United States Office of Pesticides
Environmental Protection and Toxic Substances
Agency Washington DC 20460
December 1983 E PA 560/4-83-003
\vEPA Indemnification
Report
to Congress
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Indemnification
Report
to Congress
by Ellen Selonick Berick
Economics and Technology Division
Office of Toxic Substances
U.S. Environmental Protection Agency
Washington, DC 20460
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Contents
Executive Summary iii
1 Introduction 1
Assumptions and Limitations of the Study 2
Methodology 4
Outline of the Report 7
2 Factors Supporting Indemnification Decisions 9
Introduction and Legal Background 9
Availability of Alternatives 11
Equity 13
Incentive Effects 15
Impact on Behavior 16
Programs 16
Administration and Cost 17
3 Need to Expand Existing Indemnification Programs 19
Oil Spill Cleanup and Chemical Spill Cleanup 19
Innovative Waste Treatment Technology and Other
Demonstration Grant Programs 21
Government Contractor's Indemnity 22
Unreasonable Clean Air Act Enforcement Action 22
Indemnification under FIFRA 23
4 Need for New Indemnification Programs 27
Confidential Business Information 28
Delays in Permit Processing 29
Regulatory Conflicts and Overlaps 30
Use of Emergency Powers 30
Unreasonable Administrative Enforcement 32
Changes in Agency Policy 33
5 Costs and Financing of Indemnification 35
Estimating the Cost 35
Impact of Indemnification 36
Financing 39
Conclusions 43
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Executive Summary
This Report to Congress fulfills the mandate of section
25(a) of the Toxic Substances Control Act (TSCA) to de-
termine whether and under what conditions the gov-
ernment should indemnify any person as a result of an
action taken by the Administrator of the Environmental
Protection Agency. The government generally does not
compensate for the cost of complying with valid regula-
tions, which the Supreme Court recently said is a burden
borne to secure "the advantage of living and doing busi-
ness in a civilized community". Andrus v. Allard, 444 U.S.
51, 67 (1979). However, on rare occasions, Congress has
awarded compensation for losses caused by agency ac-
tion. The purpose of the study was to determine whether
EPA causes any harms which justify indemnification.
The government has traditionally been immune from
almost all liability for the results of its actions. Although
recent statutes have expanded potential liability, core gov-
ernment functions such as policy decisions and writing
budgets are still protected. Regulations represent a social
agreement on an adjustment of private rights for the pub-
lic welfare. More practically, the government could hardly
function if it had to pay for every cost of its actions.
Against this background of limited government liability,
the instances of indemnification stand out as exceptions.
Indemnification has distinct meanings in the law of con-
tracts and equity. An equitable right of indemnity may
accrue to a party who discharged a duty for which an-
other is primarily responsible, for example an employee
who paid his employer's debt. Or a party may agree to in-
demnify another for certain kinds of losses in return for
payment, as in an insurance contract. Indemnification has
been used loosely to refer to a wide variety of compensa-
tion situations involving the government with parallels to
both equity and contract law. In addition, it is a remedy
for an error by the government, and can be used to insure
against certain risks, thus encouraging contractors and
iii
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other private parties to undertake risky enterprises of so-
cial utility.
The most recent approval of indemnification is the "Tris
Bill" passed by the 97th Congress. The statute gave the
U.S. Claims Court special jurisdiction to hear and award
claims relating to the ban of children's sleepwear treated
with the flame retardant tris. Other claims for indemnifica-
tion in similar circumstances have been denied: for ex-
ample, those by food packers after cyclamates were ban-
ned.
As a first step in determining "what conditions, if any"
justify indemnification, this study examined existing in-
demnification programs, both at EPA and other agencies.
