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1.3.1 Assurance of Financial Responsibility for the Closure and
Post-Closure Care of Hazardous Waste Management Facilities
Owners or operators of TSDF's must establish financial assurance
for closure of their facilities. In addition, owners or operators of
disposal facilities must establish assurance for 30 years of post-
closure care. Assurance for facilities operating with interim status
must be provided by either a trust fund, a surety bond guaranteeing
payment into a standby trust fund, a letter of credit, a combination of
these instruments allowed by the regulations (see Section 2.4.2), a
State-required mechanism authorized by the Regional Administrator (see
Section 4.1), or a State assumption of responsibility for these require-
ments (see Section 4.2). Owners or operators of facilities operating
with general status may also provide assurance using a surety bond
guaranteeing performance of closure or post-closure monitoring and
maintenance.
Owners or operators of facilities operating with interim status
must provide assurance for closure and post-closure by July 13, 1981.
Owners or operators of new facilities which will operate with general
status must provide evidence of this assurance 60 days before hazardous
waste is first received for treatment, storage or disposal. Surety
bonds and letters of credit need not be effective, however, until imme-
diately before hazardous waste is first received for treatment, storage
or disposal. Owners or operators of facilities which are granted
permits and change from interim to general status will already have
their mechanisms for assurance of closure and post-closure care in place
before the change occurs.
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1.3.2 Liability Insurance for Claims Arising from Sudden and
Accidental Occurrences
An owners or operators of TSDF's must demonstrate financial respon-
sibility for claims arising from the operatic is of their facilities from
sudden and accidental occurrences that cause Injury to persons or
property. Financial responsibility for these claims must be provided by
liability insurance, a State-required mechanism authorized by the
Regional Administrator (see Section 4.1), or a State assumption of
responsibility for these claims (see Section 4.2). This coverage is
necessary only during the operating life of a facility. The level of
liability coverage required is discussed in Section 3.2.3.
Owners or operators of facilities operating with interim status
must provide evidence of this liability mechanism for claims arising
from sudden and accidental occurrences by July 13, 1981. Owners or
operators of new facilities which will operate with general status must
provide evidence of this liability mechanism 60 days before hazardous
waste is first received. T the coverage must be effective prior to the
receipt of hazardous waste for treatment, storage, or disposal. Owners
or operators of facilities which are granted permits and change from
interim to general status will already have their liability mechanism
for claims arising from sudden and accidental occurrences in place.
1.3.3 Liability Insurance for Claims Arising from Nonsudden and
Accidental Occurrences
Owners or operators of surface impoundments, landfills, or land
treatment facilities must demonstrate financial responsibility for
claims arising from the operations of theier facilities from nonsudden
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and accidental occurrences that cause injury to persons or property.
Financial responsibility for these claims must be provided by liability
insurance, a State-required mechanism authorized by the Regional Admin-
istrator (see Section 4.1), or a State assumption of responsibility for
these claims (see Section 4.2). This coverage is necessary only during
the operating life of a facility. The level of liability coverage
required is discussed in Section 3.2.3.
This financial requirement will be phased in for owners or
operators of facilities operating with interim status and for owners or
operators of facilities which are granted permits and change from
interim to general status (see Section 3.4 for these dates). Owners or
operators of new facilities must provide evidence of this coverage 60
days before hazardous waste is first received for treatment, storage, or
disposal. The coverage must be effective prior to the receipt of
hazardous waste for treatment, storage, or disposal.
1.3.4 The Difference Between Financial Requirements Under
Interim Status Standards and General Status Standards
There are minor differences between the financial
requirements of Parts 264 (general status standards) and 265
(interim status standards). These differences are summarized
below.
(1) Deadlines for the establishment of financial mechanisms
(see Table 1-2 and Sections 1.3.1, 1.3.2, 1.3.3 and 3.4).
(2) Amount of time allowed for the build-up of a trust fund
(see Sections 2.1.7.1, 2.1.7.2 and 2.1.7.3).
(3) Types of surety bonds allowed to provide assurance (see
Section 2.2.2).
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1.4 Role and Responsibility of Involved Parties
The promulgation of the regulations establishing financial require-
ments for the owners and operators of hazardous waste management
facilities is only a preliminary step in carrying out some of the goals
of RCRA. These goals will only be achieved if the parties involved
understand and carry out their responsibilities as prescribed by the
financial requirements regulations.
1.4.1 Owners or Operators
Owners or operators will have the primary responsibility for
carrying out the requirements of these regulations. They will have to
develop cost estimates based on closure and post-closure plans (see
Sections 1.5.1 and 1.5.2) and set aside assets or use a third-party
guarantee to prove that funds will be available when needed for these
activities. They will also have to provide a liability mechanism so
that third-party claims may be satisfied while the facility is in opera-
tion.
Once financial and liability mechanisms are established, owners or
operators must also adjust the mechanisms whenever necessary to reflect
changes which occur annually (e.g., cost estimates due to inflation) or
periodically (e.g., change in extent of facility operations, sale of a
facility). This is further explained in Sections 1.5.1, 1.5.2, 1.5.3,
1.5.4 and in the discussions in Sections of 2.0 and 3.0 of the various
financial and insurance mechanisms.
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1.4.2 Regional Administrators
There are five basic areas of responsibility for Regional Adminis-
trators in conjunction with financial requirements.
(1) Regional Administrators will have to evaluate each
financial and liability mechanism provided by an owner or
operator to ensure that it is a mechanism allowed by the
regulations.
(2) Regional Administrators will have to determine that the
financial and liability mechanisms provided are executed
correctly (see the sections describing the various
mechanisms).
(3) Regional Administrators will have to check that financial
mechanisms provide assurance at least equal to the
relevant cost estimates (see Section 1.5.2) unless
assurance is provided by a trust fund (in which case the
assurance must be at least equal to the required
percentage of the cost estimates).
(4) Regional Administrators will have to judge whether
liability mechanisms reflect the degree and duration of
risks at individual facilities (see Section 3.6.1).
(5) Regional Administrators will have to evaluate requests
from owners or operators for decreases in co\/erage of
financial mechanisms, releases from the financial and
liability requirements, and reimbursements for expenses
from trust funds (see sections describing the various
mechanisms).
Regional Administrators should also be sure that owners or
operators rigidly adhere to deadlines (e.g., for the establishment of
mechanisms, for payment into a trust fund). The financial and liability
mechanisms were developed to provide Regional Administrators with some
warning of threatened losses of coverage, necessary increases in
coverage, and failures to make payments into trust funds. The Regional
Administrators must know when cancellations will take effect and whether
necessary increases in coverage have been obtained. A chronological
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record of all actions taken by owners or operators to comply with the
financial responsibility requirements is therefore necessary for each
facility. Documents, correspondence, and other items related to the
financial responsibility requirements of a facility must always be dated
using a time-clock or a date stamp.
1.4.3 Financial and Insurance Communities
EPA expects the financial and insurance communities to follow
standard business practices when offering the financial and liability
mechanisms required by the financial requirements regulations. The
financial and insurance communities must use the forms developed by EPA
(unless they are offering State-required mechanisms) and certify that
the wording of the mechanism is identical to the wording of the
mechanism developed by EPA. Specific requirements for different members
of the financial and insurance communities are discussed in the sections
describing the financial and liability mechanisms.
1.5 Relationship of the Financial Regulations to Other Portions of
the RCRA Regulations
Owners or operators of TSDF's must have financial assurance in an
amount sufficient to cover the costs of closure and post-closure care.
The amount guaranteed by the financial mechanism chosen is based on the
closure and post-closure cost estimates, which are derived from the
closure and post-closure plans. Guidance on developing cost estimates
and preparing closure and post-closure plans is provided in two other
EPA guidance manuals.
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1.5.1 Relationship between Closure end Post-Closure Plans and
Financial Responsibility
The cost estimates are based on the costs of activities described
in the closure and post-closure plans. The closure plans describe the
procedures required to ensure that the facilities are closed in a manner
consistent with the closure regulations. The post-closure plans
describe procedures for monitoring and maintaining disposal facilities
for a specified period of time after the facility has been closed. The
activities described in both closure and post-closure plans must account
for the maximum extent of operation; that is, the most extensive activi-.
ties that could be required.
For facilities operating with interim status, closure and post-
closure plans must be prepared and be available, subject to inspection
at the facility, by May 19, 1981. Although all owners and operators are
not required to submit their plans, the Regional Administrators intend
to request some owners and operators to submit their plans for
evaluation. For facilities operating with general status, the plans
will have been evaluated as part of the permitting process.
During both interim status and general status, owners or operators
must revise the plans during both the operating life of their facility
and during post-closure, if changes in operations or design affect the
plans. These changes only affect financial responsibility if they also
affect the cost estimates and render the amount guaranteed by the finan-
cial assurance mechanism inadequate. However, owners or operators only
have to adjust the level of their financial assurance mechanisms during
the active life of their facilities.
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During interim status, owners or operators are responsible for
updating their plans when needed and for keeping updated versions of the
plans at the facility available for EPA inspection. For a facility
operating with general status, the plans become part of the conditions
of the permit and all plan revisions are treated as permit
modifications.
1.5.2 Cost Estimates and Financial Responsibility
The amount guaranteed by the financial responsibility mechanism is
based on the cost estimates. The effectiveness of the financial
requirements depends both on the accuracy of the cost estimates and the
fact that the amount covered by the financial instrument accurately
reflects the cost estimates. During interim status, owners or operators
must prepare cost estimates by May 19, 1981 and have them available at
theier facilities subject to inspection, but they do not need to submit
them, unless requested by the Regional Administrator. For facilities
operating with general status, the cost estimates will be evaluated
during the permitting process and will be part of the permit conditions.
During interim status and general status, owners and operators must
revise the cost estimates annually to reflect the effects of
inflation. The cost estimates must also be revised whenever changes in
plans affect the costs of closure or post-closure. During interim
status, owners or operators must adjust their estimates every May 19
using an inflation adjuster specified in the regulations; during general
status, estimates must be adjusted on the anniversary date of the
permit. Whenever the cost estimates are increased during the active
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life of the facility, the amount provided by the financial assurance
mechanisms must be adjusted upward if it is no longer sufficient to
cover the costs of closure or post-closure. Once closure begins (within
30 days after the date on which the owners or operators expect to
receive the final volume of wastes), however, owners or operators not
required by regulation to adjust the amount provided by the financial
mechanisms, regardless of the revisions made to the plans.
At any time (i.e., during the life of the facility or post-
closure) , owners or operators may request that their cost estimates and
their level of financial responsibility be reduced if the amounts exceed
the current cost estimates. For example, if owners or operators change
their operating plans and reduces the area that is open during the life
of the facility, they may reduce their closure cost estimates and the
level of their financial responsibility. Similarly, they may reduce
their post-closure cost estimate and the amount provided by the
financial instrument if they are granted a variance to the 30-year post-
closure care period.
1.5.3 Cost Estimates and Levels of Assurance
Regional Administrators may check to be sure that financial instru-
ments are always based upon current cost estimates. Although the most
recent plans and estimates are kept at the facilities during interim
status, Regional Administrators may request at any time that the plans,
estimates, or both be submitted to them so that they can review them.
The Regional Administrators also may check the plans and estimates at
the facilities, where they must be available for inspection.
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When owners or operators receive a RCRA permit for a facility, the
cost estimates requirements will become part of the permit conditions.
Annual adjustments to account for inflation and to reflect current costs
must be submitted to the Regional Administrators for approval, as part
of the conditions of a permit. On each anniversary of the date on which
a facility was granted a permit, and at any other time that Regional
Administrators receive a request for a modification of the cost
estimate, they should compare the new cost estimate with the amount
assured by the financial instrument.
1.5.4 Effects of the Permitting Process and the RCRA Permit
Conditions on Financial Responsibility
All facilities which were in operation on November 19, 1980, and
whose owners or operators have submitted notification and Part A of the
permit application, are operating in interim status until a RCRA permit
is recieved. Any time after July 13, 1981, the Regional Administrators
may require owners or operators of existing container, tank, surface
impoundment and pile facilities to submit Part B of the permit
application. This will enable the Regional Administrators to begin
permitting these facilities. The permitting process for incinerator
facilities may begin any time on or after July 22, 1981. The permitting
regulations for land disposal facilities have not yet been promulgated.
Owners or operators of new facilities (i.e., facilities not in
existence on November 19, 1980) must have a RCRA permit before they
begin operations. As part of the permitting process, closure and post-
closure plans, cost estimates, and financial assurance mechanisms will
be evaluated and revised if necessary and incorporated as part of the
permit conditions.
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The Regional Administrators will review each permit after a
specified period of time, and either reissue it for another specified
period or revoke it. During this review, the Regional Administrators
should ensure that the amount covered by the financial mechanism is
adequate. Once a facility has received a permit, the Regional Adminis-
trators only have to ensure that the financial mechanism is consistent
with the conditions of the regulation.
1.6 Effects of Compliance Procedures on Financial Responsibility
Mechanisms
It is the intent of these regulations to ensure that hazardous
waste management facilities are never without the required coverages for
closure and post-closure. Therefore, surety bonds and letters of credit
may not be cancelled while a compliance procedure is pending. A compli-
ance procedure is defined broadly as "any proceedings pursuant to RCRA
or regulations issued under authority of RCRA which seeks to require
compliance or which is in the nature of an enforcement action or an
action to cure a violation." (40 CFR §§264.141 and 265.141)
Every compliance order, notice of intent to terminate interim
status or to terminate a permit, or any other notice with respect to an
enforcement action or an action to cure a violation issued by a Regional
Administrator must reference the trust funds, surety bonds, letters of
credit, or State-required mechanisms which are providing assurance of
financial responsibility for closure or post-closure; warn that these
mechanisms may not be cancelled while the compliance proceeding is
pending; and warn that they may be subject to claims by the EPA if
violations are not corrected. If the Regional Administrator deems the
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owner's or operator's violation to be serious enough (e.g., violation of
closure requirements), the order or notice may also indicate the
Regional Administrator's intention to have the financial institution or
surety company place the funds guaranteed by a letter of credit or
surety bond in the standby trust fund (see Section 2.1.11).
Policy from the Agency will be forthcoming on how funds in trust
funds or standby trust funds will be expended if it becomes necessary
for the Agency to direct closure or post-closure care at hazardous waste
management facilities.
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2.0 FINANCIAL RESPONSIBILITY MECHANISMS
2.1 Trust Funds
2.1.1 What is a Trust?
A trust is an agreement among three parties, in which one party
transfers legal title to assets (usually money) to another party, who
manages the assets for a third party. The party providing the assets to
create a trust is the grantor or trustor, the party with legal title is
the trustee, and the party deriving the benefits from the property is
the beneficiary.
Trust arrangements are governed by a trust agreement or
instrument. The instrument typically names the grantor, trustee, and
beneficiary, and defines the objective of the trust. It may also
specify the amount of discretion the trustee will exercise over invest-
ments or define the types of assets that may compose the trust.
Individuals or corporations establish trusts for many different
reasons. Some possible benefits of establishing a trust are:
Professional Asset Management Trustees may be highly
skilled professionals with access to specialized
information with which to make investment decisions.
