As a last resort, if the EPA determines that statutorily recognized methods of financial responsibility are generally unavailable, the EPA may suspend enforcement of financial responsibility requirements in a particular state for periods not exceeding 180 days.(fn6) But, the EPA must also find that "steps are being taken to form a risk retention group . . . or . . . such state is taking steps to establish a fund [that will provide financial responsibility]."(fn7)
On October 26, 1988, the EPA published its final regulations governing financial responsibility.(fn8) The regulations establish different financial responsibility limits and compliance deadlines for various classes of owners and operators.(fn9) Owners or operators who market petroleum(fn10) or who handle an average of more than 10,000 gallons of petroleum per month must have financial responsibility limits of $1 million per occurrence.(fn11) All other owners and operators must have per occurrence limits of $500,000.(fn12) Owners and operators must have an annual aggregate limit of $2,000,000 if more than 100 tanks are owned or operated,(fn13) and $1,000,000 if less than 100 tanks are owned or operated.(fn14)
Petroleum marketing firms must be in compliance with the financial responsibility regulations by January 1989 if more than 1000 tanks are owned,(fn15) by October 1989 if 100-999 tanks are owned,(fn16) by April 1991 if 13-99 tanks are owned,(fn17) and by October 1991 if 1-12 tanks are owned.(fn18) A non-marketing owner must comply by January 1989 if the owner has a net worth of more than $20,000,000.(fn19) All other non-marketing owners, including local governments, must comply by October of 1991.(fn20)
Despite the variety of methods available to satisfy EPA financial responsibility regulations, few owners or operators have the financial resources necessary to satisfy the self-insurance standards or have a parent or similar company willing to issue a guarantee that conforms to regulations.(fn21) Few, if any, financial institutions or other corporations will issue a surety bond or letter of credit conforming to EPA regulations.(fn22) Therefore, most owners and operators will be forced to purchase insurance or similar coverage from a risk retention group unless a state fund is available.(fn23)
Unfortunately, financial responsibility coverage through insurance companies and risk retention groups has become less rather than more available in the past year because of several factors. First, the cost of such insurance is very high. Second, owners and operators have difficulty in qualifying for coverage. Third, a few major providers of pollution liability coverage have withdrawn from the insurance market.(fn24) Given the inability of owners and operators to comply with financial responsibility regulations, Washington state owners and operators sought creation of a state program of financial responsibility assurance.(fn25)
This Article reviews Washington state efforts to create a state financial responsibility assurance program; it analyzes EPA financial responsibility regulations; it examines the risks associated with insuring underground petroleum storage tanks; and it assesses the problems and merits of the state pollution liability insurance program as a potential solution to owner and operator financial responsibility needs. The Article concludes that the Washington program reflects the best efforts of the legislature to compromise the competing interests of the public, owners and operators of USTs, and environmental groups. If pollution insurers bargain in good faith with the state, the program will succeed in creating an affordable pollution insurance market in Washington while creating a profitable business opportunity for insurers.
II. Program Development
In 1988, the Washington State Legislature created the Joint Select Committee on Underground Storage Tanks to study and recommend legislation to assist owners and operators of USTs in complying with federal financial responsibility regulations.(fn26) In the months before the 1989 legislative session, the Joint Committee met, in part to consider various proposals to create a financial responsibility insurance program for owners and operators.(fn27) The Committee sought to answer three basic questions: first, the kind of insurance coverage the state is being asked to provide; second, its cost; and third, the manner in which it should be provided.
Obviously, Washington state could choose to reject any request for pollution insurance coverage assistance. However, if the state provides such assistance, the amount and kind of insurance coverage that the owner or operator requires must meet EPA regulations. EPA financial responsibility regulations establish the qualifying standards for any contract, agreement, or insurance policy which will serve as proof of compliance with financial responsibility assurance.(fn28) These regulations hold a state program to the same standards that are applied to other methods of obtaining financial responsibility assurance.(fn29) Thus, a state program providing complete financial responsibility assurance must cover owner or operator liabilities at least to the same extent as an insurance company issuing a qualifying pollution liability policy.
Owners or operators of petroleum USTs "must maintain evidence of all financial assurance mechanisms used to demonstrate financial responsibility . . . ."(fn30) Evidence of financial responsibility must conform word for word to the certification form adopted by the EPA for each method of assurance.(fn31) These forms incorporate the required terms and conditions of financial responsibility coverage.(fn32) However, the EPA recognized that too narrowly defined terms and conditions would conflict with and potentially kill private insurance as a method of financial responsibility assurance, the method most owners or operators will use.(fn33)
An insurance policy meets EPA standards if it covers the insured's liability for corrective action, and third party bodily injury and property damage "caused by accidental releases arising from the operation of USTs."(fn34) Coverage limits must be exclusive of defense costs and in an amount appropriate for the owner or operator insured.(fn35) Coverage may be provided on a claims-made basis and must offer a six month extended reporting period.(fn36) The policy may be cancelled only after the insured receives 60 days prior written notification of cancellation,(fn37) or 10 days notice in the case of cancellation for nonpayment of premiums.(fn38) Finally, the insurer must provide coverage within the policy limits without regard to the insured's payment of any deductible(fn39) and without regard to the insured's bankruptcy or insolvency.(fn40)
Each of these elements of coverage are partially defined in the financial responsibility regulations.(fn41) Coverage for accidental releases must include both sudden and nonsudden releases "neither expected nor intended by the tank owner or operator."(fn42) As noted earlier, regulatory definitions were intended to coincide with standard insurance industry usage to avoid conflict with existing pollution liability insurance policies. The EPA went so far as to include this philosophy in a note to the definition of "occurrence":
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