Gas Station Insurance: Covering the Basics

Introduction

Proper risk management in gas station operations is vital to the needs of the business, and structuring a proper insurance coverage package is a necessary step in the process. Operating a gas station without adequate insurance coverage is an invitation to disaster; not only would management face the possibility of fines from regulators such as the Environmental Protection Agency, but the entire assets of the company would be exposed to massive lawsuits should something go wrong. One would only have to imagine the cost of cleaning up an underground tank leak or a fire at the pump to understand the risk involved. To properly manage the risk associated with this type of business operation, there are two categories of insurance that should be considered; standard commercial protections and specialized coverage related to the specific needs of gas stations.

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The first category includes the types of coverage every business needs, i.e., property and casualty, liability, and statutory policies such as workers compensation. These policies help to protect the company from everyday accidents and general risk exposures faced by any commercial enterprise. The second group addresses the specialized needs of a gas station operation such as environmental protection, business income and interruption coverage, as well as additional liability protection. The specialized insurance policies address the specific risks faced by gas station operators in the course of operating a business that has known hazards.

The purpose of this paper is to set forth a brief description of the types of insurance products that should be considered when establishing a risk management program for a gas station business. Taken together, these policies provide a significant protection bundle that can be relied upon to mitigate the foreseeable risks inherent in providing a regulated chemical product to the general public.

General commercial insurance coverage is the place to begin with programming a risk management structure for a gas station. Regardless of the special nature of its product and service operations, a gas station requires the same type of commercial coverage that would apply in the risk management strategy of any company offering a service to the general public. This strategy includes three types of coverage; commercial general liability, business property, and workers compensation.

Commercial General Liability

This type of coverage is the most basic form of insurance for the commercial enterprise, and forms one of the foundational cornerstones for a properly managed portfolio of insurance protection for the gas station. It is formally defined as a “standard insurance policy issued to business organizations to protect them against liability claims for bodily injury and property damage arising out of premises, operations, products, and completed operations; and advertising and personal injury liability” (IRMI, n.d.). With this set of protections in mind, consider the application of this type of protection to a gas station operation.

Commercial general liability offers a two-fold protection across four areas of exposure. It protects against claims for bodily injury as well as property damage in any situation occurring on the premises, related to operations and advertising, the result of using products, as well as the result of completed operations. If an individual is injured on the gas station site, through a malfunctioning piece of equipment or even the classic slip-and-fall, this policy will pay for their medical expenses and other claims up to the policy limits. The same principle applies if the injury is a result of the product itself, e.g., a skin rash due to gasoline exposure or a burn. Similarly, any customer’s property damaged as a result of the above activities will be repaired or replaced up to the policy limits.

The risk mitigation utility of this type of policy is obvious. A gas station operation combines a noxious chemical supply to the general public that, in the majority of cases, handles the delivery of the chemical to their own vehicles without any assistance from trained personnel. Accordingly, there are multiple opportunities for accidents and other incidents that would potentially cause personal injury or property damage. A commercial general liability policy provides the protection needed by the company or individual who owns the operation; company assets would be at significant risk without such protection in place. Particularly with the litigious climate in the American legal system, one serious injury or major incidence of property damage could bankrupt the company—absent such a policy, the company would be liable to pay not only the medical expenses or property replacement related to such an injury or event, but would also be exposed to any punitive awards should a judge or jury find negligence on the part of the ownership. In terms of operations, the gross and net profit margins of these types of businesses do not allow for high enough reserves to cover such a potential loss—thus the operating capital and owner’s equity would potentially be exposed to total loss. For this reason, the cost associated with a commercial general liability policy is well worth the expense of the premiums. As a foundational part of the risk management strategy, owners should ensure that the policy limits are high enough to cover any potential loss from personal injury or property damage. While it is not necessary to overpay for limits that are unreasonable, it is important to set the limits at a level that affords sufficient protection should such a claim be filed. This, in conjunction with the umbrella policy discussed below, will provide the necessary protection and peace of mind required for management to focus on the successful and profitable operations of the gas station.