Security and Protection Both the grantor and the
beneficiary have the security of knowing that the trustee
is legally charged with acting solely for the benefit of
the trust.
Relief from Administrative Details Trustees can free
both grantor and beneficiary from having to handle details
associated with managing assets.
Financial Planning A trust can be used in planning how
to meet future financial commitments (statutory or
otherwise).
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2.1.2 RCRA Trust Fund
Owners and operators of TSDF's may create a trust fund to meet
their obligation to provide financial assurance for closure and post-
closure care. Table 2-1 indicates the sections of the Code of Federal
Regulations (CFR) applicable to the implementation and use of the trust
fund and the section specifying the wording of the agreement.
TABLE 2-1
TRUST FUND REGULATIONS
SUBJECT OF
REGULATION
SECTION OF REGULATION
INTERIM STATUS GENERAL STATUS
Closure Trust
Post-Closure Trust
Trust Agreement Form
40 CFR §265.143(a)
40 CFR S265.145(a)
40 CFR §265.151(a)
40 CFR §264.143(a)
40 CFR §264.145(a)
40 CFR §264.151(a)
For the text of these regulations see 46 Federal Register pp. 2851 et
seq. (January 12, 1981).
In the RCRA trust agreement, the owner or operator is the grantor,
his bank or other financial institution is the trustee, and EPA is the
beneficiary.
The trust fund is designed to ensure that the owner or operator
will set aside assets over a period of time to cover the costs of
closure or post-closure care (or both) when these activities occur at
the facility. For facilities with interim status, the value of the
trust may build towards the required level of assurance over a period of
20 years, or over the life of the facility, whichever is shorter (see
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Section 2.1.7.1). For permitted facilities with general status, the
value of the trust may build over the life of the permit which, in most
cases, will be 10 years (see Section 2.1.7.2). When a facility receives
a permit and thus changes from interim to general status, the balance of
the required trust amount must be paid in over the term of the permit
(see Sections 1.2.6 and 2.1.7.3).
In addition to providing one alternative form of financial
assurance, the trust agreement and regulations also serve another
purpose. Owners and operators who use surety bonds or letters of credit
as financial assurance mechanisms must also at the same time establish a
standby trust fund (see Section 2.1.11). Any funds drawn under those
instruments will be placed directly into the standby trust fund (see
Sections 2.2.2.1, 2.2.2.2 and 2.3.2). Except with regard to payments
into the fund the standby trust fund generally functions according to
the trust agreement and regulations described in this section.
Each section of the RCRA trust agreement provides for specific
features of the trust. Those features are briefly explained here. Most
sections of the trust agreement are also explained in greater detail in
other indicated sections of this manual.
Sections of the Trust Agreement
Introduction describes parties to and purpose of the
trust fund (see Sections 2.1.1 and 2.1.2)
Section 1 defines "fiduciary," "grantor," and
"trustee" for the purposes of this trust
Section 2 provides for the identification of the
facilities and the amounts of the closure and post-
closure cost estimates covered by the trust agreement
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Section 3 establishes EPA as the beneficiary of the
trust and describes the constitution of the "fund"
Section 4 provides for reimbursement of closure and
post-closure expenditures (see Section 2.1.9.3)
Section 5 describes the assets which will be paid into
the fund
Section 6 explains how the trustee will manage and
invest the assets composing the fund (see Sections
2.1.2.1 and 2.1.4.1)
Section 7 specifically authorizes certain trustee
investments (see Section 2.1.2.2)
Section 8 describes the powers of the trustee (see
Section 2.1.2.2)
Section 9 provides that certain taxes and fees will be
paid by the fund and that the trustee will be reimbursed
for expenses either by the grantor (owner or operator) or
by the fund (see Section 2.1.4.1)
Section 10 obligates the trustee to value the fund
annually and to provide the appropriate Regional Adminis-
trator with the valuation (see Section 2.1.7)
Section 11 allows the trustee to consult with counsel
Section 12 authorizes trustee compensation (see
Section 2.1.4.1)
Section 13 sets forth the procedure for a change of
trustees (see Section 2.1.10.2)
Section 14 explains how the trustee is to receive
orders from EPA or the grantor (owner or operator) and
the duty of the trustee to act in accordance with these
orders
Section 15 obligates the trustee to notify EPA and the
grantor if a scheduled payment into the fund is not
received (see Section 2.1.8)
Section 16 explains how the trust can be amended
Section 17 establishes that the trust is irrevocable
and sets forth how it can be terminated (see Sections
2.1.2.3 and 2.1.10.2)
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Section 18 addresses the extent of trustee liability
(see Section 2.1.12)
Section 19 provides that the trust will be
administered according to the laws of a chosen State
Section 20 discusses the use of headings and grammar
in the trust agreement
Many of the above provisions are common to most trusts. Two of the
most important provisions specific to the RCRA trust, concerning invest-
ment and the irrevocability of the trust, are discussed in the following
three sections of this manual.
2.1.2.1 Investment of Funds
The RCRA trust agreement allows the trustee discretion in investing
the trust's assets, but holds the trustee to a "prudent man" standard.
Originally stated in 1830 by the Massachusetts State Supreme Court, a
recent version of that standard has been codified in the Employee
Retirement Income Security Act of 1974 (ERISA), an act which established
provisions for management of the assets of trusts established for
pension plans. The ERISA prudent man standard requires the fiduciary to
discharge his duties "... with the care, skill, prudence, and diligence
under the circumstances then prevailing that a prudent man acting in a
like capacity and familiar with such matters would use in the conduct of
an enterprise of a like character and with like aims...." (29 USC
§1104). This statutory standard is the basic investment guideline for
management of the trust assets by the trustee of the RCRA trust.
The Agency has added three exceptions to this standard. These
additional investment provisions are discussed in the. following section.
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2.1.2.2 Specific Investment Provisions
Section 6(i) of the trust agreement specifically forbids the
trustee to invest in:
Securities or other obligations of the Grantor, or any other
owner or operator of the facilities, or any of their
affiliates as defined in the Investment Company Act of 1940,
as amended, 15 USC §80a-2.(a)...
EPA included this provision to protect the trust corpus in the
event of the bankruptcy of any of the businesses or affiliates of the
owner or operator.
Securities and other obligations of the Federal government or a
State government are specifically exempted from this restriction on
investment. EPA did not want to exclude investments in Federal and
State bonds where the Federal government or a State government is the
owner of the facility or the land on which a facility is situated, but
the operator is another entity and is the party responsible for meeting
the financial requirements.
Trustees are generally obligated to keep trust property segregated
from the trustee's own funds and from other funds. However, in the
interest of increasing the availability of trust funds for EPA'3
purpose, the trust agreement specifically allows the trustee to depart
from this general rule. First, he is allowed to invest in time or
demand deposits of the trustee, up to the insured amount. Second,
Section 7 of the trust agreement expressly allows the trustee to
transfer assets of the fund "to any common, commingled or collective
trust fund created by the trustee in which the Fund is eligible to
participate...." This practice is forbidden by law except in authorized
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cases. The Securities and Exchange Commission has agreed that in the
case of the RCRA trust fund such commingling of trust assets will be
allowable, to increase the number of trustees available.
2.1.2.3 Trust Irrevocability
The RCRA trust is irrevocable; it cannot be changed or terminated
by the grantor except by the written agreement of the trustee and the
SPA Regional Administrator, as well as the grantor.
2.1.3 Qualifications of the Issuing Institution
EPA has decided that the trustee named in the trust agreement must
be a bank or other financial institution which has the authority to act
as a trustee and whose trust operations are regulated and examined by a
Federal or State agency.
All domestic bank trust departments and savings and loan trust
departments are regulated and examined. In order to determine whether
the financial institution named as trustee on a trust agreement has the
authority to act as a trustee, the regulatory authority may be
contacted. Table 2-2 indicates the primary regulatory authority for
each type of financial institution.
Some American branches of foreign banks are regulated and examined
by the Federal Deposit Insurance Corporation, and that authority can
certify whether the bank in question has trust powers. Other foreign
banks with American branches should be able to provide information about
which regulatory authority oversees their operations and can attest to
their trust powers.
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TABLE 2-2
REGULATORY AUTHORITIES FOR FINANCIAL INSTITUTIONS
Type of Financial
Institution
Primary Regulatory
Authority
1. State Bank
a. not insured by the FDIC*;
not a member of the FRS**
b. insured by the FDIC;
not a member of FRS
b. insured by the FDIC;
a member of the FRS
2. National Bank and some
Washington, D.C. Banks
3. State-chartered Savings
and Loan
Federally-chartered
Savings and Loan
State Banking Authority for
the State in question
Federal Deposit Insurance
Corporation
Board of Governors of the
Federal Reserve, through
Federal Reserve Banks
Comptroller of the Currency
State Savings and Loan Insurance
Corporation for the State
in question
Federal Home Loan Bank Board
*FDIC * Federal Deposit Insurance Corporation
**FRS * Federal Reserve System
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Trust companies or other institutions should be able to provide
owners, operators or Regional Administrators with the name of the regu-
latory authority able to attest to their trust powers.
2.1.4 Initially Executing the Trust Fund
2.1.4.1 Information for the Owner or Operator
The trust agreement allowable under these regulations should be
widely available, although the owner or operator might have to
familiarize his chosen trustee institution with the trust instrument
specified in the regulations. Trustee institutions charge fees for
their services. These fees can be expected to vary depending upon the
specific trust institution involved, the amount of the trust fund, the
extent to which the owner or operator uses the trust institution for
other services, and the extent of investment activity and trustee invol-
vement.
This trust agreement specifies that the trustee must provide
services that include:
Making authorized payments from the fund (see Section
2.1.9.3);
Investing, reinvesting, exchanging, selling and managing
the fund (see Section 2.1.2.1);
Furnishing an annual valuation of the fund to the
Regional Administrator and to the owner or operator (see
Section 2.1.7); and
Notifying the Regional Administrator of the failure of
the grantor to make a deposit (see Section 2.1.8).
As discussed in Sections 2.1.2.1 and 2.1.2.2, the trustee is
allowed a large degree of discretion in investing the fund. The owner
or operator should discuss investment with prospective trustees to
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determine how different investment strategies would affect fees. The
general investment philosophy of the trustee (e.g., maximization of
income, maximization of safety, etc.) is another topic which should be
of interest to the owner or operator. The owner or operator could also
discuss the eligibility of his trust to participate with others in a
commingled fund (see Section 2.1.2.2) as this too might have a bearing
on costs.
The owner or operator should inquire about other expenses and fees
that would be levied against the trust such as:
Income Taxes State and Federal
Brokerage Fees
Legal Fees (e.g., for setting up the trust)
Accounting Fees
If an owner or operator is dissatisfied with the performance of his
chosen trustee, he may change to another eligible trustee institution
after receiving a written consent from the Regional Administrator and
the trustee (see Section 2.1.10.2).
The owner or operator and the trustee should note especially that
when initially executing the trust agreement, they both will be held
responsible for making certain that the wording of the trust agreement
is identical to the wording of 40 CFR §265.151(a) (Interim Status) or 40
CFR §264.151(a) (General Status). They both are also responsible for
making certain that the certification of acknowledgment accompanying the
trust agreement (see Section 2.1.4.3) conforms to state requirements on
the proper content of this acknowledgment.
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2.1.4.2 Information for the Regional Administrator
All trust agreements submitted to EPA must:
Be delivered to the Regional Adminstrator either in
person or by certified mail.
Be received by the Regional Administrator by the
effective date of the interim status regulations (July
13, 1981) for existing facilities. For new faciliteis
the trust agreement must be received 60 days before the
date on which hazardous waste is first received for
treatment, storage, or disposal.
Have wording identical to the wording specified in the
regulations
Be accompanied by a formal Certification of Acknowledge-
ment
In addition, the initial trust fund payment (see Section 2.1.7.1) must
be made at the time the trust is established.
2.1.4.3 Certification of Acknowledgment (State Requirement)
An acknowledgment is a formal declaration by persons executing an
instrument (such as a trust fund) that they affirm the obligation or
responsibility created by the instrument and that they give their affir-
mation freely. The acknowledgment is usually given before an authorized
official, such as a notary public.
State laws may differ concerning the form and wording of the
acknowledgment and who, if anyone, must witness the acknowledgment.
Therefore, no standard language has been provided in the regulation.
Although the owner or operator and trustee will be held responsible for
making certain that the certification of acknowledgment conforms to
State law, Regional Administrators should become familiar with the
acknowledgments required by the States they are administering.
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2.1.5 Care of the Trust Agreement
Copies of the trust agreement should be kept in a safe location.
2.1.6 Multiple Facilities on One Trust Fund
An owner or operator may use one trust fund to provide assurance of
financial responsibility for closure, post-closure care, or both, for
one or more facilities (see Section 2.4.3 and 2.4.4).
2.1.7 Payments into the Trust Fund and Trust Valuation
The trust fund is not required to provide assurance of financial
responsibility in the full amount of the cost estimate when it is first
established. During interim and general status, the amount of financial
assurance provided by the trust is allowed to build to the required
level over specified time periods (see Sections 2.1.7.1, 2.1.7.2 and
2.1.7.3).
Owners and operators and Regional Administrators should remember
that in addition to deliberate adjustments in the value of the trust
fund to reflect changes in cost estimates, the value of the trust fund
will fluctuate depending on the investment earnings (or losses) of the
assets composing the fund. The trustee will be responsible for the
valuation of the trust fund (see Section 2.1.7.5 for the valuation
procedure). The owner or operator will be responsible for the accuracy
of cost estimates. After the owner or operator has updated his cost
estimates and received the trustee's report of valuation, the owner or
operator will have to calculate how large the new deposit into the trust
fund will have to be to maintain the required amount of assurance of
financial responsibility.
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2.1.7.1 Payments Into the Trust Fund During Interim Status
During interim status the procedure for determining and making
payments into the trust fund must operate as follows. Sample
calculations are provided in the Appendix.
May 19, 1981
By this date closure and post-closure cost estimates
must be available at the facility.
July 13, 1981
By this date the first payment must be deposited into
the trust fund. The amount of the first payment may be
calculated using the formula:
ACE-CV
Y
where ACE equals the adjusted closure cost estimate or the
adjusted post-closure cost estimate or both, CV equals the
current value of the trust fund (the value of CV would be
zero before the first payment was made), and Y equals the
remaining operating life of the facility or 20 years, which-
ever is shorter.
May 19, 1982
By this date cost estimates must be adjusted using the
inflation factor calculated in accordance with 40 CFR
§§265.142 and 265.144.
Between the end of June and the end of July 1982
The trustee must furnish to the grantor and the appro-
priate EPA Regional Administrator(s) a statement confirming
the value of the fund.
No later than August 12, 1982
By this date the second payment must be deposited into
the trust fund. The amount of the second payment may be
calculated using the same formula as above.
Subsequent adjustments of cost estimates for inflation must take
place annually by May 19 over the operating life of the facility.
Subsequent statements confirming the value of the fund must be furnished
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by the trustee to the grantor and the appropriate Regional
Administrator(s) annually between the end of June and the end of July.
Subsequent payments into the fund must be deposited annually by August
12.
