Canadian Underwriter, August 2007

Introduction:

The failure of residential oil tanks, causing leaks and spills, has seen a dramatic rise over the last several years, and with it, a corresponding increase in the number of insurance claims, in excess of 50% over a period of approximately 10 years.
When you consider, as reported by the Insurance Bureau of Canada, that spills from outdoor oil tanks, if left untreated, can quickly contaminate soil and groundwater (one litre of leaked oil can contaminate up to one million litres of drinking water), it makes it easier to comprehend the necessity of conducting a proper remedial effort to treat the soil and groundwater contaminant following an oil spill, which can cost anywhere from $10,000 at the low end, to in excess of $350,000, depending upon the volume of the spill; the spread of the plume; and the oils potential to migrate off site onto neighbouring properties.

Due Diligence by the Broker or Underwriter during
the Applications Process

There are however a number of pre-emptive measures that can be taken by brokers and underwriters to help minimize the risk of claims, when binding insurance policies for residential dwellings that utilize oil as a source of home heating.

First and foremost, the broker or underwriter should, as part of its due diligence, obtain as much relevant information about the existing oil tank servicing the dwelling in order to properly assess the risk going forward.

The broker or underwriter should ascertain the age of the oil tank, including the age of any supporting cradles upon which the oil tank has been placed. Oil tanks should normally be replaced every 10 - 25 years, depending on their size, quality and thickness.

It is also recommended, whenever possible, that a visual inspection of the oil tank be undertaken following the receipt of the insurance application.

If the dwelling is serviced by an indoor tank, typically located in a basement or cellar, it should be installed away from any areas where water can pool or leak, since this 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, and should sit on a concrete slab, or similar structure that is non-combustible.

The oil tank should not be installed within close proximity of an exterior wall, where again, it may be more susceptible to rust as a result of increased condensation.
The broker or underwriter should also ensure that the home owner keeps the oil tank clear of ice and snow during the winter months, and protects 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.
The broker or underwriter should ensure that the requirements of the Technical Standards and Safety Act, 2000, S.O. 2000, c. 16 (enacted by the Ontario Legislature in June, 2001) 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.

The owner of the building is required, pursuant to the legislation, to keep a record of the inspections, which should be produced to the broker or underwriter. It is recommended that this practice be followed when evaluating residential dwellings as well. The broker or underwriter should also request the homeowner to provide copies of all servicing records for the heating system and oil tank from the date of installation.

The home owner should be reminded to inspect the oil tank on an annual basis, including the adequacy of the fuel tanks delivery lines, valves, piping, and fittings.
The home owner should be advised that in order to protect his home, he should consider installing a plastic heating oil tray or pan under the tank which will make it easier to keep the tank area clean and help capture a small oil leak.

Best Practices Following the Receipt of a Claim

Once an oil spill or leak is reported to the insurer, immediate action must be taken to implement a plan to contain the spill; including dwelling cleaning/repair and the remediation of soil and groundwater, in addition to eliminating (whenever possible) any risk that oil will migrate off site to neighbouring properties.

If an oil leak in a basement or cellar migrates into a sump pump system or floor drain, the financial cost of the clean up will increase significantly, particularly if it 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 directed 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, the homeowner 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. The homeowner should be advised to take whatever steps are necessary to prevent the oil from reaching the floor drain.

The homeowner should be instructed to immediately put his home heating contractor on notice of the oil spill, in addition to reporting the oil spill, or the suspicion of an oil leak to the spill centre of the Ministry of the Environment and the Technical Standards Safety Authority. The Fire Department should also be notified immediately if there is a risk of explosion or fire.

For oil spills of any significance, the insurer should take immediate steps to retain an engineering firm, including a hydro geologist, who should be instructed to attend the site of the spill as soon as possible to delineate the heating oil's impact to the soil and groundwater on the property, and to assess the potential for impact migration to neighbouring properties.

The engineering firm that is retained will generally excavate test pits in the soil adjacent to the location of the oil spill, in addition to sampling the ground water in order to ascertain if the level and extent of petroleum hydro carbons that are present exceed applicable Ministry of the Environment guidelines. Monitoring wells are also 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 that the Ministry of the Environment will become further involved in the monitoring of the clean up effort, which may lead to the implementation of a work order requiring the home owner through its insurer to comply with a lengthy and expensive groundwater monitoring program that can last anywhere from 6 months up to a period of 2 years, at a significant financial cost.

Conclusion:

By implementing the measures referred to in this article, insurers should not only be able to reduce the number of oil leaks and spills being reported by their policy holders, but should also 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'.

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