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Business Property

A second cornerstone in the insurance protection portfolio of a proper risk management program for a gas station is the business property policy. This offers a different type of protection than the liability policy discussed above—it covers the property owned by the gas station operator or company. General liability coverage protects the business from claims of loss by others, whereas business property insurance protects the buildings, equipment, and other property that belongs to the business itself. This is an important distinction and one reason why good risk management will use both liability and property coverage to protect the business.

In terms of application, business property insurance is straightforward. Depending on the terms of the policy, any property belonging to the gas station that is damaged or lost as a result of fire, theft, or other calamity will be paid for up to the policy limits. It is very important to note that most business property policies specifically exclude certain types of disasters from coverage; most often, flood or earthquake damage and terrorism (Insurance Information Institute, 2010). Accordingly, any proper risk management plan will consider both policy limits and non-covered events when building insurance protection for the gas station.

As for risk mitigation, there are two areas of particular importance that the owner of a gas station should bear in mind. First, as mentioned above, it is vital to be aware of what the policy does and does not cover. If, for example, the policy excludes flood insurance and the gas station is located in a flood plain where damage from such an event is likely, an additional flood insurance policy should be purchased. In this case, the assets of the company are being directly protected by the insurance and all steps should be taken to ensure that everything is covered. A second area of this type of policy to study is the type of payment made for claims. Business property insurance comes in two varieties; the type that pays a flat amount for a claim, and the type that pays replacement cost—and the difference can be substantial. For example, consider the gas station owner who purchases a new pump for $5,000 and insures that pump on his property policy for the purchase amount. In four years, there is a fire on the premises that destroys that pump—but to replace the pump now costs $7,500. If the business owner purchased a policy that paid out the original purchase price, he would have to spend an additional $2,500 out of pocket. If, however, the business property policy is written for replacement costs, the policy limit will cover the entire cost of the new pump. It can be easily seen from this simple example how important it is for the service station owner to be aware of the type of property coverage carried and to plan accordingly.

Workers Compensation

This type of insurance coverage is generally mandated by most states or counties, and covers any injury to an employee that happens in the workplace. As the name implies, this policy will pay for the medical expenses of the employee as well as provide partial payment of the worker’s salary during their recovery period.

The application for this type of insurance coverage is as straightforward as its definition; when an employee of the gas station is injured on the job, whether it is an accidental fall or some other mishap, the company is responsible to take care of the employee—even if it was his fault. This includes covering the medical expenses as well as paying a portion of the wages until the employee is able to return to work. So many companies neglected to do this in the past that most states have passed laws requiring employers of more than five employees to provide the coverage as a matter of statutory compliance. With a proper risk management perspective, however, the prudent manager of a gas station operation would want this coverage in place anyway.

Consider the concept from a risk mitigation point of view—an employee of the gas station has an accident, e.g., gets a bad burn on his arm from smoking a cigarette while filling up a small gas can on the lawn mower. This accident was completely preventable and was entirely the employee’s fault—nevertheless, the accident occurred on the job and now the employee has been rushed to the hospital with second and third degree burns on his hand and arm. There is even speculation that he might lose part of the use of his hand. Without any workers compensation insurance, the gas station is facing a major risk—even if it could be proven to a jury that the owner and company were not at fault, a major (and expensive) legal battle will ensue. Considering that the employee is going to undergo emergency treatment, hospitalization, post-operative care like skin grafts and rehabilitation, he will be off work for at least six months. After that time, he will need to be on “light duty” assignments for another six months. If you are the owner of the gas station, consider the massive risk you would be undertaking without workers compensation insurance. You would be responsible for the medical bills, the post-operative treatment, you would have to hire a replacement worker during the employee’s time off even while still paying some type of wage to the injured worker (to keep him from suing you), and then you would have to employee him part time until he could come back to work. This would be the case, unless he was disabled by the accident and decided to try to get disability and then sue you anyway—and these types of situations can always end up this way. Now, consider the amount of money you will pay for a workers compensation insurance premium. Whatever that amount is, you want to pay it because it reduces your risk in an employee injury situation so significantly that the peace of mind you gain from having this policy in place is worth the price.