2.1.7.2 Payments Into the Trust Fund During General Status
During general status, the procedure for determining and making
payments into the trust fund must operate as follows. Sample calcu-
lations are provided in Appendix A.
Date the facility receives a permit
By this date approved cost estimates must be
available at the facility.
* Each anniversary of the date on which the facility
received a permit
Cost estimates must be adjusted annually by this
date using the inflation factor calculated in accordance
with 40 CFR §§264.142 and 264.144.
60 days before the date on which hazardous waste is first
received for treatment, storage or disposal.
By this date the first payment must be deposited
into the trust fund. The amount of the first payment may
be calculated using the formula:
ACE-CV
where ACE equals the adjusted closure cost estimate
or the adjusted post-closure cost estimate or both; CV
equals the current value of the trust fund (the value of
CV would be zero before this first payment was made), and
Y equals the number of years in the term of the initial
RCRA permit.
End of the month coincident with or preceding the
anniversary date of the first establishment of (and
payment into) the fund
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The trustee must furnish to the grantor and the
appropriate EPA Regional Administrator(s) a statement
confirming the value of the fund.
No later than 30 days after the anniversary date of the
first payment into the trust fund
By this date the second payment must be deposited
into the trust fund. The amount of the second payment
may be calculated using the same formula as above except
that Y would equal the number of years remaining in the
initial RCRA permit.
Subsequent adjustments of cost estimates for inflation must take
place annually over the operating life of the facility on the anniver-
sary of the date on which the facility received a permit. Subsequent
statements confirming the value of the fund must be furnished by the
trustee to the grantor and the appropriate Regional Administrators )
annually at the end of the month coincident with or preceding the anni-
versary date of the first establishment of the fund. Subsequent
payments into the fund must take place annually over the term of the
initial RCRA permit no later than 30 days after the anniversary date of
the first establishment of the fund.
After the term of the initial RCRA permit
Subsequent adjustments of cost estimates for inflation must take
place annually on the anniversary of the date on which the facility
receives a new permit. These adjustments must be made annually during
the operating life of the facility. Subsequent valuations of the fund
must take place annually at the end of the month coincident with or
preceding the anniversary date of the first establishment of the fund.
Subsequent payments into the fund must take place whenever the value of
the fund is less than the amount of the new estimate. The difference
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must be deposited into the fund within 60 days of the change in the cost
estimate.
2.1.7.3 Payment into the Trust Fund Facility Changes from
Interim to General Status
When a facility with interim status is granted a permit, the
facility begins operating with general status (see Section 1.5.4) and
must comply with general status standards. If a facility has a trust
fund, there are two significant differences in procedures: (1) annual
adjustments of cost estimates to account for inflation will become due
on the anniversary of the date of the permit rather than May 19, and (2)
the number of years of the pay-in period will change from the remaining
operating life of the facility or 20 years, whichever is shorter, to the
number of years in the term of the initial RCRA permit. A. sample calcu-
lation is provided in the Appendix.
2.1.7.4 Payments into the Trust Fund Variations Allowed
Owners or operators may elect to make payments into the trust fund
at an accelerated rate, or to deposit the full amount of the cost
estimates at the time the fund is established. The owner or operator,
however, must still adjust cost estimates annually for the inflation
factor and to reflect changes in closure and post-closure plans. The
trustee must also still value the fund annually and provide a statement
to the grantor and appropriate EPA Regional Administrator(s) confirming
the value of the fund. In order to determine whether a new payment into
APKr*v
the trust fund is necessary, the formula " should be
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applied in the manner described in Sections 2.1.7.2, 2.1.7.3 and
2.1.7.4.
2.1.7.5 Valuations of the Trust Fund
The trustee's statement to the grantor and appropriate Regional
Administrator(s) confirming the value of the fund should detail both the
results of investment activity and the expenses levied against the fund.
According to Section 10 of the trust agreement, "securities in the Fund
will be valued at market value as of no more than 30 days prior to the
date of the statement." Examples of expenses that might be levied
against the fund are given in Section 2.1.4.1.
The owner or operator (grantor) may object to the trustee's invest-
ment activities, or to expenses levied against the fund, in writing,
within 90 days of the date the statement is furnished to him. Notwith-
standing any objections, the owner or operator is obligated to make
required payments into the fund by the appointed date. The EPA
(beneficiary) may object to any of the trustee's activities at any time
with no time limitation. If the trustee issues a revised statement of
the fund's value to the owner or operator and the appropriate EPA
Regional Administrator(s), the owner or operator may apply for a refund
if the value of fund exceeds the required amount (see Section 2.1.9.1).
2.1.8 Trustee Notice of Non-Payment
The trustee is obligated to notify the owner or operator and the
appropriate EPA Regional Administrator(s), by certified mail, within 10
days following the expiration of the 30-day period after the anniversary
of the establishment of the trust, if a required payment has not been
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received. Upon receiving such notice, the Regional Administrator wil]
institute a compliance procedure if the value of the trust fund is less
than the amount required (see Section 1.6).
2.1.9 Release of Funds from the Trust Fund
Owners and operators may be permitted to have funds released from a
trust fund for several reasons which are described in the following five
sections of the manual. If a Regional Administrator determines that an
owner's or operator's request for a release of funds is justified he
must authorize the trustee in writing, within 60 days of having received
the request, to release such funds.
2.1.9.1 Release of Funds When Value of Trust Fund Exceeds Cost
Estimates
Regional Administrators may approve a release of funds if the
current value of the trust fund (according to the trustee's statement of
value) exceeds the total applicable cost estimates. Such a situation
might occur if the owner or operator had made deposits higher than those
required by these regulations, inflation was lower than expected, or
investment earnings were significantly higher than expected.
2.1.9.2 Release of Funds Due to the Provision of an Alternate
Financial Assurance Mechanism
The Regional Administrator may approve a release of funds from a
trust fund if the owner or operator substitutes another form of
acceptable financial assurance for closure or post-closure care (see
Sections 2.2 on RCRA Surety Bonds, 2.3 on RCRA Letters of Credit and 4.1
on State-required mechanisms). Such release may not occur until after
the Regional Administrator has received proof that the alternative
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financial assurance mechanism has been executed and is in force (see
Section 2.4., 1).
2.1.9.3 Release of Funds As Reimbursement for Closure or Post-
Closure Expenses
After the beginning of final closure, the owner or operator may
request reimbursement for closure expenditures by submitting itemized
bills to the Regional Administrator. Similarly, bills for post-closure
care may also be submitted for reimbursement. Within 60 days of
receiving the bills, the Regional Administrator will instruct the
trustee to make reimbursements, if the expenditures are in accordance
with the closure or post-closure plan or are otherwise justifiable.
The Regional Administrator will need to use his judgment in
assessing whether the expenditures are justifiable. During closure, for
example, adverse weather conditions may create a need for unanticipated
remedial activities which were not included in the plan. Ordinarily, the
Regional Administrator will only release up to 80 percent of the closure
fund during the actual closure period. The remaining 20 percent will be
held to ensure that some funds are available if closure is incomplete or
inadequate. It will be returned when certification of satisfactory
closure has been received by the Regional Administrator (see Section
2.1.9.4)
Assessing the validity of post-closure expenditures may be even
more difficult since the post-closure plan is only revised during the
operating life of the facility when it will be difficult to predict the
kinds of activities that will be needed in future years. In addition,
the plan only has to account for routine post-closure monitoring and
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maintenance activities and expected contingencies (e.g., adverse weather
conditions likely to occur over a 30-year period). Thus, there probably
will not be enough money in the fund to cover the costs of extraordinary
events (e.g., liner failure, damages caused by unusually severe weather
conditions).
When assessing the itemized bills, the Regional Administrator will
need to decide if any extra expenditures due to the costs of cleaning up
a contingency not accounted for by the plan or due to an accelerated
maintenance schedule, should be covered by the trust or whether the
owner or operator should pay them himself. If the owner or operator has
to cover these costs himself, the costs might place an undue financial
burden on the owner or operator and lead him into bankruptcy. In this
case, the EPA would be left responsible for post-closure care of the
facility. If the Regional Administrator agrees to reimbursement, there
is the possibility that the trust fund will run out of funds before the
end of the post-closure period.
2.1.9.4 Release of Funds Due to Release from the Requirement to
Provide Financial Responsibility for Closure or Post-
Closure
The Regional Administrator will notify the owner or operator within
60 days after receiving acceptable certifications (from the owner or
operator and an independent registered professional engineer) that he is
no longer required to maintain financial assurance for closure if the
Regional Administrator is convinced that closure has been accomplished
in accordance with the closure plan.
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At the end of the post-closure period the owner or operator may
request a release from the requirement to provide financial assurance
for post-closure care. If any assets remain in a trust at the end of
the post-closure period, the Regional Administrator may authorize their
release after the trustee has levied final administrative expenses.
2.1.9.5 Release of Funds After Change in Facility Owner or
Operator
If the owner or operator sells the facility for which the trust
fund provides financial assurance, the trust fund will not transfer to
the next owner or operator. Instead, the new owner or operator will
have to provide new financial assurance for the facility.
The Agency will not allow a trustee to release funds from a trust
fund to an owner or operator because the ownership or operation of the
facility has been sold or transferred until the new owner or operator
meets the applicable financial responsibility requirements and is
granted interim status or a permit.
2.1.10 Changes of Trustees
The trustee of a trust has a legal interest in the property in the
trust because he has control over it, can sue to protect it, and is
responsible for its preservation. Unless the trust instrument specifi-
cally identifies an individual as trustee, however, the trust exists
independently of the trustee. A change from one trustee to another will
not affect the existence of the trust itself.
2.1.10.1 Why Trustee Is Changed
The owner or operator must change the trustee if the trustee insti-
tution fails to meet the requirements of the regulations (see Section
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2.1.3 for qualifications of trustee institutions). If an owner or
operator is dissatisfied with the performance of his chosen trustee, he
may change to another eligible trustee. Finally, the trustee may
resign.
2.1.10.2 How Trustee is Changed
Upon written agreement of the owner or operator, the trustee and
the appropriate Regional Administrator(s), the trustee may resign or the
owner or operator may appoint a successor trustee. If the owner or
operator cannot or does not appoint another trustee when the present
trustee wishes to resign, the present trustee will request a court of
competent jurisdiction to appoint a successor. The present trustee
remains responsible, however, until he has been replaced. The name of
the successor trustee and the date on which he takes over administration
of the trust must be sent to the appropriate Regional Administrator(s),
the owner or operator and the former trustee 20 days before the change
becomes effective.
2.1.11 Standby Trust Fund
By the time a letter of credit or a surety bond is obtained, the
owner or operator is also required to set up a standby trust fund. An
originally signed duplicate of the trust agreement must be sent to the
appropriate Regional Administrator with the letter of credit or surety
bond.
Any funds collected from a surety company or drawn from a letter of
credit must be placed directly into the accompanying standby trust fund
by the surety or institution making the payment. Without such a deposi-
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tory mechanism, funds payable to a Regional Administrator would have to
be deposited directly into the United States Treasury and could not be
used specifically to pay for closure or post-closure care of a hazardous
waste management facility (see 31 U.S.C §484).
EPA plans to seek authority from Congress to directly receive and
disburse funds derived from financial assurance mechanisms under RCRA.
If EPA obtains that authority, owners and operators would no longer be
required to establish standby trust funds.
A standby trust fund is essentially the same as the trust fund used
as a primary financial mechanism. However, after a nominal payment is
agreed upon by the owner or operator and the trustee and paid into the
fund as specified in the trust fund requirement, further payments into
the trust fund are not required until the trust fund is funded by the
owner or operator, a surety company, or an institution issuing a letter
of credit.
The owner or operator is obligated to fund the standby trust fund
if it is accompanying a financial guarantee bond (see Section
2.2.2.1). The owner or operator may choose to partially fund the stand-
by trust fund in order to increase his amount of financial assurance
coverage when using a surety bond or letter of credit (see Sections
2.2.6.1 and 2.3.6.1).
A surety company will fund the standby trust fund when it becomes
liable for the actions of the owner or operator (see Section 2.2.9).
An institution issuing a letter of credit will fund the standby
trust fund when the Regional Administrator draws on the letter of credit
(see Section 2.3.9).
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When financial assurance mechanisms are combined to provide assur-
ance of financial responsibility (see Section 2.4.2), only one trust
fund or standby trust fund is required. A letter of credit or surety
bond combined with a trust fund need not be accompanied by a separate
standby trust fund. If a surety bond and letter of credit are combined,
only one accompanying standby trust need be provided.
2.1.12 Liability of Trustee
The trustee is responsible for errors in the administration of the
trust that are the result of not acting in good faith. This includes
errors made through willful negligence or gross misconduct and
violations of the "prudent man" standard for investment.
2.2 Surety Bonds
2.2.1 What is a Surety Bond?
A surety bond is a contract of suretyship, typically involving the
assumption of liability by one party, the surety, for the obligation of
another party, the principal or obligor, to a third party, the obligee
or beneficiary. In a surety bond, the surety states the conditions
under which it agrees to protect the obligee against the default of the
principal. The surety bond also contains a "penal sum" which represents
the extent of the surety's liability in monetary terms.
Surety bonds can be written for many different purposes:
Fidelity bonds insure against losses caused by the
dishonesty of employees.
Contract bonds secure the performance of contractual
obligations.
Court bonds secure the performance of a litigant, in
advance of a final decision by a court in order to
protect the opposing litigant from loss.
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License and permit bonds secure that the performance of
licensees (liquor store owners, auctioneers, etc.) will
be in conformity with obligations under the license or
permit.
2.2.2 RCRA Surety Bonds
An owner or operator may use a Financial Guarantee Bond for Closure
and a Financial Guarantee Bond for Post-Closure to satisfy the interim
status financial responsibility requirements. During general status an
owner or operator has the option of using both the Financial Guarantee
Bonds and the Performance Bonds to satisfy the financial responsiblity
requirements for closure and post-closure.
In the RCRA surety bonds, the owner or operator would be the
principal and the EPA would be the obligee. Table 2-3 shows the
location of the regulations applicable to surety bonds and the bond
forms.
Since surety bonds guarantee the performance of statutory or con-
tractual obligations, the responsibilities or obligations of the
respective parties (surety, principal, and obligee) must be clearly
defined in the underlying contract or in the relevant statute. The
obligations and provisions of financial guarantee bonds are clearly
specified in the regulations; the bases for the performance bond
contract are the closure and post-closure plans.
During interim status, the Regional Administrator will normally not
review an owner's or operator's plans until 180 days before final
closure is scheduled to begin. The terms of the underlying contracts
for performance bonds are based on plans which could change
significantly when the plans are reviewed. Since major changes in
performance requirements could be used as a defense against liabilities
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TABLE 2-3
SURETY BOND REGULATIONS
SUBJECT OF
REGULATION
SECTION OF REGULATION
INTERIM STATUS GENERAL STATUS
Closure Bond
Financial Guarantee Bond
Performance Bond
Post-Closure Bond
Financial Guarantee Bond
Performance Bond
Bond Form
Financial Guarantee Bond
Closure
Post-Closure
Performance Bond
Closure
Post-Closure
40 CFR §265.143(b)
NA
40 CFR §265.145(b)
NA
40 CFR §265.151(b)
40 CFR §265.151(c)
NA
NA
40 CFR §264.143(b)
40 CFR §264.143(c)
40 CFR §264.145(b)
40 CFR §264.145(c)
40 CFR §264.151(b)
40 CFR §264.151(d)
40 CFR §264.151(c)
40 CFR §264.151(e)
NA: Not Applicable
For the text of these regulations see 46 Federal Register pp. 2851 et
seq. (January 12, 1981).
for the surety, performance bonds are not allowed during interim
status. Performance bonds will be allowed for facilities operating with
general status, because the plan will be evaluated and approved as a
condition of the permit.
