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Why Heating Oil Tank Leaks and Homeowners Insurance Don't Mix

It was a bleak, cold morning in early January when Stephanie Nuss smelled a pungent chemical odor coming from her basement. As she prepared breakfast for her husband and two young children she also noticed something else — the house was cold. Very cold.

So she went into the basement — where her furnace and oil tank were located — to investigate, and when she took the final step down onto the concrete floor she felt her feet sink into a cold, dark ooze. It was a layer of heating oil about three inches thick and it covered the majority of her basement.

She quickly came to understand the cause of the odor and the plummeting temperature of her home.

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Nuss says the oil tank sprung a small rupture the night before, shortly after being filled by the company that supplied her family’s heating oil. Throughout the evening and into the early hours of the morning, oil leaked out of the tank and not only covered her basement and many of its belongings, but also seeped into small cracks in the concrete floor.

“This turned into a huge and expensive problem,” Nuss recalls. “We had no idea the trouble that it was going to cause us.”

Nuss’ husband immediately called the oil company and his homeowners insurance provider. In the end, he learned that he would not need a new oil tank and that the cleanup and remediation of the spilled oil, which had seeped into the ground beneath his house, was going to cost more than $23,000.

He also learned that his homeowners policy wasn’t going to cover the loss.

“They said our policy didn’t cover pollutants and that it was essentially on us,” Nuss says. “It’s been a nightmare.”

This was more than a year-and-a-half ago and the matter is now being adjudicated in court, with Nuss’ attorney claiming the oil company overfilled the tank and that they should be held responsible for the damages and remediation.

Oil leak? Your homeowners insurance may not cover that

Regardless of how the matter resolves, the Nuss’ story should serve as a warning for homeowners with oil tanks.

“Unfortunately, homeowners policies almost never cover remediation incidences for oil leaks unless you have a supplemental policy specific to the tank,” says Jonathan Faccone, founder of the New Jersey-based real estate development and investment company Halo Homebuyers. “Now, if the leak is caused by negligence from an oil supplier, they should theoretically be held responsible. But negligence is very hard to prove and it could take a very long time to receive compensation.”

If you live in a home with an oil tank — either above or below ground — here is what you need to know about what you homeowners policy will and won’t cover.

The cost of residential oil spill remediation is never cheap, and according to property insurance adjuster Mike Este, the cost typically ranges between $15,000 to more than $100,000.

“There are just so many different variables that come into play,” Este says. “Did the oil seep into the ground water? Did it seep into a neighbor’s property? Did it contaminate any adjacent protected land or waterways? Unfortunately you won’t know the answer until disaster strikes, which is why you need to be proactive from the start.”

The first priority for all homeowners is knowing whether or not there are any old or damaged tanks on the property as well as getting a sense of the structural integrity and age of the oil tank currently in operation.

“If you’re purchasing a home with an oil tank, you should first pay for an oil tank sweep to make sure there are no other tanks potentially buried on the premises,” Faccone says. “And if your oil tank is below ground I would recommend that you get the tank pulled. Some may disagree with me on this point, but I just won't take any chances with underground tanks — especially if they are operable.”

Faccone has first-hand “horror story” experience with the exact situation.

Several years ago he was under contract on a home in New Jersey and the seller was an executrix of an estate, so she didn't have insurance on the tank. What’s more, she didn’t know if had ever been insured before.

“She thought that since the tank was currently operable, there shouldn't have been a problem,” Faccone says. “But I offered to pull the tank at no cost to her because I didn't want to take a chance. I needed a contingency if there happened to be any leakage.”

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Faccone’s client and her attorney were more than cooperative. Unfortunately, she was incorrect on her assessment and not only did they find out that leakage had occurred and that remediation was needed, but the footings needed new piers because the oil had leaked underneath the home.

“She was eventually able to sell the home and settle the estate, but only after spending close to $60,000 on the whole ordeal,” says Faccone.

Pollutants often not covered

According to the nonprofit Insurance Information Institute (III), most typical homeowner policies do not automatically cover residential fuel spills.

And that’s because property policies typically provide exclusions for losses caused by “the discharge, dispersal, seepage, migration, release, or escape of pollutants.” What’s more, the III says the term “pollutant” is typically defined to include any solid, liquid, gaseous, or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals, and waste.

“Typically there are sub-limits built into the homeowner’s policy with little coverage,” says Teresa Wharton, senior account executive with the insurance consultant firm CBIZ Inc. “To trigger most standard homeowners policies, a covered peril must be the cause of the loss. This means if there is some type of spill or leak from the tank, a covered peril — like storm damage or fire — must have caused the incident. If the loss is simply the tank leaking, most unendorsed homeowners insurance policies exclude coverage for this type of loss.”

Wharton adds that some insurers may provide limited coverage if the company is permitted to inspect the tank before writing the policy, but unless the home is less than five years old the homeowner will most likely have to buy a new tank or buy additional insurance to protect against the financial burden of a potentially expensive remediation.

Consider an oil remediation rider

“If you’re buying a home with an oil tank — or you currently live in one — you need to let your insurance company know about it right away,” says Pennsylvania-based property agent Patricia Combs. “They might inspect it and say there’s no big deal. It’s a new tank and they’ll add it to the policy. But they might also tell you that they won’t provide coverage, and you definitely want to know this before you have an expensive problem on your hands.”

Combs says that when you’re upfront with your homeowner provider you not only avoid the possibility of a future financial calamity, but they will also let you know if they offer additional riders to cover potential losses from the existing oil tank.

“A lot of insurers will offer you additional insurance that isn’t that expensive,” Combs says. “Or they might point you in the direction of another company that specializes in oil tank insurance.”

The cost of this additional insurance will vary depending on the insurer and the state in which you live, says Darlene Ball, personal lines account representative at the Massachusetts-based McGrath Insurance Group. But no matter the cost, Ball says it’s worth it in the long run.

“An oil remediation rider is the least expensive coverage you can add to your home insurance, and it usually provides a minimum of $50,000 for first-party property — meaning your personal property — and $200,000 for third-party liability for things like cleanup efforts and damage to an adjacent property,” Ball says. “On average, the yearly estimated cost ranges anywhere from $50 to $100 a year, and that provides a lot of peace of mind.”

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