United States
Environmental Protection
Agency
Office of
Underground Storage Tanks
Washington, D.C. 20460
EPA/530/UST-88/009
September 1988
&EPA
Financial Assurance
Programs:
A Handbook for States
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FINANCIAL ASSURANCE PROG1AMS:
A HANDBOOK FOR STATES'? -,'.:>
OFFICE OF UNDERGROUND STORAGE TANKS
U.S. ENVIRONMENTAL PROTECTION AGENCY
October 1988
U S Environmental Protection Agency
Region 5, Library (PL-12J)
77 West JaeksffR Boulevard, Uttv no
Chicago, it 60604-3520 -
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TABLE OF CONTENTS
Chapter Page
TABLE OF CONTENTS
SECTION I: SETTING UP A STATE ASSURANCE PROGRAM
1. INTRODUCTION 1-1
What Is A State Financial Assurance Program? 1-1
What Federal Law Requires 1-1
Using This Handbook 1-1
2. DO YOU NEED AN ASSURANCE PROGRAM? 2-1
What Is The Problem? 2-1
What Are Your Goals? 2-1
What Evaluation Criteria Are Important? 2-2
Do You Need A Cleanup Fund? 2-3
What Are Your Alternatives? 2-3
3. DESIGNING A STATE ASSURANCE PROGRAM 3-1
Potential Assurance Program Components 3-1
What Structure Should You Choose? 3-5
4. FUNDING AND ADMINISTRATION 4-1
How Much Money Should You Commit To An Assurance Program? .... 4-1
Claims On The Program 4-2
Costs Of Administering An Assurance Program 4-3
Notifying Participating Owners and Operators 4-3
5. EXAMPLES OF STATE ASSURANCE PROGRAMS 5-J
Guarantee Fund 5-1
Insurance Program 5-3
Cleanup Fund 5-5
6. UST LOAN OR GRANT FUNDS 6-1
Uses For Loan or Grant Funds 6-1
UST Loan or Grant Fund Components 6-1
SECTION II: INFORMATION SOURCES
7. INFORMATION SOURCES 7-1
Where Can You Get More Information? 7-1
State UST Financial Responsibility Laws 7-1
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TABLE OF CONTENTS (concluded)
Chapter Page
SECTION III: APPENDICES
Appendix A: Summary of Federal Financial Responsibility Requirements . A-l
Appendix B: Glossary of Financial Assurance Terms B-l
Appendix C: List of State Contacts C-l
Appendix D: Model State Financial Responsibility Legislation D-1
Appendix E: Insurance Availability E-l
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SECTION I
SETTING UP A STATE ASSURANCE PROGRAM
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1. INTRODUCTION
WHAT IS A STATE FINANCIAL ASSURANCE PROGRAM?
A State financial assurance program is a State fund or insurance program that is
structured explicitly to assist underground storage tank (UST) owners or operators to
meet Federal and eventually State financial responsibility requirements for USTs. The
purpose of this handbook is to assist States to design State financial assurance programs
for USTs containing petroleum.
Insurance companies have little experience with the recently promulgated UST
financial responsibility program and have been reluctant to provide UST coverage, partly
because there is limited information about the expected scope and costs of future
petroleum releases from USTs. As a result, State financial assurance programs will help
UST owners and operators comply with the new Federal financial responsibility
requirements and also provide a timely source of money for cleanups of petroleum
releases. If such assurance programs are flexible, they can adapt to future situations,
such as changes in cleanup rates (influenced by changes in UST release rates) or
cleanup costs. For instance, the level of financial assurance coverage provided by a
State fund could decrease as insurance becomes more available.
WHAT FEDERAL LAW REQUIRES
Under Subtitle I of the Resource Conservation and Recovery Act of 1976 (RCRA),
as amended in 1984 and 1986, Congress mandated that EPA establish financial
responsibility requirements for the costs of cleaning up petroleum releases (termed
"corrective action") and compensating third parties for damages caused by petroleum
releases. Under EPA's regulations, UST owners and operators may demonstrate coverage
for corrective action and third-party compensation costs using a variety of financial
assurance mechanisms, including State funds or other State assurance programs (e.g.,
State-run insurance programs). The financial responsibility requirements are part of the
overall UST program that includes technical standards, such as leak detection and
corrosion protection requirements for new and existing USTs, and corrective action
requirements, as well as State UST program approval procedures.
RCRA requires that all USTs at facilities engaged in petroleum refining,
distribution, and marketing must provide a minimum level of assurance of $1 million.
Owners and operators may use a variety of mechanisms to demonstrate financial
responsibility, including State funds, insurance, guarantees, surety bonds, letters of
credit, qualification as a self-insurer, or other methods deemed appropriate by EPA or
the State implementing Agency. Finally, recognizing the limited availability of financial
assurance mechanisms, RCRA allows EPA to suspend enforcement of the requirements for
particular classes of USTs when mechanisms are generally unavailable. Appendix A of
the handbook contains a brief summary of the Federal financial responsibility
requirements.
USING THIS HANDBOOK
The first six chapters of this handbook, contained in Section I, describe the
factors States should consider in establishing UST State financial assurance programs.
The seventh chapter, under Section II, includes EPA information sources and
descriptions of several State UST financial responsibility requirements. The appendices
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to the handbook, contained in Section III, provide additional detailed information on
relevant financial responsibility topics.
The intended audience for the handbook includes employees of State environmental
protection agencies and State insurance commissions, State legislators, and EPA Regional
employees. EPA recognizes that financial assurance mechanisms may be difficult to
obtain in the initial period following promulgation of EPA's financial responsibility
requirements, that States, rather than EPA, will largely implement these requirements,
and that only a few States currently have experience implementing UST financial
assurance programs. Nonetheless, a number of States already have developed or are
considering assurance programs in an effort to assist UST owners and operators in
complying with financial responsibility requirements. Those States that have or are
considering programs are listed in Exhibit 1-1. Finally, given the uncertainties about
the cost and extent of future UST releases, EPA assumes that general information about
State assurance programs would be more accurate and useful than quantitative estimates
of expected program costs.
As a result, the handbook provides general information on several topics, including
a process States can follow in determining their financial assurance goals and needs, the
types of assurance programs possible, and the types of programs States currently have
or are considering. Finally, it evaluates prototype State assurance programs and
provides additional sources of information.
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EXHIBIT 1-1
Several States Have UST Assurance Programs
(as of September 1988)
Key
>
- States with UST Assurance Programs
- States considering UST Assurance Programs
- Slates without UST Assurance Programs
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2. DO YOU NEED AN ASSURANCE PROGRAM?
No State is required to establish an UST financial assurance program (e.g., a State
fund or State UST insurance program). Congress allowed UST owners or operators to
use State assurance programs to demonstrate financial assurance because it recognized
that the most common mechanism, insurance, may be unavailable for many UST owners
or operators. In addition, other mechanisms, such as the financial test of self-
insurance, may be available only to a few larger UST owners or operators. A State
assurance program may be critical to most UST owners or operators to fund the costs
of cleanups of UST releases and to meet Federal UST program requirements.
WHAT IS THE PROBLEM?
To determine if your State needs an UST financial assurance program, first
determine what type of problem you face. Are many UST releases in your State not
cleaned up because the responsible owner or operator did not have enough money? Are
UST owners having difficulty demonstrating financial responsibility? Are some tank
owners or operators unable to meet insurance underwriting criteria? Will small
businesses be forced to close because they cannot comply with the financial
responsibility requirements? Why can't small businesses comply with the financial
assurance requirements? Identifying and understanding the problems you want to
address will guide your remaining efforts."
Once you have specified the problem, you need to examine what you know about
the problem. Do you have information on the financial characteristics of UST owners
in your State? Do you have information on the availability of UST insurance in the
State? Do you know how many owners and operators will be able to use a financial
test or self-insurance and thus not need assistance from the State (e.g., do you have
information on the net worth of UST owners in the State)? Do you know the expected
scope and costs of corrective action and third-party damages in the State? Answers to
these and other questions will help you evaluate your options.
WHAT ARE YOUR GOALS?
A State may have a number of goals in solving UST financial responsibility
problems, some of which may overlap or conflict. Several potential goals are listed
below.
Increase Compliance
To increase compliance with the financial responsibility requirements, a State can
supplement coverage provided by financial assurance mechanisms available in the
marketplace. A State may determine that available mechanisms fail to provide the full
amount of required coverage or that available mechanisms are too costly. In addition,
assurance programs may provide additional incentives for UST owners and operators to
comply with technical standards for USTs required under Federal law (e.g., tank leak
detection and monitoring requirements). A State assurance program, for example, could
require that UST owners or operators demonstrate compliance with the technical
standards before providing coverage for corrective action costs and third-party
compensation.
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Assist Small Businesses
States may wish to assist small businesses that have difficulty obtaining financial
assurance mechanisms or raising the capital required to comply with the program. Since
many small businesses owning USTs provide basic services on which a community
depends, State implementing agencies may want to ensure that financial support is
available to such businesses. This goal could be satisfied by designing an assurance
program (e.g., a loan fund) that would allow these small businesses to upgrade their
tanks on schedule, but defer the cost of compliance through loan repayments to a State
fund.
Avoid Competition With Private Insurance Providers
Your State may wish to avoid competition with private insurance providers.
Certain types of State financial assurance programs could draw clients away from
insurers. If few insurers are currently willing to offer UST insurance, your State could
provide financial assurance in the short-run. In the long-run, however, this short-term
solution may preclude insurers from ever offering coverage in the State, thus
perpetuating the problem. States can design assurance programs to minimize competition
with insurance, or to allow periodic adjustments to the level and type of coverage to
respond to changes in the insurance market.
Supplement The Trust Fund
A State may wish to supplement the Federal Leaking UST Trust Fund in the event
it provides inadequate monies to clean up releases from USTs whose owners or operators
cannot or will not pay, or if third-party compensation is necessary. The Trust Fund
may not be available to pay corrective action costs up to $1 million (i.e., the Trust
Fund may not automatically fund cleanup that is the owner's or operator's responsibility
under the financial responsibility requirements), and will never compensate third-parties
for damages caused by a petroleum release. By providing funds for cleanup, a State
assurance program can ensure prompt response to releases to minimize threats to human
health and the environment. An assurance program also can ensure that third parties
are compensated for injuries and damages from those releases. As noted above, a trust
fund also could be authorized to pay for releases detected in the early phases of the
program before owners and operators have obtained financial assurances.
States may choose a combination of these and other goals that may be
accomplished through the specific design of a State assurance program. After an
assurance program is established to attain a set of goals, States can reassess their
financial assurance needs and adjust their programs to meet changing conditions.
WHAT EVALUATION CRITERIA ARE IMPORTANT?
You should develop explicit criteria to evaluate options for solving your problem.
The criteria should measure the expected degree of success in meeting goals. Potential
criteria could include:
• The effect on the State (e.g., administrative costs);
• The effect on UST owners and operators; and
• The effect on insurance markets.
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We will use these criteria to evaluate assurance programs by developing them further in
Chapter 3 and applying them to example programs in Chapter 5.
DO YOU NEED A CLEANUP FUND?
As leak detection requirements take effect, the number of existing releases that
are identified is likely to increase dramatically. Because some UST owners and
operators may not have adequate financial resources to clean up these releases, they
may go unaddressed or be cleaned up improperly. One component of a State assurance
program could be a trust fund to pay for corrective action for releases detected early
in the program.
WHAT ARE YOUR ALTERNATIVES?
Finally, you should identify alternatives and evaluate those that most clearly meet
your needs. Such alternatives might include a State fund, a State-run insurance
program, or a technical assistance program. Develop several alternative solutions and
evaluate them using the criteria most important to your State. If you determine that
you need to establish a State assurance program, this handbook should help you
determine what type of program will best suit your needs and goals.
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3. DESIGNING A STATE ASSURANCE PROGRAM
States have wide latitude in designing the characteristics of a financial assurance
program. The structure of an assurance program may influence significantly the degree
of compliance with the UST financial responsibility requirements. Moreover, program
structures will impose different financial burdens on owners and operators, create
varying incentives to prevent UST leaks, and affect State taxpayers to differing degrees.
To highlight these distinctions, this chapter examines the key elements of potential
State assurance program components.
POTENTIAL ASSURANCE PROGRAM COMPONENTS
State assurance program structures have five main components:
1. Type of assurance;
2. Participation;
3. Covered costs;
4. Financing method; and
5. Duration of the program.
These components and their implications are examined below. In addition, Exhibit 3-1
depicts the key features of four of the components.
Type of Assurance - Insurance Or Guarantee?
A State may establish its assurance program as an insurance mechanism, a
guarantee mechanism, or a blend of both.
Insurance. If the assurance program acts as an insurer, it
would pay for corrective action costs and/or third-party
compensation regardless of an owner's or operator's ability to pay.
For example, the State would establish a program that paid all
corrective action costs above $100,000. Alternatively, the State
could act as a reinsurer to private insurance companies offering
UST coverage.
Guarantee. The State could establish an assurance program
that pays only if the owner or operator is unwilling or unable to
pay (i.e., the fund would act as a guarantor). Under the guarantee
approach, the State could have the right to recover costs from
owners or operators.
Who Participates?
There are three broad approaches to who could participate in a State assurance
program. First, the State may require all UST owners and operators in a State to
participate in the program. Such a program would relieve the owners and operators of
the burden of locating and obtaining other financial assurance mechanisms for the costs
covered by the assurance program. Where a program does not cover all costs that are
required to be covered under the Federal rules (e.g., third-party compensation), owners
or operators would have to obtain additional coverage.
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EXHIBIT 3-1
Potential Components of State Funds
All Corrective Action
and Third-Party
Compensation Costs
Up to 1,000,000
r
vners/
ators
\
r
Owners/Operators that
Elect to Participate
\
\
Owners/O
Otherwise I
r
What Costs are Covered
Partial Coverage
of Corrective Action
and/or Third-Party
Compensation Costs
Only Otherwise
Unassured Costs
Fees Linked to
UST Risks
Fees Based on
Non-Risk
Characteristics
\
I
Cost
Recovery
Funds from
Other State
Revenue Sources
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Second, the State may allow voluntary participation in the program. Under this
approach, owners or operators would have the option of participating in the program or
using other mechanisms to comply with the financial responsibility rules.
Finally, under the third approach, only UST owners or operators who are otherwise
unassured could join a State program. For example, the State assurance program could
cover owners or operators who have obtained coverage for third-party compensation but
not for corrective action costs. Or, if an owner or operator could obtain coverage for
only the first $500,000 of costs, for example, the State assurance program could cover
the remainder up to $1 million.
What Costs Are Covered?
Several potential options are available to States in determining what costs should
be covered by a State assurance program. First, in the most encompassing case, a State
assurance program would cover all financial responsibility costs required under the
Federal regulations (i.e., corrective action and third-party compensation costs). If other
mechanisms are not available to many owners and operators in the early years of the
UST program, this State assurance program option may be the only way some owners
and operators would be able to comply with the financial responsibility requirements.
Second, a State assurance program could provide partial coverage by covering
corrective action and/or third-party compensation costs greater than a set amount (e.g.,
$100,000) up to some ceiling (e.g., $1 million). For example, Virginia law provides
partial coverage for corrective action and third-party compensation ($100,000 for
corrective action and $300,000 for third-party compensation). In other States, such as
Minnesota, assurance programs cover corrective action costs only.
Third, a State assurance program could cover only otherwise unassured costs.
Under this approach, an UST owner or operator would have to obtain financial
assurance mechanisms on his own and turn to the State assurance program as a last
resort. For example, an UST owner may be able to obtain insurance coverage for up to
$500,000 in corrective action and third-party compensation costs. Then, the State
assurance program could provide the remaining amount of required financial
responsibility coverage. Combinations and variations of the preceding options also are
possible.
How Is The Assurance Program Financed?
States can choose from four types of funding approaches to pay for State
assurance programs:
1. Risk-based fees;
2. Non-risk based UST fees;
3. Petroleum taxes; and
4. General funds.
These options could be combined or used at different times to finance a State assurance
program. For example, a fund could be financed using both general revenues and fees
assessed on UST owners and operators. Or, a fund could be financed initially through
general revenues and later through risk-based fees. In addition to the information
presented in this section of the handbook, the Office of Underground Storage Tanks
(OUST) at EPA has developed a handbook on methods of financing State UST programs.
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You may obtain this handbook, Underground Storage Tank Programs: Funding Potions
For State And Local Governments, by contacting EPA Regional Offices (see Chapter 7
for addresses and phone numbers).
f
Under the first approach, UST owners or operators would pay fees or premiums to
a State assurance program based on the degree of risk posed by their USTs. Although
this method is used primarily for financing insurance programs, it could be used for
other State assurance programs as well. A State also could charge participating owners
or operators an initial capitalization charge to build up the assurance program's
reserves, similar to the capitalization charge necessary to establish a risk retention
group. Under this approach, owners or operators responsible for higher risk USTs
would pay higher fees.
Under the second approach, non-risk-based factors would be used as the basis for
assessing fees on UST owners or operators. Several financing sources tied to USTs
could be used:
• Tank registration fees;
• Tank license fees;
• Tank inspection fees; and
• Revenue taxes on firms owning USTs.
Under the third approach, the State assurance program would be financed through
taxes on petroleum production, distribution, sales, and use. For example, a State could
increase gasoline excise taxes to provide revenues for the State assurance program.
' A
Under the fourth approach, State assurance programs would be financed by general
funds not tied to petroleum or an UST owner's or operator's activities. Several
financing sources could be used, such as:
• General revenues or appropriations;
• State bond issues; and
• Property taxes.
How Long Should The Program Operate?
States may be reluctant to undertake an "open-ended" financial assurance program.
Therefore, the timeframe for the program and how to scale down its size or phase it
out over time are important concerns. Several States have set explicit "sunset" dates by
which their State funds will expire. A sunset provision may ensure that the State
assurance program provides short-term financial assurance mechanisms, while allowing
time for insurance or risk retention groups to become established. A formal study of
the program's effectiveness and the status of the insurance market prior to the sunset
date also can provide the basis for decisions on whether and how to continue the
program.
States can establish a process to scale down or phase-out financial assurance
programs over time as other mechanisms become available. The amount of financial
assurance coverage could decrease, for example, over a five-to-ten-year period (e.g., by
increasing the deductible from $100,000 in year 1 to $500,000 in year 10), or end
completely. State environmental and insurance officials could survey the availability of
UST insurance in the State to determine the phase-out rate of the State UST assurance
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program. By establishing sunset dates and phase-outs, States may be able to minimize
their involvement in the UST insurance market.
WHAT STRUCTURE SHOULD YOU CHOOSE?
Chapter 2 of the handbook identified three criteria you could use to evaluate
components of State assurance programs:
1. Effect on States;
2. Effect on UST owners and operators; and
3. Effect on insurance markets.
Using these three criteria, this section discusses some of the advantages and
disadvantages of the various assurance program components listed above. The particular
program structure you choose depends on your State's goals and needs and will be
affected by technical and political considerations.
Effect On States
A major concern is likely to be the potential cost to the State of an assurance
program and the ease of administering the program. In general, a guarantee program
that covers only costs the owner or operator cannot pay is likely to be less expensive
to the State and simpler to administer than a State-run assurance program that covers
all costs regardless of the owner's or operator's ability to pay. The cost to the State
also will depend on the type of financing mechanism selected. Programs financed
primarily by owners and operators, such as tank or petroleum fees, will cost less to the
State than programs financed by general revenues or bonds.
A State may want to consider non-monetary impacts as well. For example, the
rate of cleanup, the efficiency of a given cleanup effort, and the level of the State's
technical involvement in the cleanup may vary depending on the type of program
adopted. Similarly, the cost recovery efforts required under a guarantee program (or a
cleanup fund) may have a different effect on the State politically and economically than
would an insurance program, where losses are factored into the program and cost
recovery actions against owners or operators generally are avoided. Finally, a program
covering third-party claims involves the State heavily in claims adjustment activities and
litigation.
Effect On UST Owners And Operators
UST owners and operators care about the cost of complying with Federal and State
UST financial responsibility requirements. Moreover, because insurance and other
financial assurance mechanisms currently are not generally available, most owners and
operators may have difficulty complying with the requirements.
The more UST owners and operators share in the costs of the assurance program,
the greater the incentive they will have to control the risks from their tanks (i.e., they
will have a financial incentive to reduce UST releases). Thus, guarantee programs,
cost-recovery requirements, and programs that require payments from tank owners (e.g.,
premiums paid to State-run insurance programs) are likely to be incentives for proper
tank management.
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Finally, some financing approaches may be perceived as fairer than others. For
instance, if you believe that cleanups of releases from USTs should be paid solely by
owners or operators, you may favor financing the State assurance program through fees
levied only on UST owners and operators (e.g., tank fees). Equity arguments also may
occur between groups of UST owners and operators. For example, in a State that was
considering imposing a fee on the volume of petroleum handled by distributors, large
petroleum marketers opposed the fee because many of them could self-insure using a
financial test rather than relying on the State fund. Conversely, smaller marketers and
dealers favored the fee because the burden of financing the State fund would be spread
across a large group.
Effect On Insurance Markets
The particular design of an assurance program also may affect the current and
future availability of UST insurance. If a State assurance program acts as an insurer,
either UST owners or operators could be required to participate or the State could offer
insurance at attractive prices. In such a case, competition with private insurers could
be high. Alternatively, if an assurance program acts as a guarantor or only covers
otherwise unassured costs, competition with insurers may be low. In cases where States
establish limited coverage funds (e.g., only corrective action costs above $100,000 are
paid by the State), insurers may choose to write policies for complementary coverage
(e.g., amounts up to $100,000). From the private insurer's point of view, such State
programs may increase the predictability of expected losses and reduce capitalization
costs. As a result, limited coverage funds may provide an incentive for insurers to
enter the market.
Because the insurance market will change over* time, the State financial assurance
program could be set up to respond with flexibility to such changes. For example, the
State could begin with a limited coverage fund (i.e., providing coverage for costs
greater than $100,000). Then, at regular intervals (e.g., every two years), the State
could reassess the insurance market and decrease coverage amounts (e.g., from costs
above $100,000 to costs above $500,000) in response to increasing availability of
insurance.
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4. FUNDING AND ADMINISTRATION
EPA and the States have little experience to rely on in estimating the appropriate
size for a financial assurance program. Deciding on the right program size depends on
several factors, such as the State's political climate, its economic strength, the
characteristics of its UST population, and its environmental setting. By carefully
defining how an assurance program will operate, however, even a small program can be
successful. This chapter does not recommend a particular financing approach or specific
operating procedures, but instead encourages States to adopt an approach that matches
their own needs.
HOW MUCH MONEY SHOULD YOU COMMIT TO AN ASSURANCE PROGRAM?
The stock of money in a fund or assurance program will be dynamic, increasing
with new revenues and decreasing with payments. For ongoing programs, the initial
level of funding may not be as important as whether a given disbursement rate can be
maintained. In other words, if the program is to receive monies and to function over a
longer term, the program should take in at least as much as it pays out. The level of
funding necessary for a particular program will depend on many factors, such as the
type of coverage, claims administration, financing provisions, effects of the UST
technical standards, and whether administrative expenses are paid from the fund or from
a separate administrative appropriation.
At a minimum, however, the initial level of the fund or assurance program should
be at least $2 million. State insurance commissioners may provide assistance or
information to establish the minimuni amount of funds to commit to the program. Some
States, for example, require that insurers establish reserves equal to at least five times
the amount of coverage provided under each policy. Thus, to write policies with $1
million policy limits, the insurance company would have to maintain a $5 million reserve.
Other States use higher ratios in situations where risks and expected losses are
significant. A reserve guards against the unexpected depletion of the fund or assurance
program. A reserve may be especially desirable in the first years of the program, until
the State gains sufficient experience in administering it.
Although a State is unlikely to fund a financial assurance program in excess of its
needs, the fund may contain more money than can be disbursed effectively in any one
year. For example, in a given year, a fund might contain $50 million, but only be able
to effectively process and pay out $15 million in claims. If the fund is to be financed
through a continuous tax (and will therefore replenish itself by the next year), there
may be little reason to maintain a $35 million reserve. Therefore, the rate of claims
processing, as well as the rate of claims applications, should be considered when setting
the funding level for the program.
The initial monies in the fund may be supplied by an appropriation, or the fund
may contain no money pending receipt of certain dedicated revenues, such as petroleum
taxes or tank fees. Floor and ceiling "triggers" may keep the level of the fund and the
associated financial burden in appropriate ranges. A floor trigger is a provision that
activates a financing mechanism when the level of the fund decreases to a certain
amount (the "floor"). A ceiling trigger is a provision that de-activates a financing
mechanism when the level of the fund increases to a certain amount. For example, a
tax on the sale of gasoline might be triggered when the State fund or assurance
program diminishes to a floor of $2 million (with the proceeds dedicated to the fund)
and remain in effect until the level of the fund increases to a ceiling of $10 million.
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As additional money is disbursed, however, the fund would again begin to diminish until
it reached the floor value, at which point the tax would again be triggered and the
cycle repeated.
CLAIMS ON THE PROGRAM
Claims rates are difficult to predict, especially in the near term. Claims are
requests for payments from the assurance fund to pay for corrective action costs and/or
third-party compensation. Claims rates will be affected by several factors, including the
number and ages of tanks in the State, local hydrogeology, the effects of the UST
technical standards, and the types of claims covered by the fund. Generally, however,
claims rates during the first five years of the program are likely to be relatively high
as the technical standards are phased in because new leak detection and monitoring
requirements will detect most of the tanks that are currently leaking. You should draw
upon resources in your State for expertise on administering claims programs. State
insurance officials, private insurance companies, and other State insurance programs
(e.g., workmen's compensation funds) may be able to provide advice on establishing an
efficient claims process.
Procedural and administrative guidelines may help to control the flow of money
from the fund. The State should define clearly what constitutes an acceptable claim
and what costs the assurance program will cover. If the level of the fund becomes
inadequate, a mechanism should exist to halt the claims process. This might include a
priority system (e.g., first come, first serve) to pay specific claims and to make clear
which claims wilj not be paid. A "first come, first serve" claims system also could be
combined with a reserve in order to respond to imminent hazards if they arise and the
primary fund cannot cover the costs. The assurance program also should specify the
time period during which reported leaks and claims will be covered.
States also may limit claims on the fund by setting both aggregate limits and per
occurrence limits. An aggregate limit means a limit to all of the costs incurred within
a given year by one owner or operator as a result of releases from all of the owner's
or operator's USTs covered by a single financial assurance mechanism. For firms with
three USTs, for example, an aggregate limit would apply to the costs of all releases
from the three tanks in one year. A per occurrence limit, in contrast, is a limit on the
costs incurred from a single release from an underground storage tank.
