OSHER # 9835.6
UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
NOV I T 1988
MEMORANDUM
SUBJECT: Guidance on Premium Payments in CERCLA Settlements
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FROM: Thomas L. Adams, Jr. \
Assistant Administrator for Enforcement
and Compliance Monitoring
J. Winston Porter
Assistant Administrator for Solid Waste
and Emergency Response
TO: Regional Administrators
Regional Counsels
Regional Waste Management Division Directors
I. BACKGROUND AND PURPOSE
Attempts to reach settlements under the Comprehensive
Environmental Response, Compensation, and Liability Act
(CERCLA), 42 U.S.C. §§9601 et sea.. as amended by the
Superfund Amendments and Reauthorization Act (SARA) of 1986,
Pub. L. No. 99-499, pose difficult problems for both the
regulated community and the Agency. Potentially responsible
parties- (PRPs) are often reluctant to settle hazardous waste
enforcement cases because future cleanup costs are unknown;
they seek broad covenants not to sue in an effort to provide
a final determination of the extent of their liability.
EPA, on the other hand, is reluctant to assume the risk that
further site remediation will be required following
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completion of the work contemplated in the settlement
agreement or that the cost estimate is inaccurate.
One way to address these obstacles to settlement is for
EPA to require, in appropriate situations, a "premium
payment" from PRPs in exchange for the Agency assuming
future remediation and financial risks. The term "premium
payment" refers to a risk apportionment device, similar to
an insurance premium, under which the risk taken by the
government for providing PRPs with a release from liability
not usually available (e.g. , a covenant not to sue without
the usual "reopeners" or a covenant not to sue for certain
types of cost overruns) is offset by a payment in excess of
the cost projected to complete the remedy. The premium
should be sufficient to compensate EPA for taking the risks
associated with the following types of contingent future
costs: (1) cost overruns when the selected remedy costs
more to complete than estimated; and (2) additional costs
when more remedial work is required because the selected
remedy is not adequately protective of human health and the
environment.1
The purpose of this memorandum is to provide guidance
on the use of premium payments in CERCLA settlements. It
1 As discussed in Section IV, infra. "Timing of
Premium Payment Settlements," premium payment settlements
will not usually occur until after the remedy has been
selected. Thus, the permanence of the remedy chosen will
not be affected by the existence of a premium payment and
such settlements are not considered to be inconsistent with
Section 122(c)(l) of CERCLA.
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describes the key features of a premium payment settlement,
considerations regarding timing of the settlement, and the
factors to be considered in deciding if a premium should be
accepted. Settlements with de minimis parties, as
authorized by Section 122(g)(l)(A) of CERCLA, will usually
include a premium payment if the de minimis parties seek a
complete release from future liability, use of premium
payments in such settlements is discussed in the Agency's
"Interim Guidance on Settlements with De Minimis Waste
Contributors under Section 122(g) of SARA," 52 Fed. Reg.
24333 (June 30, 1987) .
II. THE PREMIUM PAYMENT CONCEPT
A. Premiums Designed to Address Future Liability
Section I22(f)(l) of CERCLA authorizes EPA in certain
circumstances to provide to PRPs covenants not to sue for
liability, including future liability, resulting from a
release or a threatened release of a hazardous substance
addressed by a remedial action.2 Typically, settlements3 in
which PRPs reimburse EPA for past costs and future oversight
costs and undertake performance of the remedy include
covenants not to sue for past costs and for present
2 This authority is discretionary, but in two
circumstances, specified in Section 122(f)(2), EPA must
grant a covenant not to sue for future liability if the PRP
qualifies under Section 122(f)(l).
3 SARA adopted in large part guidance on settlements
set forth in the Agency's "Interim CERCLA Settlement
Policy," 50 Fed. Reg. 5034 (Feb. 5, 1985).
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liabilities (e.g., construction of the remedy). They may
also include covenants not to sue for future liability,4
usually with certain exceptions (i.e., reopeners). Under
Section 122(f)(3), covenants not to sue for future liability
may not take effect until EPA certifies that the remedial
action is complete.