(The charts on pages 45, 46, and 47 summarize EPA
and non-EPA indemnification for reference and compari-
son). No single formula could explain why indemnifica-
tion was granted in all of these cases, and no situation al-
ways warranted indemnification. However, six factors
appear to be important in considering indemnification re-
quests:
1. Availability of Alternatives. Every environmental statute
administered by EPA contains mechanisms for relief of
unjustified, erroneous, or otherwise unreasonable losses
due to actions by the Administrator. These mechanisms
include exceptions, variances, regulatory review, phased-
in compliance periods, and cost benefit analyses, among
others. Indemnification is used when these alternative
means of preventing, shifting, reducing, or sharing regula-
tory losses will not suffice. The mechanisms are generally
less effective in mitigating losses of non-regulated parties.
Directly regulated parties are not as likely to be in-
demnified because the administrative procedures usually
provide adequate relief without requiring the government
to spend money.
2. Equity. Indemnification is usually granted to "innocent"
parties, those who did not contribute to their own losses.
Directly regulated parties are rarely indemnified as they
often share a responsibility for the loss or the failure to
foresee it. Also, indemnification is more common when
the government has a direct responsibility for the loss or
is considered to be at fault.
3. Incentives. Indemnification is sometimes used to in-
fluence the behavior of the recipients or the government
itself.
4. Effects on Behavior. Care must be taken that an in-
demnification program does not cause unintentional
effects on behavior. For example, the availability of in-
demnification could reduce incentives for private parties
IV
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to prevent loss, or might inhibit the government in taking
actions that could lead to compensible losses.
5. Need for a program. Indemnification programs, as op-
posed to individual or ad hoc indemnification payments,
are set up in advance of a particular loss. Programs are
more efficient in dealing with a number of losses, and
they provide better incentives than ad hoc decisions after
the loss occurs.
6. Cost, financing, and administration. These factors affect
the design of a program rather than the initial decision to
establish one.
The study used these factors to evaluate the need for
new indemnification programs at EPA. Rather than con-
struct a model indemnification rule and search for situa-
tions at EPA that would fit, we looked for real and
hypothetical losses to evaluate for indemnification. We
first considered possible expansion of the four existing in-
demnification programs at EPA to analagous situations
and then the need for completely new indemnification
programs. Research on EPA's programs was conducted
between November 1978 and May 1982, with some
checks and updating early in 1983.
Conclusions None of the four indemnification programs
in the laws administered by EPA should be
expanded at this time.
The indemnification programs already established at EPA
represent the variety of uses for indemnification. The pro-
grams and the situations they address are all different.
Each was analyzed separately and revealed a different
reason why expansion is unnecessary at this time.
1) Section 311(i) of the Clean Water Act (CWA) compen-
sates owners or operators of vessels or facilities from which
quantities of oil or hazardous substances are discharged
who clean up discharges of these substances for the cost
of their efforts, if the owners or operators can show that
the discharges were caused solely by acts or omissions
over which they had no control. (See p. A-41 of the Back-
ground Report). The promise of indemnification encour-
ages prompt clean up by those close to the spill by
postponing disputes over financial responsibility. Awards
are made by the Court of Claims and paid out of a fund
established by sec. 311(k) that is replenished by penal-
ties, recovered costs, and appropriations.
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The most natural place to contemplate expanding the
oil spill provision is to spills of other substances. All re-
leases of hazardous chemicals are now covered by the
Comprehensive Environmental Response, Compensation,
and Liability Act (CERCLA or "Superfund") which employs
an approach similar to sec. 311(0 among its other pro-
visions. CERCLA authorizes the government to reimburse
the clean up costs of non-liable parties, provided the
clean up was certified in advance by the responsible
federal official and performed in accordance with the
National Contingency Plan. Because CERCLA covers most
of the situations to which sec. 311(i) could logically be ex-
tended, there is no need for additional indemnification at
this time.
2) Section 202(a)(3) of the Clean Water Act pays for repair
or replacement of failed innovative and alternative tech-
nology in waste water treatment plants subsidized by
EPA. Very few of the plants utilizing innovative and
alternative technology have been completed, accounting
in part for the small number of claims made to date. (Pay-
ment must be made with money that would otherwise be
used for constructing plants - no separate reserve fund
was authorized). There is no evidence that indemnification
without the accompanying subsidy would encourage in-
novation. If the government does decide to absorb the
financial risks of experimental technology in any field, the
purchase of commercial insurance through grant funds
should be studied as an alternative to indemnification.