The Federal financial responsibility regulations for USTs set aggregate requirements
based on the number of USTs owned or operated. Similarly, a State assurance program
could set different aggregate levels based on the number of USTs. For instance, a
State fund that covered corrective action costs up to $1 million per occurrence could
cover aggregate costs up to $2 million.
Finally, to ensure the timely availability of funds, the State assurance program
should provide "first dollar coverage." First dollar coverage means the program would
pay for costs first, or should be able to pay for costs where the owner or operator is
unable or unwilling to pay. Depending on the terms of the program, the State could
then seek reimbursement from the owner or operator.
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4-3
COSTS OF ADMINISTERING AN ASSURANCE PROGRAM
States must consider who will run the assurance program and what powers they
will have. An assurance program can be administered by a State environmental agency
or an insurance commission, an independent board, or a private administrator under
contract with the State.
Administrative costs of a State assurance program cover a variety of activities,
including: maintaining a list of participants, setting premium rates, making eligibility
determinations, and processing claims. Program design will affect administrative costs
and complexity. In addition to some fixed administrative costs, such as maintaining a
list of participants, costs will increase with the amount of individual processing required
for each participant or for each claim. Also, for some programs, there may be costs for
determining the underwriting criteria (i.e., determining the key risk factors in setting
premium rates). In other programs, there may be legal and other costs involved in
pursuing cost recovery actions against owners and operators. Further administrative
costs are incurred for programs which monitor or direct the cleanup activities.
Some administrative costs may be reduced by simplifying and standardizing the
terms of the program. For example, a program assuring all UST corrective action costs
after the first $100,000 would be simpler, more predictable, and less costly to administer
than a program assuring costs that are not covered by any other source (which may
require individual determinations of eligibility). However, even if the State assures
costs above $100,000, additional eligibility criteria still may require individual processing
of applicants.
Many States will consider a State assurance program as part of a comprehensive
UST regulatory program. This may reduce the administrative burden of managing the
fund or assurance program because there will be a number of activities and information
needs that can be shared by different program components. For example, under
notification requirements, a State may maintain a database of UST owners, operators,
and tanks. A State agency may use the data for compliance monitoring and
enforcement, leak investigation and cleanup, as well as identifying participants in a
State assurance program. Program activities such as leak investigation and cleanup also
may be structured to accommodate the administrative needs of a State financial
assurance program.
NOTIFYING PARTICIPATING OWNERS AND OPERATORS
The State should inform owners and operators about the State assurance program
and about any remaining responsibilities and conditions that they may have. UST
owners and operators need to know about eligibility requirements they must fulfill in
order to obtain coverage or comply with the UST financial responsibility requirements.
For example, a condition of the fund may be that the owner or operator must obtain
financial assurance coverage up to $100,000 in order to be eligible to receive State
money for any costs above $100,000.
Under the Federal UST financial responsibility requirements, if the State fund or
assurance program becomes inoperative or insolvent, the State must notify participating
owners and operators within 60 days. UST owners and operators then must obtain other
coverage as necessary in order to remain in compliance with financial assurance
requirements.
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4-4
Exhibit 4-1 depicts an example of how a State assurance program that covers
corrective action costs from $100,000 to $1 million (e.g., an insurance fund rather than
a guarantee fund) would pay for corrective action.
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4-5
EXHIBIT 4-1
Paying for Corrective Action
(assuming cleanup qualifies for State and Federal funds)
Leaking UST Corrective Action Cleanup Bill for Cleanup
BILL
$ 1,300,000 total
UST Owner/Operator UST Owner/Operator's Share
• UST Owner's
Deductible and
Private Insurance
Covers Costs
up to $100,000
Private Insurance Co.
$ 100.000
State Fund Share
State Fund May
Cover Costs from
$100,000 to 1,000,000
State Capitol'
$ 900.000
Federal Government
May Cover Costs
over $1,000,000
I
LUST Fund Share
$ 300.000
Total Bill is Paid i
S 1.300.000 total
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5. EXAMPLES OF STATE ASSURANCE PROGRAMS
There are many possible variations in the way financial assurance program
components can be combined. This chapter presents three examples that either reflect
existing State assurance programs or illustrate the ways in which program components
may be combined. The three examples are:
1.. Guarantee fund;
2. Insurance program; and
3. Cleanup fund.
These programs are evaluated below using the three criteria discussed in Chapter 3.
Exhibit 5-1 summarizes the key provisions of the three programs.
GUARANTEE FUND
The guarantee fund is designed to minimize the involvement of the State in
providing financial responsibility. The other key objective of the fund is to assure that
all costs and all UST owners and operators are covered either under private assurance
mechanisms or by the fund. Under the guarantee fund:
• Only unassured or partially covered owners and operators
participate;
• Only unassured corrective action and third-party liability costs are
covered;
• The fund acts as a guarantor; and
• The fund is financed by general revenues and cost recovery.
Under this approach, owners and operators would be required to obtain the
maximum amount of required coverage available. If owners and operators were unable
to obtain the full amount of coverage, the fund would cover the difference. Thus, the
fund would cover only the amount above the coverage obtained by the owner or
operator, up to the required amount of coverage. If, for example, an UST owner or
operator could only obtain insurance coverage for $300,000 of corrective action costs,
the guarantee fund could provide the remaining $700,000, up to $1 million. Then, if the
owner had an UST leak that cost $500,000 to clean up, the owner's insurance would
cover the first $300,000. The State guarantee fund would pay the remaining $200,000
and subsequently attempt to recover that amount from the UST owner or operator.
Effect On States
Losses from the guarantee fund would occur where the State is unable to recover
costs from UST owners or operators. States are likely to experience significant
administrative costs implementing the cost-recovery provisions of the minimum coverage
fund. For example, a State would frequently have to initiate cost-recovery proceedings
and determine how much an owner or operator is able to pay. In addition, the State
may have mixed success in recovering costs from certain firms, such as small businesses
or firms with multiple subsidiaries. Finally, administrative costs for determining
eligibility could be high because case-by-case efforts must be made to determine that
coverage is otherwise unavailable.
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5-2
EXHIBIT 5-1
Key Provisions of the Three Examples
Assurance
Program
Type of
Assurance
Who
Participates?
What Costs
are Covered?
How is the
Program Financed?!
General
revenues and
cost recovery
Only unassured
owners and
operators
Only
unassured
costs
1. Guarantee
Guarantee
Risk-based
premiums
Voluntary
participation
Insurance
2, insurance
Program
Corrective
action costs
General
revenues and
cost recovery
Universal
participation
3. Cleanup
Fund
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5-3
Effect On Owners and Operators
Because the fund acts only as a guarantor, this approach provides owners and
operators incentives to prevent UST leaks (e.g., they must pay all costs of cleanup).
Owners and operators would also have to work harder to find other financial assurance
mechanisms than under other assurance programs because the State would require that
they have attempted to obtain other mechanisms before turning to the State fund.
Also, the fund would provide no protection to owners and operators from catastrophic
loss. The owner or operator remains obligated to pay the costs of cleanup or third-
party claims and risks major losses in the event of a sizable leak.
Effect On Insurance Markets
Finally, competition with insurance would be low under the guarantee fund because
only unassured costs would be covered (i.e., owners and operators would have to attempt
to obtain insurance before using the fund). If States do not pursue cost recovery,
however, owners and operators will have little incentive to seek private insurance.
Finally, the guarantee fund provides few incentives for insurers to enter the market
because it does not reduce the insurer's uncertainty about expected losses.
INSURANCE PROGRAM
In its purest form, a State insurance program is modeled closely after a private
liability carrier. The insurance program is similar to an insurance plan. Under the
insurance program:
•. Participation is voluntary;
• Deductible amounts may vary based on premiums;
• Fund acts as an insurer; and
• Financing comes from risk-based premiums.
• Covers corrective action and third-party liability costs.
A State insurance program is a mechanism for providing insurance coverage for
tank owners when commercial pollution liability insurance for underground storage tanks
is not readily available or affordable. Unlike most other UST assurance programs,
however, an insurance program pays tank-related corrective action and third-party
liability claims without recourse against the insured tank owner and is typically funded
by risk-based premiums. States sponsoring insurance funds must engage in a full range
of insurance-related activities from risk assessment to claims handling, much like a
private insurer.
State-sponsored insurance funds are not a new concept. Many States have
established State workers' compensation programs. Some States have other types of
State-sponsored insurance programs, such as patient compensation funds and public
school insurance programs. States contemplating State-sponsored insurance programs for
UST systems should consider the purposes the program might serve, as well as the
practical aspects of setting up an insurance program.
A State insurance program may be administered by a quasi-independent entity and
run by State employees or a. private company under contract to the State. The program
is self-supporting and driven by its contractual obligations to its policyholders, the tank
owners and operators participating in the program. Premiums are based on the degree
of risk which each tank or site represents. The total premiums each year should cover
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5-4
the claims the program is obligated to pay as well as the program's administrative
expenses. States could structure the program to cover primarily high-risk owners and
operators who are not insurable by private insurers. Alternatively, the State could rely
on a private insurer to provide coverage and act as a reinsurer to the insurance
company for excess coverage. If a private company runs the program, it is important to
consider whether there are any constitutional problems with the delegation of authority
to a nongovernmental entity.
Effect On States
The administrative complexity and cost of the insurance program could be
significant. The costs depend on the degree of subsidy by the State in setting
premiums.
Running an insurance program will require more specialized skills than
administering a trust fund. One approach is to have the governor appoint a board to
oversee the program and make all executive and policy decisions. A representative of
the insurance department and the implementing agency for the State's UST program
could be ejc officio members of the board. The board could then have the authority to
contract with a private administrator who would run the program's day to day operation.
The legislation creating the board should give it enough authority to carry out all
the functions necessary for the program to succeed. This includes the authority to
invest the program's income, contract with administrators, lawyers and others as
necessary, pursue subrogation claims against responsible parties, obtain reinsurance, and
issue and cancel insurance policies. A positive effect on the State is that an insurance
.program could result in less expensive, and more timely cleanup efforts than a guarantee
program, which might not act until a determination is made that the owner or operator
does not have other financial assurance and is unable to pay.
Effect On Owners and Operators
The program allows UST owners and operators to pick their own financial
assurance mechanism, rather than being forced to accept a State assurance program.
Where States impose conditions on coverage, such as inventory control or tank
upgrading, owners and operators will have an incentive to manage their USTs properly.
Risk-based premiums will also provide risk management incentives.
If participation is voluntary, private insurers are likely to provide insurance first
to low risk tank owners, leaving the State program with higher per tank risks shared by
fewer participants. Because administrative costs would be shared by fewer insureds, the
average cost of premiums would rise. In addition, an insurance program provides the
greatest protection to the owner or operator. Unlike the guarantee program, insurance
transfers risk and protects the owner or operator from the catastrophic financial loss he
would suffer if faced with an uninsured leaking tank.
Effect On Insurance Markets
The structure of the program would determine the degree to which it competes
with insurance. State insurance programs with low premiums or extensive coverage
limits would provide greater competition with insurers than State programs with high
premiums or limited coverage. If the State prefers to lessen the competition, it could
establish an insurance program with fees that are always at least ten percent greater
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5-5
than comparable insurance premiums. Alternatively, an insurance program could compete
directly with private insurers if program fees were no more expensive than insurance
premiums.
CLEANUP FUND
The cleanup fund, as distinct from a guarantee fund, is designed to clean up
petroleum releases from underground storage tanks, not to provide a financial assurance
mechanism to UST owners and operators. The cleanup fund would protect human health
and the environment by ensuring that UST releases are addressed quickly and
completely. Under the cleanup fund:
• All UST owners and operators participate;
• Only corrective action costs are covered;
• The fund is not a financial assurance mechanism; and
• The fund is financed by general revenues and cost recovery.
It is likely that during the early years of the UST program, as leak detection
requirements are phased in, there will be a significant increase in the number of
identified UST releases. Many owners and operators will not be able to pay for the
costs of these releases, since they do not currently have financial assurance to cover
the costs.
The cleanup fund would provide a source of money to respond to petroleum
releases, including releases for which no responsible party could be found to pay for
corrective action. Corrective action costs paid by the cleanup fund could be recovered,
where possible, from responsible UST owners or operators. Because the cleanup fund is
not intended to be a financial assurance mechanism, UST owners and operators would
have to demonstrate financial responsibility using other mechanisms, such as insurance.
It could, in fact, be set up to meet short-term needs in the first three to five years of
the program.
Effect on States
A cleanup fund could ensure quick response to any releases detected in the early
years of the program before all owners and operators have obtained financial assurances.
Therefore, it can provide a direct human health and environmental benefit. Several
States currently have cleanup funds that are not intended to be financial assurance
mechanisms. Cleanup funds may cost less to States than most other assurance programs
because costs may be recovered from individual UST owners and operators responsible
for releases. A greater share of the fund's costs will be borne by the State if the fund
is financed primarily through general revenues rather than cost recovery, tank fees, or
petroleum taxes.
Effect on Owners and Operators
Initially, many owners and operators will be faced with corrective action
responsibilities without any financial assurance mechanisms to cover the costs. In
addition, in order to obtain assurance mechanisms, owners and operators will have to
clean up any existing releases (pre-existing conditions, as termed in insurance policies)
as well as install tank monitoring and upgrading to meet pre-conditions for many types
of financial assurances. A cleanup fund could be used to address tanks that are
currently leaking. The cleanup fund could assist owners and operators in complying
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5-6
with the technical corrective action and financial responsibility requirements of the UST
regulatory program.
The cleanup fund could not be used by UST owners and operators to demonstrate
financial responsibility. As a result, owners and operators would have to obtain other
mechanisms, such as insurance, or .demonstrate that they could self-insure (i.e., by
passing a financial test). A State might consider using a cleanup- fund and an insurance
or guarantee program in combination, the first to address existing problems and the
second to ensure that future problems are addressed. Without a cleanup fund, some
owners and operators may be unable to clean up releases until they become critical risk
situations.
Effect on Insurance Markets
Owners and operators would have an incentive to obtain insurance or other
financial assurance mechanisms, as a good business practice, to cover potential losses.
A cleanup fund might foster the insurance market by making an owner's or operator's
tank more insurable if existing contamination is addressed. A State cleanup fund would
not compete with insurers because owners and operators would be required to pay all
corrective action costs incurred by the fund. Neither would the fund foster UST
insurance markets in a particular State, except to the extent that concerns about cost
recovery under a cleanup fund encourages a greater number of UST owners or operators
to demand insurance than would do so in the absence of a cleanup fund.
The three preceding approaches to State financial assurance programs are only
examples. Other approaches are possible and may be better suited to your needs.
Moreover, there are criteria that could be used to evaluate potential assurance
programs, such as equity among owners and operators, that were not used here. Each
State should select its own key criteria and program components to evaluate.
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6. UST LOAN AND GRANT FUNDS
This chapter discusses UST loan or grant funds used to assist owners or operators
to upgrade or replace USTs. These funds are not financial assurance programs, like the
programs discussed in earlier chapters of the handbook. However, they are included in
this handbook because States may wish to establish such funds to offset problems
owners and operators may have in securing financial responsibility and in complying
with UST technical requirements.
USES FOR LOAN AND GRANT FUNDS
Financial assurance providers (e.g., insurers and risk retention groups) may not be
willing to offer coverage to UST owners and operators who have not upgraded or
replaced old or deficient USTs. In the current UST insurance market, for example,
some insurers require, as a precondition for obtaining coverage, that USTs be in
compliance with Federal and State technical requirements, such as leak detection and
monitoring. In addition, some assurance providers will not provide coverage for USTs
older than 15 to 20 years or require payment of surcharges for policies covering bare
steel USTs. Or, even where such coverage is available, it may be expensive and
unaffordable for smaller UST owners and operators.
Some UST owners or operators may not be able to afford to pay the costs of such
improvements. They may be unable to obtain loans from conventional lending sources as
well. To solve this problem, a State may choose to establish an UST technical
compliance fund to make direct loans, guaranteed loans, or grants to UST owners and
operators to upgrade or replace their tanks. Thus, the underlying purpose of a loan or
grant fund is to assist UST owners and operators to implement applicable UST technical
standards. As a result, the risk of petroleum leaks from USTs will be reduced. In
addition, by complying with the technical standards, UST owners and operators may find
it easier to obtain UST financial assurance mechanisms.
UST LOAN OR GRANT FUND COMPONENTS
UST loan or grant programs are not widely used by States now, although several
States have developed loan programs recently. The terms and financing sources for
these programs are listed in Exhibit 6-1. This list illustrates example loan programs. It
is based on a review of selected State environmental laws in the BNA Environment
Reporter, as of September 1988. The list is not intended to be a current or
comprehensive listing of such programs.
Those States wishing to start an UST technical compliance fund could establish
several program components:
• Eligibility criteria;
• Type of program (e.g., direct or guaranteed loans); and
• Length of program.
These program components are discussed below.
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EXHIBIT 6-1
State/Fund Title
Eligibility
STATE LOAN OR GRANT FUNDS
(as of September 1988)
Revenue Source
Interest Rate
Term of Loan
Expiration Date
California
California Petroleum
Underground Storage Tank
Financing Authority
[PROPOSED]
Small businesses unable to obtain
loans from private lending sources.
The amount of a loan may not exceed
$70,000. Loans may be used to upgrade
or replace USTs.
1. State appropriations
2. Application fees -
3. Interest on outstanding
loans
A. Federal appropriations
5. Interest income from the
fund
Equal to the cost of money
to the State on the first
day of the calendar quarter
during which the loan is
approved.
Not to exceed ten years.
January 1, 1992
Iowa
Petroleum Underground
Storage Tank Financing
Account [PROPOSED]
Maine
Underground Storage
Facility Replacement Fund
Provide loans to financially qualified 1. Petroleum tank fees
small businesses to repair, upgrade,
or replace UST to meet applicable
State or Federal standards. The
maximum amount of a loan may not
exceed $50,000.
Money in the fund may be used for
direct loans for all or part of
underground oil storage facility
replacement projects according to
criteria set by the State. Also
provides funds, at the discretion of
the State, for insuring mortgage
payments for UST loans. The mortgage
insurance is limited to an aggregate
total of $5 million.
2. Interest received on
outstanding loans
3. State and Federal grants
1. State appropriations
2. Interest income on the
fund
3. Repayments
Equal to the cost of
borrowing money by the
State on the first day of
the calendar quarter during
which the loan is approved.
To be determined.
The shortest feasible term July 1, 1998
commensurate with the
repayment ability of the
borrower.
To be determined.
To be determined.
to
New Jersey
State Underground Storage
Tank Improvement Fund
New York
State Underground
Petroleum Storage Facility
Improvement Fund
[PROPOSED]
Revolving fund; low interest loans
made to UST owners who have been
directed by the NJDEP to repair or
replace one or more of their USTs or
install monitoring systems; loans
issued based on economic hardship.
Loans made to owners of facilities who
are required pursuant to law or
regulation to replace one or more
underground storage tank facilities.
1. State appropriation of $5 Not more than six percent;
million fixed rates.
2. Repayment of loans
Not to exceed ten years.
December 31, 1991
State appropriation of
$5 million.
Interest from outstanding
loans
An annual rate equal to the
Federal discount rate.
Not less than five years
nor more than ten.
December 31 of
the fifth full
calendar year
subsequent to the
effective date of
the Act.
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EXHIBIT 6-1 (concluded)
State/Fund Title
STATE LOAN OR GRANT FUNDS
(as of September 1988)
Eligibility
Revenue Source
Interest Rate
Term of Loan
Expiration Date
Rhode Island
Underground Storage Tank
Replacement Revolving Loan
Fund
Low interest loans to residential and 1.
commercial owners of USTs to remedy 2.
leaking tanks and replace tanks that 3.
are likely to leak; revolving fund. 4.
State appropriations
Repayment of loans
Federal grants
Gifts, bequests,
donations
Bond issues
Two points below the six-
month Treasury Bill rate at
the time the loan is
awarded; fixed rates.
Depends on the income of
the recipient and whether
it is a commercial
facility; ranges from five
to fifteen years maximum.
No expiration
date.
South Dakota
Loan Program
Vermont
Underground Storage Tank
Incentive Program
Petroleum Cleanup Fund
Available to petroleum marketers to
improve environmental safety of USTs;
predominantly capital investment in
equipment.
Grants up to $5,000 for small retail
gasoline outlets (sales <20,000
gallons/month) and municipalities
(pop. <2,500) to aid in their
compliance with State regulations for
replacing USTs.
Up to one-half of fund can be used to
provide no interest loans (up to
$40,000) to small rural dealers and
small municipalities for tank
replacement.
State revenue bond
Funds authorized by the
oil overcharge fund and
from the petroleum
cleanup fund for this
purpose.
1. License fees 02
2. Interest income from fund
3. Reimbursement and cost
recovery
No specific terms specified
although rate would be
lower than would otherwise
be available.
N/A
No terms specified.
N/A
10 years
No expiration
date.
No expiration
date.
No expiration
date.
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6-4
Eligibility Criteria
The loan or grant fund could be designed to provide funds only to those UST
owners and operators who are otherwise unable to obtain money to upgrade or replace
their tanks. Criteria to determine eligibility could include the following:
• The firm is a small business and meets other class definitions;
• The applicant is creditworthy, based on data from reliable sources
such as financial records and the applicant's credit rating;
• The funds wilt be used solely for upgrading or replacing USTs; and
• Funds to upgrade or replace USTs are unavailable from any other
source, including the applicant's own resources and resources from
affiliated companies.
Direct Loan Programs
Where a State makes direct loans, the maximum loan amount, the interest rate, and
repayment period must be established. For example, proposed legislation to establish an
UST loan program in California would set a maximum loan amount of $70,000, with the
interest rate at the cost of money to the State and the term of the loan up to ten
years.
In addition, the State should establish the optimum annual flow of UST loan funds,
to ensure liquidity, by setting a total annual limit on the amount of loans disbursed
from the fund and determining an estimated default rate on loans. For example, default
rates of 1 to 3 percent are typical of loans made by private lenders. Finally, to
administer a direct loan program, a State must establish an administrative structure with
adequate staff and expertise.
Guaranteed Loan Programs
The State may guarantee UST loans made by private lenders. Because private
lenders review loan applicants and administer loan payments, loan guarantees reduce the
administrative burden to the State of managing loan accounts. Moreover, guaranteed
loan programs are advantageous in that private lenders provide close oversight of the
uses for funds. Private lenders may require, for example, that UST owners and
operators obtain estimates or other documentation for project costs prior to making
loans. Such oversight may ensure that loans are used only for authorized purposes (i.e.,
to upgrade or replace USTs). On the other hand, since private lenders share loan risks
with States, they may not make loans to high-risk UST owners and operators. As a
result, guaranteed loan programs may not assist some of the marginal UST owners or
operators who are the intended beneficiaries of the programs.
As with direct loan programs, States with UST loan guarantee programs must
provide staff to oversee fund disbursements, establish a total annual limit on loan
disbursements, and estimate default rates. And, to ensure that private lenders make
responsible loans, the State may not want to guarantee more than 80 percent of each
UST loan. In case of default, private lenders would incur a loss of 20 percent of the
loan amount. Thus, private lenders would have an incentive to ensure that UST owners
and operators have the ability to repay loans.
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6-5
Grant Programs
A State may make direct grants to UST owners or operators to pay for upgrading
or replacing USTs to meet technical standards or insurance preconditions. For example,
the State of Vermont has established an Underground Storage Tank Incentive Program,
under which small municipalities or owners of small retail gasoline outlets may apply for
grants of up to $5,000.
Grant programs must set limits on the individual and total annual amount of grants
disbursed. In addition, States may wish to target grants to high-priority USTs, such as
those owned by small businesses or over 20 years old. Finally, States must establish
procedures to review grant applications and mechanisms to ensure that grant funds are
used for their intended purposes.
Length of Program
For UST owners and operators, the most important time to have a loan program
available is in the early, phase-in period of Federal and State UST program
requirements (e.g., the first ten years after the technical standards are effective). In
time, UST owners and operators must upgrade or replace old USTs in order to comply
with such requirements. Thus, most of the technical preconditions established by
financial assurance providers will have been met, in most cases, by UST owners and
operators.
As a result, States could stop making new loans or grants to owners and operators
after the date on which all UST owners and operators must comply with these technical
design and operating standards. Alternatively, if States found that certain owners and
operators continued to need financial assistance to upgrade or replace tanks, UST loan
or grant programs could be continued, but with lower total disbursements.
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SECTION II
INFORMATION SOURCES
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7. INFORMATION SOURCES
WHERE CAN YOU GET MORE INFORMATION?
Current information on State UST programs may be obtained directly from States
(see Appendix C for a list of State contacts). In addition, you may obtain information
on Federal UST requirements by contacting the EPA Hotline at 800-424-9346 or
contacting one of the Regional UST Program Managers listed in Exhibit 7-1.
STATE UST FINANCIAL RESPONSIBILITY LAWS
Several States have already initiated activities to address financial responsibility,
including:
• Authorizing State agencies to promulgate UST financial
responsibility regulations;
• Establishing explicit financial responsibility requirements in State
law; and
• Establishing UST corrective action and third-party compensation
programs.
These statutes, regulations, and programs may be useful models for States seeking to
establish UST financial responsibility programs. In addition, several States are currently
considering enactment or promulgation of UST financial responsibility requirements.
The description of several State UST financial responsibility requirements below
illustrates the range of approaches a State may take in establishing State funds and in
mandating financial responsibility. The list, found in Exhibit 7-2, is only a sample of
State statutes and proposed laws and is not a current or comprehensive list of all State
UST programs. It is based on a review of selected State environmental statutes,
compiled in the BNA Environment Reporter in September 1988, and proposed State
financial responsibility legislation. You may wish to contact State officials for details
on particular laws (see Appendix C for addresses).
