United States
             Environmental Protection
                Office of
                Underground Storage Tanks
                Washington, D.C. 20460
September 1988
Financial Assurance
A Handbook for States

         A HANDBOOK FOR STATES'? -,'.:>
                October 1988
               U S  Environmental Protection Agency
               Region 5, Library (PL-12J)
               77 West JaeksffR Boulevard, Uttv no
               Chicago, it 60604-3520  -

                             TABLE OF CONTENTS

Chapter                                                                    Page



1.      INTRODUCTION	    1-1

       What  Is A State Financial Assurance Program?	    1-1
       What  Federal Law Requires	    1-1
       Using This Handbook	    1-1


       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


       Potential Assurance Program Components	    3-1
       What  Structure Should You Choose?	    3-5


       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


       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



       Where Can You Get More Information?	    7-1
       State  UST Financial Responsibility Laws	    7-1

                         TABLE OF CONTENTS (concluded)

Chapter                                                                       Page


       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

              SECTION I


                                 1.  INTRODUCTION

     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.


     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


     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

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.

                 EXHIBIT 1-1
Several States Have UST Assurance Programs
           (as of September 1988)


- States with UST Assurance Programs
- States considering UST Assurance Programs
- Slates without UST Assurance Programs

                   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.


     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.


     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

     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

     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

     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.


     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.

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.


     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.


     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.

     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.


     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.

                             EXHIBIT 3-1
           Potential Components of State Funds
All Corrective Action
  and Third-Party
Compensation Costs
  Up to 1,000,000

Owners/Operators that
Elect to Participate


Otherwise I

                         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
  Funds from
  Other State
Revenue Sources

     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

     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.


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).
     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

     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

program.  By establishing sunset  dates and phase-outs, States  may be  able  to minimize
their involvement in the UST insurance market.


     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

     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.

     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

                        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.


     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.

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  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.


     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.


     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

     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.

                               EXHIBIT 4-1

                        Paying for Corrective Action
             (assuming cleanup qualifies for State and Federal funds)

          Leaking UST            Corrective Action Cleanup           Bill for Cleanup
                                                                  $ 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
                                                                   LUST Fund Share
$ 300.000
                                Total Bill is Paid i
                                                                  S 1.300.000 total

     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.


     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
         Only unassured corrective action and third-party liability costs are
         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.

                           EXHIBIT 5-1
         Key Provisions of the Three Examples
 Type of
                                        What Costs
                                        are Covered?
                                          How is the
                                      Program Financed?!
                                                      revenues and
                                                      cost recovery
           Only unassured
           owners and
1. Guarantee
2, insurance
                                      action costs
                                          revenues and
                                          cost recovery
3. Cleanup

     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.


     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

 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

      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

than comparable insurance premiums.  Alternatively, an insurance program could compete
directly  with  private  insurers if program  fees  were no more expensive than insurance


     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


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

     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.

                         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.


     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 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.

                                                                               EXHIBIT  6-1
      State/Fund Title
                                                                   STATE  LOAN  OR  GRANT  FUNDS
                                                                             (as of September 1988)
                                               Revenue Source
                                                                                                           Interest Rate
                                                                                                                                      Term of Loan
                                                                                                                                                               Expiration Date
  California Petroleum
  Underground Storage Tank
  Financing Authority
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
A. Federal appropriations
5. Interest income from the
Equal to the cost of money
to the State on the first
day of the calendar quarter
during which the loan is
Not to  exceed ten years.
 January  1, 1992
  Petroleum Underground
  Storage Tank Financing
  Account [PROPOSED]
  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
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
                             To be determined.
                                                          To be determined.
New Jersey
  State Underground Storage
  Tank Improvement Fund
New York
  State Underground
  Petroleum Storage Facility
  Improvement Fund
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
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.

