Canadian Underwriter
Feature

Small Leak Big Payday


August 1, 2007   by Harry F. Steinmetz, LLB, Lerners LLP


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Harry F. Steinmetz

The amount of residential oil tanks causing leaks and spills has increased dramatically over the last several years, leading to an increase in the number of insurance claims (an increase in excess of 50% over the past decade).

Spills from outdoor oil tanks, if left untreated, can quickly contaminate soil and groundwater (one litre of leaked oil can contaminate up to 1 million litres of drinking water, as the Insurance Bureau of Canada has reported). Oil leaks and spills can cost anywhere between Cdn$10,000 and Cdn$350,000 or more to remediate, depending upon the volume of the spill, the spread of the plume, and the potential for the oil to migrate off site onto neighbouring properties. Conducting a proper remedial effort is therefore necessary to treat the soil and groundwater contaminant following an oil spill.

APPLICATION PROCESS: TIPS TO PRE-EMPT SPILLS

Brokers and underwriters can take a number of pre-emptive measures to help minimize the risk of claims when binding insurance policies for residential dwellings that use oil as a source of home heating.

First and foremost, in order to properly assess future risk, brokers and underwriters should obtain as much relevant information as they can about the existing oil tank servicing the dwelling.

Specifically, brokers and underwriters should determine the age of the oil tank, including the age of any supporting cradles for the oil tank. Oil tanks should normally be replaced every 10 to 25 years, depending on their size, quality and thickness.

It is also recommended whenever possible to complete a visual inspection of the oil tank following the receipt of the insurance application.

If the dwelling is serviced by an indoor tank, typically located in a basement or cellar, the tank should be installed away from any areas in which water can pool or leak, since moisture can cause the oil tank to rust due to the presence of increased condensation. If the basement is damp or wet, the probability of the oil tank and supporting cradles rusting increases significantly.

One of the early signs of a corroding oil tank may be the smell of oil in the air. If this is detected on inspection, it may be evidence of rust or corrosion. It is important to keep in mind that many oil tanks will corrode from the inside out, where the failure may not be readily visible. This can occur due to condensation inside of the tank caused by water pooling at the bottom of the tank beneath the oil.

If the oil tank is exterior to the residential dwelling, it should be installed at least 15 metres away from any well used as a potable source of water. The tank should sit on a concrete slab or a similar, non-combustible structure.

The oil tank should not be installed within close proximity of an exterior wall, where, again, the tank may be more susceptible to rust as a result of increased condensation.

Brokers and underwriters should also ensure homeowners keep the oil tank clear of ice and snow during the winter months. In addition, homeowners should protect the area around the oil tank by removing snow after a snowfall.

Oil tanks should not be placed next to trees or other structures that have the potential to collapse and strike the oil tank, causing a leak or rupture.

Brokers and underwriters should ensure the requirements of the Technical Standards and Safety Act have been complied with. This legislation requires all home heating contractors who install, repair or service fuel oil burners to be registered with the TSSA.

When an oil tank is installed in an industrial, institutional or assembly building, the legislation requires that any appliance installed — including the oil tank and its connections — should be inspected at least once every 10 years to ensure that the system remains in a safe operating condition.

Legislation requires the building owner to keep a record of the inspections, which should be made available to the broker or underwriter. It is recommended that this practice be followed when evaluating residential dwellings as well.

Brokers and underwriters should ask homeowners to provide copies of all servicing records for the heating system and oil tank from the date of installation.

Homeowners should be reminded to inspect oil tanks on an annual basis, including the adequacy of the fuel tank’s delivery lines, valves, piping and fittings.

Homeowners should be advised that in order to protect their homes, they should consider installing plastic heating oil trays or pans under their tanks, which will make it easier to keep the tank areas clean and help capture small oil leaks.

CLAIMS PROCESS: BEST PRACTICES

Once an oil spill or leak is reported to an insurer, immediate action must be taken to contain the spill. This might include dwelling cleaning/repair, the remediation of soil and groundwater and eliminating (whenever possible) any risk that oil will migrate offsite to neighbouring properties.

If an oil leak occurs in a basement or cellar and migrates into a sump pump system or floor drain, the financial cost of the clean-up will increase significantly — particularly if the leak spreads to a potable water source or the groundwater table.

As a result, when an insurer first receives notification from the homeowner reporting an oil spill, the homeowner should be instructed to attempt to identify the source of the leak and apply a temporary patch to the tank (which can be undertaken where there are pinhole leaks, as opposed to larger ruptures).

In addition, homeowners should be advised to collect as much of the oil as possible at the source of the leak, in buckets or trays, and to spread sand or any other non-combustible material that can quickly absorb the oil if it is spreading onto the floor area. Homeowners should be advised to take whatever steps are necessary to prevent the oil from reaching the floor drain.

Homeowners should be instructed to notify their home heating contractors immediately of any oil spill. In addition, oil spills or any suspicion of an oil leak should be reported to the Spills Action Centre of the Ministry of Environment and the Technical Standards Safety Authority. The fire department should be notified immediately if there is a risk of explosion or fire.

For oil spills of any significance, insurers should take immediate steps to retain an engineering firm, including a hydro-geologist. The hydro-geologist should be instructed to attend the site of the spill as soon as possible. He or she should delineate the impact of the heating oil on the soil and the property’s groundwater, and assess the potential for the oil spill to migrate toward neighbouring properties.

The retained engineering firm will generally excavate test pits in the soil adjacent to the location of the oil spill, and take samples of the ground water in order to determine if the level and extent of petroleum hydrocarbons that are present exceed applicable Ministry of Environ- ment guidelines.

Monitoring wells are routinely installed to determine the quality of the groundwater, particularly for rural properties that are serviced by wells as a potable water source.

A groundwater investigation is considered prudent in rural areas where there is a potable water source. Omitting the verification of groundwater quality greatly increases the possibility of oil migration via natural groundwater flow offsite onto neighbouring properties.

Should this occur, there is a greater risk the Ministry of Environment will become further involved in the monitoring of the clean-up effort; if so, homeowners, through their insurers, may have to comply with a lengthy and expensive groundwater monitoring program. The program can last anywhere from six months to a period of two years, at a significant financial cost.

By implementing the measures refer-red to in this article, insurers should be able to reduce the number of oil leaks and spills being reported by their policyholders. They should also be able
to minimize indemnity payments made under their respective policies by recognizing the importance of immediately retaining a qualified team of experts to conduct a cost-effective, thorough remediation.

The end result should see a reduction and, under a best-case scenario, elimination of those “big-pay days.”