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7-2
EXHIBIT 7-1
EPA Regional UST Program Managers
San Francisco
William Torrey
U.S. EPA, Region I
Kennedy Bldg., Room 2203
Mail Code: HPU-CAN2
Boston, MA 02203
617-573-9604
Thomas Taccone
U.S. EPA, Region II
Mail Code: 2AWM-HWP8
26 Federal Plaza, Rm. 906
New York, NY 10278
212-264-1369
Wayne Naylor
U.S. EPA, Region III
841 Chestnut Street
Mail Code: 3-HW-31
Philadelphia, PA 19107
215-597-7354
Mike Williams
US EPA, Region IV
345 Courtland St., N.E.
Atlanta, GA 30365
404-387-3866
Gerald Phillips
U.S. EPA, Region V
230 South Dearborn St.
Mail Code: SHS-JCK-13
Chicago, IL 60604
312-886-6159
William Rhea
U.S. EPA, Region VI
1445 Ross Avenue
Mail Code: 6H-A
Dallas, TX 75202-2733
214-655-6755
Chet Mclaughlin
U.S. EPA, Region VII
726 Minnesota Avenue
Kansas City, KS 66101
913-236-2852
Debbie Ehlert
U.S. EPA, Region VIII
999 18th St., Suite 500
Mail Code: 8-HWM-WM
Denver, CO 80202-2405
303-293-1489
Eric Yunker
U.S. EPA, Region IX
215 Fremont Street
Mail Code: T-3-I
San Francisco, CA 94105
415-974-8071
Joan Cabreza
U.S. EPA, Region X
1200 6th Avenue
Mail Code: HW-112
Seattle, WA 98101
206-442-0344
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EXHIBIT 7-2
State/Fund Title
STATE FUND OR OTHER STATE ASSURANCE PROGRAMS
COVERING PETROLEUM RELEASES
(as of September 1988)
Eligibility/Description
Revenue Source
Coverage For
Corrective Action Third-Party Liability
Alabama
Groundwater Protection Trust
Fund
California
State Underground Tank Insurance
Fund [PROPOSED]
Storage Tank Cleanup Fund
[PROPOSED!
Colorado
Underground Storage Tank Fund
[PROPOSED]
Delaware
Leaking Underground Petroleum
Storage Tank Response Fund
Establishes a $10 million fund to provide
for the cleanup of LUSTs during a two-year
grace period, after which the State will set
financial responsibility requirements with
an owner/operator responsible for a maximum
of $100,000 for corrective action (CA) and
$300,000 for third-party compensation
coverage (with a $500,000 per occurrence
limit). Also provides for an insurance pool
for those unable to secure cleanup and/or
liability insurance.
Establishes a board of directors that will
determine the eligibility requirements and
the amounts of coverage for CA and third-
party liability. Authorizes the board to
act as a reinsurer as well.
Owners and operators must file claims for
reimbursement of covered costs from the
fund.
The bill would allow the State insurance
commissioner to establish a program to
assist owners and operators in complying
with the financial responsibility
requirements.
Nonlapsing revolving fund; Covers remedial
cleanup costs after a $2,500 deductible if
LUSTs are reported by December 1988. After
that date, the trust fund covers cleanup
costs up to $1 million after a $100,000
deductible. Establishes a $100,000
environmental liability limit for owners and
operators and a $300,000 limit for third-
party claims.
1. Motor fuels fee
1. State appropriations
2. Premiums
3. Interest income on the fund
4. Cost recovery
5. Revenue bonds
1. Fees
2. Interest income on the fund
3. State appropriations
4. Cost recovery
1.
2.
3.
4.
5.
6.
7.
I.
2.
3.
4.
5.
Registration fees
Civil penalties
Certification fees
Gifts
Reimbursements
State appropriations
Interest income on the
fund
Cost recovery from the owner/operator
Expenses, costs, and judgments recovered
pursuant to the Act
Interest income from fund
Reimbursements under Federal law
Tank registration fees
Yes
During the two-year
grace period, all CA
costs are covered;
subsequently, costs
will be covered
according to the yet-
to-be established
financial
responsibility
requirements.
Yes
To be determined.
Yes
Covers costs of CA
from $100,000 to
$1 million per
occurrence.
To be determined.
Yes
Covers all third party
claims over $300,000
with a per occurrence
limit of $500,000.
Yes
To be determined.
No
To be determined.
Yes
Remedial costs over
$2,500 for LUSTs
reported by 12/88.
After that date,
$100,000 to $1 million
per occurrence per
facility.
Yes
$300,000 to $1 million
per occurrence per
facility.
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EXHIBIT 7-2 (continued)
State/Fund Title
STATE FOND OR OTHER STATE ASSURANCE PROGRAMS
COVERING PETROLEUM RELEASES
(as of September 1988)
Eligibility/Description
Revenue Source
Coverage For
Corrective Action Third-Party Liability
Florida
Inland Protection Trust Fund
Early Detection Incentive
Program (part of the Inland
Protection Trust Fund)
Set up to allow the Dept. of Natural
Resources to respond without delay to
incidents of inland petroleum contamination;
nonlapsing, revolving fund.
Amnesty period set up from 7/1/86 to 10/1/88
during which the State will clean up all
reported leaks meeting certain criteria.
1. Tank registration and renewal fees
2. Excise tax on petroleum products
3. Penalties
4. Loan of five million dollars from the
Florida Coastal Protection Trust Fund
5. Cost recovery
6. Interest income from the fund
See above
Yes
Funds for State-
sponsored CA only.
Yes
No defined limit;
reimbursement at
"reasonable rates for
allowable costs."
No
No
Petroleum Liability Insurance
Program
Georgia
UST Environmental Corrective
Action Trust Fund
Illinois
Underground Storage Tank Fund
Indiana
Underground Petroleum Storage
Tank Trust Fund / Underground
Petroleum Storage Tank Excess
Liability Fund
Provides $1 million third-party liability
insurance and $1 million restoration
insurance to qualified tank owner operators.
Dept. of Natural Resources Board establishes
criteria for reimbursing tank
owner/operators for corrective actions.
Tank replacement and retrofit are not
eligible costs.
Only available to tank owners/operators who
have registered their tanks and paid an
annual fee of $100. Funds are available for
cleanup where the owner/operator refuses to
comply, cannot be found, or there is an
emergency.
The Trust Fund is designed for use by the
Dept. of Environmental Management for costs
incurred by the State for CA. The Excess
Liability Fund may be used by owners and
operators for CA costs between $100,000 and
$1 million. Includes a study for future
funding needs and the establishment of a
risk retention group.
1. Tank registration and renewal fees for
restoration coverage
2. Excise tax on petroleum products for
restoration coverage
3. Premium for third-party liability
1. Tank fees
1. Annual $100 fee from UST owners
2. Cost recovery
1. Annual registration fees
No
Yes
CXmer/operator pays
first $10,000 and then
after cleanup submits
eligible CA costs for
reimbursement.
Yes
Yes
Covers CA costs
$100,000 to
$1 million.
No
from
Yes
Covers CA costs
between $100,000 and
$1 million.
No
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EXHIBIT 7-2 (continued)
State/Fund Title
STATE FOND OR OTHER STATE ASSURANCE PROGRAMS
COVERING PETROLEUM RELEASES
(as of September 1988)
Eligibility/Description
Revenue Source
Coverage For
Corrective Action Third-Party Liability
Iowa
Comprehensive Petroleum
Underground Storage Tank Fund
[PROPOSED]
Louisiana
Environmental Programs Trust
Fund / Underground Storage Tank
Trust Fund
Coastal and Inland Surface Oil
Clean-up Fund (CISOCF)
Massachusetts
Underground Storage Tank
Petroleum Cleanup Fund
[PROPOSED]
Minnesota
Petroleum Tank Release Cleanup
Fund
Establishes a "deductible" or minimum
financial responsibility requirement for
owners and operators of $20,000 for CA and
third-party liability costs. An owner or
operator may apply to the State for coverage
above the deductible up to $1 million per
occurrence. Also allows an owner or
operator to apply for full coverage by the
fund under specified conditions. The
minimum fund amount is $5 million.
The fund is set up to defray the cost of the
State UST program, including State-initiated
CA; also provides matching funds for Federal
UST grant money.
Nonlapsing, revolving fund; Fund total is
limited to $4,500,000.
Funds will be provided at the discretion of
the State for reimbursement of CA costs over
$5,000 up to $1 million, including third-
party claims. Eligibility is confined to
those owners and operators who are in
compliance with the State UST regulations.
Provides authority to the Pollution Control
Agency to take or compel CA. Available to
owners and operators who have taken
corrective action in response to a release
reported on or after 6/4/87. Provides for
reimbursement of 755£ of eligible CA costs
greater than $10,000 and less than $100,000.
UST owner or operator must be in compliance
with all applicable State and Federal laws
at the time of the release.
1. Risk-based premiums
2. Tank fees
3. Cost recovery and penalties
4. Interest income from the fund
5. Gifts, grants (including Federal grants),
and appropriations
1. Registration fees
2. Annual monitoring and maintenance fees
1. License fees
2. Funds loaned from the Ground Water Oil
Clean-up Fund
3. Penalties
4. Interest income on funds invested
5. Cost recovery
6. Federal matching funds
7. Borrowing of funds by and between CISOCF
1. Petroleum fee (suspended when fund
balance is over $30 million; reinstated
at a balance of $10 million)
2. Interest income on the fund
1. Cost recovery from responsible parties
2. Civil penalties
3. Certification fees
4. Gifts, grants other than Federal grants,
reimbursements, or appropriations from
any source intended to be used for the
purposes of the fund
5. Interest income from fund
6. Petroleum tank release cleanup fee (only
if the fund balance falls below
$1 million)
Yes
Upon application to
the State, an owner or
operator may qualify
for either full
coverage or meet a
$20,000 "deductible"
up to $1 million per
occurrence.
Yes
Funds for State-
sponsored CA only.
Yes
Funds for State-
sponsored CA only.
Yes
Covers CA costs
between $5,000 and
$1 million.
Yes
Reimbursement for 75%
of CA costs greater
than $10,000 and less
than $100,000.
Yes
Upon application to
the State, an owner or
operator may qualify
for either full
coverage or meet a
$20,000 "deductible"
up to $1 million per
occurrence.
No
Yes
No defined limit on
the level of coverage;
six month limitation
on filing a claim
after an occurrence.
Yes
Covers third-party
costs between $5,000
and $1 million.
No
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EXHIBIT 7-2 (continued)
State/Fund Title
STATE FOND OR OTHER STATE ASSURANCE PROGRAMS
COVERING PETROLEUM RELEASES
(as of September 1988)
Eligibility/Description
Revenue Source
Coverage For
Corrective Action Third-Party Liability
Mississippi
Groundwater Protection Trust
Fund
New Hampshire
Oil Discharge and Disposal
Cleanup Fund
New Jersey
Spill Compensation Fund
A revolving fund for the investigation and
assessment of contamination sites, restora-
tion and replacement of potable water
supplies, and rehabilitation of contamina-
tion sites. The owner or operator is liable
for the costs if he or she is not in
"substantial compliance" on the date of
discharge. When the balance of the fund
reaches $6 million, the funding fee will
abate until the balance falls below
$4 million, at which point the fee is
reimposed. Establishes a two-year grace
period from the date of enactment (July 1,
1988), during which all CA costs are covered
under specified conditions.
Provides partial reimbursement to owners and
operators of USIs (including home heating
fuel tanks) with a capacity equal to or
greater than 1,100 gallons and who are in
compliance with the regulatory requirements.
Reimbursement is provided for CA and third-
party liability costs according to the
number of facilities owned by the owner or
operator. At $5 million, the fee abates
until the fund drops below $2.5 million.
Transfer and transport fee and cleanup fund
will lapse on January 1, 1994.
Money available to the NJDEP to pay for
cleanups and indemnify its contractors in
the event they cannot obtain insurance,
indemnification by the DEP expires 1/1/88;
also allows preventive measures by the DEP;
Nonlapsing, revolving fund.
Environmental protection fee on all motor
fuel distributor sales and deliveries
Interest income on the fund
Federal grants
Tank regulatory fee
Cost recovery from owners not in
substantial compliance on the date the
release is reported
Per gallon fee on oil and oil product
transfer or transport within or into the
state
Per barrel license fee
Spill Compensation and Control Tax
Penalties
Cost recovery
Automatic liens against the property of
the discharger
Interest received on the fund
Federal government securities and
interest
7. State appropriation
Yes
Reimbursement upon
application--no
$1,000,000 limit
during the grace
period. After the
two-year grace period,
the State will
establish minimum
financial responsibil-
ity requirements for
CA not exceeding
$100,000 per
occurrence.
Yes
Owners and operators
of one facility are
responsible for the
initial $5,000 of CA
costs; two to nineteen
facilities, the
initial $20,000;
twenty or more, the
initial $30,000;
coverage provided up
to $1 million.
Not for the owner or
operator; only DEP
initiated actions and
reimbursement for
third-party cleanups
(including municipal-
ity cleanup where the
DEP has approved the
plans).
Yes
$1,000,000 per
occurrence limit.
After the two-year
grace period, the
State will establish
minimum financial
responsibility
requirements for
third-party liability
not exceeding $300,000
per occurrence. (The
State will cover
claims up to
$700,000).
Yes
Owners and operators
of one facility are
responsible for the
initial $5,000 of CA
costs; two to nineteen
facilities the initial
$20,000; twenty or
more the initial
$30,000; coverage up
to $1 million.
Yes
No limitation on the
level of coverage;
also indemnification
for contractors by the
DEP was provided
through 1/1/88.
ON
-------
EXHIBIT 7-2 (continued)
State/Fund Title
STATE FUND OR OTHER STATE ASSURANCE PROGRAMS
COVERING PETROLEUM RELEASES
(as of September 1988)
Eligibility/Description
Revenue Source
Coverage For
Corrective Action Third-Party Liability
New Mexico
Environmental Impairment Cleanup
Fund
1. Gasoline and special fuels surcharge tax
2. Cost recovery
New York
Environmental Protection
Spill Compensation Fund
and
Oregon
Leaking Underground Storage Tank
Cleanup Fund
Underground Storage Tank
Insurance Fund
South Carolina
State Underground Petroleum
Environmental Response Bank
Account (SUPERB)
South Dakota
Petroleum Release Compensation
Fund
License fees
Surcharge on license fees
Penalties
Cost recovery
Interest received on the fund
Reimbursements
Provides reimbursement of 50% of owner/
operator CA costs over $150,000 up to
$750,000, and reimbursement for 100% of the
costs from $750,000 to $1 million. The
balance of the fund is set to range from
$5 million to $2 million. Fund covers all
State-registered USTs.
Nonlapsing, revolving fund; claims against
the fund have to be filed within three years
of the date of discovery of damage and
within ten years of the date of the incident
which caused the damage. There is no limit
on the amount of awards.
Provides a source of funds for
State-initiated CA; also matching funds for
Federal CA under the Solid Waste Disposal
Act Amendments of 1980.
Provides the authority to establish a
fee-supported fund covering the financial
assurance requirements for owners and
operators.
Fun will reimburse owner/operator for
cleanup expenditures due to early detection
of releases from 12/31/87 to 12/31/89.
After this grace period, the fund will
reimburse from $100,000 to $1 million as
long as funds are available.
A $5 million revolving fund created to cover 1. Tank inspection fee
1. Cost recovery
2. Penalties, fines, and damages recovered
1. Annual Financial Responsibility (FR) fee
(to be determined) levied on owners and
operators
1. Registration fee on regulated tanks
2. Interest income on the fund
the costs of administering the petroleum
release program, to reimburse tank
owner/operators for corrective action, and
promote research and development efforts
concerning cleanups.
2. Cost recovery
3. Interest income on the fund
4. Gifts, grants
5. One-time interagency allocation
Yes
Covers 50% of CA costs
from $150,000 to
$750,000, and 100% of
CA costs from $750,000
to $1 million.
Yes
Covers State-initiated
CA; the discharger and
the fund are liable
for all cleanup and
removal costs and all
direct and indirect
damages.
Yes
Funds for State-
sponsored CA only.
Yes
Set according to the
FR requirements.
Yes
As long as funds are
available
Yes
Covers costs of CA
from $10,000 to
$90,000
No
Yes
No limit on the amount
of awards.
No
Yes
Set according to the
FR requirements.
No
No
-------
State/Fund Title
EXHIBIT 7-2 (continued)
STATE FOND OR OTHER STATE ASSURANCE PROGRAMS
COVERING PETROLEUM RELEASES
(as of September 1988)
Eligibility/Description
Revenue Source
Coverage For
Corrective Action Third-Party Liability
1. Fees
2. Civil penalties and damages
3. Interest income from the fund
4. State appropriations
Vermont
Petroleum Cleanup Fund
Tennessee Nonlapsing, revolving fund with a minimum
Petroleum Underground Storage balance of $2 million and a maximum balance
Tank Fund of $5 million. After the first year the Act
is in effect, the CA coverage will be set at
a level between $50,000 and $100,000 by the
State. Likewise, the third-party liability
coverage will be set between $150,000 and
$300,000 after the first year.
The fund provides assistance to uninsured
owners and operators in meeting the State
financial responsibility requirements. It
also provides a source of funds for State-
initiated CA in emergencies and other
situations where there is no owner or
operator found, or he or she cannot or will
not take CA. In these cases, the fund
allows for cost recovery where appropriate.
The fund may be used to cover any cost in
setting up a risk retention group that is in
excess of "reasonable" contributions by the
participants.
Environmental Contingency Fund Authorizes the Secretary of the VT Agency of 1. Permit filing fees
Licensing fees
Interest income from the fund
Reimbursement and cost recovery
General fund appropriations
Risk Retention Pool
Environmental Conservation (AEC) to take CA
in cases where "the discharging party is
unknown, cannot be contacted, is unwilling
to take action or does not take timely
action."
Authorizes owners and operators of USTs to
set up insurance pools with the Banking and
Insurance Commissioner's approval.
2. Hazardous waste generator tax
3. Cost recovery
4. Federal matching funds
1. Contributions from pool members
Yes
100X of CA costs over
$75,000 up to $1
million per
occurrence.
Yes
Covers CA costs
between $100,000 and
$1 million.
Yes
Covers all claims in
excess of $150,000 up
to $1 million per
occurrence.
Yes
Covers third-party
compensation costs
between $300,000 and
$1 million.
Yes
Funds for State-
sponsored CA only;
level of coverage not
defined except for
"individual non-
emergency situations"
where the limit is
$50,000/situation.
Determined on a case-
by-case basis.
No
Determined on a case-
by-case basis.
-------
EXHIBIT 7-2 (concluded)
State/Fund Title
STATE FOND OR OTHER STATE ASSURANCE PROGRAMS
COVERING PETROLEUM RELEASES
(as of September 1988)
Eligibility/Description
Revenue Source
Coverage For
Corrective Action Third-Party Liability
Virginia
Underground Petroleum Storage
Tank Fund
Wyoming
Environmental Pollution
Mitigation Account [PROPOSED]
The State will adopt financial responsibil- 1.
ity requirements for owner and operators of 2.
not less than $100,000 for CA and $300,000 3.
for third-party liability. The fund also is 4.
designed to assist in the administration of 5.
the State regulatory program for USTs and
provides a source of funds for State-
initiated CA and matching funds in
accordance with the Water Resources
Development Act of 1986 (P.L. 99-662). The
fund contains $5 million for 1988.
The fund provides for prompt State response 1.
to UST releases or threats of releases, 2.
administrative costs, and reimbursement of 3.
responsible persons according to certain A.
requirements. The fund does not allow for
reimbursements that exceed the amount of
money in the fund. Eligible responsible
parties may be reimbursed for all CA costs
in excess of $50,000 and third-party
liability costs in excess of $100,000.
Expenses, costs, and judgments recovered
Federal reimbursements
Interest income from fund
State appropriation
Cost recovery
Penalties and judgments
Reimbursements
Registration fees
Cost recovery
Yes
$100,000 to $1 million
per facility.
Yes
Provides reimbursement
of CA costs in excess
of $50,000 for
eligible responsible
persons.
Yes
$300,000 to $1 million
per occurrence.
Yes
Provides reimbursement
of third-party
liability costs in
excess of $100,000 for
eligible responsible
persons.
-------
SECTION III
APPENDICES
-------
APPENDIX A
SUMMARY OF FEDERAL FINANCIAL RESPONSIBILITY REQUIREMENTS
WHAT FEDERAL LAW REQUIRES
Subtitle I of the Resource Conservation and Recovery Act of 1976 (RCRA), as
amended by the Hazardous and Solid Waste Amendments of 1984 (HSWA), mandates that
EPA promulgate release detection, prevention, and corrective action regulations for
underground storage tanks (USTs)1 containing regulated substances, including petroleum2
and hazardous substances.3
In 1986, Congress amended Subtitle I of RCRA with the passage of the Superfund
Amendments and Reauthorization Act (SARA). SARA required EPA to establish financial
responsibility requirements for the costs of taking corrective action and compensating
third parties for bodily injury and property damage caused by accidental releases of
petroleum and hazardous substances. The statute allows UST owners or operators to
satisfy the financial responsibility requirements using one or a combination of
mechanisms, including insurance, guarantees, surety bonds, letters of credit, qualification
as a self-insurer, or other methods deemed acceptable by the EPA Administrator. The
statute establishes a minimum level of coverage at $1 million per occurrence for USTs
at facilities engaged in petroleum refining, distribution, or marketing and an appropriate
annual aggregate, but permits the Administrator to set lower per occurrence limits for
all other USTs.
If EPA makes a determination that financial assurance is not generally available
for a particular class or category of USTs, it may suspend enforcement of the financial
responsibility requirements for 180 days. To obtain a suspension, the class must
demonstrate that a risk retention group is being formed or a State in which the class
exists must be attempting to establish a State fund. The initial suspension period may
not exceed 180 days. EPA may grant subsequent 180-day suspensions if significant
progress has been made in forming a risk retention group, or if the State in which the
class is located is unwilling or unable to establish a fund and formation of a risk
retention group is not possible.
SARA also established the Leaking UST Trust Fund, a $500 million fund to pay for
corrective action, including cleanup, enforcement, and cost recovery actions, for
1 Under Section 9001(1) of Subtitle I, an UST is defined as any one or
combination of tanks (including pipes connected to the tank or tanks) that is used to
contain an accumulation of regulated substances, and the volume of which is at least 10
percent or more beneath the surface of the ground. This section excludes certain USTs,
such as farm or residential tanks of 1,100 gallons or less, septic tanks, pipeline facilities,
and surface impoundments.
2 Under Section 9001(2), petroleum is defined as "petroleum including crude oil or
any fraction thereof which is liquid at standard conditions of temperature and pressure
(60 degrees Fahrenheit and 14.7 pounds per square inch absolute)."
3 Under Section 9001(2), hazardous substances are defined as "an accumulation of
hazardous substances defined in section 101(14) of CERCLA ..., other than any substance
regulated as a hazardous waste under Subtitle C of RCRA."
-------
A-2
petroleum releases. The Trust Fund may not be used to compensate third parties for
damages or to clean up hazardous substance releases.
-------
APPENDIX B
GLOSSARY OF FINANCIAL ASSURANCE TERMS
Accidental Release
Accidental release means any sudden or nonsudden release of petroleum from an
underground storage tank that results in a need for corrective action and/or
compensation for bodily injury, or property damage neither expected nor intended by the
tank owner or operator.
Annual Aggregate
Annual aggregate is the maximum liability protection afforded by an insurance
policy in any given year. For example, if insurance provides liability coverage of $1
million per occurrence with an annual aggregate of $5 million, the insured will be
covered for each occurrence, up to $1 million, but no more than $5 million a year.
Corrective Action Costs
Corrective action costs are costs incurred while cleaning up a petroleum release
from an underground storage tank.
Financial Assurance Mechanism
A financial assurance mechanism is a financial instrument, such as a State fund
program, guarantee, letter of credit', surety bond, or insurance, that is available to an
UST owner or operator to demonstrate financial responsibility.
Financial Responsibility
Financial responsibility refers to the requirement under RCRA Subtitle I whereby
firms or other entities engaged in environmentally dangerous activities must provide
funds in advance for potential damage to the environment or third parties.
Guarantee
A guarantee is a contract in which the guarantor undertakes to answer for the
payment of another's debt or the performance of another's duty, liability, or obligation.
A guarantee is one of the financial assurance mechanisms that can be used by UST
owners or operators to satisfy the RCRA Subtitle I financial responsibility requirements.
Guarantor
A guarantor is the government entity, person, or company who provides a
guarantee.
Insurance Pool
An insurance pool is a State insurance program or an association established for
the purpose of sharing certain types of loss exposures, such as on environmental
impairment liability policies, on an agreed-upon basis. Members of the pool may share
the limits of liability by specified percentages or dollar amounts.
-------
B-2
Letter of Credit
A letter of credit is a mechanism by which the credit of one party, such as a
bank, is extended on behalf of a second party, called the account party, to a third
party, the beneficiary. The issuer allows the beneficiary to draw funds upon the
presentation of certain documents specified in the letter of- credit. A letter of credit is
one of the financial assurance mechanisms that can be used by UST owners or operators
to satisfy the RCRA Subtitle I financial responsibility requirements.
Occurrence
Occurrence is an accident, including continuous or repeated exposure to conditions,
which results in a release from an underground storage tank.
Premium
A premium is the price paid for an insurance contract or policy.
Risk Retention Group
Under the Risk Retention Act of 1986, as amended, firms in the same industry may
jointly establish a captive insurance company that, in turn, offers members
environmental liability insurance at favorable rates. A captive insurer is an insurance
company established by a company or group of companies to ensure their own risks or
risks common to the group. Risk retention groups need only to be chartered in one
State in order to offer insurance in any State, unlike traditional insurance companies.
Self-Insurance
Self-insurance means the financing of losses from within the financial structure of
a company or other entity, rather than transferring losses to an insurance company
through purchase of liability insurance. If an UST owner or operator can pass a
financial test, self-insurance is one of the financial assurance mechanisms that can be
used to satisfy the RCRA Subtitle I financial responsibility requirements.
Surety Bonds
A surety bond is a contract providing for monetary compensation or performance
should there be a failure to perform any specific act within a specific period. A surety
bond is one of the financial assurance mechanisms that can be used by UST owners or
operators to satisfy the RCRA Subtitle I financial responsibility requirements.
Third-Party Compensation Costs
Third-party compensation costs are costs incurred to pay any third party for bodily
injury or property damage caused by a petroleum release. A third party is a person not
party to a financial assurance contract between provider and insured, but who may make
claims under the contract. For example, a person whose well was contaminated by an
UST petroleum releases may bring an action against the UST owner or operator.
-------
B-3
Underground Storage Tank
RCRA Subtitle I, section 9001(1) defines an underground storage tank as "any one
or combination of tanks (including underground pipes connected thereto) which is used
to contain an accumulation of regulated substances, and the volume of which (including
the volume of the underground pipes connected thereto) is 10 percent or more beneath
the surface of the ground. Such term does not include any-
(A) farm or residential tank of 1,100 gallons or less capacity used for storing
motor fuel for noncommercial purposes,
(B) tank used for storing heating oil for consumptive use on the premises where
stored,
(C) septic tank,
(D) pipeline facility (including gathering lines) regulated under--
(i) the Natural Gas Pipeline Safety Act of 1968 (49 U.S.C. App. 1671, et
seq.),
(ii) the Hazardous Liquid Pipeline Safety Act of 1979 (49 U.S.C. App. 2001,
et seq.), or
(iii) which is an intrastate pipeline facility regulated under State laws
comparable to the provisions of law referred to in clause (i) or (ii) of
this subparagraph.