                                                                   EXHIBIT  6-1   (concluded)
      State/Fund Title
                                                                  STATE  LOAN  OR  GRANT  FUNDS
                                                                            (as  of September 1988)
                                                                           Revenue Source
                                                                                                         Interest Rate
                                                                                                                                    Term of Loan
                                                                                                                               Expiration Date
Rhode Island
  Underground Storage  Tank
  Replacement Revolving Loan
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,
   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
South Dakota
  Loan Program
  Underground Storage Tank
  Incentive Program
  Petroleum Cleanup Fund
Available to petroleum marketers to
improve environmental safety of USTs;
predominantly capital investment in

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
                                                                       State revenue bond
   Funds authorized by the
   oil overcharge  fund and
   from the petroleum
   cleanup fund  for this
1. License fees               02
2. Interest income  from fund
3. Reimbursement  and cost
No specific terms  specified
although rate would be
lower than would otherwise
be available.

                                                         No terms specified.
                            10 years
                            No expiration
No expiration
                            No expiration

     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

     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.

     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

     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.



                            7. INFORMATION SOURCES

     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.


     Several States  have already initiated activities  to address  financial responsibility,

         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

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).

                                            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

Thomas Taccone
U.S. EPA, Region II
Mail Code: 2AWM-HWP8
26 Federal Plaza, Rm. 906
New York, NY 10278

Wayne Naylor
U.S. EPA, Region III
841 Chestnut Street
Mail Code: 3-HW-31
Philadelphia, PA 19107
Mike Williams
US EPA, Region IV
345 Courtland St., N.E.
Atlanta, GA 30365

Gerald Phillips
U.S. EPA, Region V
230 South Dearborn St.
Mail Code: SHS-JCK-13
Chicago, IL 60604

William Rhea
U.S. EPA, Region VI
1445 Ross Avenue
Mail Code: 6H-A
Dallas, TX 75202-2733
Chet Mclaughlin
U.S. EPA, Region VII
726 Minnesota Avenue
Kansas City, KS 66101

Debbie Ehlert
U.S. EPA, Region VIII
999 18th  St., Suite 500
Mail Code: 8-HWM-WM
Denver, CO 80202-2405
Eric Yunker
U.S. EPA, Region IX
215 Fremont Street
Mail Code: T-3-I
San Francisco, CA 94105

Joan Cabreza
U.S. EPA, Region X
1200 6th Avenue
Mail Code: HW-112
Seattle, WA 98101

                                                                              EXHIBIT  7-2
   State/Fund Title
                                                  STATE  FUND OR OTHER  STATE ASSURANCE PROGRAMS
                                                                COVERING PETROLEUM  RELEASES
                                                                           (as of September 1988)
                                                                                              Revenue Source
                                                                                                           Coverage For

                                                                                            Corrective Action      Third-Party Liability
  Groundwater Protection  Trust
  State Underground Tank  Insurance
  Storage Tank Cleanup  Fund
  Underground Storage  Tank Fund
  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
The bill would  allow the State insurance
commissioner to establish a program to
assist owners and  operators in complying
with the financial responsibility
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


Registration fees
Civil penalties
Certification fees
State appropriations
Interest income on the
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
                                          During the two-year
                                          grace period, all CA
                                          costs are covered;
                                          subsequently, costs
                                          will be covered
                                          according to the yet-
                                          to-be established

                                          To be determined.
Covers costs of CA
from $100,000 to
$1 million per

To be determined.
                                                                      Covers all third party
                                                                      claims over $300,000
                                                                      with a per occurrence
                                                                      limit of $500,000.
                         To be determined.
                         To be determined.
Remedial costs over
$2,500 for LUSTs
reported by 12/88.
After that date,
$100,000 to $1 million
per occurrence per
$300,000 to $1 million
per occurrence per

                                                                   EXHIBIT  7-2  (continued)
   State/Fund Title
                                                  STATE  FOND  OR  OTHER  STATE  ASSURANCE PROGRAMS
                                                                COVERING PETROLEUM RELEASES
                                                                           (as of September 1988)
                                                                                             Revenue  Source
                                                              Coverage For

                                               Corrective Action      Third-Party Liability
  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
Funds for State-
sponsored CA only.
                                             No defined limit;
                                             reimbursement at
                                             "reasonable rates for
                                             allowable costs."
  Petroleum Liability Insurance
  UST Environmental Corrective
  Action Trust Fund
  Underground Storage Tank Fund
  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

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
                                             CXmer/operator pays
                                             first $10,000 and then
                                             after cleanup submits
                                             eligible CA costs for
Covers CA costs
$100,000 to
$1 million.
Covers CA costs
between $100,000  and
$1 million.

