In various states, the Department of Environmental Protection (DEP) requires either an insurance policy or financial assurance, which can be an insurance policy, letter of credit, or a surety bond, to protect underground storage tanks from possible sudden accidental spills or an ongoing leak. For the purposes of this article, I will go through the surety bond. The surety bond protects adjacent property owners and individuals that may come into contact with the possible spill from what’s called third-party liability, and it would be a source of funds in the event there was a sudden or accidental release. 

This happens a lot with older gas stations and property owners that need to register the tanks at the Department of Environmental Protection. Related to the registration, the EPA will require a bond pursuant to 40 CFR Part 280 — Technical Standards and Corrective Action Requirements

Related to that, some people have found that when they go to the insurance markets for storage tanks above a certain age, let’s say 25-26 years, it’s nearly impossible to insure them. As an alternative, you can obtain a bond. The bond isn’t going to be significantly better than the price of insurance or the collateral behind it, but it will be slightly better, so the bond is seen as the better option. This is more of a temporary solution pending the replacement of the tank. Once replaced, clients re-enter the market for reasonably priced insurance policies and replace their bond with them.

Bonds that provide recourse or coverage for third-party liability have greater risks. Since a condition of any bond requires the execution of an indemnification agreement, this risk is not transferred to the surety but is retained by the bond principal or the party that is obtaining the bond. The surety bond itself is an extension of credit so that the risk is retained by the surety bond principal or the party who needs the bond and any entities or individuals that execute the indemnity agreement. 

My office will need a financial statement from the company or the entities applying for the bond to underwrite the matter.

Neil Pedersen
15 Maiden Lane Suite #800
New York, NY, 10038

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