(E) surface impoundment, pit, pond or lagoon,
(F) storm water or waste water collection system,
(G) flow-through process tank,
(H) liquid trap or associated gathering lines directly related to oil or gas
production and gathering operations, or
(I) storage tank situated in an underground area (such as a basement, cellar,
mineworking, drift, shaft or tunnel) if the storage tank is situated upon or
above the surface of the floor."
Underwriting
Underwriting is the practice of insurance. Underwriters agree to become
answerable for a designated loss in return for receiving a premium. Underwriting also
is the process of rating the acceptability of risks for insurance policies.
Source: "Glossary of Terms Related to Financial Assurance," prepared for the Office
of Solid Waste, Environmental Protection Agency, by ICF Incorporated, July
21, 1986.
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APPENDIX C
LIST OF STATE CONTACTS
Alabama
Contact:
Title/Position:
Phone Number:
Address:
Sonja Massey
Ground-Water Section Chief
(205) 271-7832
Alabama Department of Environmental Management
Ground Water Section/Water Division
1751 Federal Drive
Montgomery, Alabama 36130
Alaska
Contact:
Title/Position:
Phone Number:
Address:
Stan Osborn
Coordinator
(907) 465-2653
Department of Environmental Conservation
Pouch O
Juneau, Alaska 99811
Arizona
Contact:
Title/Position:
Phone Number:
Address:
Gerald Teletzke
Director, Arizona Department of Environmental Quality
(602) 257-2300
Arizona Department of Environmental Quality
Environmental Health Services
2005 North Central
Phoenix, Arizona 85004
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C-2
Arkansas
Contact:
Title/Position:
Phone Number:
Address:
Ed Dunn
Coordinator
(501) 562-7444
Arkansas Department of Pollution
Control and Ecology
P.O. Box 9583
Little Rock, Arkansas 72219
California
Contact:
Title/Position:
Phone Number:
Address:
James W. Baetge
Coordinator
(916) 445-9552
State Water Resources Control Board
P.O. Box 100
Sacramento, California 95801
Colorado
Contact:
Title/Position:
Phone Number:
Address:
Scott Winters
Coordinator
(303) 331-4864
Colorado Department of Health
Waste Management Division
Underground Tank Program
4210 East llth Avenue
Denver, Colorado 80220
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C-3
Connecticut
Contact:
Title/Position:
Phone Number:
Address:
Scott Deshefy
Program Manager, UST/LUST
(203) 566-4630
Hazardous Materials Management Unit
Department of Environmental Protection
State Office Building
165 Capitol Avenue
Hartford, Connecticut 06106
Delaware
Contact:
Title/Position:
Phone Number:
Address:
Tom Crosby
UST Coordinator
(302) 736-5744
Division of Air and Waste Management
Department of Natural Resources and Environmental Control
P.O. Box 1401
89 Kings Highway
Dover, Delaware 19903
District of Columbia
Contact: Shawn Norton
Title/Position: UST Coordinator
Phone Number:
Address:
(202) 783-3207
Department of Consumer and Regulatory Affairs
Pesticides and Hazardous Waste Management Branch
Room 114
5010 Overlook Avenue, S.W.
Washington, D.C. 20032
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C-4
Florida
Contact:
Title/Position:
Phone Number:
Address:
Marshall Mott-Smith
Contact
(904) 488-0300
Florida Department of Environmental Regulation
Solid Waste Section
Twin Towers Office Building
2600 Blair Stone Road
Tallahassee, Florida 32399
Georgia (Georgia does not have a UST/LUST program)
Contact: Randy Williams
Title/Position:
(404) 656-7404
Phone Number:
Address:
Georgia Environmental Protection Division
3420 Norman Berry Drive
Hapeville, Georgia 30334
Hawaii
Contact:
Title/Position:
Phone Number:
Address:
Denis Lau
Coordinator
(808) 548-8873
Hazardous Waste Program
645 Halekauwila Street
Honolulu, Hawaii 96813
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C-5
Idaho
Contact:
Title/Position:
Phone Number:
Address:
Rick Jarvis
Coordinator
(208) 334-5847
Water Quality Bureau
Idaho Department of Health and Welfare
Division of Environment
450 West State Street
Boise, Idaho 83720
Illinois
Contact:
Title/Position:
Phone Number:
Address:
E. William Radlinski, Lead Agency
Manager, UST/LUST Coordinator
(217) 782-6760
Illinois EPA
Division of Land Pollution Control
Environmental Protection Agency
2200 Churchill Road, Room A-104
Springfield, Illinois 62706
Indiana
Contact:
Title/Position:
Phone Number:
Address:
Jacqueline Strecker
Coordinator
(317) 243-5055
Underground Storage Tank Program
Office of Environmental Response
Indiana Department of Environmental Management
105 South Meridian Street
Indianapolis, Indiana 46225
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C-6
Iowa
Contact:
Title/Position:
Phone Number:
Address:
Keith W. Bridson
UST/LUST Coordinator
(515) 281-8135
Iowa Department of Water, Air, and Waste Management
900 East Grand
Des Moines, Iowa 50319
Kansas
Contact:
Title/Position:
Phone Number:
Address:
Chuck Linn
UST Coordinator
(913) 286-1594
Kansas Department of Health and Environment
Forbes Field, Building 740
Topeka, Kansas 66620
Kentucky
Contact:
Title/Position:
Phone Number:
Address:
Jim Jarman
Chief, UST Section
(502) 564-6716
Department for Environmental Protection
Hazardous Waste Branch
Fort Boone Plaza, Building #2
18 Reilly Road
Frankfort, Kentucky 40601
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C-7
Louisiana
Contact:
Title/Position:
Phone Number:
Address:
Joan Albripton
UST Program Coordinator
(504) 342-1265
Louisiana Department of Environmental Quality
P.O. Box 44066
Baton Rouge, Louisiana 70804
Maine
Contact:
Title/Position:
Phone Number:
Address:
George Seel
UST Coordinator
(207) 289-2651
Underground Tanks Program
Bureau of Oil and Hazardous Material Control
Department of Environmental Protection
State House - Station 17
Augusta, Maine 04333
Maryland
Contact:
Title/Position:
Phone Number:
Address:
Bernie Bigham
Coordinator
(301) 225-5649
Department of the Environment
201 West Preston Street
Baltimore, Maryland 21201
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C-8
Massachusetts
Contact:
Title/Position:
Phone Number:
Address:
William McCabe
Department Commissioner
(617) 566-4500
UST Registry, Department of Public Safety
1010 Commonwealth Avenue
Boston, Massachusetts 02215
Michigan
Contact:
Title/Position:
Phone Number:
Address:
R. Dowe Parsons
UST Coordinator
(517) 373-2794
Michigan Department of Natural Resources
Waste Management Division
P.O. Box 30028
Lansing, Michigan 48909
Minnesota
Contact:
Title/Position:
Phone Number:
Address:
John Hoick
UST Coordinator
(612) 296-7743
Underground Storage Tank Program
Division of Solid and Hazardous Wastes
Minnesota Pollution Control Agency
520 West Lafayette Road
St. Paul, Minnesota 55155
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C-9
Mississippi
Contact:
Title/Position:
Phone Number:
Address:
Walter Huff
UST Coordinator
(601) 961-5171
Department of Natural Resources
Bureau of Pollution Control
Underground Storage Tank Section
P.O. Box 10385
Jackson, Mississippi 39209
Missouri
Contact:
Title/Position:
Phone Number:
Address:
Gordon Ackley
UST Coordinator
(314) 751-7428
Missouri Department of Natural Resources
P.O. Box 176
Jefferson City, Missouri 65102
Montana
Contact:
Title/Position:
Phone Number:
Address:
Larry Mitchell
Coordinator
(406) 444-2821
Solid and Hazardous Waste Bureau
Department of Health and Environmental Science
Cogswell Building, Room B-201
Helena, Montana 59620
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C-10
Nebraska
Contact:
Title/Position:
Phone Number:
Address:
Jon Gross
Fire Marshall
(402) 471-9465
Nebraska State Fire Marshal
P.O. Box 94677
Lincoln, Nebraska 68509-4677
Nevada
Contact:
Title/Position:
Phone Number:
Address:
Allen Biaggi
UST Coordinator
(702) 885-5872
Division of Environmental Protection
Department of Conservation and Natural Resources
Capitol Complex, 201 South Fall Street
Carson City, Nevada 89710
New Hampshire
Contact:
Title/Position:
Phone Number:
Address:
Phil Lavoie
Coordinator/Notification
(603) 271-3503
New Hampshire Department of Environmental Services
Water Supply and Pollution Control Division
Hazen Drive
P.O. Box 95
Concord, New Hampshire 03301
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C-ll
New Jersey
Contact:
Title/Position:
Phone Number:
Address:
Kenneth Goldstein
(609) 984-3156
Underground Storage Tank Coordinator
Department of Environmental Protection
Division of Water Resources (CN-029)
Trenton, New Jersey 08625
New Mexico
Contact:
Title/Position:
Phone Number:
Address:
Karl Souder
UST Manager
(505) 827-2894
New Mexico Environmental Improvement Division
Groundwater/Hazardous Waste Bureau
P.O. Box 968
Santa Fe, New Mexico 87504
New York
Contact:
Title/Position:
Phone Number:
Address:
Paul Sausville
(518) 457-4351
Bulk Storage Section
Division of Water
Department of Environmental Conservation
50 Wolf Road, Room 326
Albany, New York 12233-0001
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C-12
North Carolina
Contact:
Title/Position:
Phone Number:
Address:
Lee Laymon
Chief, Ground-Water Operations Branch
(919) 733-3221
Division of Environmental Management
Ground-Water Operations Branch
Department of Natural Resources and Community Development
P.O. Box 27687
Raleigh, North Carolina 27611
North Dakota
Contact:
Title/Position:
Phone Number:
Address:
Gary Berreth
Coordinator
(701) 224-3498
Division of Hazardous Management and Special Studies
North Dakota Department of Health
Box 5520
Bismarck, North Dakota 58502-5520
Ohio
Contact:
Title/Position:
Phone Number:
Address:
Mike Nimocks
UST Coordinator
(614) 864-5510
State Fire Marshal's Office
Department of Commerce
8895 East Main Street
Reynoldsburg, Ohio 43068
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C-13
Oklahoma
Contact:
Title/Position:
Phone Number:
Address:
Walter Kramer
Coordinator
(405) 521-3107
Underground Storage Tank Program
Oklahoma Corporation Comm.
Jim Thorpe Building
Oklahoma City, Oklahoma 73105
Oregon
Contact:
Title/Position:
Phone Number:
Address:
Dennis Dickerson
UST Coordinator
(503) 229-5153
Underground Storage Tank Program
Hazardous and Solid Waste Division
Department of Environmental Quality
P.O. Box 1760
Portland, Oregon 97207
Pennsylvania
Contact:
Title/Position:
Phone Number:
Address:
Foster Diodato
Coordinator
(717) 787-8184
Pennsylvania Department of Environmental Resources
Bureau of Water Quality Management
Ground Water Unit
9th Floor Fulton Building
P.O. Box 2063
Harrisburg, Pennsylvania 17120
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C-14
Rhode Island
Contact:
Title/Position:
Phone Number:
Address:
Sav Mancieri
(401) 277-2234
UST Registration
Department of Environmental Management
83 Park Street
Providence, Rhode Island 02903
South Carolina
Contact:
Title/Position:
Phone Number:
Address:
Don Duncan
Director, Ground-Water Protection Division
(803) 734-5332
Ground-Water Protection Division
South Carolina Department of Health and Environmental
Control
2600 Bull Street
Columbia, South Carolina 29201
South Dakota
Contact:
Title/Position:
Phone Number:
Address:
Lee Baron
Coordinator
(605) 773-3296
Office of Water Quality
Department of Water and Natural Resources
Joe Foss Building
Pierre, South Dakota 57501
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C-15
Tennessee
Contact:
Title/Position:
Phone Number:
Address:
Chuck Head
Manager, UST Program
(615) 741-0690
Division of Ground-Water Protection
Tennessee Department of Health and Environmental
150 Ninth Avenue, North
Nashville, Tennessee 37219-5404
Texas
Contact:
Title/Position:
Phone Number:
Address:
Dwight Russell
Coordinator
(512) 463-8180
Underground Storage Tank Program
Texas Water Commission
P.O. Box 13087
Austin, Texas 78711
Utah
Contact:
Title/Position:
Phone Number:
Address:
Mark Ellis
Coordinator
(801) 533-6170
Division of Environmental Health
P.O. Box 45500
Salt Lake City, Utah 84145-0500
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C-16
Vermont
Contact:
Title/Position:
Phone Number:
Address:
Paul Van Hollebeke
Coordinator
(802) 244-8702
Underground Storage Tank Program
Vermont AEC/Waste Management Division
State Office Building
Montpelier, Vermont 05602
Virginia
Contact:
Title/Position:
Phone Number:
Address:
Russell P. Ellison, III, P.O.
UST Coordinator
(804) 367-6350
Virginia Water Control Board
P.O. Box 11143
Richmond, Virginia 23230-1143
Washington
Contact:
Title/Position:
Phone Number:
Address:
Tom Lufkin
UST Coordinator
(206) 459-6272
Department of Ecology, M/S PV-11
Solid and Hazardous Waste Program
Olympia, Washington 98504-8711
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C-17
West Virginia
Contact:
Title/Position:
Phone Number:
Address:
Douglas Steel
Coordinator
(304) 348-5935
Solid and Hazardous Waste
Ground Water Branch
West Virginia Department of Natural Resources
1201 Greenbriar Street
Charleston, West Virginia 25311
Wisconsin
Contact:
Title/Position:
Phone Number:
Address:
William Morrissey
UST Coordinator
(608) 266-7605
Bureau of Petroleum Inspection
P.O. Box 7969
Madison, Wisconsin 53707
Wyoming
Contact:
Title/Position:
Phone Number:
Address:
Jake Strohman
Coordinator
(307) 777-7085
Water Quality Division
Department of Environmental Quality
Herschler Building, 4th Floor West
122 West 25th Street
Cheyenne, Wyoming 82002
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C-18
American Samoa
Contact: Pati Faiai
Title/Position:
Phone Number: 10288-011 (684) 633-2682
Address:
Environmental Quality Commission
Office of the Governor
American Samoan Government
Pago Pago, American Samoa 96799
Guam
Contact:
Title/Position:
Phone Number:
Address:
Charles P. Chrisostomo
Coordinator
10288-011 (671) 646-8863
Guam Environmental Protection Agency
P.O. Box 2999
Agana, Guam 96910
Overseas Operator (Commercial call 646-8863)
Northern Mariana Islands
Contact:
Title/Position:
Phone Number:
Address:
Russell Meachem
Coordinator
10288-011 (607) 234-6984
Division of Environmental Quality
P.O. Box 1304
Commonwealth of Northern Mariana Islands
Saipan, CM 96950
Cable address: Gov. NMI Saipan
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C-19
Puerto Rico
Contact:
Title/Position:
Phone Number:
Address:
Thomas Rivera
(809) 725-0717
Water Quality Control Area
Environmental Quality Board
Commonwealth of Puerto Rico
Santurce, Puerto Rico
Virgin Islands
Contact:
Title/Position:
Phone Number:
Address:
Francine Lang
(809) 774-3320
205(J) Coordinator
Division of Natural Resources Management
14 F Building 111, Watergut Homes
Christianstead, St. Croix, Virgin Islands 00820
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APPENDIX D
MODEL STATE UST FINANCIAL RESPONSIBILITY LEGISLATION
Model UST financial responsibility legislation has been developed by the National
Conference of State Legislatures (NCSL) as part of UST model State legislation.4 The
legislation would authorize State departments to promulgate UST financial responsibility
rules. Additional language may be necessary to authorize establishment of a State fund
or to precisely set detailed financial responsibility requirements, such as amounts of
required coverage or allowable financial assurance mechanisms. Components of the
model legislation developed by the NCSL follows:
1) The Department shall adopt requirements for maintaining evidence of
financial responsibility for taking corrective action and compensating
third parties for bodily injury and property damage caused by sudden
and nonsudden accidental releases arising from operating an underground
storage tank.
2) If the owner or operator is in bankruptcy, reorganization, or
arrangement pursuant to the Federal bankruptcy law, or if jurisdiction in
any State or Federal court cannot be obtained over an owner or
operator likely to be solvent at the time of judgment, any claim arising
from conduct for which evidence of financial responsibility must be
provided under this subsection may be asserted directly against the
guarantor providing the evidence of financial responsibility. In the case
of action pursuant to this subsection, the guarantor is entitled to invoke
all rights and defenses which would have been available to the owner or
operator if any action had been available to the owner or operator if
any action had been brought against the owner or operator by the
claimant and which would have been available to the guarantor if an
action had been brought against the guarantor by the owner or operator.
3) The total liability of a guarantor shall be limited to the aggregate
amount which the guarantor has provided as evidence of financial
responsibility to the owner or operator under this subsection. This
subsection does not limit any other State or Federal statutory,
contractual, or common law liability of a guarantor to its owner or
operator, including, but not limited to, the liability of the guarantor for
bad faith in negotiating or in failing to negotiate the settlement of any
claim. This subsection does not diminish the liability of any person
under section 107 or 111 of the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, or other applicable law.
4) Corrective action and compensation programs financed by fees on tank
owners and operators and administered by the Department may be
submitted as evidence of financial responsibility under this section.
4 Paul Doyle, Underground Storage Tank Model State Legislation. National
Conference of State Legislatures: Denver, Colorado. June 1986.
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APPENDIX E
INSURANCE AVAILABILITY
The availability of insurance coverage for underground storage tanks (USTs) is
currently limited. Some coverage is, however, available from several sources, and the
recent entry into the market of new sources suggests that current market conditions
may be improving. In future, coverage is most likely to be available from sources
specializing in pollution liability coverage because of the expertise required to write the
coverage. Insurers are also likely to be more selective concerning the tanks they will
cover, and may require tightness testing and tank upgrades as conditions for coverage.
This appendix provides an overview of insurers currently offering UST coverage.
Major Providers
The following insurers provide the bulk of all UST coverage and are the only
insurers currently known to be actively marketing UST policies. For the most part,
these insurers write policies only for petroleum marketers.
Federated Mutual currently provides coverage for over 80,000 tanks at 25,000
locations in 39 states. Federated's policies have coverage limits of $500,000 per
occurrence and $2 million annual aggregate, and most are written with a $25,000
deductible. These limits are exclusive of legal defense costs. Federated policies can be
written to include coverage for cleanup of the insured's site, provided that the cleanup
is undertaken to prevent third-party damages. Soil core testing is required as a
condition for obtaining coverage.
PETROMARK is a newly formed risk retention group (RRG) offering coverage to
petroleum marketers in all fifty states. The group currently has sufficient capital to
offer coverage limits of $1 million per occurrence and $2 million annual aggregate. The
average premium is currently $2,000 (a one-time capital contribution equal to the
premium payment is also required), and policies are written with a $5,000 deductible. So
far, PETROMARK has written policies to cover 575 owners and operators with tanks at
8,100 locations, and is constantly adding new insureds. PETROMARK was organized by
The Planning Corporation, an insurance broker that, until the withdrawal of its UST
coverage underwriter in July 1987, had supplied UST coverage to over 1,500 marketers
with 96,000 tanks at 26,000 locations. PETROMARK is targeting these previous insureds
and plans eventually to offer coverage to single station owners and operators as well.
The Pollution Liability Insurance Association (PLIA) is a pool of 14 insurers writing
pollution liability policies, including coverage for about 100,000 USTs (although not all
members of the pool will cover USTs). PLIA polices have coverage limits of $1 million
per occurrence and $2 million annual aggregate, with a $25,000 deductible, and PLIA
members will only insure petroleum marketers with 20 or more tanks. In addition, PLIA
is somewhat selective about the tanks it will cover; the application process is lengthy
and tanks more than ten years old must undergo tightness testing before they can be
included in the policy.
Oilmen's Fund offers coverage to petroleum wholesale and retail distributors.
Policies have coverage limits of $500,000 per occurrence and $1 million annual
aggregate, and are available only if other lines of commercial liability coverage are
purchased from Oilmen's. Oilmen's will not provide coverage to other marketers, such
as gasoline dealers and single station owners and operators.
-------
E-2
Michigan Mutual has recently begun offering UST coverage to petroleum marketers,
and will write policies in all 50 states. Policies have coverage limits of $1 million per
occurrence and $2 million annual aggregate, with a $2,500 deductible. Average premiums
are $1,200 to $1,600 per site depending on the age of the covered tanks. Michigan
Mutual will write policies for single station owners and operators, but will not provide
coverage for tanks over 20 years old. Michigan Mutual is selective about the USTs it
will insure; owners and operators must demonstrate responsible inventory control and
there must be no current problems at the site.
Providers of Coverage to Non-Marketers
Insurance coverage for UST owners and operators who are not petroleum marketers
is more limited in availability than insurance coverage for marketers. This coverage is
generally not available from specialized "UST insurers" and is more likely to be provided
by an owner or operator's commercial general liability insurer as an accommodation for
an existing customer.
Federated Mutual is the only major provider that will write polices for non-
marketers. Coverage limits and conditions are the same as those for marketers.
Universal Underwriters recently entered the UST market and will provide coverage
to non-marketers at limits of $1 million per occurrence and $2 million annual aggregate.
Coverage is available only to customers who purchase other lines of coverage from
Universal.
Traveler's. Liberty Mutual, and Transamerica all provide UST coverage to selected
customers as an accommodation. Liberty Mutual policies have coverage limits of $1
million per occurrence and $1 million annual aggregate. Traveler's and Transamerica
policies are available at limits under $1 million. It is likely that there are other
insurers who, like these companies, provide UST insurance to certain existing customers
under limited circumstances.
Coverage Available Through Trade Associations
A number of trade associations offer coverage packages to their members that
include pollution liability coverage. These packages are generally written through one
of the major insurers described above. Package arrangements may make it easier for an
owner or operator to obtain coverage by streamlining the application process (e.g.,
shorter applications, quicker review, waivers from some underwriting conditions, etc.).
The National Association of Convenience Stores (NACS) and the Society of Independent
Gasoline Marketers of America (SIGMA) both had such group coverage arrangements
through The Planning Corporation. The National Association of Truckstop Operators
also had a group coverage program. When The Planning Corporation lost its underwriter
in July 1987, these associations also lost their group programs. SIGMA is currently
putting together a new package arrangement with PLIA to replace the coverage formerly
purchased through The Planning Corporation.
-------
E-3
INSURANCE COMPANY ADDRESS LIST:*
Federated Mutual Insurance Company
129 East Broadway
Owatonna, MN 55060
(507) 455-5200
PETROMARK
The Planning Corporation
13347 Sunset Hills Road
Reston, VA 22090
(703) 481-0200
Pollution Liability Insurance Association
1333 Butterfield Road, Suite 100
Downers Grove, IL 60515
(312) 969-5300
Oilmen's Fund
350 Fifth Avenue, Suite 6805
Empire State Building
New York, NY 10018
(212) 629-4290
Michigan Mutual Insurance Company
28 West Adams Ave.
Detroit, MI 48226
(313) 965-8600
Universal Underwriters Insurance Company
5115 Oak Street
Kansas City, MO 64112
(816) 753-5800
The Travelers
One Tower Square
Hartford, CT 06183
(203) 277-0111
Liberty Mutual Insurance Company
175 Berkeley Street
Boston, MA 02117
(617) 357-9500
Transamerica Insurance Company
1150 South Olive Street
Los Angeles, CA 90015
(213) 742-4242
*Note: These addresses are provided for informational purposes only.
-------
INSURING UNDERGROUND STORAGE TANKS:
State-Sponsored Insurance Programs
A Program Development Handbook
January, 1989
LJNIVl
SCHOOL OF LAW
INSTITUTE OF PUBLIC LAW 1117 Stanford N.E., Albuquerque, NM 87131
-------
Insuring Underground Storage Tanks:
State-Sponsored Insurance Programs
A Program Development Handbook
Prepared for Region VI
of the U.S. Environmental Protection Agency
Patricia Holt, Project Officer
Prepared by
Institute of Public Law
University of New Mexico School of Law
1117 Stanford N.E.
Albuquerque, NM 87131
E.P.A. Assistance I.D. No. X-006432-01-0
January, 1989
-------
DISCLAIMER
This report was prepared under contract to an agency of the
United States Government. Neither the United States
Government nor any of its employees, contractors,
subcontractors, or their employees: (1) makes any warranty,
expressed or implied; (2) assumes any legal liability or
responsibility for any third party's use of this report or any of
its contents; or (3) represents that use of this report or its
contents will not infringe on the privately owned rights of
others.
-------
TABLE OF CONTENTS
Chapter Page
EXECUTIVE SUMMARY
I. INTRODUCTION 1-1
What Is a State Insurance Program? 1-1
Summary of Contents 1-2
II. WHY CONSIDER A STATE INSURANCE PROGRAM? 2-1
The Availability of UST Insurance 2-1
Other Financial Mechanisms 2-2
Meeting State Goals 2-5
Increase Regulatory Compliance 2-5
Protect the Environment 2-5
Assist Small Businesses 2-6
Promote Risk Management 2-6
Minimize State Subsidies 2-6
Clean Up Pre-Existing Leaks 2-7
Combining a State Insurance Program with Other
State Funds 2-7
III. DESIGNING A STATE INSURANCE PROGRAM 3-1
The Program Design Process 3-1
Program Elements 3-1
Participation 3-2
Type of Participation 3-2
Standards for Participation 3-3
What Costs Are Covered? 3-5
Level of Coverage 3-6
Corrective Action and Third Party Claims 3-6
Coverage of Existing Leaks 3-7
Other Coverage Issues 3-8
Legal Considerations 3-12
Anti-Donation Clauses 3-12
Limitations on Indebtedness 3-13
Limitations on Use of Gasoline Taxes 3-13
-------
TABLE OF CONTENTS (Continued)
Chapter Page
Prohibitions on Raiding Program Funds 3-13
Constitutional Amendments 3-13
Applicability of Other State Laws 3-13
Administrative Considerations 3-15
Who Will Govern the Program? 3-15
Powers of the Agency or Board 3-16
Program Operations 3-16
Duration of the Program 3-18
Sunset Provisions 3-18
Funding Future Claims 3-19
IV. FINANCING THE PROGRAM 4-1
Analyzing a Program's Financial Feasibility 4-1
Identifying Cost Variables 4-2
Gathering Information 4-2
Estimating Funding Requirements 4-3
Adjusting Program Elements 4-5
Specific Financing Considerations 4-7
Initial Capitalization 4-7
Funding Mechanisms 4-7
Public vs. Private Funding 4-11
Loss Reserves and Premium Levels 4-12
Reinsurance and Other Protection
Against Insolvency 4-15
Putting the Program Elements Together 4-17
V. THE STATE AS REINSURER 5-1
VI. MULTI-STATE PROGRAMS 6-1
VII. CONCLUSION 7-1
APPENDICES
Appendix A - Definitions. A-1
Appendix B - Program Checklist B-1
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ES-1
EXECUTIVE SUMMARY
The U.S. Environmental Protection Agency has adopted regulations
requiring that owners and operators of petroleum underground storage
tanks be able to demonstrate financial responsibility for their tanks. These
requirements are being phased in over a two-year period. By October 26,
1990, all owners or operators governed by the regulations will have to
purchase insurance or use another financial mechanism that demonstrates
their ability to pay $1 million or, in some cases, $500,000 for corrective
action costs and third party claims arising from a release of petroleum.