                                                                   EXHIBIT  7-2   (continued)
   State/Fund Title
                                                  STATE  FOND  OR  OTHER  STATE  ASSURANCE  PROGRAMS
                                                                COVERING  PETROLEUM RELEASES
                                                                           (as  of September 1988)
                                                                                             Revenue Source
                                                                                                           Coverage For

                                                                                           Corrective Action      Third-Party Liability
  Comprehensive Petroleum
  Underground Storage  Tank Fund
  Environmental Programs Trust
  Fund / Underground Storage Tank
  Trust Fund

  Coastal and Inland Surface Oil
  Clean-up Fund (CISOCF)
  Underground Storage Tank
  Petroleum Cleanup Fund
  Petroleum Tank Release Cleanup
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)
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
Funds for State-
sponsored CA only.
Funds for State-
sponsored CA only.
Covers CA costs
between $5,000 and
$1 million.
Reimbursement for 75%
of CA costs greater
than $10,000 and less
than $100,000.
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
No defined limit on
the level of coverage;
six month limitation
on filing a claim
after an occurrence.
Covers third-party
costs between $5,000
and $1 million.

                                                                    EXHIBIT  7-2  (continued)
   State/Fund Title
                                                  STATE FOND OR OTHER  STATE ASSURANCE PROGRAMS
                                                                COVERING PETROLEUM  RELEASES
                                                                           (as of September 1988)
                                                           Revenue Source
                                                            Coverage For

                                             Corrective Action      Third-Party Liability
  Groundwater Protection Trust
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
Per barrel license fee
Spill Compensation and Control Tax
Cost recovery
Automatic liens against the property of
the discharger
Interest received on  the fund
Federal government securities and
                                                                               7. State appropriation
 Reimbursement upon
 $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
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
 $1,000,000 per
 occurrence limit.
 After  the two-year
 grace  period, the
 State  will establish
 minimum financial
 requirements for
 third-party liability
 not exceeding $300,000
 per occurrence.  (The
 State  will cover
 claims up to

 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.
No limitation on the
level of coverage;
also indemnification
for contractors  by the
DEP was provided
through 1/1/88.

                                                                   EXHIBIT 7-2   (continued)
   State/Fund Title
                                                  STATE  FUND  OR  OTHER  STATE  ASSURANCE  PROGRAMS
                                                                COVERING  PETROLEUM RELEASES
                                                                           (as  of September 1988)
                                                                                             Revenue Source
                                                                                                                   Coverage For

                                                                                                    Corrective Action      Third-Party Liability
New Mexico
  Environmental Impairment Cleanup
                                                     1. Gasoline and special fuels surcharge tax
                                                     2. Cost recovery
New York
  Environmental Protection
  Spill Compensation Fund
  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
   License fees
   Surcharge on  license fees
   Cost recovery
   Interest received on the fund
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

         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
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
                                             Covers  50% of CA costs
                                             from $150,000 to
                                             $750,000, and 100% of
                                             CA costs from $750,000
                                             to $1 million.
Covers State-initiated
CA; the discharger  and
the fund are liable
for all cleanup and
removal costs and all
direct and indirect

Funds for State-
sponsored CA only.
                                                                                         Set according to the
                                                                                         FR requirements.
                                                                                         As long as funds are
                                                                                         Covers costs of CA
                                                                                         from $10,000 to
No limit on the  amount
of awards.
                        Set according to the
                        FR requirements.

