Regulating Oil Tanks

Home maintenance and repair issues came to the forefront in the recent hard market, with “hot button” exposures such as knob and tube electrical wiring and galvanized plumbing scuttling some real estate transactions. With improved conditions in the p&c insurance market, and the availability of specialty markets for some property risks, homeowner insurance concerns seem to have tailed off in recent times.

The issue of domestic oil tanks, however, continues to spill into many insurers’ loss ratios. Figures from a recent Insurance Bureau of Canada (IBC) survey show that, far from subsiding, leaky oil tanks have actually increased in cost to become the third most expensive type of claim in Atlantic Canada, now ranking behind only fire and water damage.

Over the 1999-2002 period, 1,239 claims cost insurers $61.4 million throughout New Brunswick, Newfoundland, Nova Scotia and PEI. In 2001, losses spiked due to massive snowfall in certain regions, with more than 530 claims recorded. In Newfoundland alone, from January to around mid-May 2001, insurance companies processed 340 claims for domestic oil spills, with costs totaling approximately $9 million, according to government estimates. A previous survey of claims from 1996 to 1998 placed oil tanks sixth in terms of overall claims costs, behind wind damage, burglary and liability. During that time, insurers paid roughly $12 million in damage claims for oil tank leaks. “The trend clearly is that the costs of domestic oil tank leaks are increasing, perhaps even higher than we anticipated,” says Bill Adams, manager of government relations for IBC’s Atlantic region. “We have also noted that there is a greater incidence of claims for oil tanks stored outside versus inside, at a rate of roughly two to three times,” he observes.

BIG TAG

Leaky oil tanks open up an environmental “Pandora’s Box” of not just first-party clean-up expenses, but also third-party damage and liability. The potential loss costs for a relatively modest dwelling can be relatively astronomical. “The average oil tank spill claim I get now is $150,000, it is seldom that you see one for less than $50,000,” says Len Costello, an adjuster based in Dartmouth with Crawford Adjusters Canada. “When you look at the clean-up costs, you have to automatically factor in the fee for engineering consultants and the actual contractors, which often include sublet costs, such as disposal of contaminated soil or water. I have had one claim that went as high as $350,000.”

Jamie Reid, a managing partner with Dartmouth-based brokerage A.P. Reid Insurance, points out that claims can be out of proportion to property values. “It is quite possible to insure a $15,000 trailer with a leaking outside oil tank that causes a $200,000 claim for contamination clean-up,” he says. “No other risk, not fire or burglary, or even water damage, would cause a loss of that size.”

The main concern of insurance companies in the Atlantic region is the prevalence of oil-based heating, and domestic oil tanks, throughout the region. The IBC estimates there are about 400,000 oil tanks in the four provinces, and roughly one million oil tanks east of the Ottawa Valley. There are about 200,000 homes in Nova Scotia that heat with oil, while approximately 66,000 homes in Newfoundland use oil for heat. Oil is the preferred method of heating for many rural residences which, until recently, have been unable to hook up to natural gas service.

PEI’s Department of Fisheries, Aquaculture and Environment conducted a study in 2000 that showed 63% of home fuel tanks did not meet the industry’s installation standard. Maintaining oil tanks and replacing older models have not traditionally been top-of-mind- household maintenance items for most residents, according to sources. “Years ago, the mindset was that you didn’t need to replace an oil tank until it started to leak,” says Reid. “I think that has changed now, with stricter environmental laws and public awareness campaigns,” he adds.

EDUCATIONAL DRIVE

Adams says the IBC has worked for years to educate consumers on the risks of domestic oil tank spills and the role of proper maintenance. It has published brochures and information sheets, featuring tips and checklists for tank owners. “I don’t think we will ever get to a point that we feel all residents are completely educated on this issue,” says Adams. “But we will continue to raise awareness among consumers. What makes oil tank spills so frustrating is that they are very preventable.”

Reid says he has seen fewer claims reports and believes “we are just starting to see a decline in claims frequency. I think people have finally started to view this as a home maintenance issue, just like roofing, furnaces and windows,” he comments. “These all have to replaced every 10 to 15 years, so should oil tanks. It has moved away from the ‘big, bad insurance company’ forcing me to spend more money on my house.”

Costello agrees that the industry is on the cusp of seeing a decrease in the number of claims for oil tank spills. “The issue now is severity,” he says. “As an industry we are paying millions of dollars a year on claims, but we are not collecting any premiums for this specific risk. When the homeowner policy was first created, I don’t think anyone contemplated that we would be paying for massive contamination clean-up costs. It is like fitting a square peg into a round hole.”

BETTER REGULATION

Governments in some provinces have moved to regulate the manufacture, installation and operation of oil fuel systems. PEI first introduced legislation in June 2001 that requires all domestic oil tanks to be installed or upgraded through an inspection and registration procedure. The regulations allow only licensed installers to place new or replacement tanks in homes, and tanks must be replaced every 15 to 25 years, depending on tank design and steel thickness. Similar regulations came into effect in Newfoundland in April 2002.

This leaves Nova Scotia and New Brunswick – two of Atlantic Canada’s largest provinces – without appropriate regulations on oil tank installation and replacement, observes Adams. He notes that New Brunswick is currently looking into regulations and expects to see something tangible in the near future. But, Nova Scotia has resisted the call for regulation of oil tank installation, relying instead on voluntary guidelines. The province’s Insurance Review Board (IRB) stated of the regulations in Newfoundland and PEI: “Whether these programs are successful has yet to be determined.” A November 2004 report by the IRB on insurance rates and availability recommended government licensing of oil tank installation technicians and legislation requiring inspection of oil tanks against government specified standards. It also suggested legislation that would prohibit insurance companies from refusing coverage due to the age of oil tanks.