Many states will choose to adopt similar requirements in order to obtain
primacy of regulation over underground storage tanks (USTs) within their
jurisdictions.
EPA's regulations permit UST owners and operators to use state funds
or other state assurance programs to demonstrate financial responsibility.
Because tank liability insurance is not presently available to all groups of
owners and operators, a number of states have established or are
considering state assurance programs to help their owners and operators
comply with the new financial responsibility requirements.
One of the types of state assurance programs described in EPA's
handbook, "Financial Assurance Programs: A Handbook for States", is a
state-sponsored insurance program. This Program Development Handbook
for State-Sponsored Insurance Programs describes the concept of a state
insurance program for underground storage tanks in more detail. It
outlines the process a state might go through and the issues it might
confront in developing such a program. The handbook is intended to help
states evaluate the possibilities for an UST insurance program and, if the
concept seems workable, develop a program proposal which suits the state's
individual needs.
State-sponsored UST insurance programs have only recently received
attention, but the concept of a state insurance program is not new. A
number of states have established state workers' compensation insurance
programs. Others have created patient compensation funds, health
insurance pools and public school insurance programs. Typically, states
get into the insurance business when the private insurance market is not
providing enough insurance at a reasonable cost to some group that needs
insurance.
State insurance programs operate much like private insurance
companies. They issue policies or certificates of participation, collect
premiums and pay any losses resulting from liabilities the program has
agreed to assume. Despite the private insurance program model, however,
the state program need not function exactly as a private carrier would
function. Since the program is created by statute, it has funding options
not available to private insurers. On the other hand, as a public or
quasi-public entity, it faces political and legal constraints that do not affect
the private carrier.
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The handbook recognizes that state environmental agencies are not in the
insurance business. Environmental and UST program officials are
encouraged to obtain assistance from their counterparts in the state's
insurance department, from officials running other state insurance programs
or from insurance consultants during the program design process.
A key assumption underlying the handbook's discussion of program
design is that no one insurance program is appropriate for all states.
Instead of prescribing the "ideal" program, the handbook explores the options
a state can choose from to create a program that suits its needs. Chapters
III and IV, in particular, explore the program elements or variables which a
state can use to adjust the scope and cost of its program or to respond to
the political or legal constraints that the program faces.
Some of the variables include:
I. Participation. Do all owners and operators have to participate in
the program or may they comply with the financial responsibility
requirements in some other manner? Mandatory participation increases the
size of the program and spreads the risk more evenly. Voluntary
participation, on the other hand, is popular with tank owners and fosters
development of the private insurance market.
2. Underwriting Standards. Will the program accept all owners and
operators whose facilities meet the environmental agency's technical tank
standards, or may the program use stricter underwriting standards and
conditions of coverage to reduce the number of claims it expects to pay?
The program's approach will affect both the number of owners and
operators eligible for coverage and the cost of coverage.
3. Coverage Issues. Will the program cover just corrective action,
just third party claims or both? What policy limits and deductibles should
be selected? Coverage decisions affect the cost of the program and the
extent to which the program will help its insureds meet the UST financial
responsibility requirements.
Responsibility for existing leaks is a major coverage issue. EPA
estimates that 25 - 30% of the tanks in the ground are leaking currently.
The cost of cleaning up leaks which have already occurred is so high that
the state's approach to this issue will have a tremendous effect on the costs
of the program.
4. Funding Options. A variety of funding sources are discussed,
although the available options depend on the state's legal, political, and
financial climate. A central issue is whether funds other than premiums will
be used as a source of program income. Since the handbook uses private
insurance programs as a model, it assumes that the program will want to
support itself to the extent possible through premiums charged the
participants. However, gasoline fees or taxes, per tank fees and other
sources of revenue could be tapped to pay some of the program's costs or
to provide it with a source of initial capital.
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A key to designing an effective state insurance program is to
recognize the inevitable conflict between the desire to provide full coverage
to all tank owners and operators and the desire to limit the state's financial
involvement. Each state must decide what trade-offs it is willing to make to
develop a viable program.
If the legislature decides that the program must be supported solely
by the owners and operators being insured by it, the program must be
careful about what tanks it insures and what costs it covers, or premiums
may rise to unacceptable levels. If, on the other hand, the state's driving
concern is that all tank-owning businesses be allowed to participate in the
program, high program cost projections may force the state to consider a
broad-based funding source, such as a gasoline fee or tax, to supplement
program revenues.
While these are the key issues in establishing a state insurance
program, a number of other decisions must be made along the way. These
include such matters as who will run the program, what laws will apply to
the program, whether the program will pay the insureds' defense costs and
how premiums will be adjusted to reflect risk. Some of these decisions
should be made before legislation is drafted and others can be made by the
program's board and administrators after legislation is adopted.
Most of the handbook focuses on a state insurance program that would
provide coverage directly to tank owners and operators. Another
alternative, described in Chapter V of the handbook, would be a state
reinsurance program. Private insurance companies try to obtain
reinsurance to protect themselves from high losses. However, reinsurance
for pollution risks has not been readily available. A state program could
offer reinsurance to one or more carriers, who would write the policies,
work with the insured owners and operators, conduct risk management
activity and pay the claims. The state's role in providing insurance would
be minimized and state administrative costs would be less than for a direct
insurance program.
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INTRODUCTION
The U.S. Environmental Protection Agency has adopted regulations,
pursuant to Subtitle I of the Resource Conservation and Recovery Act
(RCRA), which will require the owners or operators of petroleum underground
storage tanks to demonstrate financial responsibility for their tanks.
Petroleum marketers and owners or operators whose tanks handle more than
10,000 gallons of petroleum a month will have to purchase insurance or use
some other financial mechanism that demonstrates their ability to pay a minimum
of $1 million for corrective action and third party claims arising from a release
of petroleum. Other tank owners and operators will have to show that at least
$500,000 is available to cover the costs of a release from their underground
storage tanks. These requirements are being phased in over a two-year
period beginning January 1989.
One financial mechanism permitted by the regulations is the state
assurance program. State assurance programs that are structured to meet
financial responsibility requirements may be used by tank owners and
operators within the state to demonstrate financial responsibility for those
costs covered by the program. In response to this provision and to the
apparent inability of many owners and operators to obtain tank liability
insurance, state assurance programs have been established or are under
consideration throughout the country.
States have taken a variety of approaches in proposing and designing
state assurance programs. One approach is a fund guaranteeing that
corrective action or third party claims will be paid by the fund if no
responsible party is willing and able to pay. When the fund pays a claim, it
seeks recovery of its expenditures from the tank owner, operator or other
responsible party. Another approach is a fund or program that pays
tank-related claims but does not seek cost recovery from tank owners or
operators. This handbook focuses on a state program in the latter category - a
state insurance program created by legislation to provide insurance coverage
for tanks within the state.
WHAT IS A STATE INSURANCE PROGRAM?
A state insurance program is a mechanism for providing insurance
coverage for petroleum underground storage tanks when commercial pollution
liability insurance for underground tanks is not readily available. In its
purest form, a state insurance program is modeled closely after a private
liability carrier. It issues policies, collects premiums and pays any losses
resulting from liabilities it has agreed to assume.
States may vary in the degree to which their insurance programs
resemble private insurance. States may, for example, incorporate some degree
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of public financing into the program. The characteristics that generally
distinguish insurance programs from other state assurance mechanisms are
that:
(1) an insurance program protects the insured against certain specified
liabilities, i.e., it pays tank-related claims without recourse
against the insured tank owner or operator; and
(2) insurance is typically funded by risk-based premiums.
Although states have only recently begun to consider insurance programs
for underground storage tanks, the basic concept of state-sponsored insurance
funds is not new. State unemployment compensation programs are essentially
insurance programs. Many states have also established state workers'
compensation insurance programs. Some states have other types of state-
sponsored insurance programs such as patient compensation funds, health
insurance pools and public school insurance programs. And states have
traditionally self-insured the liabilities of state agencies through state risk
management programs.
SUMMARY OF CONTENTS
This handbook is intended to assist states that are considering or
developing state-sponsored insurance programs for petroleum underground
storage tanks. The handbook discusses some of the reasons for considering an
UST insurance program, as well as issues involved in determining the
feasibility of a program and alternatives for designing and financing the
program. Although the handbook's focus is on insurance programs, some of
the topics discussed may be relevant to the development of other state
assurance programs. The following topics are covered in Chapters II through
VI:
Chapter II. looks at current problems with the availability of insurance,
compares insurance with alternative financial responsibility mechanisms and
discusses the circumstances under which a state might consider establishing a
state insurance program.
Chapter III. raises issues to be considered in designing a state
insurance program, including participation in the fund, the type and extent of
coverage to be offered, and the structure and administration of the program.
Chapter IV. outlines a procedure for analyzing the feasibility and
financial needs of a state insurance program, and looks at such financing
issues as the options for the initial capitalization of the program, the
determination of premium levels and loss reserves, and protection against
insolvency.
Chapter V. describes an alternative response to the problem of insurance
availability, the creation of a state reinsurance program that would act as a
reinsurer to private insurance carriers.
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Chapter VI. notes the untested possibility that states could sponsor
insurance programs jointly or share administrative functions for their separate
programs.
The handbook contains two appendices. The first is a list of definitions
for terms used in the handbook. The second is a program checklist. The
checklist is intended to remind the state of issues to consider when reviewing
proposed legislation or designing a state insurance program.
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II. WHY CONSIDER A STATE INSURANCE PROGRAM?
Insurance is the mechanism property owners have traditionally relied
upon to demonstrate their ability to respond to third party claims for
property damage and bodily injury. Insurance is well suited to this task
because it spreads the risk of loss better than most other financial
mechanisms and provides an established method of claims handling. Since
insurance premiums are usually based on the degree of risk a tank represents
as well as prior loss history, insurance also provides a financial incentive for
good tank management while protecting the tank owner or operator from
financial devastation if a loss should occur.
As discussed below, the availability of UST pollution liability insurance
is currently limited. The lack of insurance can create difficulties for tank
owners and operators, particularly in light of the financial responsibility
requirements imposed on them by RCRA. The United States General
Accounting Office, in a January 1988 report to Congress entitled
"SUPERFUND: Insuring Underground Petroleum Tanks" (GAO/RCED-88-39),
concluded:
Because of the current state of the tank insurance market,
thousands of tank owners will not be able to comply with
upcoming financial responsibility requirements by purchasing
insurance.... Small businesses in both the retail and non-
retail motor fuel sector are very likely candidates for
non-compliance. Given the limited insurance market, some
solutions seem warranted to assist tank owners in meeting
financial responsibilities, (page 32)
Although the GAO considered federal responses to the problem, states
should consider their own approaches to the situation if conditions within the
state warrant state involvement. A state might consider establishing a
state-sponsored insurance program for underground storage tanks if it
determines that:
(1) sufficient liability insurance is not available to tank owners and
operators within the state;
(2) alternative financial mechanisms are not proving to be adequate
substitutes for insurance; and
(3) businesses and agencies relying on underground tanks for
petroleum storage are so affected by the inadequate supply of
insurance that the state's interests are being harmed.
THE AVAILABILITY OF UST INSURANCE
Pollution liability insurance for petroleum underground storage tanks is
expected to become more available over the next few years, but the present
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supply is limited. One major commercial carrier, Federated Mutual Insurance
Company, insures over 80,000 tanks, but is not seeking to expand its share
of the tank insurance market.
Other insurance companies, notably several carriers underwritten
through the Pollution Liability Insurance Association, issue tank liability
policies. And two risk retention groups, of which PETROMARK is the largest
in terms of UST coverage, also insure tanks. But the present capacity of
the insurance market to cover tanks is not large.
In some cases, the total number of tanks the company can insure is
limited due to capital restrictions. In other cases, policy limits may be below
the limits required by EPA and/or the coverage may be available only to
limited segments of the market, such as petroleum marketers or automobile
dealerships.
The reasons insurers commonly give for leaving or not entering the
UST insurance market include: (1) the perceived riskiness of insuring against
pollution releases; (2) expanding liability resulting from judicial decisions and
environmental laws; (3) the lack of accurate loss information; (4) the
unavailability of reinsurance for environmental risks; and (5) the time and
investment required to develop expertise in the tank insurance area.
Despite these problems, the number of insurers entering the tank
liability insurance market is increasing, primarily as a result of the potential
market created by the financial responsibility requirements imposed on tank
owners and operators. It may be a number of years, however, before private
insurers provide tank owners and operators with all the coverage they need.
OTHER FINANCIAL MECHANISMS
The new EPA regulations make available to tank owners and operators
a variety of noninsurance mechanisms that can be used for demonstrating
financial responsibility. One purpose of these alternative mechanisms is to
alleviate the burden on tank owners and operators who must contend with the
shortage of tank liability insurance.
Some of these mechanisms, particularly self-insurance, are both
suitable and available to certain segments of the tank-owning population. But
methods other than insurance are not available or affordable to all tank
owners and operators, and some methods may be of limited applicability as a
substitute for insurance. To better understand the role insurance plays, it
is helpful to compare it to the alternative financial mechanisms discussed
briefly below.
Self-Insurance. A tank owner or operator may self-insure its financial
responsibility obligations by meeting one of two financial tests set out in
EPA's regulations. Each test requires that the owner or operator have a
tangible net worth of at least $10 million and meet a number of other
requirements.
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Self-insurance has been used by larger corporate tank owners and
operators in the past and is an acceptable mechanism for those who qualify.
The large net worth requirement, however, will probably restrict the use of
the mechanism to large, financially stable corporations such as major oil
companies, large petroleum jobbers, national bus companies or utilities.
Guarantees. A firm having a controlling interest in or substantial
business relationship with a tank owner or operator may guarantee the owner
or operator's obligations. To qualify as a guarantor, the firm must meet the
financial test for self-insurance for the number of tanks it agrees to
guarantee together with any tanks it self-insures.
How extensively guarantees will be used is not known. Major oil
companies may find that providing guarantees to their retailers gives them a
market advantage by freeing their retailers from the cost of other financial
mechanisms.
On the other hand, major oil companies have so far indicated that they
do not want to guarantee their customer's obligations because it would tie up
substantial amounts of assets and restrict their operating abilities. But even
if major companies do ultimately provide guarantees, this mechanism will not
be available to the majority of tank owners and operators.
Risk Retention Groups. Risk retention groups are formed and
operated by entities facing similar types of risks. Each member's individual
risk is transferred to the group in return for payment of a premium
calculated to cover the group's expected losses each year. The risk retention
group is similar to a mutual insurance company that is owned by its insureds.
The Risk Retention Act of 1986 has eliminated some of the legal
barriers to the development of risk retention groups, but practical barriers
remain. A risk retention group must invest a considerable sum for
organizational costs and legal and actuarial consultants before any policies are
issued, and adequate member participation during this early period can be
difficult to obtain.
Petroleum Marketers Mutual Insurance Company (PETROMARK) is a
risk retention group that has been writing pollution liability coverage for
USTs for several months. The Environmental Protection Insurance Company
(EPIC) is also beginning to offer coverage.
Risk retention groups may ultimately provide coverage to many groups
of tank owners and operators, although their development to date has been
slow. The primary drawbacks of this approach are: (1) practical problems
with setting up and capitalizing a risk retention group; (2) a number of tank
owners and operators may not belong to groups able to form or interested in
forming a risk retention group; and (3) risk retention groups may not be
large enough to adequately spread the risk of major losses.
Letter of Credit. A letter of credit is issued by a bank or other
financial institution. It is essentially a guarantee to EPA or the implementing
agency that a line of credit will be available to meet the customer's financial
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responsibility requirements. If the customer (the tank owner or operator)
fails to meet its obligations, EPA or the agency can draw funds from the
institution by presenting certain documents specified in the letter.
Letters of credit, considered risky by banks, are quite expensive,
costing from $10,000 to $25,000 for a $1 million letter of credit. To the
extent they become available, it will be mostly to financially secure tank
owners and operators with excellent credit ratings and substantial income and
assets. Some lenders have indicated that the risks of foreclosing on
environmentally damaged property are curtailing banks' dealings with
petroleum storage and retail facilities.
Surety Bonds. A surety company may enter into an agreement with a
tank owner or operator stating that if the bonded owner or operator fails to
perform corrective action or pay third party claims, the surety company will
do so. Bonds are normally more expensive than insurance and so far surety
companies have shown little or no interest in issuing bonds for tank
liabilities.
Like guarantees and letters of credit, surety bonds do not transfer
the risk of loss. A surety company that pays a claim may seek recovery from
the tank owner or operator. For this reason surety bonds will probably be
available, if at all, only to larger, financially strong firms that represent
good risks of recovery.
State Funds. States may establish funds that can be used by tank
owners and operators within the state to demonstrate financial responsibility.
These funds may take many forms. Comprehensive funds can be set up to
respond to all releases, or the fund may be designed to respond only when
the owner or operator is unable or unwilling to respond.
The state fund approach to financial responsibility has many
advantages. The funds address the public's concern, expressed in federal
legislation, that financial resources be available in every case to respond to
underground leaks that threaten public health and the environment.
The primary drawback of state funds as a financial responsibility
mechanism is that the funds, if set up like traditional cleanup funds, may
seek to recover any monies spent from the tank owner or operator. Owners
and operators will still need to purchase insurance if they want to protect
themselves from a major loss.
The purpose of this handbook is to assist states in evaluating and
designing a type of state financial assurance mechanism that overcomes this
drawback: a state-sponsored insurance program. The concept of a state LIST
insurance program is of more recent origin than the state guarantee fund,
which is modeled after a cleanup fund. The rest of this chapter looks at how
an insurance program would address the various goals a state might want its
UST assurance program to fulfill.
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MEETING STATE GOALS
A state insurance program accomplishes goals similar to those of other
UST assurance programs. Because of its unique characteristics, however, it
accomplishes some goals better than others. The strong points of an
insurance program include its ability to increase compliance with regulatory
requirements, protect the environment and the public health from future
leaks, and, in certain respects, assist small businesses.
On the minus side, creation of a state insurance program is not an
effective way to address existing leaks. And a state UST insurance program
will not necessarily make UST insurance available to all tank owners and
operators or make it more affordable.
Increase Regulatory Compliance
When insurance is available, it is the financial assurance mechanism
preferred by many tank owners and operators because it provides protection
from disastrous losses. By making this mechanism available to a greater
number of owners and operators, a state insurance program can increase
compliance with the UST financial responsibility requirements.
An UST insurance program can also provide incentives for compliance
with the technical standards. A typical requirement for participation in any
insurance program is that the tank be in compliance with all applicable federal
or state regulations. Premium costs are often adjusted based on tank and
equipment specifications and release detection practices, providing an
additional financial incentive for good tank management.
Protect the Environment
An insurance program serves the goal of protecting public health, the
environment and the public water supply by providing the funds and
administrative support necessary for a prompt response to releases. If
insurance is not readily available, an uninsured tank owner or operator may
not have the resources to respond to a leak in an adequate and timely
manner. A guarantee fund will pay for corrective action, but only after it is
apparent that neither the owner/operator nor his insurance company is willing
or able to pay for it.
Insurance also provides an incentive for the accurate reporting of
releases and suspected releases. A tank owner or operator is unlikely to
jeopardize his insurance protection by failing to give notice of a possible claim
as required by the insurance program. On the other hand, an uninsured
owner or operator may have a financial incentive for concealing a leak he can
not pay to correct because he knows the guarantee fund or implementing
agency will try to recover cleanup expenses from him.
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Assist Small Businesses
A major advantage of a state insurance program is the insurance
protection afforded small businesses that participate in the program. The
liability costs associated with a serious tank leak could bankrupt a small tank
owner or operator. While some tank owners and operators may respond to
this threat by taking steps to reduce the likelihood of leaks, others may
respond by closing their businesses or failing to report suspected leaks.
Ultimately a mechanism like insurance which "spreads the risk" of
catastrophic losses will produce the healthiest environment for small
businesses. When commercial UST insurance is not available, state-sponsored
insurance is the only assurance mechanism that provides financial protection
for small tank owners and operators while promoting financial responsibility.
This does not mean that a state insurance program will automatically be
able to assist all small owners and operators. If the program is designed to
maintain itself on a self-supporting basis, it may have to set standards for
participation or premium levels that some small owners and operators will not
be able to meet or afford. However, some of the program options discussed
in Chapters III and IV can be used by a state to make its insurance program
more available to smaller tank owners and operators.
Promote Risk Management
Any insurance program that sets standards for participation or adjusts
premiums by degree of risk should promote risk management. Owners and
operators desiring coverage will have an incentive to upgrade their facilities
and adopt acceptable tank management practices to qualify for participation.
Owners and operators whose tanks fall into high risk/high premium
categories will be rewarded with reduced premiums when they lower their
risk. It should be noted, though, that insurance programs in which all
owners and operators participate automatically or which are funded through a
broad-based mechanism such as a gasoline tax will not provide the same
incentives.
Insurance programs can also improve their insureds' tank management
practices through risk management education programs and on-site
evaluations. Risk management specialists retained by private insurers report
that insureds generally cooperate with insurers' risk management efforts and
attempt to implement their recommendations.
Minimize State Subsidies
The state may want a financial assurance program that relies as little
as possible on state funding. An insurance program that is authorized to set
its own underwriting criteria and premium levels is potentially
self-supporting.
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Clean Up Pre-Existing Leaks
Insurance programs are not good mechanisms for cleaning up
pre-existing leaks. Because the program is likely to be funded in whole or
in part by risk-based premiums, exposure to known risks must be minimized
if the fund is to operate fairly and remain actuarially sound.
Comparison can be made to private insurance programs that do not
cover leaks occurring prior to the policy's retroactive date. Some insurers
require tank tests, inventory analysis and/or site assessments to verify that
no undiscovered leaks exist before extending coverage to a new insured.
COMBINING A STATE INSURANCE PROGRAM WITH OTHER STATE FUNDS
A state insurance program provides a mechanism for prompt response
to covered releases, while protecting tank owners and operators from
catastrophic loss in the event of a release. The major drawbacks of an
insurance program are that it cannot, if it is to remain financially viable,
provide coverage for pre-existing leaks or for all UST systems, regardless of
tank condition. For these reasons, an insurance program works particularly
well in conjunction with cleanup funds and loan or grant upgrade programs.
Both types of programs are described in the handbook entitled "Financial
Assurance Programs: A Handbook for States," prepared by EPA's Office of
Underground Storage Tanks.
Cleanup funds address the problem of cleaning up pre-existing leaks
when the tank owner or operator will not or cannot undertake corrective
action. Once the site is cleaned up and the problem with the tank remedied,
the owner or operator may become eligible to insure that tank site through
the insurance program. Figure 3.1 in Chapter III provides an example of the
way an insurance program and a cleanup fund could work in combination.
Tank upgrade loan or grant programs can be tapped to help pay for
tank improvements which may qualify a high risk tank for participation in the
insurance program or for lower premiums. Tank upgrade programs can be
targeted to meet the needs of smaller businesses in rural or low income areas.
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III. DESIGNING A STATE INSURANCE PROGRAM
THE PROGRAM DESIGN PROCESS
In the process of creating a state insurance program, a state will
consider a variety of financial, legal and administrative issues. Because no
one individual or agency is likely to have expertise in all these areas, a good
way to begin the program development process is to assemble an advisory
group composed of members representing different interests and areas of
expertise.
Members of legislative committees, the regulated community, environ-
mental groups and others can help identify state goals and needs. The state
environmental agency will have information about the tank population and the
tank-owning community. It will be familiar with the state cleanup standards
and have some information on losses.
Based on experience in regulating private insurers, the state insurance
department should be able to provide guidance with respect to capital
requirements, loss reserves, premium setting and other financial aspects of
the program that may be unfamiliar to many. When the state insurance
department is not able to participate, private insurance consultants can be
retained to assist in these areas.
The program design group's main tasks begin with identifying the state's
needs and any legal, economic or political constraints the program may face.
The group will then need to review and evaluate available program options.
From these it can select a combination of elements to form a program that will
serve the needs of the state while recognizing the limitations the state may
face. Finally, the group should summarize its recommendations in a useful
form, perhaps by drafting legislation, or a report or recommendations to a
legislative body.
PROGRAM ELEMENTS
For the purposes of this discussion, the term "program elements" is used
to describe the "building blocks" a state puts together to develop a viable
insurance program. Program elements are variables that can be adjusted to
affect the scope, cost and/or structure of the program. For example, the
type and degree of participation in the program by tank owners and operators
are key variables that affect both scope and cost.
As a general rule, participation can be expanded to increase an
insurance program's scope, or restricted to reduce its cost. Expanded
participation tends to be politically popular, while restrictions on participation
make a program more attractive economically. The concept of a state
insurance program as a combination of elements emphasizes the flexibility a
state has in tailoring a program to suit its needs.
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One way to identify program elements is to think of them as the
"answers" to the questions a state confronts as it sets out to design an
insurance program:
* Who will participate in the program?
* What coverage will be provided?
* What are the program costs?
* How will the program be funded?
* Are there any legal impediments to the program?
* Who will administer the program and how will the
program operate?
* How long should the program last?
Program costs and funding will be discussed in Chapter IV. Issues for states
to consider when answering the other questions are addressed in this
chapter.