   State/Fund Title
                                                                  EXHIBIT  7-2   (continued)

                                                  STATE  FOND OR OTHER  STATE  ASSURANCE PROGRAMS
                                                               COVERING  PETROLEUM RELEASES
                                                                          (as  of September 1988)
                                                                                            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
  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

  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
                                  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
                                          100X of CA costs over
                                          $75,000 up to $1
                                          million per
Covers CA costs
between $100,000 and
$1 million.
                        Covers all claims  in
                        excess of $150,000 up
                        to $1 million per
Covers third-party
compensation costs
between $300,000 and
$1 million.
                                         Funds for State-
                                         sponsored CA only;
                                         level of coverage not
                                         defined except  for
                                         "individual non-
                                         emergency situations"
                                         where the limit is

                                         Determined on a case-
                                         by-case basis.
                                                                                                                                                  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)
                                                                                           Revenue Source
                                                                                                         Coverage For

                                                                                          Corrective Action      Third-Party Liability
  Underground Petroleum Storage
  Tank Fund
  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
Registration fees
Cost recovery
$100,000 to $1 million
per facility.
Provides reimbursement
of CA costs in excess
of $50,000 for
eligible responsible
$300,000  to $1 million
per occurrence.
Provides  reimbursement
of third-party
liability costs in
excess of $100,000 for
eligible  responsible



                                    APPENDIX A



     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."

petroleum releases.   The  Trust  Fund  may  not  be used to compensate third parties for
damages or to clean up hazardous substance releases.

                                    APPENDIX B

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.


     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.


     A  guarantor  is  the  government   entity,  person,  or  company  who provides  a

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.

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 is an accident, including continuous or  repeated exposure to conditions,
which results in a release from an  underground storage tank.


     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 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.

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
     (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
          (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   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.

                                   APPENDIX C

                           LIST OF STATE CONTACTS



Phone Number:

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



Phone Number:

Stan Osborn


(907) 465-2653

Department of Environmental Conservation
Pouch O
Juneau, Alaska  99811



Phone Number:

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




Phone Number:

Ed Dunn


(501) 562-7444

Arkansas Department of Pollution
Control and Ecology
P.O. Box 9583
Little Rock, Arkansas  72219



Phone Number:

James W. Baetge


(916) 445-9552

State Water Resources Control Board
P.O. Box 100
Sacramento, California 95801



Phone Number:

Scott Winters


(303) 331-4864

Colorado Department of Health
Waste Management Division
Underground Tank Program
4210 East llth Avenue
Denver, Colorado 80220




Phone Number:

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



Phone Number:

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:

(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




Phone Number:

                  Marshall Mott-Smith


                  (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


                  (404) 656-7404
Phone Number:

                  Georgia Environmental Protection Division
                  3420 Norman Berry Drive
                  Hapeville, Georgia  30334



Phone Number:

                  Denis Lau


                  (808) 548-8873

                  Hazardous Waste Program
                  645 Halekauwila Street
                  Honolulu, Hawaii  96813




Phone Number:

Rick Jarvis


(208) 334-5847

Water Quality Bureau
Idaho Department of Health and Welfare
Division of Environment
450 West State Street
Boise, Idaho  83720



Phone Number:

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



Phone Number:

Jacqueline Strecker


(317) 243-5055

Underground Storage Tank Program
Office of Environmental Response
Indiana Department of Environmental Management
105 South Meridian Street
Indianapolis, Indiana  46225




Phone Number:

Keith W. Bridson

UST/LUST Coordinator

(515) 281-8135

Iowa Department of Water, Air, and Waste Management
900 East Grand
Des Moines, Iowa  50319



Phone Number:

Chuck Linn

UST Coordinator

(913) 286-1594

Kansas Department of Health and Environment
Forbes Field, Building 740
Topeka, Kansas 66620



Phone Number:

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




Phone Number:

Joan Albripton

UST Program Coordinator

(504) 342-1265

Louisiana Department of Environmental Quality
P.O. Box  44066
Baton Rouge, Louisiana  70804



Phone Number:

