Due to rapidly approaching Florida storage tank upgrade deadlines, insurers issuing policies covering storage tank systems are likely to see a growing number of claims in the next year. The increase in claims has also begun to be reflected in a number of new storage tank related decisions out of Florida state and federal courts. The trigger for this development, Florida’s upcoming administrative deadlines, and several recent Florida decisions relating to storage tank coverages, are discussed below.

The Upcoming Deadlines

The Florida Administrative Code (the “FAC”), chapter 62-761, requires that by December 31, 2009, all underground storage tank (“UST”) systems in the state of Florida must comply with requirements for “secondary containment” with “interstitial monitoring,” which were established in July 1998. In addition to the underground storage deadline, the FAC, chapter 62-762, requires that all above ground storage tank (“AST”) systems must also be upgraded to include “secondary containment” by January 1, 2010.

With respect to UST systems, the FAC provides that “secondary containment” means “a release detection and prevention system that meets specific performance standards that include dispenser sumps, piping sumps, spill containment systems, double-walled tanks and piping systems, or single-walled tanks or piping systems that are contained within a liner or an impervious containment area.” It further provides that “[a]ny component of a storage tank system with secondary containment shall have an interstitial monitoring method meeting the requirements of Rule 62-761 F.A.C.” “Interstitial monitoring” monitors the space between the inner and the outer walls of integral secondary containment tanks or piping systems. This monitoring method can detect a leak before it releases into the environment. Accordingly, the entire tank system, including tanks, piping, dispensers, and spill containment systems, must have some form of secondary containment and monitoring system.

With respect to AST systems, the FAC provides that the materials used for “secondary containment” must be “[i]mpervious to the regulated substance.., [n]on-corrosive..., [c]apable of containing regulated substances for at least 30 days; and [o]f sufficient thickness and strength to withstand hydrostatic forces at maximum capacity to prevent a discharge during its operating life,” among other requirements.

The Florida Department of Environmental Protection (the “FDEP”) has indicated that it will enforce the deadlines strictly and will deem the failure to adhere to these requirements to be “a significant violation.” FDEP, 2009 Upgrade Deadline Note, February 8, 2006 [http://www.dep.state.fl.us/northeast/waste/docs/2009_upgrade_note.pdf]. Further, the FDEP has strongly encouraged facility owners to take steps to ensure compliance before the deadline. There have been six similar deadlines for tank upgrades in Florida since its storage tank rules were adopted in 1984; none were extended.

Rising Claims

To comply with these upcoming deadlines, owners and operators of storage tanks in Florida are replacing non-compliant systems. The removal of old storage tanks can result in the discovery of contaminant releases that might not otherwise have been detected. This, in turn, will likely result in an increase in claims to insurers for coverage of cleanup costs, and anecdotally already has.

Recent Storage Tank Decisions

There have been several recent Florida court decisions on issues that often arise in claims involving storage tank contaminant releases.

Enforceability of Out of State Choice of Law and Forum

Florida’s First District Court of Appeal has enforced a choice of law/forum selection provision which designated New York law and New York forum in an environmental liability policy insuring a gas station located in Florida. In Land O’Sun Management Corp. v. Commerce and Industry Ins. Co., 961 So. 2d 1078 (Fla. 1st DCA 2007), the insurer refused to defend its insured in an administrative proceeding that sought to impose clean up costs for underground pollution at the insured location. The insured then brought a coverage action in Florida against the insurer and the insurer moved to dismiss the suit based upon the mandatory New York choice of law/forum selection clause. The trial court dismissed the suit based upon the clause and the First District affirmed.

On appeal, the insured argued that the choice of law/forum selection clause should be found invalid on public policy grounds. The insured contended that the choice of a New York forum and New York law violated “Florida’s interest in environmental protection and insurance regulation.” The First District rejected this argument, holding that:

  • because the Florida Office of Insurance Regulation reviewed and approved the policy, including the clause, it could not be said that the clause violated public policy;
  • the clause represented a contract obligation assumed by the contracting party; and
  • the constitutional separation of powers precluded the court from directing the legislative branch to adopt the public policy statements urged by the insured. The First District affirmed the dismissal and ruled that any litigation regarding the policy must proceed in New York.