PARTICIPATION
States should consider participation in a state insurance program from
two perspectives. First, consider the point of view of tank owners and
operators. Must they participate or are they free to self-insure or purchase
private market insurance without having to support the program financially?
Second, consider the viewpoint of the program. Must the program accept all
tank owners and operators or is it free to establish standards for acceptance?
The answers to these questions affect both the number of participants in the
program and the costs of the program.
Type of participation
Participation can be mandatory or voluntary. A mandatory program is
one in which all tank owners or operators must participate regardless of
whether they could obtain financial assurance ejsewhere. A voluntary
program is one in which owners and operators do not have to apply for
coverage if they can demonstrate financial responsibility through another
means, such as through self-insurance or through an insurance policy from a
private insurer. Of course, even a voluntary program is not entirely volun-
tary. Owners or operators who cannot obtain financial assurance elsewhere
would have to apply for coverage from the fund in order to comply with
financial responsibility requirements.
Mandatory participation has the advantage of bringing into the program
tank owners and operators representing a range of risks. This creates a
good mix of "low risk" and "high risk" tanks. It also provides the largest
pool of insureds over which to spread the risk of loss. In addition, a
mandatory program provides more participants among whom to spread fixed
administrative costs.
Mandatory participation has significant disadvantages. It may be un-
popular with tank owners and operators who can self-insure or who, as
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preferred risks, qualify for commercial insurance at lower premiums than the
state program would charge. It would also be unpopular with private
insurers who offer pollution liability insurance. A mandatory program
providing complete coverage may exclude those insurers from the state's UST
insurance market and discourage private market development.
At the other extreme, states interested in actively encouraging the
private insurance market could consider a "last resort" program in which a
tank owner or operator may participate in the program only after demon-
strating an inability to obtain financial assurance elsewhere. Owners and
operators could be required to demonstrate that they cannot obtain other
financial assurance at all or that they cannot obtain it at a fair price.
A voluntary program is likely to be the most popular alternative. One
drawback to a voluntary program, at least one without strict standards for
participation, is that private insurers can be expected to provide insurance to
low risk owners and operators, leaving the state program with higher per
tank risks shared by fewer participants. Fewer insureds would share both
program expenses and potentially high losses. Premiums would likely be high
and significant state financial support might be needed.
One approach is to leave participation voluntary and attempt to reduce
the risks the program covers through such means as requiring tank testing
or computerized inventory analysis prior to extending coverage. Conditions
of continued coverage might also include monitoring requirements. These and
other standards for participation are discussed below.
Standards for Participation
A private insurer determines what risks it is willing to cover through a
process known as underwriting. The insurer desires to remain solvent, to
make a profit and to provide a return to its investors. Meeting these goals
is unlikely if the insurer provides insurance to people whose losses will be so
great and/or so frequent that the insurer's payments ultimately exceed its
income. The underwriting process permits the company to determine what
risks the company can realistically handle. In addition, state insurance
regulators may restrict how many risks an insurer can assume, based on the
company's assets and financial condition.
A state program has somewhat greater flexibility than does a private
insurer because it may choose to supplement premiums with other sources of
revenue to support its program. But the total cost of the program will still
be determined in large part by the nature of the tank population that the
program undertakes to insure. Three basic approaches to program
participation from an underwriting standpoint are:
* No underwriting criteria are used. All tank owners and operators in
the state automatically participate in the program. This approach
would involve no applications and no evaluation of the risks presented
by a particular owner or operator.
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3-4
* All tank owners and operators who can demonstrate that they are in
compliance with applicable federal or state technical tank regulations
may participate in the program. Compliance (or substantial compli-
ance) is demonstrated by application or sworn statement, possibly
supported by copies of tank-related records. Premiums are adjusted
to reflect the degree of risk posed by a tank or site.
* The owner or operator must qualify for participation based on under-
writing criteria which may be stricter than those provided in the
technical regulations. Interested owners and operators must apply to
the program and may be required to provide extensive information
about their tanks, to test their tanks, to have their inventory records
analyzed, and/or to undergo a site assessment. Premiums are
risk-based and the program may deny coverage for those sites that do
not meet its criteria.
Automatic Participation Program. In this program, all tank owners and
operators are automatically eligible to participate, although they may have to
comply with federal or state UST regulations or pay premiums to receive
benefits. An advantage of this type of program is that it eliminates much of
the administrative expense involved in processing risk-based applications.
The state also avoids the political difficulties of refusing participation in a
state-sponsored program while at the same time insisting on compliance with
financial responsibility requirements.
The primary disadvantage of this approach is that losses can be ex-
pected to be much higher and the costs of the program therefore greater than
in an underwritten program. Even if sites with existing leaks are somehow
excluded (see discussion of existing leaks, beginning at p. 3-7), the cost of
extending coverage to other high risk tanks will raise the total program cost
considerably.
Premiums for private insurance, cautiously underwritten, tend to be at
least $2,000 a year per site. Yet these payments do not include any dollars
for losses caused by old or poorly managed tanks, which are not accepted for
coverage. If an automatic participation program is established, higher
premiums or significant additional public funding could be needed to support
the extra coverage.
Regulatory Compliance Program. Owners or operators would have to
apply for coverage and affirmatively demonstrate during the application
process that they are in compliance with all regulatory standards. In this
type of program, the state asks no more of the owner/operator community
under the insurance program than it asks under the environmental program.
This fact may make the program more acceptable to legislatures than a
program that uses state resources but insures only the better risks.
A regulatory compliance program should be less expensive to support
than an automatic participation program because many problem tanks will be
identified during the application process, before the insurance program
assumes liability for their leaks. However, this program is still more
expensive than the strictly underwritten program. At least initially, the
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3-5
program may include older, bare steel tanks, tanks without release detection
and other arguably high risk tanks. Leaks would be more frequent and
possibly more expensive to clean up.
Strict Underwriting Program. The legislation creating this program
would authorize the use of underwriting criteria which could be more strict
than the technical tank standards set forth in the UST regulations. For
example, the program's underwriters could decide that tanks 20 years of age
or older present too great a risk for the program to cover. The program
would reject the tank owner's application even though regulatory standards
might permit use of such tanks.
The strictly underwritten program has several advantages. Since losses
should be lower, premiums would be more affordable. The hypothetical
example in Figure 4.2 on page 4-6 illustrates how changes in underwriting
criteria can significantly affect program cost. If the program is to be
self-supporting, this is an important consideration. A program with strict
eligibility requirements also provides the best incentive to owners and
operators to upgrade and improve their facilities.
This type of program has drawbacks, the biggest being whether such a
program is needed at all. The strict underwriting criteria approach is similar
to that used by those private insurers currently providing tank coverage.
Owners and operators who qualify for state coverage may also qualify for
coverage in the private market so that a state program would merely duplicate
coverage. On the other hand, the private market may well lack the capacity
or desire to cover all the tanks the state would insure with its program.
Further, not all private carriers provide for on-site corrective action, which
UST owners and operators must have under EPA's financial responsibility
regulations. The state program could provide this coverage.
Another difficulty facing a strictly underwritten program may be
resistance from some groups of owners or operators whose members would not
qualify for state insurance because of the age and condition of their tanks or
their monitoring practices. Small tank owners and operators are likely to be
over-represented in this group and legislators may be sensitive to their
arguments.
WHAT COSTS ARE COVERED?
A state insurance program can be designed to cover all or any part of
an owner's or operator's financial responsibility obligations. It could cover
only corrective action, only third party claims, or both. The program could
offer first dollar coverage, where the program would pay from the first dollar
of loss, or excess coverage (perhaps over $100,000), where the program has
no obligation to pay until claims reach the designated level. These and other
coverage issues are discussed below.
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3-6
Level of Coverage
From the tank owner or operator's viewpoint, the ideal program would
offer the types and amounts of coverage that the owner or operator could not
obtain at reasonable cost from private insurers. Initially, for some owners
and operators, this would include coverage for both corrective action and
third party claims up to $1 million with a deductible which the insured could
afford to pay.
Funding considerations or a desire to encourage the private insurance
market might prompt a state to limit the coverage it offers. Since most claims
are below $100,000, the state might choose to provide excess coverage only.
On the other hand, if the state wants to ensure that funds are available to
cover most claims, it might choose to provide the primary (e.g., $0 to
$100,000) coverage. The "excess" approach should result in a less expensive
program in terms of total program costs than the "primary coverage"
approach.
If a state decides to offer excess coverage, private insurers would be
needed to provide the primary layer of coverage. Since most losses are
under $100,000, however, the insurers may charge close to the same premium
whether covering $100,000 or $1 million of liabilities. If the state offers the
primary coverage, insurers would be needed to write the excess layer.
However, the private insurer may still want control over cleanup in order to
minimize loss. These are questions worth discussing with private insurers in
the state before proposing either type of legislation. Another question to
pose is whether either program would attract private insurers to the state.
State fund experience so far provides no clear answer.
Corrective Action and Third Party Claims
Corrective action costs are incurred in cleaning up a release from an
underground storage tank. Third party claims are claims made by third
parties (such as the owners and users of local drinking water supplies) for
compensation for property damage or bodily injury caused by a petroleum
release.
Faced with funding limitations, the state could decide to provide insur-
ance for cleanup costs and leave third party claims to private carriers. The
advantage to this approach is that the insurance industry and the state each
cover the activity with which it is most familiar. Insurers are in the
business of adjusting third party claims while states are used to dealing with
environmental cleanup.
A further advantage is that third party claims occur much less
frequently than corrective action claims, which may make UST third party
coverage more attractive to private insurers. Insurers may be even more
willing to provide coverage if the state clearly defines third party claims to
exclude cleanup activity.
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If a state takes this approach, its program should have sufficient
financial resources and staff to permit it to respond to corrective action
claims without delay. Private insurers may be reluctant to offer third party
coverage if delays in cleanup increase the likelihood of third party damages.
The state must decide whether separating the two types of claims is
worthwhile given the size and nature of its program. When corrective action
and third party claims are covered by separate mechanisms, the EPA rules
require that they each be covered for $1 million per occurrence. The state
should also be aware that cleanup costs are by far the bigger expense for a
program and that excluding third party claims may not result in significant
cost savings for the program.
Coverage of Existing Leaks
One factor that will have a major impact on the cost of an insurance
program is whether or not currently existing leaks will be covered. While the
cleanup of existing sites is a great environmental need, the insurance
program may not be the appropriate mechanism to accomplish this goal.
Florida's Early Detection Incentive Program is similar to an insurance
program in that it will clean up releases, or reimburse owners and operators
for their cleanup of releases, which are reported during a 30-month period
ending December 31, 1988. This "amnesty" program does not seek cost
recovery from the owners and operators.
Out of the 77,000 above and below ground tanks registered at 27,000
facilities, 4,000 leaking sites were reported as of September, 1988. The
program was receiving 150 - 200 claims each month. Cleanup costs were
averaging $250,000, possibly due to environmental factors and the length of
time some leaks had continued without detection. Reimbursement claims were
averaging $300,000. Basic arithmetic suggests total claims in excess of $450
million a year during the amnesty period.
All states cannot compare themselves with Florida, which has a very high
water table that may cause cleanups to be more expensive than elsewhere.
What the Florida program indicates, however, is that the cleanup of currently
existing leaks is a costly endeavor, one which cannot be supported solely by
premiums paid by the participants in an insurance program.
Insurance policies available in the private market tend to provide pro-
tection only against the risk of future leaks. The policy usually includes a
"retroactive date", which is typically the effective date of the owner or
operator's first policy with the insurer.
Claims are only covered if they arise from pollution incidents which
occur after the retroactive date. The policy will not cover leaks which
occurred prior to that date even if the claim is filed later. The insurer may
require tank testing, inventory analysis, or some other evidence that the
tank is leak-free at the time it agrees to cover the tank, or it may use
experts to investigate reported releases and determine the date they began.
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Another type of policy seen in the private market provides coverage
based on "manifestation of loss". This policy will cover losses that manifest
themselves after the effective date of the policy even though the release
causing the losses may have occurred previously. The insurer may or may
not require tank testing, inventory analysis or other evidence of a sound
tank or clean site prior to issuing a policy.
The retroactive date approach should cost the state's insurance program
less and result in lower premiums for the tank owner or operator than a
"manifestation of loss" approach. From a financial viewpoint the program will
also be more stable. Program managers can make financial projections and
exercise some control over future losses through their underwriting and risk
management programs. The use of a "manifestation" rule, on the other hand,
provides more coverage to the tank owner or operator.
Neither of the policies just described provides coverage for leaks that
are known to the insured at the time the policy is issued. A state insurance
program using either approach to avoid existing leaks will not solve the
state's cleanup problems or protect tank owners and operators from liability
for old leaks.
State decision-makers should look carefully at their goals and reasons for
establishing a state assurance program. If the primary goal is to clean up
problem sites, a guarantee or cleanup fund supported by sufficient public
funds to perform this expensive task would be an appropriate mechanism. If
the program's purpose is to offer tank owners and operators a means of
demonstrating financial responsibility with minimal state support, a state
sponsored insurance program offering coverage on a retroactive date basis
will meet the state's needs.
One alternative mentioned earlier is to establish two programs, an insur-
ance program to provide future protection from tank releases, and a cleanup
fund to take care of existing problems. As a condition of coverage, the
insurance program could require a tank test, inventory analysis and/or soil
tests. If a leak were detected, the applicant would be referred to the
environmental agency for the development of a corrective action plan and, if
needed, the use of cleanup funds to rehabilitate the site. Once the problem
were corrected, the owner or operator would be eligible to reapply to the
insurance program assuming he met its other standards for participation.
This scenario is outlined in Figure 3.1.
Other Coverage Issues
On-Site/Off-Site Corrective Action. The coverage of on-site cleanup has
been an issue for private insurance carriers. Some current insurance policies
provide coverage only for off-site corrective action, with the insurer having
the option to clean up on-site contamination if the release is likely to cause
off-site damage.
EPA's financial responsibility regulations require coverage for on-site
and off-site corrective action. Some insurers have argued that including
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Figure 3.1
USING AN INSURANCE PROGRAM AND A CLEANUP FUND IN COMBINATION
INSURANCE PROGRAM
provides future protection to
owner/operator and the environment;
owner/operator required to apply if
he/she has no other financial assurance
u
Owner/operator submits results of test (e.g.,
tank test or inventory analysis) with application
o>
I
CO
I
No leak detected
Leak detected
Owner/operator accepted
into insurance program
If owner/operator resolves
problems through cleanup,
repair and/or upgrade,
referral is made back to
insurance program
CORRECTIVE ACTION
PROGRAM
Owner/operator referred
to environmental agency's
corrective action program
and cleanup fund to
address existing problems
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3-10
on-site cleanup in tank liability policies will cost more than the current
policies, because of the increased frequency or severity of claims. A state
insurance program will probably want to meet the need for coverage of on-site
cleanup but should also consider its cost when estimating funding
requirements.
Aggregate Limits. Annual aggregate limits place a ceiling on the
insurer's liability under a policy regardless of the number of occurrences.
EPA has established permissible aggregate limits for tank owners and opera-
tors which take into account the number of tanks being insured. Owners or
operators of 1 to 100 tanks must have at least $1 million in annual aggregate
coverage while those with 101 or more tanks must have an aggregate of at
least $2 million.
States should consider setting aggregate limits for their insurance
programs. The limits would give the program some control over costs,
thereby contributing to the financial viability of the program. Assuming the
program can afford it, the simplest approach would be to adopt the aggregate
limits set by EPA.
Use of Deductibles. EPA's financial responsibility regulations require
that commercial insurers obligate themselves to provide first-dollar coverage
in order for the policy to be used to demonstrate financial responsibility.
While the policy may contain a deductible for which the insured is
responsible, the insurer must pay the sum even if the insured does not. The
insurer may then seek to recover the amount of the deductible from the
insured.
A state program may not have to meet the same requirements as a
private insurer. But it is a good idea to provide first dollar coverage when-
ever the program is providing the primary level of coverage. This permits
the program to undertake and pay for corrective action immediately and then
collect the deductible from the insured.
Deductibles reduce the cost of a program but should not be set higher
than the insureds can realistically pay. For the sake of administrative ease,
the program could consider omitting deductibles altogether. But using them
provides an additional incentive for controlling leaks and spills and may
prevent the program from becoming involved in very small releases which the
insured can correct himself for less than the cost of his deductible.
Defense Costs. Traditionally, pollution liability insurers have provided
their insureds with legal counsel and paid litigation expenses when claims are
made against the insured. The insurer's payment of these defense costs can
be almost as valuable to the insured as coverage of the claim against him,
especially where the claim is greater than the policy limits (exposing the
insured to personal liability) or the insured's business reputation is at stake.
EPA's financial responsibility regulations require that defense costs be
outside the limits of liability set forth in an insurance policy. High defense
costs, however, have concerned pollution liability insurers. Prior to
promulgation of EPA's rule, carriers had begun to (1) include defense costs
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within the limits of the policy or (2) provide a defense outside the policy
limits but with a ceiling on the defense costs they will incur.
Should the state program cover defense costs? Providing a defense to
the insured permits the program to exercise control over inflated or frivolous
claims and is a valuable service to the insured. The cost to the program of
providing a defense is an issue, however. A program that provides a
defense must budget adequately for the expense and recover it through
premiums.
To avoid defense costs, the state could adopt the approach being taken
by EPA with respect to standby trust funds. According to the financial
responsibility rules, the standby trust fund will pay third party claims
presented by signed agreement of the owner or operator and the claimant or
reflected in a valid court judgment. The use of this approach by an
insurance program may, however, result in the program paying out more for
unsupported or inflated claims than it would save by not providing a defense.
If the state insurance program will provide a defense to its insureds, it
would be advisable to establish an independent agency or board to run the
program. Insureds may perceive a conflict of interest if the environmental
agency runs the program. The agency ordering corrective action would then
be the same agency that would be expected to defend an insured against
unreasonable corrective action requirements.
Occurrence-Based vs. Claims-Made Coverage. The state should consider
whether to pay claims on an occurrence-based or claims-made basis. This
decision may be an important concern to owners and operators deciding
whether to join the program or trying to understand what coverage they get
for the premium they pay. The state's decision will also affect the length of
time the program should maintain reserves.
The tank owner or operator's general liability policy on his business
(which is likely to contain a pollution exclusion) is probably "occurrence-
based". While terms vary greatly, the policy is likely to cover claims that
arise as a result of occurrences which take place during the policy period,
regardless of when the claims are made.
Today's pollution liability policies, on the other hand, are written on a
"claims-made" basis. Claims made after the policy is cancelled or not renewed
are not covered even if the leak commenced during the period of time the
policy was in effect. The insured might be able to purchase coverage for
claims made on such leaks for a period of time after the policy is terminated
but the reporting period is usually short, maybe a year. (This extended
reporting period is commonly referred to as a "tail".)
Occurrence-based coverage provides the greatest long-term protection to
the owner and operator. However, the state insurance program, to provide
that protection, would have to maintain some level of reserves to cover claims
from an occurrence in year one for as many as 15 - 20 years. Claims-made
coverage does not provide the same long-term protection to the insured, but
would permit the program to maintain reserves for a shorter period of time.
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The policy provisions specified in EPA's regulations require that a
claims-made policy include a six month extended reporting period following
termination of the policy. The state insurance program could use this same
policy provision. Once release detection requirements are implemented, it is
hoped that insured tank owners and operators will be able to discover and
report releases within much shorter periods.
LEGAL CONSIDERATIONS
Early in the planning process, the state's Attorney General or other
legal counsel should review the insurance program concept and any proposed
legislation. The state's legislative council service and insurance department
may also be able to assist in identifying and resolving legal issues.
Knowing the legal constraints imposed by state constitutions or statutes
will permit the state to shape its program accordingly. Among the issues that
may be relevant are the following:
Anti-Donation Clauses
An anti-donation clause in the state constitution prohibits public money
from being spent for private purposes. It may take the form of a prohibition
on guaranteeing private debt, extending the state's credit to or in aid of a
private entity, or appropriating funds legislatively to any entity not wholly
controlled by the state. Anti-donation clauses generally prohibit the use of
state revenues for the private benefit of individuals, corporations, or causes,
no matter how benevolent they might be.
If the state insurance program is supported by premiums paid by the
policyholders, anti-donation clauses should not be a concern. The insureds
are purchasing the policies. However, as is suggested in Chapter IV, one
option for funding the program in whole or in part is a gasoline tax. The
use of such funds by a state insurance program might violate an anti-donation
clause if the gasoline tax proceeds are considered public funds and are seen
as providing insurance benefits to private tank owners and operators.
Generally, a state may be able to spend public funds in ways that
benefit private persons if a sufficient public purpose is served. However,
states subject to an anti-donation clause should look closely at the provision's
language and their court's interpretation of the language. The limitations it
imposes on the state program can then be determined and the program
designed accordingly. Some states may need to select funding mechanisms
that do not involve public funds or adopt legislation which clearly states the
public purpose served by the program.
If public money cannot be appropriated to fund the program even at the
initial capitalization stage, a state might consider raising initial capital for the
program through a state loan to be repaid from premiums and other income.
Note that, depending on the state, a state loan may also violate the
anti-donation clause if a market interest rate is not charged.
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Limitations on Indebtedness
A fund may encounter other problems under some states' constitutions,
as the constitution may limit the amount or type of debt a state can
guarantee. Depending on the language of the constitution, the state may
want to include a provision in the authorizing legislation which relieves the
state of any liability should the program become insolvent. Such a provision
is a good idea in any event. The state would not want to be forced to tap
its general revenues to pay insurance program claims.
Limitations on Use of Gasoline Taxes
Statutory or constitutional provisions may limit use of gasoline taxes to
specific purposes, such as highway repair. If the state wants to consider
the use of such taxes as a means of funding the insurance program in whole
or in part, it should consider whether a change in the law is necessary or
feasible. It could also decide that some other funding mechanism, such as a
fee on tanks rather than a tax on petroleum products, is acceptable.
Prohibitions on Raiding Program Funds
During periods of economic hardship, a legislature might be tempted to
raid program funds to cover deficits incurred by other state programs. The
insurance fund may look like a good candidate for raiding because it is likely
to accumulate what appear to be excess funds, but which are actually funds
reserved to pay for incurred claims or set aside as surplus to protect the
program from unexpected losses.
A specific dedication of the state insurance fund can reduce the likeli-
hood of raiding. The state should also consider ways to make the legislature
understand that the monies reserved are not excess dollars but are genuinely
needed to protect the financial integrity of the fund.
Constitutional Amendments
After reviewing the legal constraints on a state-sponsored insurance
program, a state may conclude that developing the desired program without
amending its constitution is difficult. A few states have adopted constitu-
tional amendments to permit the establishment of state workers' compensation
insurance programs. Although state constitutions are not easy to amend, this
approach can be taken when the proposed program has widespread support.
Applicability of Other State Laws
Some of the statutes generally applicable to state agencies or to insur-
ance companies may not be appropriate when applied to a state insurance
program. To permit the program to function smoothly and to avoid confusion,
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the authorizing legislation should specify the extent to which these state laws
will apply to the program. Some statutes to consider are listed below.
Administrative Procedures Act (State APA). Should the state insurance
fund be governed by the state administrative procedures act? If the program
issues policies and deals with its insureds on a contractual, free market
basis, state APA procedural requirements may be unnecessary and could
hinder the functioning of the program.
However, if an "entitlement" type program is created, the state should
include certain due process safeguards for persons denied rights to which
they may be entitled under the legislation. In this case, the state might
want to specify rights of appeal or clarify the appeal process in the
legislation.
Procurement Code. The state procurement code guides purchasing and
contracting by public entities. If most of the money the insurance program
will spend is from premiums paid by insureds rather than tax revenues, the
public interest may not justify formal procurement procedures. Also, the
program needs to be able to hire contractors to perform corrective action on
an expedited basis. Legislation could exempt the program from the
procurement law or make special provisions for it.
On the other hand, some state oversight of the program's finances
should be maintained. An annual audit of the program's financial records by
the State Auditor might be adequate.
Sovereign Immunity. Will the doctrine of sovereign immunity prevent
either an aggrieved tank owner or an injured third party from suing the
fund? States have waived sovereign immunity to varying degrees and for
varying types of claims; these waivers can be found in the case law or in the
state's statutes on tort or contract claims against state entities.
Assuming that the state insurance program issues policies to its partici-
pants, the policyholder will be basing any legal claims on the policy. States
typically waive sovereign immunity for claims based on written contracts.
Their treatment of tort claims, such as where an injured third person sues to
recover damages for his injuries, is more varied. To avoid confusion, the
insurance program legislation should include any waivers of immunity
considered necessary or advisable.
Subtitle I of RCRA provides for direct actions against the provider of
financial assurance when a solvent owner or operator cannot be found within
the jurisdiction of the state or federal court or when the owner or operator is
in bankruptcy. A direct action provision included in the program legislation
would clear up uncertainties and bring the state program into compliance with
federal requirements.
Insurance Code. The state insurance code regulates private insurers
doing business in the state. It would be a good idea to clarify which, if
any, provisions of the code apply to the insurance program. Do the
program's rates and policy forms need to be approved by the Insurance
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Commissioner? Should the financial standards imposed on private insurers
apply to the state program? Should the policy terms and conditions required
by the code be included in the program's policy forms? Can the program be
exempted from premium taxes?
A related concern is the extent to which judicially developed insurance
law applies to the state program. That law, for example, construes policy
language in favor of the insured and against the insurer. In contrast, the
courts tend to give deference to agency regulations, which the program could
promulgate. The state insurance program may want to take advantage of this
deference by setting out its policy terms by regulation instead of using
individual policy forms.
Public Finance Code. The state public finance code may limit the types
of investments which can be made with state funds and who can make them.
The state insurance code may regulate the investments made by private
insurance carriers. If the state treasurer invests the programs funds, no
special provisions will be necessary. But if the program will do its own
investing, the state should consider which, if either, set of guidelines
should apply to the investment of the program's funds.
ADMINISTRATIVE CONSIDERATIONS
A state should determine who will govern the insurance program, who
will administer the program, and what powers the policy-makers and
administrators will have.
Who Will Govern the Program?
An insurance program may be governed by a state agency or by an
independent board. The appointment of an independent board is a commonly
used approach in state insurance programs. The board makes executive
decisions and sets policy for the program, but does not operate the program
on a day to day basis. It is typically appointed by the Governor, sometimes
with the advice and consent of the state Senate.
The composition of the board can be specified by statute. For example,
the authorizing legislation may provide that the state Insurance Commissioner
or his designee and the director of the state's UST program or his designee
shall be ex officio members of the board. To provide the program with a
balanced perspective, the legislation may also specify the other interests to
be reflected in the board's membership.