3) Section 113(b) of the Clean Air Act (CAA) authorizes
payment of attorney's fees and court costs of parties
against whom the Agency took an unreasonable enforce-
ment action. Only one $10,000 claim was paid (and one
other made) since enactment in 1977. In spite of multiple
layers of review and a policy of concentrating on the
worst violators, there is a possibility of unreasonable en-
forcement actions under every statute enforced by EPA.
However, new indemnification authority is not needed for
this purpose because the Equal Access to Justice Act of
1980 (EAJA) provides attorney's fees and court costs
whenever small businesses prevail against the gov-
ernment and the position of the government was not
"substantially justified". The EAJA applies to all court and
formal administrative actions, not just judicial enforce-
ment, thus expanding the scope of the CAA provision in
some ways.
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4) Section 15 of the Federal Insecticide, Fungicide, and
Rodenticide Act (FIFRA) requires compensation for in-
ventories of pesticides rendered worthless by the suspen-
sion and cancellation of the pesticide's registration due to
imminent risk when certain statutory criteria are met. The
section includes a "special rule" allowing the Administra-
tor to permit a reasonable time for the use or disposal of
such pesticides instead of paying indemnification. This
section is one of the two found during the study in which
indemnification has been provided for the consequences
of a valid regulation, and the only program enacted be-
fore any losses had occured. The statute did not desig-
nate a method of funding.
The provision has been used for three cancellations
since it was enacted in 1972. Two of them resulted in
small payments from EPA funds to a total of five
claimants. However, the cancellation of some registrations
for home and garden uses of Silvex resulted in over $18
million awarded to hundreds of retailers, distributors, for-
mulators, manufacturers, and others. The Silvex claimants
applied first to EPA. After EPA found the claims "appro-
priate" but declared itself without funds to pay them, the
claimants filed in the U.S. Claims Court.
TSCA is the obvious statute to examine for expansion
of the FIFRA program because it is the only other EPA-
administered statute that authorizes product bans. There
is no evidence that bans of chemicals under TSCA will
cause losses beyond the ordinary costs of compliance.
Nor is there any other reason that chemical bans should
be treated differently from bans of food additives, drugs,
or other products under other statutes.
TSCA contains authority to order the manufacturer of a
banned chemical to repurchase it from processors and us-
ers even in an imminent hazard situation. The repurchase
provision would compensate many of those who could
not be expected to anticipate the ban, and who have less
responsibility for the safety of the chemical, such as con-
sumers or formulators. Repurchase orders would also en-
courage compliance with a ban and disposal order, an
argument made for the FIFRA indemnification program.
TSCA affirms the responsibility of chemical man-
ufacturers and processors for the continued safety of their
products. Thus, indemnification could not be justified by
equity arguments based on the Agency's responsibility for
evaluating hazardous chemicals. Any individual inequities
or errors that might occur under TSCA are difficult to
foresee and impossible to plan for under one indemnifica-
tion program. It is more appropriate to use existing in-
demnification mechanisms, such as private bills, until
there is evidence of a need for a comprehensive program.
VII
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There is no evidence of current need for
any new indemnification programs at EPA.
The final step in the study was to search alt of the laws
and regulations administered by EPA to find any poten-
tially indemnifiable losses. Six categories of actions that
seemed more likely to result in such losses helped focus
the search. In addition to reviewing all the major laws and
regulations and talking to many EPA officals, we con-
sulted trade associations and individual companies. While
these conversations did not amount to a formal survey,
they were extensive. We gathered from the conversations
that the primary interest of industry is preventing regula-
tory losses by changing statutes and regulations rather
than obtaining compensation for losses after they occur.
Summary conclusions for the six primary categories of
potentially indemnifiable losses follow.