With these three basic insurance policies in place, the risk mitigation strategy of the gas station is well on its way to providing protection from negative events. Taken in sum, these policies provide fundamental protection for structures, customers, and employees in such a way as to offer significant protection for the operations and financial security of the business. The next three insurance policies will build upon this foundation to offer a more comprehensive line of protections against unforeseen accidents and incidents.

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Environmental

As Stazewski (2002) points out, there are several businesses—gas stations among them—that have “environmental exposures that could require special risk analysis, loss control and liability coverage” (p. 52). Environmental risk management can be undertaken with insurance specifically designed to cover leaks, spills, and other accidental introductions of controlled chemicals into the environment. The application of this type of insurance has a broad range across the operations of a gas station.

There are two primary exposures of an environmental nature for which the owners should be prepared; spills and tank leakage. Most gas stations receive their supplies from tanker trucks that deliver the commodity to the site and pump it into underground storage tanks. During the process, the possibility of a significant spill is dramatically increased. Many states or municipalities require that insurance be in place to pay for any cleanup or necessary emergency services, i.e., a fire department HAZMAT team that responds to a spill. Even if the regulators do not require such insurance, it is a good idea for gas station companies and owners to have. Even worse, an underground tank leak can go undetected for months if not years. In this case, the expense of removing the tank, cleaning the soil, and replacing the underground storage unit can be prohibitive. Prudence dictates that cash reserves should be maintained for such an eventuality, but the retention of an environmental insurance policy makes obviating this type of accident much more affordable.

As for risk mitigation, consider the consequences of enduring such an accident in the absence of proper insurance coverage. All expenses related to the direct cleanup of the spill or leakage would be the responsibility of the gas station. Further, there would be potential liability exposure should the leak contaminate groundwater supplies or cause other business or residences to be disrupted as a result of the cleanup. American legal history is full of examples where long-term exposure to leaks of noxious chemicals resulted in huge jury awards to plaintiffs demonstrating conditions such as cancer, brain damage, and other debilitating conditions. There simply is no reason for a gas station management team to take such a risk. Even if the risk were mitigated through constant monitoring and appropriate operational procedures, it would only take one inadvertent mistake to potentially expose the company to horrendous liability. Given the fact that environmental insurance is relatively inexpensive—even compared to standard liability coverage, much less a toxic waste cleanup—the premium dollars are money well spent. Any risk mitigation strategy for a gas station operation should add this coverage to its insurance portfolio.

Umbrella Liability

This type of coverage is a safety net that sits underneath the standard commercial liability in the event of a catastrophic event that depletes the policy limits of the standard policy. Much like an umbrella us used to keep precipitation off of our heads even though we may be wearing a hat, an umbrella liability policy sits as a supplemental tool to add protection to gas station operations. While this coverage is listed in this paper as an addition to the basic package of policies, it really is a highly recommended addition.

In terms of application, on a dollar-per-dollar basis umbrella coverage can allow for the management of standard coverage limits on the basic (and more expensive) commercial liability policy. Because it is a “second line” of defense against claims, it can be one of the most inexpensive insurance policies to purchase. This is because the protection afforded by the umbrella policy does not come into play until—and unless—the limits on the general liability policy are exceeded. For example, if the general liability policy has a $500,000 limit on claims and a serious injury or death occurred on the gas station premises, a jury award might exceed that amount. Under the general liability policy, the gas station owners would be liable for the amount of the award above the limit. With an umbrella policy, which is usually very large (millions of dollars), the umbrella would cover the amount above the general liability limits.