The board created by the legislation could be empowered to employ a
program manager who would in turn be authorized to hire expert staff or to
contract out for the financial, underwriting, and claims management services
the program needs. Another approach would be to authorize the board to
retain one or more firms that contain the full range of expertise required to
operate the program.
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The insurance program could be run by an existing state agency,
although a conflict of interest might arise if the environmental agency were to
run the program. The same agency would be setting premium levels while
also setting cleanup standards and defending against claims while also
ordering cleanup. One alternative would be to create a new state agency
devoted to the program. Whether the agency is an existing one or is newly
created, it may consider contracting with private firms to actually operate the
program.
One state has passed legislation authorizing the creation of a state LIST
insurance program which would cover third party claims alone and would be
funded by premiums charged the participants. The agency responsible for
the program is considering contracting with a private insurance carrier which
would not only operate the program but issue its own insurance policies and
assume the liability for the program. If a carrier agrees to take on the
program, the state may have found a way to offer insurance coverage to its
owners and operators with minimal state involvement.
Powers of the Agency or Board
The legislation creating the program should give the board or agency
enough authority to carry out all functions necessary for the program to
succeed. This includes the authority to invest the program's income, con-
tract with administrators, lawyers and others as necessary, pursue subro-
gation claims against responsible parties, issue and cancel insurance policies,
and purchase reinsurance.
If the governing entity is a board, the act should specify the extent to
which the board is a state agency and the members of the board and the
board staff are state employees. The status of the program can affect
employee status and benefits, insurance coverage for program operations, and
the applicability of a number of laws governing state agency conduct. When
the program contracts with private firms for administrative services, the legal
responsibilities and authority of both the governing board and the contractor
should be clearly spelled out in the contract.
Program Operations
Once the legislature authorizes a program, the board or agency respon-
sible for setting up and running the program will have to turn its attention
to program operations. It will have to decide how to structure and administer
the program and whether to hire staff or contractors to perform program
tasks.
The idea of setting up an insurance program may sound overwhelming to
a state reluctant to increase the complexity and cost of government. It will
wonder, for example, whether it will have to commit an entire agency to the
program, hire employees, and somehow learn the insurance business from the
ground up. The state should keep in mind that it can contract out virtually
all of the services involved in setting up and operating the program. This
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may be desirable if the needed expertise is more readily available from
existing firms than state personnel applicant pools.
Successful design and implementation of the program will require admin-
istrative and technical personnel experienced in environmental liability
insurance and in management systems for underground storage tanks. The
skilled professional disciplines, e.g., underwriting, claims management, engi-
neering, information management, accounting and public communications, could
be acquired through one or an assembly of experienced contractors.
Developing a contractual relationship with one or more entities that possess
this experience and professional skill should enable the state to develop a
program effectively and expeditiously.
Figure 4.1 in Chapter IV lists a number of the activities of a state
insurance program. These include:
Information Dissemination/Marketing. The program should budget time
and money for explaining the program to owners and operators in the state.
The state should also decide whether the program will use licensed insurance
brokers and agents ("producers") to sell the program's policies or whether
applications for program coverage will be handled out of a central office.
Producers' commissions would increase the price of the policy and the
program would have to devote some effort to educating the producers to
ensure that the program is well understood. On the other hand, producers
would perform such services as taking the application from the prospective
insured and explaining the coverage to him. To the extent the state uses at
least a few agents around the state, the program also becomes more accessible
to people than a program with a single office. The use of producers is
discussed further in Chapter IV, page 4-15.
Information Management/Data Processing. The program should consider
investing in computer hardware and software capable of managing the informa-
tion obtained. Underwriting, policy and claims information need to be
accessible on a rapid retrieval basis. Not only will the information be needed
in the course of program operations but it will be an invaluable database for
the state. The loss information obtained over time will assist in tailoring the
program and will help private insurers who consider entering the state to
write UST liability coverage.
Accounting/Financial. This includes basic bookkeeping functions as well
as the more sophisticated needs of an insurance program. Loss reserves and
a surplus account must be established and maintained; monies must be
invested and the income realized to the program.
Underwriting Management. The program will determine underwriting
criteria, design policies, develop ratings and determine premium levels.
Prospective insureds will have to be given quotes and their applications for
coverage evaluated. Policies will have to be issued and reviewed. These
activities can be highly individualized or the program can develop a standard-
ized application review process. They are critical functions for any program
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that is to support itself, especially where actuarially sound data is not avail-
able and the insurability of a particular site becomes a matter of judgment.
Risk Management. One way an insurance program can control losses is
to develop a proactive risk management program. Not only can the program
require that participating owners and operators use proper leak detection and
tank management practices but it can keep participants informed of current
trends in these areas. It can work closely with high risk participants or
with participants who have suffered losses to prevent future leaks.
The state insurance program should develop a good working relationship
with the state environmental agency regulating underground storage tanks.
Since they are both interested in risk management, their respective activities
in this area can be designed to complement each other.
Claims Management. Claims expenses are usually significant in a pol-
lution liability program. Staff or contract personnel will determine the extent
of damage, evaluate and implement corrective action options, monitor and
adjust claims payments, and coordinate the activities of corrective action
contractors and specialty consultants who may be needed for a specific claim.
Claims handling costs may decrease over time as standardized procedures and
familiarity with local cleanup requirements develops.
Legal Services. The program will need legal advice in the running of
the program. If the program agrees to defend its insureds, it will also have
to retain attorneys to provide that defense.
A state may develop a variety of procedures to resolve disputes between
the insured or a third party claimant and the program. These may range
from informal negotiations with claims adjusters to administrative hearings to
formal arbitration.
DURATION OF THE PROGRAM
Sunset Provisions
As private insurers enter the UST insurance market and offer better
coverage or lower premiums, tank owners and operators may begin to leave
the state insurance program and obtain coverage from the private carriers.
This process may be hastened by a program that requires owners and
operators to try to obtain coverage in the private market before applying to
the state entity for coverage.
Over time, the state program may end up insuring a small population of
tank owners with the highest risk tanks. This will signal the program's
success in providing needed coverage in the short run while encouraging the
development of the private market.
Legislation creating the state insurance program could prepare for this
eventuality by containing a sunset provision providing that the program will
end after a number of years and requiring that the legislature reconsider the
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program at a given legislative session. Alternatively, the legislation could
require a phase-out of the program to begin at a specified time in the future.
In this case, provisions should be spelled out for handling the claims and
funds which remain at the program's end.
Funding Future Claims
Assuming that the program offers claims-made coverage with a six month
extended reporting period, the program will have to maintain itself for at
least six months after the end of the last policy period to receive claims. In
addition, costs associated with reported claims will have to be paid out over a
period of time beyond the last extended reporting period.
If the state has a cleanup fund, one approach to closing out the insur-
ance program might be to transfer to the cleanup fund any remaining insur-
ance program funds. The cleanup fund would then be authorized to complete
cleanup or pay claims for the program. If the insurance program has excess
funds which are not needed to pay claims, it could return those funds to the
policyholders.
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IV. FINANCING THE PROGRAM
An early step in the evaluation of a state insurance program is to
determine whether the program will be economically feasible. Over time, the
premiums collected, together with other sources of funding, must generate
enough income to pay the claims the program has agreed to cover as well as
the administrative expenses of the program. At the same time, the premiums
assessed should not be so expensive that participation in the program is not a
viable alternative for most tank owners and operators.
The process of analyzing a program's feasibility involves gathering
information about the tanks to be insured and analyzing the data to determine
the program's financial requirements. Additional financial considerations
include providing the program with the initial capital it will need, exploring
funding options and estimating loss reserves and premium levels for the
program.
During the financial analysis process, it will be very helpful for the
program design group to have access to an actuary, underwriter or other
individual familiar with insurance concepts and terms. The state insurance or
risk management departments may be able to provide this assistance. If not,
the group might try to obtain the services of an interested insurance
consultant.
ANALYZING A PROGRAM'S FINANCIAL FEASIBILITY
Before prescribing specific funding levels or mechanisms for a state
insurance program, the state should give some thought to the factors that will
affect the program's financial requirements. The following four steps outline
a process that allows a state to consider the financial implications of different
program approaches before deciding on an approach that suits its needs.
The four steps are to:
(1) Identify variables likely to affect program cost.
(2) Gather information relating to those variables, including
information about:
a) tank and client population, and
b) incidence and cost of expected claims.
(3) Estimate the funding requirements of the desired type of
insurance program.
(4) Analyze data to determine whether the desired program is
economically feasible; adjust program elements and funding
mechanisms if necessary.
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Identifying Cost Variables
By developing a list of the variables that are likely to affect the cost of
an insurance program, the state can identify the types of information it will
need to collect. For example, the level of participation in the program is a
factor that will affect its cost.
The state might therefore want to survey a representative sample of tank
owners and operators to determine the interest in the program among
different types of tank populations. Information about the number of owners
and operators currently insured and the cost and availability of private
insurance would also give indications as to who would be likely to participate
in the program and what cost limitations the program might face.
Some variables which can be expected to affect program cost are:
* Participation - how many owners or operators will participate; what
classes of owners and/or operators will participate (e.g. major oil
companies, independents, nonretail tank owners); are owners and
operators likely to participate?
* Tank Characteristics - number of tanks, ages and types of tanks
owned or operated by those most likely to participate, use of
release detection equipment, etc.
* Loss Data - incidence of releases and cost of cleanup and third
party claims for the types of tanks likely to be covered.
* Environmental Characteristics - depth to groundwater, climate and
soil characteristics, etc. which affect the likelihood and severity of
tank releases.
Gathering Information
Once the information needs are identified, collection of the information
can begin. One of the best sources of tank characteristic information may be
the records kept pursuant to the state's regulatory activities. At least since
1986, most states have collected information about the location, type and
number of underground storage tanks within the state.
Participation information may be best obtained through a survey of a
representative sample of tank owners and operators. Insurance agents and
brokers handling the pollution liability business in the state may also know
something about the number of insured tanks in their areas.
Some loss information may be available from the state's existing
underground storage tank program or other state agency involved in the
cleanup of tank releases. Other sources of loss data include studies by EPA,
private tank associations and other states. Some private tank insurance
underwriters have up-to-date loss information which they may be willing to
share on a contract or consultant basis. If using this data, states should
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remember that insurers tend to insure the "best" risks. State insurance
program loss rates will probably be higher.
Not all the relevant information a state would like to have may be
available. Loss data in particular is difficult to obtain. But it should be
emphasized that perfect information is not necessary for designing a workable
program. As long as the program is provided with an initial source of capital
reserves and has the ability to adjust premiums or other sources of income
based on experience, it is possible to design a program that can meet its
initial obligations and develop into a viable insurance program.
When complete information is not available, a state may have to design a
program based on its best judgment. For example, insurance premiums are
usually adjusted to reflect the degree of risk posed by the covered tanks.
Older, unprotected or unmonitored tanks pose a higher risk than new tanks
which meet current technical standards. They should therefore require
higher premiums if premiums are based on risk.
But if a state does not have enough data to adequately assess risk based
on age and condition of tank, it may scale its premiums based on other
factors, such as numbers of insured tanks and deductible levels, until it has
enough loss experience to assess premiums based on risk. When a state has
obtained what information is available to it, it can begin to assess the
program's financial needs and outline the program elements.
Estimating Funding Requirements
The costs of an insurance program, and therefore its funding
requirements, are determined not only by loss rates and cleanup costs, but
by the selection of program elements discussed in Chapter III. Once the
information described above is collected, the next step is to select an initial
program design specifying whether participation is voluntary or mandatory,
whether coverage is extended to all applicants meeting minimum criteria or
whether strict underwriting criteria must be met, etc.
This information can then be analyzed by an actuary and/or an
experienced insurance underwriter to estimate specific program costs. An
actuary uses a mathematical analysis to estimate the cost of future claims and
necessary premium levels based primarily upon assumptions and information,
such as estimates of participation levels, which are provided by the state.
Underwriters use the formulas prepared by actuaries and their own risk
assessment experience to establish the rates, terms and conditions of
insurance to be applied to individual tanks or classes of tanks.
The state insurance department may be able to provide assistance in
evaluating the program's financial needs and should be consulted early on in
the process of designing a state insurance program. The state's risk
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Figure 4.1
Program Costs and Tasks
Start Up Costs
Legal and actuarial services
Facilities
Equipment, including computer and software
Publication costs
Per diem and mileage for board members or director salaries
Initial Program Tasks:*
Regulation and policy development
Information dissemination
Set up computer and information processing/accounting systems
Underwriting analysis and rate-setting
Ongoing Program Costs:
Administrative costs:
Staff and/or contractors
Per diem and mileage for board members or director salaries
Legal, actuarial and technical services, as needed
Facilities
Supplies
Printing
Insurance costs:
Claims paid
Claims handling and defense costs
Loss reserve contributions
Reinsurance, if any
Producer commissions, if any
Ongoing Program Tasks:*
Information dissemination
Information management/data processing/accounting
Risk management activities
Review of applications, rating, and policy issuance
Claims management, including claims adjusting and defense
Supervision and management of corrective action activities
Policy renewals, processing and cancellations
On going review of underwriting criteria and rating assumptions
* NOTE: The list of initial and ongoing program tasks is for information
purposes. The legislation creating the insurance program only needs to
delegate sufficient authority to a governing entity that it can consider
program tasks and hire staff or contractors to perform them.
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management agency and its financial arm may also have useful information and
insights. The state should seek to develop estimates of:
* the level of claims the program can expect over a period of years
(some actuaries recommend 5 year projections) for the group of
tanks it plans to insure. Claims costs should include claims
handling and defense costs. Different estimates based on different
underwriting criteria can be developed for comparison purposes;
* administrative expenses, including producer commissions, if any;
* the amount of initial capitalization the program will require; and
* the premiums that will need to be assessed.
According to one tank insurance underwriter, administrative expenses
may average about 10-15% of total premium. This figure does not include
producer commissions or claims handling expenses attributable to a particular
case, the latter of which are considered to be loss expenses. A program's
actual expenses as a percentage of premium will vary depending on the size
of the program, its complexity and whether services are contracted out or
performed by program staff or agency employees. A list of common expenses
is included in Figure 4.1.
The legislation creating the program should authorize the program's
governing entity to set premiums from year to year. The purpose of trying
to estimate in advance what future premiums might look like is to determine
(1) whether adjustments can be made to the scope of the program so that it
can realistically be expected to support itself; or (2) whether some kind of
public funding mechanism should be incorporated, either to provide initial
capital, to reduce the premiums charged to policyholders or as protection
against insolvency.
Adjusting Program Elements
In the course of its economic analysis, a state is likely to discover that
there is no absolute yes or no answer to the question of whether a state
insurance program is economically feasible. Different program options will
result in different program costs. The feasibility of an UST insurance
program depends on the tradeoffs a state is willing and able to make and the
program elements it selects.
Based on its initial analysis, a state may decide that it wants to adjust
costs by expanding or restricting participation through the use of
underwriting criteria, tank tests or site assessments; adjust income by
supplementing premiums with other sources of income; or change coverage
levels, deductibles or other program elements to come up with a program that
is both financially sound and affordable.
Figure 4.2 is a hypothetical example illustrating the effects of varying
underwriting criteria on total program cost. It shows how reductions in the
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Figure 4.2
Effects of Underwriting Criteria on Program Losses: A Hypothetical Example
1. State loss data indicates a past UST system failure rate of 8%
(failure rate = total annual releases as a percentage of total number
of tanks in the state);
2. A minimal underwriting program is estimated to adjust this rate to
6% for insured tanks;
3. A preferred risk underwriting program yields an estimated rate of
3%;
4. Site assessments or tank tests prior to underwriting and an active
risk management program yield an estimated rate of 1% (NOTE:
strict underwriting criteria and tank tests or site assessments prior
to policy issuance could reduce failure rates well below 1%);
5. The average corrective action claim is estimated to be $55,000
(including cleanup expenses and third party damages);
6. If policies are issued on a per location basis, the formula for
determining the annual cost of claims is:
Number of insured locations X average number of tanks per
location X estimated failure rate X $55,000 = Expected Annual
Claims
A state with 5000 insured tank locations averaging 3.5 tanks per
site and a 3% failure rate would apply this formula as follows:
5000 X 3.5 X .03 X $55,000 = $28,875,000*
If the failure rate is reduced to 1%, the cost of claims is also
reduced:
5000 X 3.5 X .01 X $55,000 = $9,625,000
However, if no attempt were made to restrict participation the
program costs could be much higher:
5000 X 3.5 X .08 X $55,000 = $77,000,000
* Note: The failure rate is based on the assumption that pre-existing
leaks are not covered. If pre-existing leaks are covered by the
program, losses would likely be several times higher during the initial
years of the program. (See the discussion of existing leaks and
retroactive dates in Chapter III, page 3-7). These figures should not
be used for actual program cost projections.
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incidence of claims can be achieved by increasing the restrictions on which
tanks the program will insure. The numbers are estimates. Although they
are intended to be representative of the type of claims a state might
experience, they should not be used as cost projections for an actual state
program.
As used in Figure 4.2, a minimal underwriting program means that bare
steel tanks over 20 years old are excluded, but no release detection
equipment is required and no environmental analysis is undertaken. The
preferred risk underwriting program in the illustration would also require
release detection equipment and procedures as a condition of insurance and
might identify additional criteria that related to the risk of loss in a
particular state (e.g., depth to groundwater).
SPECIFIC FINANCING CONSIDERATIONS
Initial Capitalization
From the day an insurance company issues its first policy it should have
established reserves to ensure that it can pay both expected and unexpected
claims. State insurance laws and regulations require private carriers to
maintain reserves in specified minimum amounts. Because loss projections in
the tank insurance area are subject to uncertainties, it is particularly
important for a state insurance program to accumulate capital reserves
through some mechanism specified in the authorizing legislation.
This initial capital can function as the program's surplus, although a
state insurance program will probably use some of this money for start-up
costs. An insurance program's surplus should be distinguished from loss
reserves, which are the funds set aside to pay claims. Surplus is intended
to remain unspent unless it is needed to pay for unexpectedly high losses or
early claims which develop before adequate loss reserves are accumulated.
The initial capital may come from up-front assessments against the
insured tank owner or operator. Risk retention groups often get the initial
money they need in this manner. Initial capital could also come from an
appropriation, or a loan from the state, or a tax or fee on petroleum products
or tanks. A number of possible funding mechanisms are discussed in the
following section.
There is no hard and fast rule for determining the amount of initial
capital a specific program needs. It depends on the size of the program, the
amount of coverage offered, whether the program will be expected to be
self-supporting and the degree of protection from insolvency the state wants
to provide. States may want to look to their own insurance laws for guidance
in determining the amount of initial capital to provide.
For example, most state insurance codes contain surplus to policyholder
ratios which prescribe the minimum amounts of surplus a private insurer must
have as a function of the largest policy it sells. A typical ratio is ten to one
which means that a company issuing a maximum policy of $1 million must
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maintain a surplus of at least $10 million. Surplus is defined in most state
statutes as the difference between total assets and total liabilities. Total
liabilities includes loss reserves for both reported and unreported losses.
Another guide could be the premium to surplus ratio. In this case,
insurance regulators compare the total premiums being written to the carrier's
surplus. The ratio of the two may not exceed that specified in the statute.
A state may want to keep these ratios in mind when providing initial capital
for the state insurance program.
Funding Mechanisms
A state insurance program will need funds for its surplus, for loss
reserves to pay claims and claims handling expenses, and for administrative
expenses. Funds can come from a variety of sources, and it is likely that
more than one source of funds will be available to a program. Some of the
possible sources of funds include:
(1) legislative appropriations
(2) assessments
(3) premiums
(4) per tank fees
(5) gasoline fees or taxes
(6) loans
(7) state-backed bond issues
(8) interest
(9) subrogation recoveries
Legislative Appropriations. Legislative appropriations can provide some
of the funds a program needs to get started. Legislators may be
understandably wary of establishing a program that requires continuing
annual appropriations. But one-time appropriations may be more acceptable.
One-time appropriations could be used to research the feasibility of a state
insurance program, or to provide startup costs and/or initial capital for a
newly established program.
Assessments. Assessments can be used either to raise initial capital or
to "balance the books" in the event the program's losses and expenses exceed
income. The latter use is discussed below in the section on protection
against insolvency.
Initial capital can be raised by levying an assessment against program
participants at the beginning of the program, much like risk retention groups
are capitalized. If it is feared that the assessment will keep owners and
operators from participating in the program, a per tank assessment could be
levied on all tanks regardless of whether the tank owner or operator will
choose to participate in the program.
The advantage of raising funds through assessments is that no
contributions of public funds are required. The disadvantage is that tank
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owners and operators may not be financially able to pay an initial assessment
plus the first year's premium in one year. One alternative might be to
spread the necessary assessments over a period of years.
Per Tank Fees. Per tank fees used to accumulate initial capital are
similar to the assessments discussed above. Per tank fees can also be used
in lieu of premiums as the primary method of funding the insurance program.
The difference between per tank fees and premiums is that per tank fees are
usually set by schedule or regulation and don't take individual risk into
account.
Because per tank fees are generally levied on all tanks, they are most
acceptable in automatic participation programs which include all tank owners
or operators. Unless per tank fees are indexed or adjusted to reflect the
volume of petroleum products that pass through a tank over time, they fall
most heavily on low volume, less profitable tanks such as those serving rural
areas.
Gasoline Fees or Taxes. Gasoline fees or taxes are an effective way to
raise initial capital for an insurance program, because a small per gallon
increase in the tax a state already levies can generate large sums of money in
a short period of time. Gasoline taxes or fees are also easy to implement
because the tax collection mechanisms are already in place.
Gasoline taxes and fees, however, become part of the base price of
gasoline and get passed directly on to the consumer. Programs funded
primarily by gasoline taxes instead of risk-based premiums provide no
incentive to individual tank owners and operators to control tank risks.
However, if a state determines that tank owners and operators cannot afford
to pay the full cost of a state insurance program, gasoline fees may be used
to supplement premiums as a source of program funds.
Loans. The state may provide initial capital for an insurance program
by authorizing a state loan. The advantage of a loan is that there is no
"gift" of public funds to a program that will largely benefit private tank
owners. There are a number of legal, political and economic reasons why this
may be important to a state. The primary disadvantage of using a loan to
fund the program is that repayment must come from premiums paid by the
insureds which will increase the cost of insurance benefits to the tank owners
and operators.
Figure 4.3 shows how the level of loss expenses a program must pay is
likely to rise for 5-10 years and then drop off somewhat as tanks are
upgraded and existing leaks discovered and cleaned up. Some extra premium
might be assessed during low-loss years to repay a loan or to build extra
reserves to minimize premium increases during high loss periods. The term
losses as used in Figure 4.3 means the actual sums of money the program
pays out in response to the claims it receives.
Premiums. Premiums are the "purchase price" which an insured must
pay to buy insurance coverage. The notable feature of premiums as a source
of program income is that premiums are usually risk-based. This means that
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Figure 4.3
Possible variations in the level of losses paid over time
Losses
Paid
1 234567 8 9 10 11 12 13 14 15
Years
The graph illustrates the relative loss rate which a program might
expect over time. Losses would be low during the early years of
the program but would rise rapidly as leak detection and tank
upgrade requirements result in more releases being discovered.
Loss levels may decline again after tank upgrade activities are
completed.
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the amount a tank owner or operator pays for insurance coverage is adjusted
to reflect the likelihood that the insured tanks will leak and the relative cost
of remedying the damage if the tanks do leak.
Premiums are likely to be the primary source of income in all insurance
programs except, perhaps, certain automatic entitlement programs which may
be supported primarily through taxes or fees. Premiums can be adjusted
each policy period to reflect the current cost of the program.
State-Backed Bond Issues. States often issue bonds to raise capital for
various government projects. At least one state is presently considering the
use of a state-backed bond issue to raise funds for a state UST fund. State
laws governing bond issues should be checked to make sure bonds can legally
be issued for such purposes as an UST insurance program.
Interest. It is likely that premiums collected during the initial years of
the program will exceed the amount the program actually pays to respond to
claims during that period (assuming existing leaks are not covered). The
legislation creating the program should provide that any interest earned on
program funds belongs to the program. This interest will help to moderate
premium costs in subsequent years as claims activity increases.
Subrogation Recoveries. When a private insurer pays claims on behalf of
its insured, it becomes "subrogated" to any rights of recovery the insured
may have had. This means that if the insured's loss was caused by a
negligent third party, the insurer may seek recovery of its loss directly from
the third party to the same extent as the insured could have.
In the tank insurance area, for example, an insurer may pay to clean up
gasoline which leaked from an underground pipe connection. During the
course of its investigation, the insurer may determine that the tank installer
improperly installed the tank piping. It may demand that the installer
reimburse it for the cleanup costs and sue, if necessary, to enforce its claim.
Subrogation will not be available in all cases. Many releases will not be
due to anyone's negligence, or will be solely the fault of the insured. In any
event, subrogation recoveries are usually not large. But subrogation, along
with interest, can provide modest sources of supplemental income which can
help to reduce premium levels.
Public vs. Private Funding
At some point, the state will need to decide whether or not to
incorporate some element of public funding in its insurance program. Public
funding, for the purposes of this discussion, means any funding obtained
from sources other than the program's insureds. It may include gasoline
fees, taxes, appropriations or across-the-board tank fees assessed against
tank owners who may not be participating in the insurance program.
The primary reason for incorporating some element of public funding
would probably be economic. If the premiums for a self-supporting or
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privately funded program were considered to be too expensive for tank
owning businesses to fully assume without significant hardship, a state might
feel justified in subsidizing the insurance program in some manner. Such
might be the case if pre-existing leaks were to be covered. States with small
tank populations may also find that they don't have enough insureds to
adequately spread the risk of loss without some state support.
Economic considerations are also among the reasons for not using public
funds. Economists generally agree that the best economic decisions are made
when all the costs of an activity are "internalized" or paid by the entity
incurring them. If insurance premiums are high because too many risky
tanks are covered, a state may be better off in the long run by requiring
that these tanks be closed or upgraded than by subsidizing their insurance
costs.
Insurance costs are likely to fall hardest on small businesses such as
rural retailers that provide a service to their communities, but are only
marginally profitable. A state should be aware that it can target these tanks
for assistance through loan or grant upgrade programs or reduced premiums,
without necessarily subsidizing the whole insurance program.
States which want a self-supporting program, but realize that high risk
tanks within the state may raise average premiums to unacceptable levels
might consider a two-tier program with two separate funding pools. Tanks
which meet minimum underwriting criteria would participate in a self-
supporting insurance program.