EPA's bonds contain a provision for an optional rider allowing the
surety company and the owner or operator to automatically adjust the
penal sum of the bond (see Section 2.2.1). Another unique feature of
EPA's surety bonds is that they must be accompanied by a standby trust
fund as discussed in Section 2.1.11.
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2.2.2.1 Financial Guarantee Bonds
The Financial Guarantee Bond for Closure and the Financial
Guarantee Bond for Post-Closure are designed to ensure that at least 60
days before the expected date of final closure of a facility the owner
or operator will place the amount of money guaranteed by the bonds in a
standby trust fund (see Section 2.1.11 for a discussion of the standby
trust fund). The bonds also ensure that the owner or operator will
place the amount of money guaranteed by the bonds in the standby trust
fund within 15 days after an order to begin closure has been issued by
the Regional Administrator or a court, or within 15 days after a termin-
ation notice of the permit has been issued. If the owner or operator
defaults on these obligations, the surety company will be responsible
for placing an amount equal to the penal sum of the bond into the stand-
by trust fund.
2.2.2.2 Performance Bonds
The Performance Bonds for Closure and Post-Closure are both
designed to ensure that the owner or operator will perform in accordance
with the closure or postclosure plans and other permit requirements.
The bonds also obligate the owner or operator to perform final closure
or post-closure even though closure may occur sooner than expected, or
the requirements in the plans or permit (or both) may change. If the
owner or operator defaults, the surety must either perform in accordance
with the plans and permit requirements or deposit the penal sum into the
standby trust fund.
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2.2.3 Qualifications of Issuing Corporate Surety
The Department of the Treasury decides which corporate sureties
meet necessary legal and financial requirements to write bonds when the
United States (or one of its agencies or departments) is the obligee.
Qualified sureties are listed in the Department of the Treasury's
Circular 570 which is published annually as of July 1 in the Federal
Register. Circular 570 can be ordered from the Department of the
Treasury at any time, but orders for over 10 copies should be submitted
prior to June 1. Interim changes to Circular 570 are also published in
the Federal Register and issued separately as supplements. Whenever
there is doubt as to whether a surety not listed in Circular 570 or in
supplements is qualified to write RCRA bonds, the Audit Staff of the
Department of the Treasury may be contacted at (202) 634-5010.
The Department of the Treasury does not allow qualified sureties to
underwrite a single risk greater than 10 percent of the paid-up capital
and surplus of the surety company. This amount, called the underwriting
limitation, is included as Note b in Circular 570 after the name and
address of the surety. Surety companies may exceed their underwriting
limitations as long as the risk is shared using coinsurance or
reinsurance. When two or more sureties (i.e., cosureties) are listed on
a bond, the penal sum of the bond may not exceed the aggregate
underwriting limitations for all of the sureties listed. If one surety
is listed on a bond and the penal sum of the bond exceeds the under-
writing limitation listed in Circular 570, the surety must submit a
Reinsurance Agreement in Favor of the United States to EPA with the
bond.
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Circular 570 (Note c) also lists the States in which surety
companies are licensed. A surety company must be licensed in the State
where it executes a bond.
A surety bond will no longer be considered assurance of financial
responsibility if the surety company is removed from the Department of
the Treasury's Circular 570. The owner or operator is required to
establish another financial mechanism within 60 days of the removal of
the surety from the list. However, if the surety has been removed from
the list due to a merger, the owner or operator must inform the
Regional Administrator of the merger within 60 days. A new bond need
not be executed as long as the new surety will be listed in Circular 570
and meets the other requirements already mentioned.
The Department of the Treasury keeps track of the financial
position of sureties listed in Circular 570 and provides updated infor-
mation to federal departments and agencies. When the Treasury staff
notices that a particular surety has a quickly deteriorating financial
position, they send a notice to federal departments and agencies to use
discretion in approving bonds issued by that particular surety.
2.2.4 Initially Executing the Surety Bond
2.2.4.1 Information for the Owner or Operator
Financial guarantee bonds and performance bonds may be considered
"hazardous" (risky) by the surety industry. This is likely to affect
the premiums charged for these bonds, the number of brokers or agents
with the authority to execute these bonds, the underwriting information
required by the surety company from the owner or operator, and the
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amount and types of collateral security required from some owners and
operators.
Surety companies charge the principal premiums as compensation to
the surety company for the use of its name and credit as surety. The
Surety Association of America (SAA) will include in their rate manual a
premium rate or possibly a scale of rates based on their evaluation of
the risks and administrative burdens involved in underwriting these
bonds. Sureties may charge different rates to their customers based on
the size of the bond penalty amount; for example, the higher the bond
penalty amount, the lower might be the percentage that the premium would
be of the bond penalty amount.
Since few sureties have had experience with the bonding of
hazardous waste management facilities, EPA believes availability of
these bonds may be limited at first. There may be a limited number of
brokers or agents with the authority to execute these bonds since
special expertise may be required. Surety companies provide their
authorized brokers or agents with a power of attorney, a written
document stating that the named broker or agent is allowed to act on
behalf of the surety company. Since power of attorney forms may contain
limitations, owners or operators should check to be sure that the broker
or agent with whom they are dealing has the authority to underwrite
these bonds. They should make certain that bonds written on behalf of
the EPA are not excluded, that the relevant types of bonds are not
excluded (e.g. all financial guarantee or performance bonds), and that
the required penal sum of the bond is not above an agent's monetary
limit.
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Before an agent or broker executes a surety bond, he will gather
underwriting information to be presented to the surety company to deter-
mine if the owner or operator will be able to meet the obligations
guaranteed by the bond. Certain factors which surety companies can be
expected to consider in their decision process are:
The financial condition of the owner or operator, based
on financial statements.
The accuracy of financial statements presented to the
surety.
The inherent risks associated with the hazardous waste
management facility .(e.g., type of facility, type of
waste, location of facility, etc.).
The expected risks and profits associated with the future
operation of the facility.
The quality of the management of the facility as well as
the qualifications of key personnel.
The past operating experience of the facility.
Surety companies may underwrite bonds for certain owners and
operators who otherwise would not qualify for a bond if collateral
security is deposited with the surety company by the owner or
operator. Surety companies are likely to prefer highly liquid forms of
collateral such as certificates of deposit or Treasury Bills.
Collateral arrangements would be defined in a collateral agreement
between the surety company and the owner or operator. Owners or
operators who are not required by the surety to deposit collateral
security with the surety company might elect to do so for the purpose of
receiving a premium discount.
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The owner or operator and the surety should note that when
executing the surety bond, they will both be held responsible for making
sure that the wording of the surety bond is identical to the wording
required by the regulations.
2.2.4.2 Information for the Regional Administrator
The EPA Regional Administrator must make sure that surety bonds
accepted as assurance of financial responsibility conform both to the
Treasury's regulations for bonds given to the United States and to EPA's
regulation governing bonds which are acceptable for this purpose. Title
6 of the U.S. Code, §§6-13, authorizes the acceptance of corporate
surety companies on bonds given to the United States. The Department of
the Treasury Circular 297 contains the Treasury regulations governing
surety companies doing business with the United States.
All surety bonds submitted to EPA must:
Be delivered to the Regional Administrator either in
person or by certified mail.
Be received by the Regional Administrator by the
effective date of the interim status regulations (July
13, 1981) for existing facilities. For new facilities
the surety bond must be received 60 days before the date
on which hazardous waste is first received for treatment,
storage, or disposal.
Be effective by the effective date of the interim status
regulations (July 13, 1981) for existing facilities. It
must be effective before the initial receipt of hazardous
waste for facilities operating with general status.
Have wording identical to the wording specified in the
regulations.
Be accompanied by an originally signed duplicate of a
standby trust fund (see Section 2.1.11).
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Have a penal sum equal, at a minimum, to the cost
estimates if the bond is the only mechanism providing
assurance (see Section 2.2.5 for bonds covering more than
one facility and Section 2.4.3 for bonds combined with
other mechanisms to provide assurance).
The Regional Administrator must also check that:
The surety has not exceeded its underwriting limitation
specified in Circular 570 (see Section 2.2.3).
The power of attorney for the individual signing for the
surety is sufficient (see Section 2.2.4.1).
The signature for a corporate, partner or individual
principal is sufficient.
If the corporate principal is a division of another corporation, an
officer (or attorney in fact) of the parent corporation must sign for
the principal. The power of attorney for the attorney in fact should be
attached to the bond (se« Section 2.2.4.1 where the purpose of a power
of attorney is described).
If the principal is a partnership, one partner can sign as long as
words indicating that he is signing for the partnership are inserted
(e.g., "For the Partnership" or "For the TSD Company"). Persons other
than partners must have a power of attorney to sign for a partner.
If the principal is an individual he should sign as "owner" or
"operator." Persons other than the "owner" or "operator" must have a
power of attorney to sign for an "owner or operator."
2.2.4.3 EPA Care of Bond
Once a bond is accepted as assurance of financial responsibility
for closure or post-closure, by the Regional Administrator, at least one
copy should be made of the bond and all attachments. The original bond
and attachments should be kept in a fire-safe location.
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2.2.5 Multiple Facilities on One Bond
An owner or operator may use one surety bond to provide assurance
of financial responsibility for more than one facility (see Section
2.4.3).
2.2.6 Changes in Coverage of the Surety Bond
The penal sum of the surety bond must at least equal the amount of
the most recent cost estimate for the facility and activity (i.e.
closure or post-closure) for which the bond is providing financial
assurance, except in cases where the bond is combined with another
mechanism (see Section 2.4.2). If the adjusted cost estimate exceeds
the penal sum of the bond during the operating life of the facility, the
owner or operator must either increase the penal sum of the bond to an
amount equal to the new estimate or combine the bond with another form
of financial assurance to cover the total costs. Regardless of changes
in costs, a surety bond does not have to be increased once a facility
has been closed.
If the most recent estimate decreases during the operating life of
the facility, the owner or operator may reduce the penal sum of the bond
to the level of the current estimate following approval by the Regional
Administrator.
2.2.6.1 Increasing the Amount of the Bond
A bond that includes an optional rider allows the owner or operator
and the surety to automatically adjust the penal sum of the bond
upwards. However, since the rider specifies that upward adjustments
will not be more than 20 percent of the penal sum of the bond, the
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surety does not have to automatically agree to upwards adjustments in
excess of 20 percent.
Owners and operators with a bond that does not include a rider
allowing an adjustment of the penal sum have several options. They may
execute a new agreement with the surety providing for an increased penal
sum. They may deposit the difference between the new cost estimate and
the penal sum of the bond into the standby trust fund which accompanies
a surety bond (see Section 2.1.11). They also may obtain a letter of
credit in the amount of the difference between the new cost estimate and
the penal sum of a financial guarantee bond.
Regardless of the option chosen, the owner or operator must
increase the amount of financial assurance to the required level within
60 days of the change in the cost estimate. Notice of the change must
be delivered to the Regional Administrator in person or by certified
mail within 60 days after the change has been made.
2.2.6.2 Decreasing the Amount of the Bond
An owner or operator must apply to the Regional Administrator for
any decrease in bond coverage. During interim status, the Regional
Administrator would likely request the closure or post-closure plans and
any other operating information about the facility necessary to decide
whether the request would be justified. A Regional Administrator could
normally make this determination and notify the owner or operator within
60 days of the application for decreased bond coverage. The Regional
Administrator's written approval would then be sent to the owner or
operator and the surety company. Once the penal sum of the bond was
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decreased by the surety, the owner or operator would have to notify the
Regional Administrator of the change by certified mail within 60 days.
The Regional Administrator should seldom allow the amount of a
Performance Bond for Post-Closure to decrease after a facility has
ceased operation. Future rates of inflation cannot be predicted with
any degree of accuracy. But even assuming a constant inflation rate of
8%, and equal annual expenditures for post-closure care, the amount of a
Performance Bond for Post-Closure would be insufficient to carry out
post-closure activities until the 17th year of post-closure.
2.2.7 Cancellation of a Surety Bond by the Owner or Operator
An owner or operator must request permission from the Regional
Administrator to cancel a surety bond. If the bond guarantees
facilities in more than one Region, the owner or operator must request
the permission of all of the Regional Administrators. Regional Adminis-
trators will give their written consent for cancellation to the owner or
operator if the owner or operator has been released from the relevant
financial responsibility requirements (see Section 2.2.7.3). Permission
for cancellation may also be given by the Regional Administrators if the
owner or operator successfully demonstrates that he has substituted an
alternate form of assurance of financial responsibility for the bond
(see Section 2.4.1).
2.2.7.1 Change in the Status of the Issuing Corporate Surety
If the surety company listed on a bond is removed from Circular
570, the bond will no longer provide acceptable assurance of financial
responsibility (see Section 2.2.3). The owner or operator must change
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mechanisms as provided in Section 2.4.1. Once alternate financial
assurance is obtained the original surety bond may be cancelled by the
owner or operator.
2.2.7.2 Cancellation of the Surety Bond Due to Changes in Facility
Ownership or Operation
If the ownership or operation of a facility has been transferred,
the Regional Administrator may not allow the surety bond providing
assurance for that facility to be cancelled until the new owner or
operator meets the applicable financial responsibility requirements and
has been granted either interim status or a permit.
2.2.7.3 Cancellation of the Surety Bond Due to the Release of the
Owner or Operator from the Requirement to Provide
Financial Responsibility for Closure or Post-
Closure Care
The Regional Administrator will notify the owner or operator within
60 days after receiving acceptable certifications (from the owner or
operator and an independent registered professional engineer) that he is
no longer required to maintain financial assurance for closure if the
Regional Administrator is convinced that closure has been accomplished
in accordance with closure plan.
At the end of the post-closure period the owner or operator may
request a release from the requirement to provide financial assurance
for post-closure care. The Regional Administrator may approve cancel-
lation of the surety bond at the end of the post-closure period.
If assurance of financial responsibility is no longer necessary for
a facility guaranteed by a surety bond, the Regional Administrator will
return the original bond to the issuring surety company with a copy of
the letter to the owner or operator informing him of his release from
this requirement.
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2.2.8 Cancellation of a Surety Bond by the Surety Company
Because surety companies choosing to underwrite the bonds might be
undertaking very long-term obligations, the bonds contain a provision
allowing them to be cancelled by the surety company. The surety company
can exercise this option by sending a notice of its intention to cancel
by certified mail to the owner or operator and to the Regional Adminis-
trator. Cancellation cannot become effective until 90 days after the
date on the Regional Administrator's signed receipt for the notice of
cancellation. A surety can also not cancel a bond while a compliance
procedure as defined in 40 CFR §§264.141 or 265.141 is pending (see
Section 1.6).