In terms of risk mitigation, it is easy to see the advantages of including an umbrella liability policy in the insurance portfolio for a gas station. While the chances of a major judgment against the company are relatively small, obtaining and keeping the umbrella policy in force provides the extra protection needed “just in case” a serious and very expensive loss occurs. Rather than carrying higher limits on the general liability policy of $1M+, the risk manager for the gas station can set the general liability limits at a lower—and less expensive—level, and trust the terms of the umbrella policy to cover a catastrophic loss. In this way, risk mitigation has occurred at an advantaged cost because basic liability protects the company from the more common claims and there is protection in place for the unlikely, but extremely expensive, situation where a major accident has happened and the courts have ruled against the gas station ownership.

Business Income and Interruption

This policy is the last recommendation in this paper, but it should not be judged as the least important. Business income and interruption coverage is a specialized policy that works in a similar way to workers compensation only it applies to the entire business and pays the owners during the time that the business is unable to support itself. If there is a loss of property that prevents the business from continuing its normal operations, this policy will provide a portion of the income normally received by the gas station so that the owners do not lose significant business revenue during any construction or renovation activities.

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The operational application of this type of insurance policy is, again, obvious. Should an accident occur that set fire to the facilities or equipment—or in any other way disabled them—to the point that operations of the gas station could not continue, this policy would pay a set amount every month to replace the revenues that would ordinarily be earned. The purpose of this type of policy is to ensure that business viability is maintained in the aftermath of a serious accident. For example, if the gas station normally earned $50,000 per month and there was an accident that took out the pumps and made the business unable to operate until they were replaced, this policy would provide replacement income during the time that the equipment was replaced. While not strictly a necessity in all cases, the utility of this type of coverage is significant.

When incorporated into a comprehensive risk management strategy, business income and interruption coverage can play an important role. For the risk manager, however, the expense of this type of coverage needs to be calculated against the probability of its use. There are two ways to do this—through an analysis of the expense of covering the entirety of the standard income normally received or the implementation of a lesser amount complemented by liquid reserves. The decision in this regard hinges upon the likelihood of a catastrophic event occurring and the reasonable expectation of having sufficient reserves in place. For the risk manager, the scenario might play out like this: Give the proactive policy and procedures of operational management, the likelihood of an accident occurring that would disrupt operations is highly unlikely. Further, the company has managed to accumulate enough liquid reserves to cover at least three months of operational expenses. In this case, management would still choose to purchase a business income and interruption policy but would set the income amount (or monthly policy payout) at about half of the necessary revenue. This would provide significant savings on the premiums while still affording coverage. Another scenario might be that the company lacks a firm policy and has been historically exposed to various accidents. Add the fact that there are no operational cash reserves and the risk manager would likely choose to insure the company for the full amount of monthly revenue. This decision, while more expensive on the premium side, would protect the business viability of the gas station while repairs were made. This type of risk management decision can only be made under specific circumstances with the necessary company information; knowing that business income and interruption insurance is available, however, allows management to make informed decisions to balance the expense of premiums with the likelihood of needing the coverage.

Conclusion

In this paper, we have examined six types of insurance policies relevant to gas station operations, with a special concentration toward effective risk management. Three are basic policies that should always be a part of a business insurance portfolio; commercial general liability, business property, and workers compensation. The other three are policies that, while perhaps not strictly required for operations, are nevertheless important to risk management; environmental, umbrella liability, and business income and interruption.

As a foundation, the first three policies are a must. They protect every possible individual or entity likely to be on the premises of the gas station; the general public, the employees of the business, and the owners of the gas station. If some accident occurs that causes an injury, the medical expenses related to that injury would be paid on the individual’s behalf. Further, these policies protect the property of both the general public and the business owner. Any item—car, building, or personal property would be repaired or replaced under the provisions of this insurance coverage. It would be hard to imagine operating a gas station without having these levels of insurance policy protection in place.