Retroactive Rescissions are Unenforceable

In another recent Florida decision, a Florida federal district court ruled that an insurer cannot retroactively rescind a liability policy insuring a UST system for an alleged material misrepresentation in the policy application. Rather, the only remedy for such a misrepresentation is the “future refusal to provide insurance.” Mid-Continent Casualty Co. v. L.B. King, d/b/a King Oil and Tires, 552 F. Supp. 2d 1309, 1314 (N.D. Fla. 2008). The insured, an owner and operator of a gas station, had obtained insurance to cover possible leaks from his tanks as required by state and federal financial responsibility regulations. Those regulations mandate that owners and operators of UST systems demonstrate financial responsibility for taking corrective action and for potentially compensating third parties for bodily injury and property damage relating to accidental releases from their UST systems. In Mid-Continent, the insurer sought a declaration that the policy was void ab initio due to material misrepresentations in the insured’s application for the policy and that it had no obligation to cover a reported release. On cross-motions for summary judgment, the insured pointed out that EPA regulations provided only for prospective termination of UST policies as a remedy for material misrepresentation, and that Florida has adopted the EPA regulations in its own financial responsibility regulations. The insurer argued that Florida law provides for retroactive rescission of the policy as a remedy for material misrepresentation. Relying on Zurich American Insurance Co. v. Whittier Properties Inc., 356 F.3d 1132 (9th Cir. 2004), which held that EPA financial responsibility regulations, rather than state law, govern UST insurance policies and the remedies for misrepresentation when a state adopts EPA regulations as its own, the Court granted the insured’s motion for partial summary judgment. Expressing concern for the environment and third parties, the Court stated, “While Mid-Continent is surely correct in pointing out that insurers might be less likely to insure gasoline stations under this interpretation, the Court agrees with Whittier and the EPA that rescission ab initio would have a greater negative effect on UST operator’s ability to fund cleanup of contamination. Allowing rescission ab initio would widen the ‘gaps’ during which an operator would not be insured and would fail to protect the environment and innocent third parties during these widened gaps.” Mid-Continent Casualty Co., 552 F. Supp. 2d at 1315.

Strict Enforcement of Reporting Requirements of Claims Made Policy Provisions

In Chambliss, Ltd. v. Commerce & Indus. Ins. Co., 2007 U.S. Dist. LEXIS 77664 (S.D. Fla. 2007), a federal district court judge upheld an insurer’s right to deny coverage under two consecutive UST policies for failure of the insured to satisfy the reporting requirements of either policy. The court determined that the insurer was entitled to summary judgment as to coverage under the first policy because: (a) the claim was not reported during the policy’s effective dates, and (b) the six-month extended reporting period federally mandated by 40 C.F.R. § 280.97 and the Resource Conservation and Recovery Act, 42 U.S.C.S. §§ 6901-6992, applied only to cancelled and non-renewed policies and did not apply when the initial and renewed policies contained the same retroactive date. In the case before the court, several incidents occurred and were known during the first policy period but were not reported until the second policy period. The court also rejected the insured’s argument that the application of the exclusion in the second policy for pollution conditions that existed prior to the inception of the policy, which the insured could reasonably expect to give rise to a claim, and which were not disclosed on the application, was an impermissible retroactive rescission of coverage. Thus, the insured was held to the requirement of proving that it had reported the claim within the first policy period.

As these decisions and the upcoming administrative deadlines demonstrate, underground storage tank issues are likely to be prominent in Florida in coming years. Environmental insurers should be prepared for a continued rise in claims activity and be alert for more new decisions. We will report on significant developments as they arise.