Regardless of whether a violation which led to a compliance order
could have any impact on the ability of the owner or operator to perform
closure or post-closure care, the surety bond will have to remain in
full force and effect. This is essential because a violation or a
series of violations completely unrelated to closure or post-closure
care could cause the Regional Administrator either to revoke interim
status or a permit. Closure might then be ordered for the facility,
making assurance of financial responsibility for closure or post-closure
care a necessity. Serious violations might also result in large expen-
ditures which would force the owner or operator to close the facility
earlier than anticipated or in the worst case, actually lead to
bankruptcy.
A compliance procedure will be automatically instituted as soon as
the Regional Administrator receives notice of the surety company's
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intention to cancel a bond. The owner or operator is allowed 30 days
from the notice to demonstrate to the Regional Administrator alternative
financial assurance as specified in the regulations. When the Regional
Administrator receives notice that an the alternative mechanism has been
provided, he will then notify the surety company that the bond cancel-
lation will become effective at the end of the 90-day period.
If the owner or operator is unable to provide assurance of
financial responsibility acceptable to the Regional Administrator within
30 days, EPA will inform the surety company of its obligation to either
place the penal sum of the bond in the standby trust fund if it is a
Financial Guarantee Bond for Closure or Post-Closure, or place the penal
sum of the bond in the standby trust fund or begin performance of
closure or post-closure care if it is a Performance Bond for Closure or
Post-Closure Care.
2.2.9 Liability of the Surety Company
If the owner or operator fails to perform as guaranteed by the
bonds, the surety will be liable (see Sections 2.2.2.1 and 2.2.2.2).
Therefore, the Regional Administrator may direct the surety to place the
penal sum of the bond in the standby trust fund or with a performance
bond, allow the surety to perform closure or post-closure care after a
determination that the owner or operator has failed to fulfill all of
the conditions of the bond. If the Regional Administrator allows the
surety to perform closure or post-closure, the surety will have to
perform according to the requirements of the permit, plans or other
regulations issued under the authority of RCRA. If a surety is to
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deposit the penal sum into a trust fund, the Regional Administrator
should notify the trustee at least two weeks in advance of the trans-
action, if possible.
If the surety either fails to deposit the penal sum in a trust fund
or is not performing closure or post-closure in accordance with the
regulation the Regional Administrator will need to issue a claim against
the surety. In order to make a claim against a surety company the
Regional Office should send a "demand letter" to the surety's Federal
process agent in the federal court district where the facility in
question is located. A "demand letter" should be a registered letter
explaining the demand for payment into the standby trust fund and
including a specific period of time during which the surety company is
expected to respond to the demand.
Federal process agents, who have power of attorney to process these
claims, are appointed by surety companies in each judicial district
where they will undertaken suretyship. The name and address of the
process agent for a particular surety may be obtained from the clerk of
the U.S district court for the district in question. If the Regional
Administrator is informed that the appointment of a process agent for
the surety is pending or that the agent is absent from the district, the
"demand letter" may be served upon the clerk of the court. This should
only be done when there is no process agent for the surety present in
the district.
If the Regional Administrator's demand for payment of a claim is
not settled to his satisfaction, he should send a report to the
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Secretary of the Treasury including a copy of the subject bond, the
basis for the claim against the company, a chronological resume of
efforts to obtain payment, a statement of all reasons offered by the
surety for nonpayment and a statement of the agency's views on the
matter.
The Secretary of the Treasury may revoke a. surety company's certif-
icate of authority to appear on bonds given to the United States if the
Regional Administrator's complaints are found to be justified.
2.3 Letters of Credit
2.3.1 What is a Letter of Credit?
A letter of credit is an instrument by which the credit of one
party, whose financial standing is considered more desirable than that
of a second party, is extended on behalf of the second party to a third
party. These three parties to a letter of credit are the account party,
or customer, who is the applicant requesting the issuance of a letter of
credit; the issuer, who is the entity undertaking the obligation of the
account party; and the beneficiary, who is the party in whose favor the
credit is issued. The issuer, on behalf of its customer, allows the
beneficiary to draw funds from the issuer upon the presentation of
papers or documents in accordance with the terms of the letter of
credit.
The best-known type of letter of credit is the documentary letter
of credit, used principally to finance shipments of merchandise. It
normally requires the beneficiary of the letter to present documents
generated by the shipment and underlying transaction (e.g., bills of
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lading, invoices, insurance certificates) before obtaining payment. It
supports the contract setting up the underlying transaction, and is used
to ensure payment if actions required by that contract are carried out.
Another type of letter of credit is the standby letter of credit
(also called the guaranty or special purpose letter of credit). It
creates an obligation on the part of the issuer to the beneficiary to
pay money to the beneficiary if the account party fails to perform a
specified obligation. The standby letter of credit is classified as
"clean" credit because shipping or commercial documents are not required
to obtain payment.
Letters of credit may be either revocable or irrevocable
instruments. Revocable credit operates as a payment arrangement which
can be terminated at the option of the issuer or account party without
the consent of the beneficiary. It thus does not provide a financial
guarantee to the beneficiary. The terms of an irrevocable letter of
credit can only be amended by the agreement of all parties to the
credit.
2.3.2 RGRA Letters of Credit
An owner or operator may satisfy the financial responsibility
requirement for closure and post-closure care by obtaining an
irrevocable standby letter of credit, which guarantees the availability
of sufficient funds to cover the costs of closure or post-closure or
their combined costs. For the purposes of these regulations the owner
or operator will be the account party, the bank or financial institution
will be the issuer, and the EPA, through its Regional Administrators,
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will be the beneficiary. The letter of credit must be irrevocable for
an initial period of at least one year and must provide for automatic
extensions of the same period. Table 2-4 shows the location of the
regulations applicable to letters of credit and the letter of credit
form.
The letter of credit is designed to ensure that funds are available
to cover the costs of closure and post-closure. The risk that the
account party (i.e., the owner or operator) will fail to pay the costs
of closure and post-closure is assumed by the issuer, who is responsible
up to the full amount of the credit upon presentation of the documents
specified in the terms of the credit.
TABLE 2-4
LETTER OF CREDIT REGULATIONS
SUBJECT OF
REGULATION
Closure
Letter of Credit
Post -Closure
Letter of Credit
Letter of Credit
Form
SECTION OF REGULATION
INTERIM STATUS GENERAL STATUS
40 CFR §265.143(c)
40 CFR §265.145 (c)
40 CFR §265.151 (d)
40 CFR §264.143(d)
40 CFR §264. 145(d)
40 CFR §264.151(f)
For the text of these Regulations see 46 Federal Register pp. 2851 et
seq. (January 12, 1981).
A unique feature of EPA's letters of credit is that they must be
accompanied by a standby trust fund. All amounts paid by the issuing
institution must be deposited into this standby trust fund. The reason
for this requirement is discussed in Section 2.1.11.
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2.3.3 Qualifications of Issuing Institution
The regulations require that the. issuing institution must be a bank
or other financial institution which has the authority to issue letters
of credit and whose letter of credit operations are regulated and
examined by a Federal or State agency.
All domestic bank and savings and loan letter of credit departments
are regulated and examined. The Regional Administrator can confirm that
a financial institution has the authority to issue a letter of credit by
contacting the regulatory authority. Table 2-2 shows the regulatory
authority primarily responsible for each type of financial institution.
Some American branches of foreign banks are regulated and examined
by the Federal Deposit Insurance Corporation (FDIC) which can certify
whether the bank in question has the authority to issue letters of
credit. Other foreign banks with American branches should be able to
specify which regulatory authority could attest to their authority.
A letter of credit will no longer be considered assurance of finan-
cial responsibility for the closure or post-closure care of a hazardous
waste management facility if the issuer becomes insolvent, bankrupt, or
its license or charter is suspended or revoked, or if it no longer meets
the requirements for qualified institutions.
2.3.4 Initially Executing the Letter of Credit
2.3.4.1 Information for the Owner or Operator
Irrevocable standby letters of credit will be treated by banks and
other financial institutions as credit commitments. An owner or
operator will be required to prepare and sign a credit application, as
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required by the institution, and to sign a consent to the terms of the
agreement. The financial institution will decide whether to assume the
credit risk on behalf of the owner or operator on the basis of the
information provided and its own credit review, which will be equivalent
to that applicable to a potential borrower in an ordinary loan.
The terms of the agreement between the owner or operator and the
bank or other financial institution will vary according to the insti-
tution's assessment of the risk it is assuming. The bank will therefore
look carefully at the reason for the letter of credit, the ability of
the owner or operator to perform, and the owner's or operator's credit
responsibility for the full term of the credit.
Because letters of credit count against the legal loan limits of a
bank, even if no payout of funds occurs, certain financial institutions
may be unable or unwilling to issue them. In such situations, a local
bank may be able to arrange for a letter of credit to be issued by one
of its larger correspondent banks (a bank which transacts business, such
as borrowing or loaning money, with another bank).
The fee for the letter of credit may be negotiable, depending on
the business history of the parties and particularly on the collateral
required to secure the credit. Most banks will probably require the
same types of collateral as for a direct loan. Collateral may be
required up to a value of 100 percent of the letter of credit. Banks
may provide letters of credit for certain owners or operators who other-
wise would not qualify, if collateral is deposited with the bank.
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The owner or operator and the issuer should note that they will
both be held responsible for ensuring that the wording of the letter of
credit is identical to that required by the regulations. The form
should be certified by the issuer and placed on the letterhead of the
bank or other financial institution issuing the letter of credit.
The contract between the owner or operator and the issuer will
normally require the owner or operator to reimburse the issuer for
amounts paid out by the issuer pursuant to the terms of the letter of
credit.
2.3.4.2 Information for the Regional Administrator
The Regional Administrator must ascertain that owners or operators
who use letters of credit as evidence of financial assurance have
complied with the following:
The owner or operator must deliver the letter of credit
to the Regional Administrator either in person or by
certified mail by the effective date of the Interim
Status regulations for existing facilities. For new
facilities, the letter of credit must be delivered at
least 60 days before the date on which hazardous waste is
first received for treatment, storage or disposal.
The letter of credit must be effective by the effective
date of the interim status regulations (July 13, 1981)
for existing facilities. It must be effective before the
initial receipt of hazardous waste for facilities
operating with general status.
The wording of the letter of credit must be identical to
the wording specified in the regulations (see Table 2-4).
An originally signed duplicate of the standby trust
agreement must be delivered to the Regional Administrator
with the letter of credit.
The face value of the letter of credit must equal at a
minimum equal the cost estimates if the letter of credit
is the only mechanism providing assurance (see Section
2.3.5 for letters of credit covering more than one
facility and 2.4.3 for letters of credit combining with
other mechanisms).
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The Regional Administrator should contact the bank or other finan-
cial institution which issued the letter of credit if questions arise
about the term of the credit.
2.3.4.3 EPA Care of Letters of Credit
It is highly recommended that the Regional Administrator keep the
original letter of credit in a fire-safe location. The Regional Admin-
istrator should also set up a system of record-keeping to account for
all letters of credit in his custody.
Because under General Status letters of credit will expire at many
different times, such record-keeping should include a "tickler" file for
alerting the Regional Administrator to impending expirations.
2.3.5 Multiple Facilities on One Letter of Credit
An owner or operator may use one letter of credit to assure funds
for multiple facilities only if they are all located in the same EPA-
Region (see Section 2.4.3).
2.3.6 Changes in Coverage of the Letter of Credit
The letter of credit must be issued for at least the amount of the
most recent cost estimate for the facility and the activities (i.e.,
closure or post-closure) for which the letter of credit is providing
financial assurance, unless the letter of credit is combined with
another mechanism (see Section 2.4.2). If the adjusted cost estimate
exceeds the guaranteed credit during the operating life of the facility,
the owner or operator must either increase the credit to an amount equal
to the new estimate or combine the letter of credit with another form of
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financial assurance to cover the total costs. Regardless of the changes
in costs, a letter of credit does not have to be increased once a
facility has been closed.
If the most recent estimate decreases during the operating life of
the facility, the owner or operator, following approval by the Regional
Administrator, may reduce the amount of the letter of credit to the
level of the current estimate.
2.3.6.1 Increasing the Coverage of the Letter of Credit
Whenever the adjusted cost estimate of closure or post-closure, or
closure and post-closure combined (whichever is be assured by the letter
of credit), increases to an amount greater than the amount of the
credit, the owner or operator must, within 60 days of the increase,
cause the amount of the credit to be increased to an amount at least
equal to the new estimate. Such an increase would be created by an
amendment to the letter of credit. That amendment will require the
written approval of the issuer, the owner or operator, and the Regional
Administrator. The amendment to the letter of credit must be delivered
to the Regional Administrator either in person or by certified mail
within 60 days of the increase. Alternatively, the owner or operator
may obtain other financial assurance to cover the increase.
2.3.6.2 Decreasing the Coverage of the Letter of Credit
Whenever the adjusted cost estimate decreases, the letter of
credit may be reduced to the amount of the new estimate following
written approval by the Regional Administrator. After receiving written
approval, the owner or operator must obtain the issuer's agreement to
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the decrease. The owner or operator then must notify the Regional
Administrator by certified mail or by personal delivery within 60 days
of the decrease in the amount of the letter of credit.
The Regional Administrator should seldom allow the amount of a
letter of credit for post-closure care to decrease after a facility has
ceased operation. Future rates of inflation cannot be predicted with
any degree of accuracy. But, even assuming a constant inflation rate of
8 percent, and equal annual expenditures for post-closure care, the
amount of a post-closure letter of credit would be insufficient to carry
out remaining post-closure activities until the 17th year of post-
closure.
2.3.7 Cancellation of the Letter of Credit by the Owner or
Operator
An owner or operator must request permission from the Regional
Administrator to cancel a letter of credit. The Regional Administrator
will give his written consent for cancellation to the owner or operator
if the owner or operator has been released from the relevant financial
responsibility requirements (see Section 2.3.7.3). Permission for
cancellation may also be given by the Regional Administrator if the
owner or operator successfully demonstrates that he has substituted an
alternate form of assurance of financially responsibility for the letter
of credit (see Section 2.4.1).
2.3.7.1 Cancellation of the Letter of Credit Due to Changes in the
Status of the Issuing Institution
If the bank or other financial institution which issued the letter
of credit fails to meet the qualifications discussed in Section 2.3.3
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the letter of credit will no longer provide acceptable assurance of
financial responsibility. The owner or operator must change mechanisms
as provided in Section 2,4.1. Once alternate financial assurance is
obtained, the original letter of credit may be cancelled by the owner or
operator.
2.3.7.2 Cancellation of the Letter of Credit Due to Changes in
Facility Ownership or Operation
If the ownership or operation of a facility has been transferred
the Regional Administrator may not allow the letter of credit providing
assurance for that1 facility to be cancelled until the new owner or
operator has met the applicable financial responsibility requirements
and has been granted either interim status or a permit.
2.3.7.3 Cancellation of the Letter of Credit Due to the Release of
the Owner or Operator from the Requirement to Provide
Financial Responsibility for Closure or Post-Closure Care
The Regional Administrator will notify the owner or operator within
60 days after receiving acceptable certifications (from the owner or
operator and an independent registered professional engineer) that he is
no longer required to maintain financial assurance for closure if the
Regional Administrator is convinced tht closure has been accomplished in
accordance with the closure plan.