As to future liability, Section 122(f)(6) provides that
in most situations, a covenant not to sue for future
liability must include a "reopener" that allows EPA to
pursue the settling PRPs concerning conditions that were
unknown at the time EPA certified that the remedial action
was complete. Agency policy also requires that settlements
include a reopener to the covenant for future liability
where new information reveals that the remedy is not
protective of human health and the environment.5
4 In Section 122(f)(l) of CERCLA, Congress authorizes
EPA to issue covenants not to sue for both present liability
and future liability, in the context of covenants not to
sue involving remedial action, "EPA interprets present
liability as a responsible party's obligation to pay those
response costs already incurred by the United States related
to a site and to complete those remedial activities set
forth in the Record of Decision for that site. Future
liability refers to a responsible party's obligation to
perform any additional response activities at the site which
are necessary to protect public health and the environment."
See EPA's "Interim Guidance on Covenants Not to Sue Under
Section 122(f) of SARA," 52 Fed. Reg. 28038, 28040 (July 27,
1987) .
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Under Section I22(f)(6), the Agency may exclude the
11 unknown conditions" reopener from the covenant not to sue
for future liability if EPA determines that "extraordinary
circumstances" exist.6 For purposes of this memorandum, the
"unknown conditions" and the "new information" reopeners
will be treated together. In determining whether
extraordinary circumstances exist, each case should be
evaluated using the various factors specified in Section
6 However, under Section 122(f)(6)(B), even if
extraordinary circumstances exist, the unknown conditions
reopener may not be waived if the settlement does not
otherwise provide reasonable assurance that public health
and the environment will be protected from any future
releases.
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122(f)(6)(B).7 The premium payment itself should be
considered in the analysis as well.
If extraordinary circumstances exist, the Agency may
waive the reopeners to the covenant not to sue for future
liability in a premium payment settlement. Given the broad
scope of the factors to be evaluated, the inclusion of a
premium payment in a settlement cannot be the sole, or even
the predominant, determinant of extraordinary circumstances.
The presence of a premium should be one of several factors
which, when taken together, lead the Agency to conclude that
7 Section 122(f)(6) refers to both the factors
specified in Section 122(f)(4) and additional factors that
reiterate the guidance set forth in the Interim CERCLA
Settlement Policy. The additional factors relate to the
volume and character of the substances at the site; to risks
associated with the strength of the government's case on
liability, ability to pay, precedential value, and
inequities and aggravating considerations; and also to
public interest considerations. The factors specified in
Section I22(f)(4) relate primarily to the nature of the
remedy. They include:
a. The effectiveness and reliability of the remedy, in
light of the other alternative remedies considered for the
facility concerned.
b. The nature of the risks remaining at the facility.
c. The extent to which performance standards are
included in the order or decree.
d. The extent to which the response action provides a
complete remedy for the facility, including a reduction in
the hazardous nature of the substances at the facility.
e. The extent to which the technology used in the
response action is demonstrated to be effective.
f. Whether the Superfund or other sources of funding
would be available for any additional remedial actions that
might eventually be necessary at the facility.
g. Whether the remedial action will be carried out, in
whole or in significant part, by the responsible parties
themselves.
What constitutes extraordinary circumstances must be
based on the facts of each case.
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the circumstances and terms of the settlement warrant the
granting of a covenant not to sue without reopeners.8
B. Premiums Designed to Address Cost Overruns
In a settlement in which the PRPs agree to reimburse
the government for cleanup costs associated with present
liability, the issue of how to calculate as yet uncertain
costs associated with the anticipated remedy must be
addressed. Generally, the government desires that PRPs
finance all response costs, and thus PRPs must await the
completion of the remedial action before the extent of their
present liability is established. However, if the PRPs
would prefer to firmly establish the "price tag" for present
liability before cleanup is completed, one option is to
require PRPs to provide funds believed to be sufficient to
cover projected cleanup costs, plus a premium to protect
against cost overruns. Although the government as a matter
of course seeks to avoid assuming risks associated with the
uncertainties of cost projections, the payment of
appropriate cost overrun premiums should ensure that,
viewing the cost recovery program as a whole, the government
is protected against those uncertainties. Settlements which
include a premium for present liability, including cost
8 In certain situations, EPA may reach settlements
where extraordinary circumstances exist without requiring a
premium payment. For example, EPA may exclude the unknown
conditions reopener without a premium payment in a
settlement with a PRP who has invoked the protection of
Chapter 7 bankruptcy laws.