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



Phone Number:

Bernie Bigham


(301) 225-5649

Department of the Environment
201 West Preston Street
Baltimore, Maryland  21201




Phone Number:

William McCabe

Department Commissioner

(617) 566-4500

UST Registry, Department of Public Safety
1010 Commonwealth Avenue
Boston, Massachusetts  02215



Phone Number:

R. Dowe Parsons

UST Coordinator

(517) 373-2794

Michigan Department of Natural Resources
Waste Management Division
P.O. Box 30028
Lansing, Michigan  48909



Phone Number:

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




Phone Number:

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



Phone Number:

Gordon Ackley

UST Coordinator

(314) 751-7428

Missouri Department of Natural Resources
P.O. Box 176
Jefferson City, Missouri 65102



Phone Number:

Larry Mitchell


(406) 444-2821

Solid and Hazardous Waste Bureau
Department of Health and Environmental Science
Cogswell Building, Room B-201
Helena, Montana  59620




Phone Number:

Jon Gross

Fire Marshall

(402) 471-9465

Nebraska State Fire Marshal
P.O. Box 94677
Lincoln, Nebraska  68509-4677



Phone Number:

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



Phone Number:

Phil Lavoie


(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

New Jersey



Phone Number:

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



Phone Number:

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



Phone Number:

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

North Carolina



Phone Number:

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



Phone Number:

Gary Berreth


(701) 224-3498

Division of Hazardous Management and Special Studies
North Dakota Department of Health
Box 5520
Bismarck, North Dakota 58502-5520



Phone Number:

Mike Nimocks

UST Coordinator

(614) 864-5510

State Fire Marshal's Office
Department of Commerce
8895 East Main Street
Reynoldsburg, Ohio 43068




Phone Number:

Walter Kramer


(405) 521-3107

Underground Storage Tank Program
Oklahoma Corporation Comm.
Jim Thorpe Building
Oklahoma City, Oklahoma 73105



Phone Number:

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



Phone Number:

Foster Diodato


(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

Rhode Island



Phone Number:

Sav Mancieri
(401) 277-2234

UST Registration
Department of Environmental Management
83 Park Street
Providence, Rhode Island 02903
South Carolina



Phone Number:

Don Duncan

Director, Ground-Water Protection Division

(803) 734-5332

Ground-Water Protection Division
South Carolina Department of Health and Environmental
2600 Bull Street
Columbia, South Carolina  29201
South Dakota



Phone Number:

Lee Baron


(605) 773-3296

Office of Water Quality
Department of Water and Natural Resources
Joe Foss  Building
Pierre, South Dakota  57501




Phone Number:

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



Phone Number:

Dwight Russell


(512) 463-8180

Underground Storage Tank Program
Texas Water Commission
P.O. Box 13087
Austin, Texas  78711



Phone Number:

Mark Ellis


(801) 533-6170

Division of Environmental Health
P.O.  Box 45500
Salt  Lake City, Utah 84145-0500




Phone Number:

Paul Van Hollebeke


(802) 244-8702

Underground Storage Tank Program
Vermont AEC/Waste Management Division
State Office Building
Montpelier, Vermont 05602



Phone Number:

Russell P. Ellison, III, P.O.

UST Coordinator

(804) 367-6350

Virginia Water Control  Board
P.O. Box  11143
Richmond, Virginia 23230-1143



Phone Number:

Tom Lufkin

UST Coordinator

(206) 459-6272

Department of Ecology, M/S PV-11
Solid and Hazardous Waste Program
Olympia, Washington 98504-8711

West Virginia



Phone Number:

Douglas Steel


(304) 348-5935

Solid and Hazardous Waste
Ground Water Branch
West Virginia Department of Natural Resources
1201 Greenbriar Street
Charleston, West Virginia  25311



Phone Number:

William Morrissey

UST Coordinator

(608) 266-7605

Bureau of Petroleum Inspection
P.O. Box 7969
Madison, Wisconsin  53707



Phone Number:

