SCHAUMBURG, Ill. -- With Zurich American Insurance Co. planning to all but abandon the U.S. tank market, what's next for retailers who have to comply with state and federal environmental financial responsibility rules?
The answer is likely to be a lot more hassle.
Zurich's decision couldn't have come at a worse time for retailers, given the imminent arrival of E15 and other higher ethanol blends and the slow demise of state tank funds, multiple sources say.
(See Related Conent below for previous CSP Daily News coverage.)
Massachusetts marketer Ed Rachins, a veteran of tank insurance battles, predicts that retailers will find it increasingly difficult to find insurance coverage in coming years, particularly as states set deadlines for the removal of single-walled tanks.
"Dealers won't be able to find carriers to write insurance as they start to pull out tanks and find contamination they didn't know they had," Rachins said. Zurich is the latest to leave, but it won't be the last, he believes. "This is just the first of the unintended consequences. Insurers are not going to want to play verbal volleyball about the cause of leaks with all these guys."
Zurich itself blames state insurance regulators for its decision.
"We are no longer in a position to offer a 'stand-alone' tank pollution coverage because certain key state insurance regulators would not allow us to charge appropriate rates to sustain insurance," Steven McKay, a spokesperson for the Schaumburg, Ill., insurer told CSP Daily News.
"We are still offering tank coverage on a limited basis as part of an overall site pollution coverage for customers that have needs in addition to tanks," he said.
Zurich will not say how much of the tank insurance market it controls but maintains that its "departure is not likely to make a material impact" on the market; however, according to a June 18 memo from Carolyn Hoskinson, director of the U.S. Environmental Protection Agency's (EPA) Office of Underground Storage Tanks, Zurich "has been one of the major national UST insurance providers over the years."
Several insurance companies have left the tank market in recent years--among them AIG, Reliance and Traveler's. Some other well-known insurers have curtailed what they will cover. For example, one firm that used to offer corner-to-corner coverage now only pays for leaks directly from the marketer's tanks. As of January this year, there were only 13 companies willing to offer some form of tank insurance, including Zurich, according to EPA.
"Zurich was one of the main go-to companies for tank insurance, especially for marketers operating across state lines," said Jeff Leiter, a leading environmental lawyer for fuel marketers. "It's going to be what is called a 'hard' market for tank insurance for a while. While it's happened before, in the past, we always had the state tank funds to fall back on."
But that may no longer be the case.
Under EPA regs, tank owners and operators are required to demonstrate that they are financially able to pay for the cleanup of leaks and spills. They must show that they can cover at minimum a $1 million remediation bill, through insurance or other financial means.
Many states set up tank funds in the 1990s to help marketers pay for cleanup, usually financed by fees imposed on tanks and marketers' per gallon fuel sales. Generally, the funds require marketers to pay a set deductible and were intended to pick up many of the remediation costs. But with budgets stretched to breaking, state lawmakers have been increasingly raiding the funds for cash, leaving some of them now almost dry.
Connecticut's fund is the latest victim. Legislators passed a bill this week that basically eliminates it. The measure says that after October 1, marketers may not use the fund as a financial responsibility (FR) mechanism to demonstrate their ability to pay for cleanup or third party compensation. Smaller marketers can use it for FR requirements until Oct. 1, 2013, only.
The bill sets deadlines for applying for reimbursement from the fund, depending on whether a marketer is a small operator (five or fewer sites), mid-sized (six to 99 stores) or a large operator (at least 100 stations). The deadline for large operators is October 1 this year. Mid-sized marketers have until Sept. 30, 2013 and small marketers must file by Sept. 30, 2014.
The measure also sets up a system where priority payments or reimbursements go to marketers who agree to accept the greatest reduction in their claim amount. And the state in many cases will not pay more than 20 cents to 35 cents on the dollar in the first year of the claim.
"The only thing they didn't have was the mask--they had the gun already," quipped Rachins.
"This is a very bad situation for marketers," said marketer attorney Tim Columbus. "If they want to put all the retail outlets out of business, this is an excellent start. We have to make it clear to legislators that state tank funds are really crucial to the industry. If private insurance becomes unavailable or prohibitively expensive, there are very few alternatives available to us."
Some sources suggest that now might be a good time for marketer trade groups to approach EPA about a temporary suspension of financial responsibility rules, or some other kind of regulatory breather for retailers who struggling to comply with state or federal requirements.
"Zurich's withdrawal from the market is significant, but I think it is too early to start pushing for changes to the financial responsibility rules," said John Eichberger, vice president of government relations for NACS. "However, NACS will be speaking with the EPA Office of Underground Storage Tanks about this situation to determine specifically what effect it will have and what options are available to ensure tank owners can remain compliant with the requirements."
Marketers could ask Zurich to sell them what's called a "discovery tail"--a policy that will allow them to submit a claim with a set period of time after their current Zurich policy expires--although the company seems lukewarm to the idea.
"Policy holders are offered a tail, but other insurers are actively working to insure these customers and most customers do not elect to purchase a tail, they just purchase the insurance from another insurer," said McKay.
In the meantime, there are some other alternatives that marketers can look at. Federal and state rules will allow marketers to use a letter-of-credit, a corporate guarantee, or some other mechanism to show financial responsibility. Marketers could create a risk insurance pool for themselves, although it is an option that failed when it was offered several years ago by McLean, Va.-based The Planning Corp., which was eventually forced to liquidate, sources say.
One Southeast marketer has seen success with his strategy for dealing with the issue. He set up a special trust fund in the 1990s to meet the $1 million coverage requirement. Under the terms of the trust, approved by state regulators, the money can be used only for environmental purposes. But the state allows him to sweep the account every now and again to collect interest earned over and above the $1 million in the fund, and he can liquidate it if he decides to sell his business.
[Correction: An earlier version of this story mentioned Liberty Mutual as an insurer that has quit the market. Liberty Mutual is still writing tank insurance. CSP Daily News regrets the error.]