Disclosure of confidential business information. The
potential for either authorized or unauthorized disclosure
causes concern to all who must report confidential in-
formation to EPA. Preventing accidental releases by secur-
ity procedures and monitoring, reducing unauthorized re-
lease by administrative discipline, and reducing the num-
ber of authorized releases by statutory amendment all
appear to present more effective solutions to the problem
than indemnification. In addition, there are severe ad-
ministrative problems in calculating the value of the loss
of confidentiality of different kinds of information. Further-
more, handling confidential information is a government-
wide function, and if a remedy is needed, it should be one
that is applicable to all agencies.
Delay in issuing permits. Closer examination of this com-
mon complaint revealed that delays in EPA permits are
not significant. Both EPA and industry have in the past fo-
cused on ways to speed up the process, and there is no
current industry interest in indemnification. Furthermore,
there would be considerable administrative problems in
separating the contribution of the Agency from other fac-
tors. Even if the Agency took longer than usual to review
a permit, it might be because the application was de-
ficient or the decision complicated. If the Agency had to
adhere to a schedule or risk paying indemnification, it
might make poor decisions in hard cases and fail to in-
volve all necessary parties (including states) for fear of
delay.
Conflicting and overlapping requirements. Neither a re-
cent GAO report nor our search found very many con-
flicting or overlapping regulations. One reason is that
VIII
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most of the statutes administered by EPA contain pro-
visions for coordination with other EPA offices and other
agencies. In addition, multiple opportunities for formal
and informal review and concurrence prevent conflicting
regulations.
Emergency actions. Actions taken in emergency situations
pose a greater risk of inequity and error because there are
fewer opportunities for the regulated parties to challenge
the action and less time to consider exemptions or var-
iances. However, an indemnification program that would
cover all future emergencies would be too broad and
vague to help make individual decisions.
Unreasonable administrative enforcement. Indemnifica-
tion for unreasonable enforcement under the Clean Air
Act applies only to judicial enforcement, but indemnifica-
tion does not appear necessary for administrative enforce-
ment actions at this time because there are adequate
alternatives. The Equal Access to Justice Act (EAJA) pro-
vides attorney fees and court costs for small businesses
and individuals who prevail against the government un-
less the position of the government is substantially jus-
tified. The EAJA covers those presumably most vulner-
able to an unreasonable enforcement action. If the EAJA
is not sufficient, another approach would be to ensure
availability of judicial review before enforcement where
review is not already available.
Changes in agency policy. Changes in agency policy re-
quire the same protection as the original government
policy decisions so that the agencies may respond objec-
tively and effectively to changes in circumstances. Ad-
ministrative law provides ways to influence and review
changes which do not require courts to pass judgment on
the policy decisions of another branch of government.
Furthermore, there are many alternatives to indemnifica-
tion that can prevent or reduce losses incident to changes
in policy.
Many potentially indemnifiable losses can
be handled through established procedures
and will not require new indemnification
programs.
There are established mechanisms through which Con-
gress can grant extraordinary relief including indemnifica-
tion. One is private legislation, a bill of specific rather
than general application. Another is a grant of special *
jurisdiction to the U.S. Claims Court to hear and award
IX
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claims which would otherwise be precluded by law. Such
procedures allow Congress to make special exceptions for
political or equitable reasons without adding a permanent
federal responsibility or establishing a new legal principle.
This appears to be the appropriate response, as many of
the losses and potential losses are themselves exceptions
resulting from unusual circumstances of an individual
case rather than the normal workings of an EPA statute or
program.
The factors identified in this analysis will help to make
decisions on whether particular incidents should be in-
demnified and whether an individual response will suffice
or a program is needed. Ultimately, the decision to in-
demnify for regulatory losses is a political one which, by
its nature as a safety valve in a democratic system and an
exception from general legal principles, cannot be re-
duced to a formula.