The second set of policies represents protection on a more sophisticated scale in that they focus upon protecting the gas station and its owners from secondary occurrences, i.e., rather than covering direct liability, the umbrella policy picks up where the commercial general liability limits end, the environmental policy covers accidents that do not result in direct and immediate injury, and business income and interruption covers any event that might threaten the viability of the business by providing revenue replacement. It is finding the right combination or “mix” of these policies that challenges most risk managers.

There are two ways to calculate the proper mix of insurance coverage for a gas station; premium dollars and probability of occurrence. To understand the risk manager’s job in using these tools to protect the assets of a gas station, we will set forth two examples; one utilizing the premium dollars approach and the other using the probability of occurrence method. In the premium dollars model, the risk manager or owner of the gas station draws up a budget of all operating expenses, sets sales goals within industry standards and arrives at a dollar amount that can spent on insurance. Much like taking cash into a grocery store, the owner then “shops” the amount he can afford and tries to obtain the best possible coverage for the money he has. In this case, he will price the commercial liability, business property, and workers compensation premiums—there is no doubt that the gas station must have these in place to operate. One way for the risk manager to save money here is to make sure the policy limits are set appropriately, i.e., neither too high nor too low. If the gas station structure is worth $100,000, there is no reason to carry a policy that pays $200,000 in the event of a loss. This is only throwing premium dollars away—over-insuring is never a good idea. The same idea applies to liability and workers compensation; buy the coverage you need but don’t over-protect. After allocating these dollars, the risk manager determines the amount he has left and looks toward an umbrella liability policy that will pick up where the commercial liability policy ends. Again, this type of insurance is relatively inexpensive and the risk manager should be able to obtain affordable coverage. With the remaining funds, an environmental policy should be considered next—as previously stated, clean up is expensive and there can be liability claims years after a spill or leak. If any insurance expense budget funds are left, they can be taken to the business income and interruption policy to provide risk mitigation in the event of a catastrophic loss.

The second method by which the risk manager can determine which policies to put in place is the probability of occurrence. This method also requires the risk manager to know how much money the company can afford to spend on insurance premiums, but his approach to the policies themselves is very different. The risk manager knows that the state in which the gas station is operating requires workers compensation. Accordingly, there is an absolute probability that this policy will be needed and so it is purchased at the most favorable terms possible. For the purposes of this example, the risk manager also knows that the Environmental Protection Agency requires all gas stations to carry environmental insurance as a matter of law. This, again, is an absolute probability of occurrence and this policy is purchased. The risk manager now takes the remaining funds and evaluates the probability of occurrence for the other policies. There is no doubt that the general public is going to be on the property pumping their own gas and that means that there is a fairly high probability that the gas station will need commercial liability coverage. The gas station facility has a mortgage on it, and the bank requires that the building be insured for its full replacement amount. Accordingly, the risk manager obtains the necessary policies at reasonable limits in order to have some budgeted funds available for additional protections. Next on the list is the umbrella coverage because it is cheap and provides significant peace of mind that if a catastrophic accident occurs on the premises, the company’s assets will be protected from lawsuits. Finally, it turns out that there simply is not enough money in the insurance budget left to provide 100% business income and interruption coverage. There is, however, enough to cover about half and, given the fact that there is a very low probability of needing such coverage, the risk manager is comfortable making that decision.

Gas station insurance and risk management are complementary to one another. Proper risk management requires the use of insurance to protect the assets of the gas station, and insurance policies with reasonable coverage and premium rates allow the risk manager to put a portfolio of coverage in place to preserve the business viability. Insurance is a major part of risk management, and the policies and strategies set forth here are one way to ensure that the gas station operation is protected.

References

Insurance Information Institute. (2010). Are there any Disasters my Property Insurance Won’t Cover. In Articles.

International Risk Management Institute. (n.d.) Commercial General Liability Policy. In Glossary of Insurance & Risk Management Terms. Web.

Strazewski, L. (2002). Small Risks can have Large Environmental Exposures. RN Magazine. Web.

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