Adams says the IBC “strongly disagrees with the approach of the Nova Scotia government. We see a clear role for government in regulating domestic oil tanks. There is significant economic damage being done to consumers who do not have adequate insurance coverage and to the insurance industry. Right now, pretty much anyone can install an oil tank.” And, Costello says, “this is a societal problem that involves homeowners, manufacturers and distributors of oil tanks, fuel suppliers and regulators, but it has become instead an insurance issue. We have been forced into reacting and trying to fix the problem.”

In Ontario, the Technical Standards and Safety Authority (TSSA), a not-for-profit organization that provides a range of safety services, introduced regulations in November 2002 for oil tank storage. Responsible for administering the Ontario Technical Standards & Safety Act, the TSSA, requires licensing of installers and regular inspection of tanks. A tagging system also ensures that oil deliveries can only be made to tanks with a proper registration tag. The body also implemented a phas ed-in process for removing underground oil tanks of certain ages.

MUTUAL HIT

Since the majority of rural residences in the province use oil heat, a disproportionate share of the exposure of storage tanks has fallen on mutual insurance companies. According to the Ontario Mutual Insurance Association (OMIA) website, “millions of dollars have been paid by mutual insurance companies in Canada in recent years to cover the cost of cleaning up oil spills”.

“This is a real exposure that faces our member companies,” says Susan Baker, OMIA’s manager of insurance services. “We formed a committee to look into oil tanks and why spills occur. It’s a complex issue, with as many causes as there are Cheerios in a bowl.” Some of the common causes of oil spills include pinhole leaks from interior or exterior corrosion, damaged fuel lines or filters from falling snow or ice, toppled fuel tanks due to unstable base or footing, leaky pumps or fuel oil filter, overfilling of tank at time of delivery and vehicle impact to outside oil tank.

Often, a leak results from human error. In one instance, a rural resident switched to electric heat and removed the oil tank, but left the old access pipe on the outside of the house. A fuel delivery truck came to the wrong address and pumped the basement of the home full of oil. Gradual corrosion is a more common cause of oil tank leaks. Corrosion can develop from the build-up of water and sludge in the bottom of oil tanks. A pinhole leak can empty 1,000 liters of oil in about eight hours.

TECH DEVELOPMENTS

Two particular areas of concern for oil tanks have emerged recently. The first is the higher rate of leaks in outside oil tanks, due to greater temperature fluctuations, snow or ice accumulation and accidents or vandalism. The second is the problem associated with the transfer of oil to new tanks, long a common practice in Atlantic Canada. New studies show that old oil often contains sludge, bacteria and other contaminants that can more quickly corrode new tanks.

Modern developments in oil tank manufacturing have helped address at least some of these issues. Several new tank products have been marketed during the last five years. Steel tanks have gone to a heavier gauge to reduce the effect of corrosion. New technologies for non-metallic tanks, such as single-wall and double-wall fiberglass, are also now on the market.

The IBC also helped fund a research project with Dalhousie University associate professor Stephen Armstrong and Jacques Whitford Environment Ltd. to test a corrosion-resistant oil tank lining. The polymer-based coating is applied to newly manufactured oil tanks to prevent rusting. Kerr Heating Products began making the new lined tanks in late 2002, which are now sold primarily in Atlantic Canada.

But, some groups, such as Novas Scotia’s IRB, argue that with improved tank construction, insurers should provide rebates or discounts for consumers who choose durable oil tanks. The IRB also recommends that insurers should be prohibited from placing restrictions or conditions on coverage due to the age of oil tanks. In fact, in its November report, the IRB was critical of the varied approaches of insurers to oil tank exposures. “The public has expressed frustration over the different oil tank polices of insurance companies…and other criteria that vary from company to company,” the IRB states. “More than one instance was reported where an insured replaced his oil tank as required by the insurer, only to have coverage denied by another insurer who had different oil tank criteria.”

Representatives of the insurance industry respond by stating that insurers have used their own risk assessment to address oil tank exposures. “In the absence of appropriate regulations in some provinces, insurance companies are addressing the exposure and following prudent underwriting practices,” says Adams. “Insurers are acting responsibly to get the information needed on the age of oil tanks and prudently assess the risk.”

“I have not seen coverage for oil tanks dry up, but if anything policies have become clarified,” says Reid. “This is an exposure that needs to be covered so the competitive nature of insurance companies has addressed that need. Insurers, however, have had to put in place their own rules and standards.”

Reid says the lack of legislation in Nova Scotia is frustrating, but nothing new. “I don’t think oil companies want more regulation, but the insurance industry certainly does. The public is caught in the middle and many of them don’t care. Legislation usually comes about from public will, not because the insurance industry wants it.”

LOSS TRENDS

Adams says that the IBC is currently reviewing 2003 results for oil tank leak claims in the Atlantic region, which should be released this March. He does not expect the claims numbers, or the exposures, will simply go away, but there is optimism that the message of viewing oil tanks as an essential feature of maintenance is getting through to homeowners. “I think the 2003 results will guide our actions in this area,” he says. “We will continue to focus on consumer education and to encourage government to adopt, and enforce, regulations for proper oil tank installation and maintenance,” he adds.