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Introduction
Congress included in the Toxic Substances Control Act of
1976 (TSCA) a requirement that the Administrator de-
termine whether EPA ought to indemnify those to whom
it causes loss. This report is submitted in fulfillment of the
mandate of TSCA sec. 25(a) which provides:
INDEMNIFICATION STUDY — The Administrator shall
conduct a study of all Federal laws administered by the
Administrator for the purpose of determining whether
and under what conditions, if any, indemnification
should be accorded any person as a result of any action
taken by the Administrator under any such law.
The study shall -
(1) include an estimate of the probable cost of any in-
demnification programs which may be recommended;
(2) include an examination of all viable means of
financing the cost of any recommended indemnification;
and
(3) be completed and submitted to Congress within two
years from the effective date of enactment of this Act.
The General Accounting Office shall review the ade-
quacy of the study submitted to Congress pursuant to
paragraph (3) and shall report the results of this review
to the Congress within six months of the date such
study is submitted to Congress.
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Assumptions and Limitations
of the Study
In a recent opinion denying compensation for the loss in
value of property due to regulatory restrictions, the Su-
preme Court said that the cost of regulation is a burden
borne to secure "the advantage of living and doing busi-
ness in a civilized community". Andrus v. A/lard, 444 U.S.
51, 67 (1979). While this is the dominant attitude toward
the costs government imposes on the public, from time to
time Congress has awarded compensation. The objective
of this study was to determine whether EPA causes harm
for which the government should pay. There are no pat-
terns of loss or potential loss that justify a new in-
demnification program at this time.
The study mandate provided no guidance on what
might justify indemnification; it did not even define the
term. The first task of the study, therefore, was to define
the terms and decide upon the scope of consideration.
The common legal use of the term indemnification was
helpful as an analogy. Indemnification between private
parties generally occurs when one party agrees to assume
the liability of another (as in an insurance contract) or be-
cause one party is legally responsible for claims paid by
another (an employer for certain liabilities of an employee
incurred within the scope of his employment).
Indemnification has been used by the government both
when it is responsible for the loss and when it agrees to
assume the financial responsibility for other reasons. The
government has agreed to assume certain liabilities
associated with international exhibits of art and artifacts
for private museums, though, of course, it has not con-
tributed to the risks of fire, theft or damage. The in-
demnification program is unlike private insurance because
the museums do not pay premiums for this coverage. In
some other cases the government has indemnified parties
for the consequences of a mistake that the government
made, such as erroneously declaring that a crop of spi-
nach was contaminated with a pesticide. The most recent
indemnification program was the "Tris Bill", enacted at
the end of the 97th Congress. The law gives the U.S.
Claims Court special jurisdiction to hear and award claims
for the value of children's sleepwear which was rendered
worthless when the Consumer Product Safety Commis-
sion declared tris-treated sleepwear a banned hazardous
substance. It appears that the implementation of the ban
concentrated the effects on a relatively small segment of
the industry. (See Background Report p. A-22)
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The pesticide indemnification program that was the
original impetus for this study is oddly unrepresentative
of other indemnification programs. It is the only program
that was established in anticipation of loss, before any
losses actually occurred, and it is one of just two pro-
grams that indemnify for the cost of complying with a
valid regulation. The 1972 amendments to the Federal In-
secticide, Rodenticide, and Fungicide Act (FIFRA) included
a section requiring EPA to indemnify owners of pesticides
for the value of the stocks when EPA suspended and then
cancelled the registration without allowing the owners to
sell their inventory. Some members of Congress who
were displeased with the amendment to FIFRA (now sec-
tion 15) tried to repeal it by inserting language to that
effect into a precursor of TSCA the following year. While
TSCA was under consideration, the section evolved into
the study included in section 25(a) of TSCA.
The definition of indemnification adopted for this report
after consideration of these and other examples and the
language of the mandate is: compensation by the U.S.
government to those injured by government action under
the laws administered by EPA. It is important to dis-
tinguish indemnification from the other payments made
by EPA. These include payment for goods and services,
subsidies such as those to build local sewage treatment
plants, and disaster relief. None of these payments is for
loss resulting from agency action.