At the end of the post-closure period, the owner or operator may
request a release from the requirement to provide financial assurance
for post-closure care. The Regional Administrator may approve cancel-
lation of the letter of credit at the end of the post-closure period.
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2.3.8 Cancellation of the Letter of Credit by the Issuing
Institution
Since institutions issuing letters of credit may be undertaking
very long-term obligations, the letters of credit contain provisions
which allow the issuers to refuse to extend the letters of credit beyond
the current expiration date (letters of credit must be irrevocable for a
period of at least one year). If the issuer decides not to extend the
letter of credit, he must notify by certified mail both the owner or
operator and the Regional Administrator of his decision at least 90 days
before the current expiration date. The letter of credit cannot be
terminated until 90 days after the date on the Regional Administrator's
signed return receipt of the notice of expiration of the letter of
credit.
The letter of credit also may not be terminated while a compliance
procedure as defined in 40 CFR §264.141 or §265.141 is pending.
Although the violation itself may not involve the closure and post-
closure regulations, the letter of credit will have to remain in full
force and effect. This is essential because a violation or a series of
violations completely unrelated to closure or post-closure care could
cause the Regional Administrator either to revoke interim status or a
permit. Closure might then be ordered for the facility, making
assurance of financial responsibility for closure or post-closure care a
necessity. Serious violations might also result in large expenditures
which could force the owner or operator to close the facility earlier
than anticipated or in the worst case, actually lead to bankruptcy.
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The Regional Administrator will automatically institute a
compliance procedure as soon as he receives notice of the. issuer's
intention to terminate the letter of credit, unless the owner or
operator has already demonstrated alternate financial assurance. The
owner or operator is then allowed 30 days to provide the Regional Admin-
istrator with substitute assurance of financial responsibility. If the
Regional Administrator accepts the substitute assurance of financial
responsibility, he will then return the original letter of credit to the
issuing institution for termination.
If the owner or operator fails to provide acceptable alternative
financial assurance within 30 days, the Regional Administrator may draw
on the letter of credit. The issuing institution must then deposit the
total amount of the letter of credit into the standby trust fund.
2.3.9 Responsibility of the Issuing Institution for Performance
EPA expects the issuing institution to fulfill its obligation to
place the total amount of the letter of credit in the standby trust fund
whenever the Regional Administrator presents the draft and statement as
specified in the letter of credit. The Regional Administrator may draw
on the letter of credit under the circumstances explained in
Section 2.3.2. If an issuing institution is to deposit the penal
sum into a trust fund, the Regional Administrator should notify
the trustee at least two weeks in advance of the transaction, if
possible.
2.4 Changing Mechanisms and Combining Mechanisms
In order to achieve the maximum amount of flexibility in these
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regulations, EPA allows owners and operators to change financial
assurance mechanisms and to combine them.
2.4.1 Changing Mechanisms
Owners or operators may change the mechanism being used to provide
assurance of financial responsibility as long as prior written approval
is received from the Regional Administrator for the Region in which the
facility is located. If the mechanism is providing assurance for more
than one facility, and these facilities are in more than one Region,
prior written approval may be needed from all of the affected Regional
Administrators (see Section 2.4.3). All of the affected Regional Admin-
istrators must be notified within 60 days after the change takes place.
Before a Regional Administrator approves of the change in
mechanisms, he will have to make certain that the new mechanism complies
with all of EPA's regulations for mechanisms to be used as financial
assurance of closure or post-closure care. The new mechanism, if
approved, must become effective before the previous mechanism runs
out. The Regional Administrator must make sure that the essential
overlap in mechanisms is present, but should strive for the minimum
necessary amount of coverage by the two mechanisms so as to reduce the
burden to the owner or operator. Some suggestions as to how this may be
carried out are discussed below.
If an owner or operator wants to cancel a surety bond or letter of
credit and place the necessary amount of funds in the accompanying
standby trust fund, he must first receive the approval of the Regional
Administrator for the cancellation of the bond or the letter of
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credit. The owner or operator would then be expected to place the
necessary amount of funds in the standby trust fund within 30 days of
the Regional Administrator's approval. If the money is not deposited
within 30 days, the Regional Administrator can issue a compliance order
(so that the bond or letter of credit may not be cancelled) because the
owner or operator could be without assurance of financial responsibility
after another 60 days. When an owner or operator changes from a surety
bond or letter of credit to a trust fund, the amount of money deposited
into the trust fund must be equal to the amount that would have had to
be in the trust fund, if the trust had been the original financial
assurance mechanism.
If an owner or operator changes from a trust fund to a letter of
credit or surety bond, the Regional Administrator should not direct the
trustee to release funds from the trust until the effective date of the
letter of credit or surety bond.
If an owner or operator changes from a surety bond to a letter of
credit (or vice versa) the effective date of the letter of credit should
be no more than 30 days after the Regional Administrator approved can-
cellation of the surety bond.
2.4.2 Use of Multiple Financial Mechanisms
Owners or operators may use more than one financial mechanism to
meet the closure or post-closure financial responsibility requirement
for one hazardous waste management facility. The mechanisms which may
be so combined are limited to the trust fund, financial guarantee bonds,
and letter of credit. The estimated costs for more than one facility
may not be assured by more than one mechanism.
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Multiple financial mechanisms may prove particularly useful when a
cost estimate for a facility guaranteed by a financial guarantee bond or
letter of credit increases markedly. The issuing surety or financial
institution may be unwilling to increase the penal sum or credit amount.
The owner or operator could make up the difference between the old and
new cost estimates (and thus remedy the deficiency of the penal sum or
credit amount) by depositing the difference in the already existing
standby trust fund (see Section 2.1.11). Cancelling the financial
guarantee bond or letter of credit and replacing it with a new mechanism
would not be necessary.
Whenever mechanisms are combined, the financial assurance provided
must equal the relevant cost estimate. Even though the amount of assur-
ance provided by a trust fund may build up when a trust fund alone is
providing assurance of financial responsibility, the amount of assurance
provided when a trust fund is combined with a letter of credit,
financial guarantee bond, or both must, at a minimum, be equal to the
relevant cost estimate.
Whenever a financial guarantee bond is combined with a letter of
credit to provide assurance for one facility, the owner or operator need
only establish one standby trust fund. If a trust fund is combined with
a surety bond or letter of credit, a separate standby trust fund is
unnecessary.
2.4.3 One Mechanism for More than One Facility
Owners or operators may use one trust fund, one surety bond or one
letter of credit to provide assurance of financial responsibility for
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closure, or for post-closure care, of more than one hazardous waste
management facility (see Sections 2.1.6, 2.2.5, and 2.3.5). In each of
these cases, the owner or operator must make sure that the mechanism
correctly lists for all facilities Included, the EPA Identification
Number, name, address, and the amount of funds assured by the
mechanism. While the trust fund of surety may provide assurance of
financial responsibilities for facilities in more than one Region, the
letter of credit may only be used to assure funds for facilities in one
EPA Region.
Whenever the list is changed by the addition or subtraction of a
facility, or by an increase or decrease in the amount of funds assured
by the mechanism, all of the appropriate Regional Administrators must be
sent corrected lists within 60 days of such changes.
Whenever a trust fund or surety bond is used to cover facilities in
more than one Region, all of the Regional Administrators of Regions in
which these facilities are located must normally be involved in
decisions related to:
Allowing decreases in the amount of funds guaranteed by
the mechanism, unless the decrease is due to
reimbursements or to switching mechanisms for a facility
or facilities in one Region (see below).
Allowing the owner or operator to change to another
financial assurance mechanism (including a State-required
mechanism).
Allowing the owner or operator to be released from the
requirement to provide assurance of financial responsibi-
lity for the closure or post-closure care for a
particular facility.
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Decisions involving a reduction in the amount ot funds guaranteed
by the mechanisms (unless the decrease is due to reimbursements or to
switching mechanisms for a facility or facilities in one Region) must be
agreed upon by all the Regional Administrators who have the facilities
in their Regions to ensure that the amount of funds remaining is
sufficient to cover all the facilities. Whenever an owner or operator
requests a reduction in the amount of funds guaranteed by the mechanism
except for reasons mentioned above, the owners or operators of all the
facilities covered by the mechanism must send their most recent cost
estimates to the Regional Administrators so that the Regional
Administrators can check the cost estimates against the amount of funds
currently guaranteed.
Decisions involving whether to authorize reimbursements from a
trust fund for closure or post-closure care expenses for a particular
facility could be made by the Regional Administrator for the Region in
which the facility is located. Similarly, decisions as to whether one
of the facilities on a list could switch to another financial assurance
mechanism could also be made only by the Regional Administrator for the
Region in which the facility is located. However, the Regional Admin-
istrator in question may not reimburse a larger amount of money than is
listed as the estimate for the particular facility, nor may he approve
switching a sum larger than the estimate for all the facilities in his
region to another mechanism.
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2.4.4 Single Mechanism for Closure and Post-Closure
An owner or operator may provide assurance of financial responsi-
bility for the closure and post-closure care of one, or more than one,
hazardous waste management facility using a trust fund or a letter of
credit. The closure and post-closure cost estimates must be listed
separately.
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3.0 LIABILITY INSURANCE
3.1 What is Liability Insurance?
Insurance Is a method of reducing risk and redistributing losses.
Ordinarily one party will contract to compensate another party or
parties for losses due to particular perils. The likelihood that losses
will be suffered is estimated; fees are collected from all participating
parties on the basis of the likelihood of losses; and all or part of
such collected funds are paid back to the participating parties who
suffer losses covered by the insurance contract.
Liability insurance protects individuals or commercial enterprises
against the possibility that as a result of their own concession of
responsibility or a judgment by a court of law or by an adminstrative
body, they may be required to pay damages to another party for injury to
the latter's person, property or other interests.
3.2 RCRA Liability Insurance
Owners and operators of hazardous waste management facilities may
use liability insurance to meet their obligations to provide assurance
of financial responsibility for claims arising from the operations of
these facilities.
Table 3-1 indicates the sections of the Code of Federal Regulations
applicable to RCRA insurance requirements.
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TABLE 3-1
LIABILITY INSURANCE REGULATIONS
SUBJECT OF REGULATION
SECTION OF REGULATION
INTERIM STATUS GENERAL STATUS
Insurance Sudden
and Accidental
Insurance Nonsudden
and Accidental
Hazardous Waste Facility
Liability Endorsement
40 CFR S265.147(a)
40 CFR §265.147(b)
40 CFR §265.151(e)
40 CFR §264.147(a)
40 CFR §264.147(b)
40 CFR§264.151(g)
For the text of these regulations, see 46 Federal Register pp. 2851 et.
seq. (January 12, 1981).
These regulations contain the minimum standards that must be met by
insurance policies in order for them to provide the required insurance
coverage. These standards concern:
The amendment of the policy by the Hazardous Waste
Facility Liability Endorsement
The coverages listed on the policy
Limits of liability
Financial condition of the insured and legal defense
costs
Deductibles in the policy
Cancellation
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These standards are discussed below.
3.2.1 Hazardous Waste Facility Liability Endorsement
Unlike the mechanisms authorized to provide assurance of financial
responsibility for closure and post-closure care, the Agency has not
developed specific wording for the instruments (policies) which must be
used to provide liability assurance.
The Agency has, however, developed specific wording for a mandatory
Hazardous Waste Facility Liability Endorsement which must be attached
and submitted with all insurance policies which are used to fulfill an
owner's or operator's obligation to provide assurance of financial
responsibility for claims. An endorsement amends an underlying
policy. It serves as a supplementary contract to qualify, enlarge, or
change in some other manner the obligation created in the underlying
insurance policy. If there is a discrepancy between any of the provi-
sions of the insurance policy and the endorsement, the provisions of the
endorsement supercede the provisions of the policy.
The first paragraph of the Hazardous Waste Facility Liability
Endorsement lists the facilities to which the endorsement will apply.
(The insurance policy might include coverages for facilities that do not
treat, store, or dispose of hazardous waste.) It also defines some
conditions under which the insurance company will be held liable for
claims (see Sections 3.2.4 and 3,2.5) and specifies that the limits of
liability are exclusive of legal defense costs (see Section 3.2.4).
3.2.2 Coverages
Owners or operators of hazardous waste TSDF's are required to have
an insurance policy (or a State-required mechanism approved by the
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Regional Administrator) providing coverage for claims from the operation
of such facility or group of facilities from sudden and accidental
occurrences that cause injury to persons or property.
Owners or operators of surface impoundments, landfills or land
treatment facilities are also required to maintain liability insurance
for claims arising from nonsudden and accidental occurrences.
3.2.2.1 Responsibility for Coverage
The owner or operator whose name appears on the RCRA permit appli-
cation or RCRA permit will be the owner or operator responsible for
providing such liability coverage.
3.2.2.2 Extent of Coverage - Multiple Facilities on One Policy
Coverage is required for a hazardous waste facility or a group of
facilities. That is, if one owner or operator is responsible for
several facilities, the required coverage will serve for all such
facilities.
Whenever more than one facility is covered by one insurance policy,
a list including the following information for each facility must be on
the policy itself or attached to the policy: the EPA Identification
Number, name, and address. Whenever the list is changed by the addition
or subtraction of a facility or by an increase or decrease in the amount
of funds assured, all of the appropriate Regional Administrators must be
sent corrected lists within 60 days of the change.
3.2.2.3 Comprehensive and General Liability Coverage
Many owners or operators of hazardous waste management facilities
already have liability insurance. Perhaps the most common type of
insurance covering some types of liability is Comprehensive and General
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Liability (CGL). This insurance would satisfy the requirements for
coverage of sudden and accidental occurrences that cause injury to
persons or property.
CGL policies do not generally provide coverage for claims arising
from nonsudden and accidental occurrences that cause injury to persons
or property. Owners or operators who must have an insurance policy with
coverage for nonsudden and accidental occurrences will have to have such
coverage added to an already existing policy or have a. new policy
executed providing such coverage.
3.2.2.4 Environmental Impairment Coverage
Some environmental impairment insurance policies include coverage
for liability claims arising from occurrences which are both nonsudden
and non-accidental. This type of policy would provide acceptable
coverage for claims arising from nonsudden and accidental occurrences as
required by these regulations. The coverage for claims arising from
occurences which are both nonsudden and nonaccidental is somewhat
broader than that currently required to meet the regulation. The regu-
lation does not require coverage for claims arising from occurrences
which are expected and intended, e.g., releases to the environment that
are allowed under the conditions of a permit. The regulation does
require coverage for claims arising from occurrences which are not
expected or intended, e.g., a gradual release in excess of that allowed
under conditions of a permit. Such a release might occur for example,
if a liner system failed.
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3.2.3 Limits of Liability
Owners or operators of TSDF's are required to maintain liability
insurance for claims arising from sudden and accidental occurrences with
liability limits in the amount of at least $1 million per occurrence
with an annual, aggregate of at least $2 million during the operating
life of the favcility.