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overruns premiums, may be appropriate, but the traditional
reopeners would be applied to future liability in such
settlements.
III. AMOUNT OF THE PREMIUM PAYMENT
As noted above, premium payments may serve two purposes
— to provide funds to protect public health and the
environment in the event that additional response work will
be needed at the site or to protect against the risk that
site remediation cost overruns may occur. In evaluating the
offer, EPA must determine whether the amount of the premium
is adequate given the risks assumed. The factors specified
in Sections 122(f)(4) and 122(f)(6) of CERCLA, used to
determine if extraordinary circumstances exist, should also
be considered in determining the amount of the premium
payment. The factors specified in section 122(f)(4) that
relate to the effectiveness, reliability, and permanence of
the remedy are particularly important in determining the
likelihood that additional response work may be necessary
and the associated possible costs.
A. Future Liability Premiums
Despite best efforts by the Agency or PRPs to design
and implement a satisfactory remedy, future problems may
arise at the site due to remedy failure or mistaken
assumptions about the effectiveness of the remedy. In
addition, the discovery of new information about site
conditions or new scientific determinations regarding what
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levels of contaminants present a risk to humans or to the
environment may make additional work necessary. One way
such new information may become available is through the
Section 121(c) five year review EPA is required to conduct
for all remedial actions at sites where hazardous substances
remain.
In determining the amount of a "future liability"
premium, two general factors should be considered: the
likelihood that future remediation will be required and the
cost of such remediation. The resulting premium could be a
percentage of the total estimated cost of the remedy.
1. The likelihood that further remediation will be
required; The need for further work may depend on the
effectiveness and reliability of the remedy. Factors such
as whether the remedy selected has been demonstrated to be
effective under similar conditions at other sites, whether
the remedy selected involves treatment or incineration as
opposed to containment, whether the settlement agreement
includes specified performance standards, or the extent to
which the remedy provides a comprehensive solution to site
contamination, all bear on the level of the premium.
The risk that further work will be required also
depends on the extent to which all relevant environmental
conditions have been discovered and evaluated. For example,
additional information about relevant conditions developed
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during the remedial design phase may enhance the Agency's
confidence in the selected remedy.
In addition, the time necessary to complete the remedy
may affect the risk of further contamination occurring. For
example, if a long period of temporary storage will precede
disposal or treatment, the premium should be calculated so
as to protect against releases during storage.
2. The cost of further remediationt Any premium
payment must be based in part on an estimate of the cost of
conducting additional remedial work should the chosen remedy
fail to abate the hazards posed by the site. EPA's estimate
should be based on a site-specific estimate of the most
probable costs of the additional response action. Where the
estimated cost of replacing, repairing, or otherwise
supplementing the remedy is very high, the government should
either retain the right to pursue the settling PRPs for
additional work or costs, or require a premium payment
commensurate with the cost and the risk that future
remediation will be necessary.
B. Cost Overrun Premiums
The Agency also recognizes the possibility that a
selected remedial action will cost more than originally
estimated because, for example, (1) the cost estimate was
inaccurate or (2) estimates concerning the amount or type of
material to be treated or the length of time for treatment
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were inaccurate.9 EPA can guard against these cost overruns
by reserving the right to seek reimbursement for any
overruns or by requiring an up-front payment of a "cost
overruns" premium. The amount of the premium should be
based on the reliability of the Agency's cost estimate,
taking into account such factors as the length of time
needed to complete the remedy and any historical data on
instances where actual costs of site remediation exceeded
projected costs. The premium could be a percentage of the
estimated cost of the remedy based on the risk of such cost
overruns.
C. Settlement Amount
In determining the total settlement amount, the premium
payment must be added to the total response costs. This
base amount to which the premium is added should include
past costs, indirect costs, prejudgment interest, the
estimated cost of the remedy (unless performed by PRPs),
oversight costs, operation and maintenance costs, and
technical assistance grants. The total settlement amount
would be the base amount plus the premium. Generally, the
settlement agreement should specify which portion of the
premium payment is allocated to present liability and which
portion to future liability.
9 If estimates concerning the amount or type of
material to be treated were inaccurate because of unknown
conditions or new information, the resulting additional
costs would be considered part of the responsible party's
future liability.