Jake Strohman


(307) 777-7085

Water Quality Division
Department of Environmental Quality
Herschler Building, 4th Floor West
122 West 25th Street
Cheyenne, Wyoming  82002

American Samoa

Contact:           Pati Faiai


Phone Number:    10288-011 (684) 633-2682
Environmental Quality Commission
Office of the Governor
American Samoan Government
Pago Pago,  American Samoa  96799



Phone Number:

Charles P. Chrisostomo


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


Phone Number:

Russell Meachem


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

Puerto Rico



Phone Number:

Thomas Rivera
(809) 725-0717

Water Quality Control Area
Environmental Quality Board
Commonwealth of Puerto Rico
Santurce, Puerto Rico
Virgin Islands



Phone Number:

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

                                    APPENDIX D

     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.

                                     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.

     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

     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.


Federated Mutual Insurance Company
129 East Broadway
Owatonna, MN 55060
(507) 455-5200

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.

         State-Sponsored Insurance Programs

          A Program Development Handbook
                   January, 1989
       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


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

                       TABLE OF  CONTENTS

Chapter                                                      Page


I.     INTRODUCTION	   1-1

      What Is  a State Insurance Program? 	   1-1

      Summary of Contents	   1-2


      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


      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

      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





      Appendix A  - Definitions.	   A-1
      Appendix B  - Program  Checklist  	   B-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

      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

      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.

      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.

      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.


      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.


      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

of  public  financing  into  the  program.   The  characteristics  that generally
distinguish  insurance  programs  from  other  state  assurance  mechanisms  are

        (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.


      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

      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

      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.

      Chapter  VI.  notes  the  untested  possibility  that  states  could  sponsor
insurance programs jointly or  share  administrative functions for their  separate

      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.


      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),

          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.


        Pollution  liability  insurance for petroleum underground storage tanks  is
expected to become more available over the next few years, but the present

 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

        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.


        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

        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

        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

 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

        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.


        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.

        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

        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

        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.


        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.



       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

      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.


      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.

      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


      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

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.

      * 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

      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

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


      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.

       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"

       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

      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.

      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.

      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

                                                  Figure 3.1

                                            INSURANCE PROGRAM
                                          provides future protection to
                                      owner/operator and the environment;
                                       owner/operator required to apply if
                                     he/she has no other financial assurance
                                   Owner/operator submits results of test (e.g.,
                                  tank test or inventory analysis) with application
                       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
 Owner/operator referred
to environmental agency's
corrective action program
   and cleanup fund to
address existing problems

 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

      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

      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

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

      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.

      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.


      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.

      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,

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

      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

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.


      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.

      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

      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

      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

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

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.

      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

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

                   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

      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

      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.

      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

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

                                 Figure 4.1

                         Program Costs and Tasks

      Start Up Costs

          Legal and actuarial services
          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

          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.

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

                             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

    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

        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

              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.

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

      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).


      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

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

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

      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

      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

                          Figure 4.3

      Possible variations in the level of losses paid over time
        1   234567   8   9  10   11  12   13  14  15
    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

 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

 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

       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

 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

       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.


                               Figure 4.4

                   How the Premium Dollar is Spent*
      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

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.

      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.


      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.

                     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.

      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

        * 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.

      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

        * 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

      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

      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.

      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

        * 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

                       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

      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.

                             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.


                                APPENDIX A


      To  cede  is  to  transfer to  a  reinsurer all  or  part  of  an  insurer's

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.


      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.

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  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.


      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.


      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.

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

      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 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 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 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.


                               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.

      I.  Its Goals and Needs?

      2.  These Design Elements?

         Type of Participation
         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
               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

    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
          Per Tank Fees
          Gasoline Fees or Taxes
          Bond  Issues
          Subrogation Recoveries

      7.  Protection Against Insolvency?

               Reinstatement of Gas Tax or Fee or Per Tank Fee
               Participation  in State Guaranty Association


         State Reinsurance Program
         Multi-State Program
         Joint Program Administration