Owners or: operators of surface impoundments, landfills or land
treatment facilities are required to maintain liability insurance for
claims arising from nonsudden and accidental occurrences with liability
limits in t:he amount of at least $3 million per occurrence with an
annual aggregate of at least $6 million during the operating life of the
facility.
Owners or operators may combine different types of insurance
policies in order to> provide the necessary coverages up to the required
limits of liabilities.
Excess liability insurance provides coverage above a specified
figure and up to a sipecified limit. Such insurance could be combined
with a CGL policy to effectively raise the liability limits of specified
coverages. An "umbrolla" contract may also serve to raise the limits of
liability on a primaicy insurance policy. It provides broader coverage
than excess liability insurance. For the purpose of these regulations
it could have the s'>arae effect as excess liability insurance and raise
the limits, of liability on those coverages required by these regulations
(as well as others) so that the amounts of liability covered would
satisfy these regulations.
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3.2.4 Financial Condition of the Insured and Legal Defense Costs
The Hazardous Waste Facility Liability Endorsement makes it clear
that the insurer is obligated to pay claims regardless of the financial
condition, insolvency, or bankruptcy of the insured, and that the stated
amounts of mandatory coverage exclude legal defense costs. The owner or
operator (insured) may contract separately with the insurer for these
legal defense costs or may contract for coverage in excess of mandatory
amounts as long as the amounts required by these regulations are speci-
fically set aside for claims awards.
3.2.5 Deductibles in the Insurance Policy
The Hazardous Waste Facility Liability Endorsement provides that no
deductible in the policy may be asserted by the insurer for claims up to
those amounts of insurance required by the regulations. However, this
provision of the endorsement does not nullify any obligation of the
insured to the insurer, as defined in the insurance policy, with regard
to deductible amounts.
3.3 Qualifications of Insurers
The Agency is not placing its own restrictions on which insurers
are acceptable underwriters of liability insurance required by these
regulations.
3.4 Evidence of Insurance Agreements
Owners or operators of hazardous waste management facilities oper-
ating with interim status must provide the Regional Administrator with
evidence of insurance coverage for claims arising from sudden and acci-
dental occurrences by July 13, 1981. The effective date for this
coverage must also be on or before July 13, 1981.
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Owners or operators of surface impoundments, landfills or land
treatment facilities operating with interim status must provide the
Regional Administrator with evidence of insurance coverage for claims
arising from nonsudden and accidental occurrences by January 12, 1982,
if their sales in 1980 were more than $10 million. If sales were more
than $5 million but less than $10 million, such evidence must be
provided by January 12, 1983. If sales were less than $5 million, such
evidence must be provided by January 12, 1984. The effective dates for
this coverage must be on or before the dates specified.
For the purpose of these regulations, "sales" shall be the total
revenues or total sales, as defined by generally accepted accounting
principles, appearing on the owner's or operator's income statements for
the calendar year 1980.
Owners or operators of new facilities operating with general status
must provide evidence of the applicable insurance coverage(s) to the
Regional Administrator at least 60 days before the date on which
hazardous waste is first received for treatment, storage or disposal.
The effective date for this coverage must be on or before the date on
which hazardous waste is first received for treatment, storage, or
disposal.
Owners or operators who receive permits will already have sudden
and accidental coverage for existing facilities. These owners or
operators must provide evidence of nonsudden and accidental coverage by
the same dates such evidence would have been provided had the facility
continued to operate with interim status (see above). The dates on
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which this coverage must become effective are the same as the dates by
which evidence must be provided.
All owners or operators must send originally signed duplicates of
their insurance policies including the endorsement(s) to the appropriate
Regional Adtninistrator(s) by certified mail, or deliver them in
person.
Regional Staff will check that insurance policies:
Conform to regulatory requirements
Are received by the correct dates
Are effective by the correct dates
3.5 Sudden and Accidental and Nonsudden and Accidental Coverage on One
Insurance Policy
Owners or operators may use one insurance policy to provide
assurance for claims arising from sudden and accidental occurrences, and
from nonsudden and accidental occurrences arising from the operations of
the facility. The liability limits of a policy providing for sudden and
accidental occurrences, and nonsudden and accidental occurrences for a
single facility must be in the amount of at least $4 million per occur-
rence with an annual aggregate of at least $8 million.
3.6 Variances to the Liability Requirements
Either an owner or operator or the Regional Administrator can
initiate a proceeding to obtain a variance to the liability requirements
for a facility.
An owner or operator may obtain a variance to the liability
requirements if he can demonstrate satisfactorily to the Regional Admin-
istrator that the levels required by the regulation are too high for the
degree and duration of risk associated with his facility.
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The Regional Administrator may require a variance for a facility if
he determines that the levels of liability are too low for the degree
and duration of risk at a facility. He may make this determination at
any time. The Regional Administrator may also require that an owner or
operator of a treatment or storage facility obtain coverage for
nonsudden and accidental occurrences if the Regional Administrator
determines that there is a significant risk to human health and the
environment from such occurrences.
3.6.1 Assessing Degree and Duration of Risk
The level of liability coverage consistent with the degree and
duration of risk of a particular facility will be a function of the
following five components of risk:
(1) Characteristics of wastes being handled or disposed;
(2) Environmental pathways at the facility;
(3) Population at risk;
(4) Design of the containment; and
(5) Management procedures.
Table 3-2 provides an outline of the risk components associated with
hazardous waste management which will affect the level of coverage
appropriate for a particular facility.
In determining a level of coverage consistent with the degree and
duration of risk, the goal is to ensure that the level chosen guarantees
protection from the maximum probable loss associated with the
facility. The maximum probable loss is not the worst conceivable event,
but rather the worst accident that could be reasonably expected to
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TABLE 3-2
OUTLINE OF RISK COMPONENTS
Waste Characterization
Volume of Waste
Lethality
Infectivity
Flammability
Radioactivity
Carcinogenicity
Mutagenicity
Compatibility with other wastes
Transformation of waste products
Half-life
Natural Pathways
Leachate formation
Solubility of wastes
Drainage and runoff
Soil porosity
Flood plains
Wetlands
Geological faults
Unstable slopes
Amount of precipitation
Evaporation rate
Storm frequency
Prevailing winds
Burrowing animals
Bioaccumulation/food-chain contamination
Population Risk
Proximity of population
Proximity to aquifer
Proximity to ground or surface waters
Proximity to wildlife preserve/endangered species
Buffer zone of facility
Zoning status of restrictions
Design of Containment
Disposal methods (e.g., drums, free burial)
Site design
Transport systems
Holding systems
Age of facility
Durability of containment system
Compatibility of containment system with wastes
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TABLE 3-2 (continued)
Management Procedures
Monitoring and leak detection system
Disposal operations
Regulatory compliance
Technical Competence
Management system
Emergency response capabilities
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occur. As a result, in arriving at an estimate of the maximum probable
loss, it is necessary to consider factors relating to the possible size
of loss, such as characteristics of the waste, the environmental
pathways and the populations at risk, and also factors relating to the
probability of the event, such as containment design, management
practices, and aspects of the environmental pathways. In some cases, a
very large maximum loss would be conceivable, but it would not represent
the maximum probable loss because of the low probability of the chain of
events that would lead to such a loss. For example, if a facility
handles very low hazard materials and is not located near water sources
or population centers, maximum losses in the event of an accident would
be small. If the containment designs are state-of-the-art, the proba-
bility of an accident would also be small.
3.6.1.1 Waste Characterization
The inherent toxicity of the waste materials generated and/or
handled by a facility and the total amount of wastes produced greatly
influence the potential maximum losses at a given facility. Toxicity,
in this context, should be viewed broadly enough to include materials
that are hazardous because of their infectivity, flammability or radio-
activity. Other key elements which greatly influence the degree of risk
at a site are the compatibility of the various wastes which are buried
in the same cells, the chemical characteristics of the "breakdown"
products that would be created during decomposition, and the half-lives
of the various elements involved.
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3.6.1.2 Environmental Pathways
In addition to the chemical toxicity of the wastes disposed, the
natural pathways specific to a particular site may greatly increase the
risk to human health and the environment. The solubility of wastes will
greatly influence the likelihood of seepage from the disposal site.
Another Influence on potential exposure is the quantity of leachate that
routinely accumulates as part of normal operations. Drainage and runoff
patterns are determinants of transport for soluble materials and those
that can be moved by water. The characteristics of the soil (e.g.,
porosity) also may guide seepage in specific directions and increase the
potential for liabilities.
The environment surrounding a facility producing, handling or
storing hazardous waste will play a large role in determining both the
chances of liabilities and the extent of the damages if an accident
occurs. Proximity of flood plains, wetlands, aquifers, geological
faults or unstable slopes all increase risk potential. Similarly,
prevailing geohydrological conditions, including groundwater flow
patterns, groundwater quality, and seasonal zones, will affect the risk
of exposure. Other potential significant climatic factors include the
amount of precipitation, evaporation rates, and the frequency of high
winds or other violent meteorological phenomena.
Ecological pathways should also be considered in the risk
evaluation. If the hazardous materials come in contact with living
organisms, bioaccumulation is possible. Organisms contaminated by toxic
wastes may become part of the human diet, contributing to a public
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health hazard. Finally, burrowing animals may destroy the structural
integrity of landfills or surface empoundments.
3.6.1.3 Population at Risk
Important factors that must be considered in evaluating the degree
of risk involved are the proximity of present and future human
population centers and the potential for wastes to reach human
populations. The proximity of waste disposal sites to aquifers and
ground and surface waters and the uses of these water sources will
greatly affect the potential size of liability claims if an accident
should occur. The risks of population exposure may also be influenced
both by the size of the buffer zone established at the facility itself
and the zoning status or restrictions on the area surrounding the
facility. Potential exposure to wildlife preserves or endangered
species may also increase subsequent liability.
3.6.1.4 Design of Containment
The probability of liabilities will be greatly influenced by the
design of the facility's containment. The degree of containment will
vary depending on how the wastes are handled and disposed (e.g., how
wastes are stored, whether wastes are disposed in drums or freely
buried) and the structural barriers of the facility. The potential for
damages will also be influenced by the structural integrity of the
facility, including the type of containment system (i.e., man-made
liners or relatively impermeable natural clay soil layers) used to
minimize leaching, the drainage and diversion structures erected, and
the piping and structural barriers provided for runoff and leachate
control.
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The age of the facility will also represent an important variable
affecting the degree of waste containment. Older systems may not have
been well designed for long-term confinement of hazardous materials, or
they may have become vulnerable to breaks because of metal fatigue or
corrosion. In addition to age, the expected lifetimes of liner
materials and burial drums and the compatibility of these materials with
the wastes may be critical factors in evaluating risk potential, espe-
cially for extremely toxic wastes with long half-lives.
3.6.1.5 Management Procedures
In assessing the probability of losses associated with a particular
facility, the management procedures employed by the operator must also
be critically evaluated. This will include evaluating the reliability
of monitoring and leak detection systems, since proper use of these
mechanisms can avoid incidents associated with seepage. In most situa-
tions, seepage is sufficiently gradual so that even if containment
fails, timely detection and adequate remedial measures may avert liabi-
lities. Also, the normal operating procedures of the facility should be
assessed. The likelihood of potential liability, for example, would be
much greater at a site where large quantities of wastes are routinely
accumulated for significant periods of time before disposal than at a
site where there is minimal lag time between the receipt and disposal of
wastes.
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This category of risk components includes many human factors.
Ideally, a facility's plan for hazardous waste management should
include:
Clear assignment of responsibility
Appropriate education for workers on hazard potentials
Procedures for safe handling
Well-defined emergency response procedures
Regulatory compliance
In assessing the overall management structure of the facility, the
surveyor must consider the status of each of these aspects of operation,
not only in terms of their existence "on paper," but also in regard to
the manner in which these objectives are communicated to facility
personnel, and the observed commitment of top level management to
fulfilling these objectives.
3.6.2 Procedures for Owner or Operator to Obtain a Variance
If an owner or operator of a facility operating with interim status
believes that the required level of insurance for his facility is incon-
sistent with the degree and duration of risk, he may submit a variance
request to the Regional Administrator. This request must be delivered
either in person or by certified mail. An owner or operator of a new
facility (i.e., a facility that was not considered in operation on
November 19, 1980) may submit a variance request with Part B of the
permit application. If an owner or operator of a facility operating
with general status wishes to request a variance, he must do so by
seeking a permit modification pursuant to the procedures under 40 CFR
§124.5.
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3.6.3 The Role of the Regional Administrator in Variance Requests
The Regional Administrator is responsible for evaluating the
validity of requests which are submitted to him. In addition, he may
adjust the level of coverage required at any time if he deems it neces-
sary to protect human health and the environment.
In evaluating variance requests, the Regional Administrator may
request any technical and engineering data he finds necessary to assess
the degree and duration of risk. The Regional Administrator will
process the requests in accordance with permit modification procedures
under 40 CFR §124.5 (for facilities operating with interim status, the
requests will be treated as permit modifications) or as part of the
permitting process under 40 CFR §122.25 for facilities applying for
general status. In considering variance requests for facilities with
interim status, the Regional Administrator may hold a public hearing at
his own discretion or whenever he finds, based upon requests for a
public hearing, a significant degree of public interest in the possible
decision to adjust the level or type of coverage required for a
facility.
3.6.4 Documentation Requirements
The owner's or operator's request for a variance should include the
level of insurance he deems appropriate for his facility as well as
sufficient documentation to support the request. This documentation
should be technical and the engineering data should be relevant to the
risk components described in Section 3.6.1. In cases where the Regional
Administrator initiates the variance proceedings, the owner or operator
must furnish any data requested within 60 days of his request.
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3.7 Cancellation of an Insurance Policy
Paragraphs 3 and 4 of the Hazardous Waste Facility Liability
Endorsement contain the conditions under which the policy and
endorsement may be cancelled.
Paragraph 3 states that the endorsement may not be cancelled
without cancelation of the policy to which it is attached. The
insurance company or the insured must send the Regional Administrator
notice in writing of intent to cancel the policy. Cancellation may not
be effective for at least 60 days after the notice is received by the
Regional Administrator. If the insurance policy and endorsement cover
facilitiss in more than one Region, originally signed copies of the
notice of intent to cancel must be sent to all of the applicable
Regional Administrators. Cancellation of the policy and endorsement
will become effective in a particular Region only 60 days after the
Regional Administrator in that Region has received such notice.
Paragraph 4 specifies further that cancellation of a "claims-made"
policy, that is a policy which covers claims which are made during the
term of the policy, may not be cancelled or terminated within 120 days
of any fire, explosion, or unplanned sudden or nonsudden release of
hazardous waste or hazardous waste constituents to air, soil, surface
water or ground water.
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4.0 ROLE OF STATES IN RCRA
Section 3006 of RCRA allows States to assume responsibility for
carrying out the requirements of Subtitle C of the Act Hazardous
Waste Management. States may assume this responsibility only after
authorization from EPA.
EPA must administer hazardous waste management in States without
authorized programs, in States whose programs do not meet the minimum
requirements prescribed by RCRA, and in States waiting for EPA authori-
zation to administer their own programs.