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IV. TIMING OF PREMIUM PAYMENT SETTLEMENTS
The Agency usually should not consider a premium
payment settlement unless it has adequate information about
the identity, waste contributions, and viability of PRPs for
the site concerned, and about the costs of remediating site
contamination. The Agency develops information about PRPs
through PRP searches, the remedial investigation and
feasibility study (RI/FS), and information-gathering
activities under Sections 104(e) and 122(e) of CERCLA and
Section 3007 of the Resource Conservation and Recovery Act.
A Nonbinding Preliminary Allocation of Responsibility
(NEAR), authorized by Section I22(e)(3) of CERCLA, if
prepared, may also provide significant information for
evaluating a premium payment settlement.10
Premium payment settlements should not be pursued until
the Agency is able to determine the likely remedial action
and estimate, with a reasonable degree of confidence, the
total cost of cleaning up the site, including oversight and
operation and maintenance. The Agency usually will arrive
at this level of confidence only after the RI/FS and a
10 See. EPA's "Interim Guidelines for Preparing
Nonbinding Preliminary Allocations of Responsibility
(NBAR)," 52 Fed. Reg. 19919 (May 28, 1987). Section
122(e)(3) of CERCLA authorizes EPA, at its discretion, to
prepare an NBAR which allocates 100 percent of response
costs among PRPs in order to promote and expedite settlements
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Record of Decision (ROD) have been completed.11 A premium
payment settlement could be considered earlier if the Agency
is relatively confident of its ability to estimate future
response costs, and the premium payment amount reflects the
increased level of uncertainty.12
V. USE OF THE PREMIUM
Normally, premium payments will be made to the
Hazardous Substances Superfund. The Agency is exploring the
circumstances under which it may be appropriate for
settling PRPs to establish site-specific trust fund or
escrow accounts. Further guidance on this issue will be
provided by separate memorandum.
If the costs of the remedy exceed the recovery from
settling PRPs (including the premium), EPA will generally
seek to recover remaining costs from other PRPs. The Agency
may also approve comprehensive settlements in which certain
PRPs pay a premium to other PRPs who, in exchange, agree to
accept the responsibility of those premium-paying PRPs
regarding site liability, including any possible future
liability.
11 Timing considerations for settlements with de
minimis PRPs are discussed in greater detail in EPA's
"Interim Guidance on Settlements with De Minimis Waste
Contributors Under Section 122(g) of SARA," 52 Fed. Reg.
24333 (June 30, 1987).
12 Early premium payment settlements may also be
appropriate in exceptional cases, such as where bankruptcy
exists.
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Normally, both the base amount and the premium will
reduce the government's claim for costs associated with
performance of the remedy. However, in settlements
involving a premium for future liability, EPA may segregate
the portion of the premium paid for future liability. In
certain cases, EPA may determine that it is appropriate to
require PRPs to set aside the premium in a site-specific
account established by the PRPs for use if the remedy fails.
If such an account is established, future liability premiums
would not reduce the amount owed by subsequent settlors or
non-settlors for present liability (i.e., the present
remedy). Rather, premiums for future liability will only
reduce subsequent settlors' or non-settlors' future
liability when and if additional cleanup is required to
protect public health or the environment. Until then, the
government will not have accepted the premium payment.13
Premium payments may be particularly useful in mixed
funding or mixed work situations. For example, EPA may
require a premium payment from PRPs to protect against cost
overruns and remedy failure for EPA's portion of the work in
a mixed funding or mixed work site.14
13 The settlement agreement also should specify how
the premium payment is to be distributed if it is not used
for remedial activities.
14 Where a de minimis settlement precedes a mixed
funding agreement, any premium payment obtained from de
minimis parties would reduce the share to be contributed by
the Fund as part of the subsequent settlement.
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VI. PURPOSES AND USE OF THIS MEMORANDUM
This memorandum and any internal procedures adopted for
its implementation, are intended solely as guidance for
employees of the U. S. Environmental Protection Agency.
They do not constitute rulemaking or final action by the
Agency and may not be relied upon to create a right or a
benefit, substantive or procedural, enforceable at law or in
equity, by any person. The Agency may take action at
variance with this memorandum or its internal implementing
procedures.
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