Tanks which are ineligible to participate because of condition or location
on a contaminated site would pay higher premiums to participate in the
high-risk pool. This pool could be subsidized with other sources of income,
but would last for only a few years while tanks are upgraded and sites
cleaned up.
Loss Reserves and Premium Levels
Loss Reserves. Loss reserves are the funds an insurer must set aside
to pay claims. There are two types of reserves: case reserves and IBNR.
Case reserves are reserves set aside for known or reported claims. When a
loss is first reported, an insurer will set aside a predetermined amount -
perhaps $30,000 - as the initial reserve for that case.
Once a claims adjuster has investigated the release, the case reserve will
be increased or reduced to reflect the adjuster's best estimate of what the
total cost of the claim will be. Further adjustments can be made as the
handling of the claim proceeds. Case reserves include cleanup costs, claims
handling costs and expected third party claims if covered by the program.
IBNR stands for Incurred But Not Reported. IBNR reserves are set
aside to cover the losses which will result from releases that have occurred
during the policy period, but which have not been discovered or reported
yet. Although unreported, IBNR represents real costs. It is very important
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to collect enough premiums during each policy period to cover all the claims
that will result from that period of coverage.
If IBNR reserves are not collected and set aside each period, losses and
premium costs will increase so rapidly in subsequent years that insureds will
be forced to leave the program. The insurance program will then be left with
lots of claims costs to pay and no premiums coming in or reserves set aside to
cover them.
IBNR reserves are often not large when claims-made policies are used.
Instead, the premium costs increase each year to cover the new claims the
company expects to receive that result from tank releases occurring during
previous policy periods. But if the state program intends to cover the same
insureds for a number of years, it can create a more stable program with
smaller annual premium increases by setting aside adequate reserves from the
beginning.
Premium Levels. The total premiums collected each year, together with
any other sources of income the program may have, should cover claims paid,
claims adjustment and defense costs, administrative expenses plus the
establishment of actuarially sound levels of reserves. Figure 4.4 illustrates
the components of the premium and their relative proportions in a hypothetical
state insurance program. Claims adjustment expenses are included in both
the claims paid and case reserves/IBNR components.
Because so much of the premium goes to pay claims and loss related
expenses, premium levels are primarily determined by the amount of risk a
program undertakes to insure. Risk, and therefore premium levels, can be
reduced by:
* using underwriting criteria to exclude tanks which pose the
greatest risks from participation in the program until they are
upgraded or comply with program requirements;
* imposing conditions of insurance, such as release detection
requirements, on insureds as a conditions of continued participation
in the program; and
* developing risk management programs to educate insureds about
proper tank management and to provide ongoing evaluation of
insured facilities.
Specific formulas for determining premium levels can't be prescribed for
all states, because the choice of program elements, program size and local
factors such as soil and climate conditions and the cost of labor will all affect
program costs and premium levels. As a general guideline, one tank
insurance underwriter advised that any annual premium below $1000 for a
three tank site would probably be too low, at least until better loss data
becomes available. Premiums now charged by private insurers tend to be
higher than this.
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Figure 4.4
How the Premium Dollar is Spent*
15C
58C
27
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Variable or Risk-Based Premiums. No insurance company charges every
applicant the same price for coverage. Every application is evaluated to
determine the degree of risk the applicant represents and the premiums are
priced accordingly. States typically assess uniform fees for most
governmental services to avoid discriminating against any group. But it is
important for states to consider pricing their tank coverage like a private
insurer would to avoid adverse selection problems.
An insurance program will want to maintain a proper mix of "good" risks
and "poor" risks. A fixed rate premium will result in overcharges to good
risks and undercharges to poor risks. Such a rate structure discourages the
good risks from participating while encouraging poor risks. As cheaper
insurance becomes available to the good risks, they will leave the program
resulting in higher per tank losses spread over fewer insureds. An
insurance underwriter can be retained by the program to help identify risk
factors and to establish premium rates based on risk.
Deductibles and Producer Commissions. Other factors which might affect
premium levels are deductibles and producer commissions. High deductibles,
in the $25,000 range, significantly cut program costs. However, the program
should not establish deductible levels that insureds cannot realistically pay.
For smaller tank owners, this figure may be under $1000. One recom-
mendation is to set deductibles at the "ouch" level - high enough that the
insured has a strong incentive to avoid a claim, but low enough to expect
that the deductible will be paid.
EPA's proposed financial responsibility regulations contain a "first dollar"
requirement which requires UST insurers to pay claims starting from the first
dollar spent when the insured does not do so in a timely manner. Insurers
may then recover the deductible from the insured. Many private insurers
routinely pay claims in this manner.
Producer commissions are paid when the insurance program uses
insurance agents to sell its policies. If a state establishes a mandatory
program or expects little competition from other carriers, it may be less
expensive to have tank owners and operators apply to a central office. But
when the state program is voluntary and will compete with private insurers,
it may be worthwhile to pay the usual commissions and let licensed agents
seek out the tanks to be insured.
Reinsurance and Other Protection Against Insolvency
Once a state insurance program issues policies and begins to insure
tanks, it is important for a number of reasons to keep the program solvent.
First, if a program's expenses exceed its income, the program is likely to
respond by slowing down the payment of claims. But when cleanup activities
are not undertaken promptly, the ultimate cost of corrective action usually
increases dramatically, placing an even greater burden on the program.
Delays also harm the policyholders who have relied on the program's
representations of coverage. Another effect of the financial failure of a state
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insurance program might be to further intimidate private insurers who are
already reluctant to enter the tank insurance market.
When losses can be accurately predicted, insolvency can be avoided by
setting premiums at appropriate levels. But underground storage tank loss
data is not as well developed as the loss data for more common types of
insurance. States may therefore want to consider some other ways of
protecting the program from insolvency during its initial years.
Reinsurance. One way to protect the insurance fund from unexpected
losses is to obtain reinsurance. Reinsurance is essentially insurance for
insurance carriers. If purchased by a state insurance program, the
reinsurer would agree to assume some portion of the risk undertaken by the
state program.
There are several types of reinsurance. The type most likely to be of
interest to state programs is "aggregate excess" reinsurance under which the
reinsurer pays any claims the insurance program might become obligated to
pay which exceed a specified aggregate. The aggregate specified would
normally not be less than the total claims the program expects to incur during
the policy period. The reinsurance protects the fund in the event that losses
are unexpectedly high.
By combining reinsurance with adequate loss reserves, an insurance
fund can do much to ensure its continued solvency. But it should be noted
that most reinsurers are currently unwilling to reinsure pollution liability
coverages. This is one of the factors contributing to the lack of adequate
tank insurance in the private market. If the state cannot locate a willing
reinsurer, there are other ways of protecting the fund from insolvency.
Assessments. The type of assessments used to prevent insolvency are
additional charges assessed during the policy period which policyholders can
be required to pay over and above their usual premiums. The legislation
creating the insurance program may authorize its governing body to make
assessments against the policyholders in the event that a deficit appears
likely or that capital reserves have been seriously depleted.
Assessments are not popular and may drive tank owners and operators
out of the program unless participation is mandatory. Because they are
usually pro rata, not risk-based, they also result in the better risk tanks
subsidizing the poor risks. But they can keep a program self-supporting
should costs exceed expectations, and for legal or political reasons this may
be a necessary program feature in some states.
Reinstate Initial Funding Mechanism. If the program received initial
funding from a gasoline tax, per tank fee or other mechanism, this mechanism
can be reinstated should the claims against the fund exceed its assets.
Permitting periodic subsidies may not encourage the program to become
self-supporting, but it may be appropriate if the program has nonexclusive
participation policies (it accepts all or almost all risks) and the cost to tank
owners and operators of a strictly self-supporting program will become
unacceptably high.
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Participate in State Guaranty Fund. Most states require private insurers
to make contributions to a guaranty fund that protects resident policyholders
in the event that an insurer becomes insolvent. By legislation, the state
could make the state insurance program a participant in the guaranty fund.
Private insurers may well object to the participation of the state
program, however, in the belief that inclusion of the program will raise all
participants' contribution costs, either because pollution liability coverages
are higher risk than other property risks, or because state programs may not
be as discriminating in who they insure as private carriers.
PUTTING THE PROGRAM ELEMENTS TOGETHER
The key issue in designing an effective and affordable insurance
program is recognizing the inevitable conflict between participation and
coverage on one hand and the cost of the program on the other. Some state
interests will undoubtedly be served by extending broad coverage to the
widest number of participants, while other state interests will be served by
trimming the cost of the program.
When a state determines that its ideal program (in terms of participation
and coverage) is too expensive, it has the option of increasing the program's
sources of income, cutting costs or both. If premiums have been set as high
as practicable, increasing income usually means supplementing premiums with
some type of public funding (fees, gasoline taxes, appropriations).
Costs can be cut by reducing coverage (lower policy limits, higher
deductibles, use of retroactive dates) or by restricting participation (through
stricter underwriting criteria, tank tests, site assessments). Other measures
such as risk management education and site evaluation programs can
effectively reduce costs over time, but will probably not have much impact on
claims rates in the short term.
An effective program design will provide some source of initial capital for
the program and will specify the continuing sources of program income which
may include premiums, interest, subrogation recoveries, and any sources of
public funding. The legislation creating the program can either set out the
program elements which have been selected, or may specifically empower the
program's governing body to fashion a suitable program following the
guidelines established by the legislature.
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V. THE STATE AS REINSURER
Chapters III and IV describe a state insurance program in which the
program provides insurance directly to owners and operators. This chapter
will describe a state reinsurance program, in which the state reinsures the
private carriers who agree to provide insurance to the tank owners and
operators in the state. Instead of paying claims on behalf of the tank owner
or operator, a state reinsurance program would make its payments to the
insurance carrier.
A private insurance carrier that provides insurance directly to insureds
tries to purchase reinsurance as a means of spreading the risk it has assumed
and protecting itself from large claims. The primary, or ceding, insurer
continues to handle the underwriting and to work with the insureds to issue
policies, handle claims and undertake risk management activities. The
primary insurer also remains responsible for meeting the terms and conditions
of its insurance contracts with the insureds, including the payment of claims
covered by the policy. Under the terms of the reinsurance agreement,
however, the reinsurer may pay the primary carrier some portion of the
losses it has incurred.
The state could provide reinsurance to a single private insurer, whom
the state selects through a competitive bidding process, or to all interested
insurers who write UST coverage in the state and who meet the reinsurance
program's standards. There are several ways a state could reinsure private
carriers, including the following:
A reinsurance program could share the primary insurer's losses using a
"quota-share" structure in which the primary carrier and the reinsurance
program each pay a percentage share of any given loss. If their shares are
20% and 80% respectively, the primary carrier paying a $40,000 claim will
expect the reinsurance program to pay it $35,000. In this case, the
reinsurance program is involved in every loss.
Another approach is to use an "excess of loss" structure in which the
primary insurer retains a specified primary limit of liability and the
reinsurance program only responds when that limit is exceeded. If the
primary insurer's retention were $250,000 on a $1 million policy and the loss
under the policy is $40,000, that insurer would pay the full sum and the
reinsurance program would not be affected. On a loss of $700,000, however,
the primary insurer would pay the claim but then recover $450,000 from the
reinsurance program. Under this approach, the state would become involved
in some, but not all, claims.
A third approach, described at page 4-16 of Chapter IV, is an
"aggregate excess" structure. Under this program, the state reinsurer would
pay the primary insurer when that insurer's cumulative losses over a stated
period of time, usually a year, exceed a specified amount. A state offering
this type of reinsurance would only become financially involved in the
program during those policy periods when the primary carrier experienced
losses in excess of the agreed upon aggregate.
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Of the three approaches described above, the "excess of loss" structure
has advantages:
* The private carrier would administer the frequent, low loss claims,
limiting the involvement of the state program to the more serious
claims.
* If the carrier's level of retention is higher than the cost of most
claims, the private carrier should be diligent in its risk management
program and in claims administration in order to contain its costs.
This effort to contain costs could benefit the reinsurance program by
not letting small claims develop into large claims that would require
state program payouts.
* Further incentive to conduct effective risk management and efficient
claims administration is provided to the primary insurer when the
reinsurance program charges premiums for reinsurance coverage. If
losses begin to reach into the reinsured layer of coverage, the
program may have to increase its premium charges to the insurer,
which in turn would have to take those reinsurance premiums from
the premiums it collects from its insureds.
The reinsurance program would probably be supported largely by
premiums charged to the primary carrier. In essence, for every dollar in
premium the carrier collects from the owner or operator, a certain percentage
would go to the reinsurance program to reflect the program's share of the
risk. The carrier would retain the remainder of the premium to cover its
share of the risk and its administrative expenses.
The state could also consider funding the reinsurance program through
other means. For example, it could decide to reinsure any losses over a
certain amount and fund the program with a gasoline fee or tax or a per tank
fee in lieu of or in addition to premiums charged the primary carrier. An
insurance carrier would have an incentive to provide insurance in the state
because it could get free or low cost reinsurance for its excess liability.
Whether program income derives from premiums or from taxes and fees,
or both, the state reinsurance program should maintain a surplus reserve to
pay unexpectedly high losses. The monies in this surplus account and
related investment income would be used to discharge the program's liabilities
under its reinsurance contracts if losses and related expenses exceed income.
The legislature might consider several options for raising this surplus,
such as :
* a one-time tax or fee on gasoline or a per tank fee;
* a percentage surcharge on the premiums the reinsurance program is
charging the primary carrier; or
* providing by legislation that the state program can borrow money
from the state if it suffers a deficiency.
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Many of the program design issues discussed in Chapter 111 apply to a
reinsurance program. The state will have to decide what terms and
conditions are acceptable before its reinsurance program contracts with one or
more private carriers. Questions to ask include the following:
* To which tank owners and operators must the primary carrier offer
coverage and what conditions on participation may it be allowed to
impose?
* What levels of coverage should the primary carrier (and reinsurance
program) provide?
* What type of coverage, in terms of claims-made vs. occurrence
policies, extended reporting periods and the like, should the carrier
offer the tank owner or operator?
* Which type of reinsurance should the state offer, and what is it
likely to cost?
With respect to these coverage issues, the state will have to consider the
financial responsibility requirements owners and operators must meet, and the
extent to which the fund can support the cost of various levels and types of
coverage.
A reinsurance program frees the state from the complexities of
underwriting and claims management and permits it to work with a single
entity or group of entities rather than hundreds of owners and operators.
However, it does not free the state from the need for actuarial analysis and
program supervision. The state will have to determine the financial needs of
the reinsurance program so that it knows what premiums to charge and/or
what funds to raise. It will also want to review and approve the policy
forms, rates for coverage and expense allowances used by the primary
carrier.
The state program bears the risk of sustaining significant financial
losses if the reinsured carrier fails to provide proper underwriting and claims
administration. Thorough investigation and careful selection of primary
carriers by the reinsurance program are essential. The state program should
also have the right to audit the reinsured carrier's underwriting and claims
procedures to assure that claims are being administered in a manner that
protects the state's interests and contributes to the viability of the program.
If the state is not sure what program will work or what will attract
private insurers, it can issue an open-ended request for proposals. Notice of
the request could be given to insurance journals, magazines and associations
for wide distribution and several months allowed for responses to give private
carriers time to do some original planning for their proposals. Information
provided to the interested carriers should include all known information on
the number and types of tanks in the state, climate, hydrology and geology
of the state and any specifications the insurer will be required to meet.
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The carriers' responses may assist the state in designing a realistic
program. To attract carriers to the state and to obtain their full
cooperation, the program legislation or request for proposals should provide
for protection of the confidentiality of the carrier's financial data.
In general, the advantages of a state reinsurance program are that:
* it attracts private carriers who are willing to write UST insurance in
the state, but whose ability to do so has been limited by the
difficulty of obtaining reinsurance for pollution coverages in the
current private market;
* it demonstrates a partnership relationship between the public and
private sectors in meeting the demand for pollution liability
insurance;
* it could provide valuable information to the state and to the
insurance industry on underground tank losses within the state and
on what constitutes fair premium charges for those claims reported;
* the administrative costs of a reinsurance program should be
significantly less than those of a direct insurance program and the
state's role in providing insurance is minimized. This is because the
reinsurance program deals with one or a few carriers rather than
hundreds of owners and operators and it does not adjust claims or
handle risk management activities.
The critical question, however, is whether the program will in fact make
insurance more available to owners and operators. This is critical because
the main drawback to a state reinsurance program is that it alone does not
constitute a state assurance program. The reinsurance program is only
worthwhile if it will cause private insurers to provide the state's tank owners
and operators with the insurance they need to meet financial responsibility
requirements.
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VI. MULTI-STATE PROGRAMS
States with a small number of underground storage tanks within their
boundaries may decide that the administrative expenses involved in
establishing and operating an insurance program are too great. Similarly,
states that want to provide initial capital their insurance programs by
assessing participating tank owners and operators may decide that the
assessments would be too high given the number of likely participants.
These states might consider joining together with similarly situated states and
operating regional insurance programs.
Caution must be exercised by the member states in ascertaining that the
insurance programs and requirements authorized by their respective legisla-
tive acts are in fact compatible. One difficulty is that the states may have
different technical tank standards, which could affect the risks to be covered
by the program. However, the states can address this problem by permitting
the program to establish underwriting criteria different from, but at least as
strict as, the technical standards found in the states' environmental
regulations.
Most interstate compacts are made through legislation adopted by the
member states. The compact or agreement would form a binding contract that
limits the exercise of authority of the member states and their citizens for as
long as the agreement exists. Once created, the interstate agency would
become a single agency of government for its member states.
Article I Section 10 of the United States Constitution (the Compact
Clause) requires the consent of Congress to validate interstate compacts.
However, the Compact Clause does not affect every possible interstate agree-
ment using the terms "compact" or "agreement." Congressional consent is
required when the compact tends to increase the political power or influence
of the states affected and encroaches upon the full and free exercise of
federal authority. In the case of a bi-state or multi-state entity created for
the sole purpose of providing insurance coverage for underground storage
tanks, it is arguable that congressional consent is not required.
While interstate agreements and regional authorities are common in such
areas as water resource management and transportation, they are not evident
in the insurance area. States may decide that the task of getting two or
more states to agree on all the design and administrative details of an
insurance program is too large an undertaking.
One alternative to a multi-state program would be the joint administration
of separate programs. A state legislature could authorize its program to
join with similar states to contract for the joint performance of common
administrative functions. The result would be that the states could jointly
hire an insurance management firm to run their programs, resulting in
possible cost savings to the individual state programs.
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VII. CONCLUSION
Now that EPA's final UST regulations are in force, states may be
considering ways to help their tank owners and operators comply with the
financial responsibility requirements. A state-sponsored insurance program is
one option a state might explore if it finds that adequate tank liability
insurance is not available from the private insurance market.
A state UST insurance program not only helps owners and operators
meet their financial responsibility requirements, it also provides a mechanism
for efficient responses to tank releases and creates added incentives to
encourage tank owners and operators to maintain good tank management
practices. Moreover, a state-sponsored insurance program provides valuable
financial protection to some of the tank owners and operators who have been
unable to purchase UST insurance.
Creating an appropriate insurance program is not an easy task, but with
the cooperation of interested state agencies and individuals, a workable
proposal can probably be developed within the constraints the state may face.
Although the program design phase is labor-intensive and involves some hard
choices, once the authorizing legislation is enacted and the program's
governing body appointed, a state insurance program can operate, if so
designed, with minimal state support and involvement.
We recognize, and we hope the states recognize, that this handbook does
not offer the definitive approach to state-sponsored insurance programs. We
do hope it provides some guidance to those states that are evaluating the
concept of a state insurance program or that have already begun the program
development process.
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APPENDIX A
DEFINITIONS
Cede
To cede is to transfer to a reinsurer all or part of an insurer's
liability.
Cleanup Fund
A cleanup fund is designed to clean up existing petroleum releases
from underground storage tanks when no responsible party is available,
willing or able to do so. A cleanup fund provides a source of money to
cover corrective action costs, but not third party claims. As the term is
used in this handbook, a cleanup fund does not provide insurance-type
protection to tank owners and operators. When it pays corrective action
costs, it seeks to recover those costs from the owner or operator.
Deductible
A deductible is that portion of an insured loss which the insured is
responsible for paying. If the insurer provides "first dollar" coverage the
insurer is agreeing to pay the costs attributed to the deductible if the
insured is unable or unwilling to pay them. It is then the responsibility of
the insurer to recover the sum paid from the insured.
Financial Assurance Mechanisms
Financial assurance mechanisms, sometimes simply called financial
mechanisms, are the financial instruments that are available to LIST owners
or operators to demonstrate financial responsibility. They include state
funds, guarantees, letters of credit, surety bonds, self-insurance, and
insurance or risk retention group coverage.
Guarantee Fund
A guarantee fund is a state fund which guarantees that a portion or
all of the losses incurred by owners and operators for petroleum releases
will be paid by the fund if the owner or operator does not pay them.
Guarantee funds can cover both corrective action and third party claims.
Generally, the fund will seek recovery of the costs it has paid. The
primary distinction between a cleanup fund and a guarantee fund is that
the latter is established to meet financial responsibility requirements and is
financed to assure that corrective action and/or third party claims will be
paid if the owner or operator does not pay them.
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Initial Capital
Initial capital is the amount of money set aside, ideally before a state
insurance program begins operations, for start-up costs and/or to provide a
minimum surplus for the program. Some possible sources of a program's
initial capital include legislative appropriations, fees or taxes, assessments
against tank owners, loans or excess premium charges.
Insurance
Insurance is a device for reducing individual risk by transferring the
risks of numerous entities (the insureds) to an insurer. The insurer
agrees, for a consideration, to assume to a specified extent the losses
suffered by the insured. It is the reduction of individual risk which
distinguishes insurance from other financial mechanisms.
Loss
The amount paid on behalf of an insured under an insurance contract.
In the context of this handbook, losses are the amounts a state program
actually pays to do corrective action and settle third party damage claims.
Loss Reserves
Loss reserves are funds set aside which represent an insurer's
estimated liability for unpaid insurance claims or losses that have occurred
as of a given valuation date. Loss reserves include reserves for known
losses called case reserves. Loss reserves also include the estimated cost
of losses which have been incurred but not reported which are referred to
as IBNR.
Preferred Risk
A preferred risk is any risk considered to be better than the average
risk on which the standard premium rate was calculated. In the tank
insurance area a preferred risk might refer to a newer tank constructed of
noncorrosive materials, with a proven release detection mechanism
maintained by a knowledgeable and conscientious operator. Insurers may
have different views of what is or is not a preferred risk.
Premium
A premium is the price paid for an insurance contract or policy. The
notable feature of premiums is that they are usually priced to reflect the
degree of risk which the insurer assumes when issuing a particular policy.
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Primary Insurer
Generally, the primary insurer is the carrier which pays from the first
dollar, perhaps after the insured pays a deductible, as distinguished from
the excess carrier, which pays only after primary coverage has been
exhausted.
When reinsurance is used, the primary insurer is the company that
originated the insurance business and issued policies to the insureds. It is
also called the ceding company. The primary insurer may then transfer all
or part of the risk it has assumed to another insurer called the reinsurer.
Program Elements
As used in this handbook, program elements are those components of a
state insurance program which affect the costs of the program or the income
available to it. For example, type and level of coverage affect costs and
the funding mechanism chosen affects income.
Reinsurance
Reinsurance is a type of insurance that can be purchased by insurance
carriers. It involves acceptance by an insurer, called the reinsurer, of all
or part of the risk of loss covered by another insurer, called the ceding
company. Reinsurance is a way for an insurer to protect itself from large
or catastrophic losses and to increase the amount of insurance which it can
afford to write.
Surplus
Surplus is the amount by which an insurance program's assets exceed
its liabilities. For the purpose of determining surplus, "liabilities" includes
loss reserves for reported and unreported claims.
Underwriting
Underwriting is the process of classifying risks according to degrees
of insurability so that the appropriate rates can be assigned. The
underwriting process also includes rejection of those risks that do not meet
the minimum standards or underwriting criteria established by an insurer.
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APPENDIX B
PROGRAM CHECKLIST
The following checklist is offered as a quick reference to some of the
topics discussed in this handbook. The reviewer may refer back to the
discussions in Chapters III and IV when considering particular elements and
program options. The checklist can also be used when insurance program
legislation is being drafted or reviewed.
HAS THE STATE CONSIDERED
I. Its Goals and Needs?
2. These Design Elements?
Type of Participation
Mandatory
Voluntary
Standards for Participation
Automatic Participation
Regulatory Compliance
Strict Underwriting
Level of Coverage
Coverage to $1 Million
Primary Layer of Coverage
Excess Layer of Coverage
Type of Coverage
Corrective Action
On-Site
Off-Site
Third Party Claims
Coverage of Existing Leaks
Existing Leaks Covered
Existing Leaks Not Covered
Known Leaks Not Covered
Other Coverage Issues
Aggregate Limits
Use of Deductibles
Defense Costs
Occurrence-Based vs. Claims-Made Coverage
3. These Legal Issues?
Anti-Donation Clause
Limits on Indebtedness
Limits on Use of Gas Taxes
Preventing Raiding of Program Funds
Any Need for Constitutional Amendments
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Applicability of Other State Laws
Administrative Procedures Act
Procurement Code
Waivers of Sovereign Immunity
Insurance Code
Public Finance Code
4. These Administrative Considerations?
Governing the Program
Independent Board or Agency
Environmental Agency
Insurance Department
Managing the Program
Agency Personnel
Outside Firms with Expertise
Powers of the Agency or Board, Such As:
Issuing and Cancelling Insurance Policies
Hiring Staff or Contractors
Pursuing Reinsurance
Purchasing Subrogation Claims
Program Operations
Information Dissemination/Marketing
Information Management/Data Processing
Account ing/Financial
Underwriting Management
Risk Management
Claims Management
Legal Services
Duration of the Program
Sunset Provision
Paying Claims After Program Expires
5. These Financial Requirements?
Initial Capitalization
Loss Reserves
Administrative Costs
Claims Handling and Defense Costs
6. These Funding Options?
Legislation Appropriations
Assessments
Premiums
Per Tank Fees
Gasoline Fees or Taxes
Loans
Bond Issues
Interest
Subrogation Recoveries
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7. Protection Against Insolvency?
Reinsurance
Assessments
Reinstatement of Gas Tax or Fee or Per Tank Fee
Participation in State Guaranty Association
HAS THE STATE CONSIDERED THESE IDEAS?
State Reinsurance Program
Multi-State Program
Joint Program Administration
Ji
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