4.1 Applicability of State Financial Requirements
A number of States have adopted hazardous waste regulations which
require owners or operators to demonstrate financial assurance for
closure and post-closure care. Several States also require liability
coverage. Like the Federal regulation, many of these State regulations
require owners or operators to use specific financial mechanisms for
these purposes.
EPA recognized that differences between State and Federal financial
responsibility requirements might result in duplication and unnecessary
costs to owners or operators. This would not be a problem in those
States that have received interim or final authorization from EPA to
operate their own hazardous waste regulatory program, since only the
State's financial requirements would apply. In order to avoid
duplication and unnecessary costs to owners or operators in States with
financial responsibility requirements but without interim or final EPA
authorization to run their own hazardous waste management programs,
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owners or operators may use State-required mechanisms to meet the
Federal financial requirements if these mechanisms provide closure or
post-closure financial assurance or liability coverage equivalent to or
greater than that of the Federal mechanisms.
A difficult but critical task for the Regional Administrator will
be to assess whether State-required mechanisms provide assurance for
closure, post-closure care, or liability coverage equivalent to or
greater than that provided by Federal mechanisms. To evaluate whether
State-required mechanisms provide for financial responsibility that is
equivalent to or greater than that required by Federal regulations, the
Regional Administrator should examine three related areas for each
facility.
(1) What types of financial responsibility coverage for the
facility are required by the State? How does this
compare with the Federal requirements?
(2) Do the financial responsibility mechanisms required by
the State have the same degree of security and
flexibility as the Federal mechanisms?
(3) Is the level of coverage required by the State
equivalent to or greater than the level of coverage
required by Federal regulations?
4.1.1 Comparing State and Federal Financial Responsibility
Requirements for Facilities
Table 1-2 summarizes the Federal financial requirements which must
be satisfied for each type of facility. After referring to this Table,
Regional Administrator should compare the Federal financial responsi-
bility required for the type of facility with the State financial
responsibility required for the type of facility. For example, a land-
fill, surface impoundment or land treatment facility according to
4-2
-------
Federal regulations, must provide assurance of financial responsibility
for closure, post-closure, and liability claims arising from sudden and
nonsudden accidents. Although a State may require a landfill, surface
impoundment or disposal facility to meet some of these financial
requirements, it may not require that it meet all of them.
Once the differences between Federal and State financial responsi-
bility requirements for a particular facility are established, Regional
Staff must decide whether Federal and State financial requirements which
sound the same are, in fact, equivalent. Definitions of what the
financial responsibility mechanisms are supposed to ensure are
especially important. In particular, Regional Staff should review the
duration of the care provided by a particular mechanism and the
activities which are included in its coverage. For instance, according
to the Federal regulations, the post-closure care period must continue
for at least 30 years. Financial mechanisms providing for post-closure
care must, by definition, provide for 30 years of care. This care must
consist of providing and maintaining applicable ground-water monitoring
and reporting systems, waste containment systems, and security
systems. State mechanisms providing for a shorter term or not covering
all of the closure and post activities defined in Subpart G of 40 CFR
264 and 265 cannot be fully equivalent.
State-required financial responsibility mechanisms to satisfy State
regulations sometimes will not include all elements of what the Federal
requirements define as assurance for closure, post-closure and liability
coverage. Because of differences in the duration of care assured by the
4-3
-------
mechanism (e.g. for post-closure) or in the levels of coverage required
(especially in the case of liability), they may not fully cover these
requirements. State-required surety bonds may only ensure closure,
partial post-closure care, and some liability coverages for sudden and
accidental occurrences.
The Regional Administrator must establish which Federal
requirements are covered by State-required mechanisms, or which portions
of Federal requirements are covered by the State-required mechanism
(e.g., five years of post-closure care instead of 30 years).
4.1.2 Flexibility and Security of State-Required Mechanisms
The Regional Administrator must examine the actual workings of the
State financial mechanisms to determine if they are equivalent to the
Federal mechanisms with regard to flexibility and security. The flexi-
bility of State-required financial mechanisms is important because the
State mechanisms alone may not be sufficient to meet all present and
future Federal financial responsibility requirements for the owners or
operators of hazardous waste management facilities. The Regional Admin-
istrator must decide if any element of a State-required mechanism
precludes adding to the mechanisms, precludes payment by the mechanism,
or calls payment by the mechanism into question if additional financial
responsibility coverage is available from other sources.
Determining if State-required mechanisms for closure and post-
closure provide the same degree of security which Federal mechanisms for
these events provide will be a particularly critical aspect of the
review process. In order to decide if a State-required mechanism for
4-4
-------
closure or post-closure provides security equivalent to the Federal
mechanisms, the Regional Administrator should ask the following
questions about the State mechanisms securing funds for closure or post-
closure.
(1) Does the mechanism offer strong protection against the
successful collection of third-party claims?
(2) Are adequate qualifications required for banks or other
financial institutions empowered to hold assets of the
owner or operator or to guarantee his payment or
performance? (e.g., Which banks may hold trust funds?
Must surety companies be state-approved?)
(3) Which circumstances will allow the State or EPA to take
over assets held by a bank or other financial
institution, or to collect a third-party guarantee?
(4) Can third-party guarantees be cancelled? If so, will the
owner or operator be able to replace it with his own
funds or with another third-party guarantee (State or
Federally required)? Will the original guarantor honor
the guarantee and provide the necessary funds for closure
or post-closure if the owner or operator is unable to
find another financial responsibility mechanism
satisfactory to the Regional Administrator?
(5) Could cancellation of a third-party guarantee become
effective before the State or EPA could legally collect
funds from the guarantor for closure or post-closure?
Would violations by the owner or operator of State or
Federal regulations not related to closure or post-
closure put a third-party guarantee in jeopardy?
The Federal mechanisms for closure and post-closure were designed
to provide a great deal of security because closure and post-closure are
events certain to occur at facilities where these procedures are
required. EPA is convinced that despite the strict specifications it
has established for financial responsibility mechanisms for closure and
post-closure, at least one mechanism for these events should be
available to each qualified owner or operator.
4-5
-------
Federally authorized mechanisms to cover liability for damage
claims arising from sudden or nonsudden accidents do not have such
strict specifications (see Section 3.0). There may never be a need for
an owner or operator to satisfy damage claims. Besides, EPA is aware
that the number of insurers willing to provide coverage for nonsudden
events is somewhat limited. If stricter requirements for liability
mechanisms had been imposed, every qualified owner or operator might not
be able to procure the necesssary coverage. Therefore, comparing a
State-required mechanism covering liability to the Federal mechanism
should be easier than comparing the State-required mechanisms for
closure and post-closure to the Federal mechanisms.
In comparing a State-required mechanism covering liability to the
Federal mechanisms, the Regional Administrator should ask the following
questions about the State mechanism securing funds for liability claims:
(1) Are the types of coverages provided by the State mechanism
equivalent to the coverages required on insurance
policies?
(2) Are the limits of liability provided by the State
mechanism at least as high as the amounts required on
insurance policies?
(3) Will these amounts be available to claimants regardless
of legal defense costs, the financial condition of the
ensured and deductibles?
(4) Will cancellation of the State mechanism not be effective
for at least 60 days, or at least 120 days of any fire,
explosion or unplanned sudden or nonsudden release of
hazardous waste if the mechanism is written on a claims-
made basis?
If a State-required mechanism attempts to include coverage for some
aspects of closure, post-closure and liability, the mechanism will be
4-6
-------
acceptable only for coverage of liability, but not closure or post-
closure, if it does not contain both the flexibility and security
elements of the Federally required mechanisms for closure and post-
closure.
4.1.3 Amount of Funds Available
If a State-required mechanism for closure, post-closure, or
liability coverage is found to be acceptable, Regional Staff must then
make certain that the amount of funds available from the State mechanism
is equal to the amount required by Federal regulations. (Closure and
post-closure amounts are discussed in 1.5.2 and liability amounts are
discussed in 3.2.3). If the amount available is less than that required
by Federal regulations, the owner or operator may add to the State
mechanism (if possible) or establish an additional Federal financial
assurance mechanism (see Section 2.0) or liability insurance (see
Section 3.0) to cover the difference. The amount of funds available
through the State and Federal mechanisms together must equal at least
the amount required by the Subpart H Regulations.
4.1.4 Evidence of the Establishment of a State-Required Mechanism
Owners or operators must submit suitable evidence to Regional
Administrators, either in person or by certified mail, if they are using
State-required mechanisms to fulfill financial responsibility closure,
post-closure, or liability requirements, of the existence and terms of
that mechanism. Examples of suitable evidence include: a copy of a
trust agreement, surety bond, letter of credit, etc., with the State
listed as the beneficiary. Such submittals must include or have
4-7
-------
attached the following information: the facility's EPA Identification
Number, name, address, and the amount of liability coverage or funds for
closure or post-closure care assured by the mechanism.
4.2 State Assumption of Financial Requirements
Both the interim status and general status financial requirements
regulations allow States to assume responsibility for the owner's or
operator's compliance with closure, post-closure or liability require-
ments. The State may assume the responsibility either: (1) by assuming
legal responsibility for an owner's or operator's compliance with the
closure, post-closure or liability requirements of these regulations or
(2) by assuring that funds will be available from State sources to cover
these requirements.
If a State assumes legal responsibility for part of these require-
ments (e.g., for closure and post-closure, but not for liability), the
owner or operator must provide the additional coverages as specified by
\
these regulations. If the amount of funds available through a State
guarantee is less than the amount required by these regulations, the
owner or operator oust obtain one of the financial assurance mechanisms
as specified in these regulations to cover the additional closure or
post-closure assurance, or additional liability insurance as specified
in these regulations to cover the additional liability assurance.
Evidence of the State's assumption of responsibility must be
provided by the owner or operator. This evidence must consist of a
letter from a legally-authorized official, or officials, of the State
describing the nature of the State's responsibility regarding the
4-8
-------
closure, post-closure, and liability requirements covered. If the State
is assuming legal responsibility for any of the financial requirements
of the owner or operator, the letter should include a citation from the
State law, regulation, legislative resolution or other legal authority
providing for such assumption of responsibility. If the State is
assuring that funds will be available from State sources to cover any of
the owner's or operator's financial requirements, the letter should
specify the source of State funds and include a citation of the State
law, regulation, legislative resolution, or other legal authority
providing that State funds may be dedicated in this manner. The letter
must include or have attached to it, the following information: the
facility's EPA Identification Number, name, address, and the amounts of
liability coverage or funds for closure or post-closure care that are
assured by the State. Such letters must be signed by the State
official, or officials, with the legal authority to execute the
financial guarantee and to make such commitments on behalf of the State.
This letter must be delivered in person or by certified mail to the
Regional Administrator. For facilities operating with interim status,
the letter must be delivered by July 13, 1981, unless it assures only
the liability requirement for coverage of claims arising from nonsudden
and accidental occurrences. In this case the letter must be delivered
by the date this specific coverage is due (see Section 3.4). For
facilities operating with general status, the letter must be delivered
in person or by certified mail to the Regional Administrator at least 60
days before the date on which hazardous waste is first received for
treatment, storage or disposal.
4-9
-------
GLOSSARY
Financial, Administrative and Legal Terms Used in This Guidance Manual
Account Party
Acknowledgment
Attorney in Fact
Beneficiary
Certificate of Acknowledgment
Coinsurance
Collateral Security
Contract of Suretyship
Person in favor of whom a letter of
credit is issued.
Formal declaration before an authorized
official, by the person who executed
the instrument, that it is his free act
and deed.
A private attorney authorized by
another to act in his place for the
transaction of business in general.
This authority is conferred by an
instument in writing commonly called a
"power of attorney."
One for whose benefit a trust is
created.
The certificate of a notary public,
justice of the peace, or other
authorized officer, attached to a deed,
mortgage, or other instrument, setting
forth that the parties thereto
personally appeared before him on such
a date and acknowledged the instrument
to be their free and voluntary act.
A relative division of risk among
insurers or sureties.
A security given in addition to the
direct security, and subordinate to it,
intended to guarantee its validity or
convertibility or insure its
performance; so that if the direct
security fails, the creditor may fall
back upon the collateral security.
Contract whereby one party engages to
be answerable for a debt, default or
miscarriage of another and arises when
one is liable to pay debt or discharge
obligation, and party is entitled to
indemnity from person who should have
made the payment in the first instance
before surety.
G-l
-------
Damages
Grantor
Hazard
Insurance
Instrument
Issuer
Letter of Credit
Market Value
A pecuniary compensation or indemnity,
which may be recovered in the courts by
any person who has suffered loss,
detriment or injury, the unlawful act
or omission or negligence of another.
The person who creates a trust.
The risk, danger, or probability that
the event insured against may happen.
A contract whereby, for a stipulated
consideration, one party undertakes to
compensate the other for loss on a
specified subject by specified
perils. The party agreeing to make the
compensation is usually called the
"insurer" or "underwriter;" the other,
the "insured" or "assured;" the agreed
consideration, the "premium;" the
written contract, a "policy;" the
events insured against, "risks" or
"perils;" and the subject, right or
interest to be protected, the
"insurable interest."
A written document; a formal or legal
document in writing such as a contract,
deed, will, bond or lease.
A bank or other financial institution
which by establishment of a letter of
credit obligates itself to make a
payment to the obligee for the account
of the obligor (account party).
A written instrument, addressed by one
person to another requesting the latter
to give credit to the person in whose
favor it is drawn.
Price which a seller, willing but not
compelled to sell, would take, and a
purchaser, willing but not compelled to
buy would pay.
G-2
-------
Notary Public
Obligee
Penal Sum
Power of Attorney
Premium
Principal
Reinsurance
Rider
Risk
Securities
A public officer whose function it is
to administer oaths; to attest and
certify, by his hand and official seal,
certain classes of documents, in order
to give them credit and authenticity.
The person in favor of whom some
obligation is contracted.
A sum agreed upon in a bond to be
forfeited if the condition of the bond
is not fulfilled.
An instrument authorizing another to
act as one's agent or attorney.
The sum paid or agreed to be paid by an
insured to the underwriter as the
consideration for insurance or acting
as surety.
The person primarily liable, for whose
performance of his obligation a
guarantor or surety has become bound.
A contract by which an insurer (or
surety) procures a third person to
insure him against loss or liability by
reason of original insurance. A
contract that one insurer (or surety)
makes with another to protect the
latter from a risk already assumed.
An addition paper attached to, and
forming a part of, an insurance policy
or surety bond.
In insurance law; the danger or hazard
of a loss of the property insured; the
causalty comtemplated in a contract of
insurance; the degree of hazard; a
specified contingency peril.
Evidences of obligations to pay money
or of rights to participate in earnings
and distribution of corporate, trust
and other property (e.g., stocks).
G-3
-------
Surety
Surety Company
Trust Fund
Trustee
Underwriting Limitation
One bound with his principal for the
payment of a sum of money or for the
performance of some duty or promise and
who is entitled to be indemnified by
someone who ought to have paid or
performed if payment or performance be
enforced against him.
A company, usually incorporated, whose
business is to assume the
responsibility on bonds in
consideration of a fee proportioned to
the amount of security required.
A fund held by a trustee for the
specific purposes of the trust.
The person appointed, or required by
law to execute a trust.
The restriction on the amount that an
insurance company or surety can
guarantee.
G-4
-------
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