Several limitations on the scope of inquiry are related
to the definition. Compensation for the victims of environ-
mental disasters is outside the scope of study, because
such losses generally do not result from an action or deci-
sion not to act by the Administrator. The disaster relief
sometimes granted when a tragedy strikes an entire com-
munity results from a philanthropic impulse rather than
law, equity or economic efficiency.
Actions under the major environmental laws were
examined, but actions under various other laws admin-
istered by EPA concerning contracts, civil rights, and
employment were not. The direct impacts of actions or
decisions not to take action were considered, but the in-
direct effects were not. For example, a ban on a particular
pesticide would directly affect both the manufacturer of
the pesticide and the farmers who use it, but would only
indirectly affect the consumers of farm products.
One important limitation was acceptance of current
legal authority as given. For example, a potential problem
at EPA might theoretically be solved by amending the
Federal Tort Claims Act. Evaluating such a suggestion is
beyond the scope of this report, as it would entail
weighing the impact of such a change on the entire gov-
ernment, not just the EPA.
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The report distinguishes between ad hoc indemnifica-
tion payments and indemnification programs and con-
centrates on the latter. Ad hoc, or individual payments,
are made in response to a claim arising from a particular
situation, generally without a prior determination that in-
demnification would be appropriate in that situation. In-
demnification programs are established in advance of a
particular loss to cover a category of events. They are a
more efficient response to a series or cluster of similar
losses, and they can be used to influence the behavior of
those who desire to obtain indemnification later. The leg-
islative history of TSCA indicated that indemnification
programs were the prime concern as they are explicit and
permanent expressions of policy.
Methodology
Phase One This Report to Congress is based upon a contractor's
study, referred to as the Background Report, which is in-
cluded as an attachment. (Page numbers in parentheses
refer to the contractor's Background Report unless other-
wise labeled.) The Background Report was prepared
under contract with close guidance and review by EPA.
Phase I of the study was a review of public and private
legislation in which indemnification had been granted in
the past. It also included a legislative history of section
25(a) of TSCA, and section 15 of the Federal Insecticide,
Fungicide, and Rodenticide Act (FIFRA) to help define the
language of the study mandate. More generally, there
was a review of government compensation policies such
as the Fifth Amendment to the Constitution, legislative ex-
ceptions to sovereign immunity (especially the Federal
Tort Claims Act), and a survey of current legislative issues
including regulatory reform, regulatory relief, and com-
pensation for asbestos workers and government con-
tractors. A summary of the most relevant legal analysis is
contained in Appendix A of the Background Report.
Five factors that seem to have been important to Con-
gress in past decisions were identified. They were con-
tinually refined and elaborated as their application be-
came better understood.
Availability of alternatives. Indemnification is used when
there are no alternative means of preventing, shifting,
reducing, or sharing regulatory losses. Directly regulated
parties are less likely to be indemnified because the reg-
ulatory relationship often provides alternatives to in-
demnification that do not require financial expenditures.
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Equity. Indemnification is usually granted to "innocent"
parties, those who did not contribute to their own loss.
Directly regulated parties are rarely indemnified as they
usually share a responsibility for the loss or the failure to
foresee it. Also, indemnification is more common when
the government has a direct responsibility for the loss or
is considered to be at fault.
Incentives. Indemnification is sometimes used to in-
fluence the behavior of the recipients, or the government
itself, but care must be taken to avoid unintended side-
effects on the behavior of the agency or the indemnified
parties.
Need for a program. Indemnification programs, as op-
posed to individual or Ad hoc payments, are established
in advance of a particular loss. Programs are more effi-
cient in dealing with a number of similar losses and they
can provide incentives.
Cost/financing, and administration. These factors affect
the design of the specific program rather than a threshold
determination of whether indemnification is justified.
Phase TWO During Phase II of the Background study, four in-
demnification programs were identified in the laws ad-
ministered by EPA. These are:
• Sec. 311(i) of the Clean Water Act (cleanup costs for
certain oil spills);
• Sec. 202(a)(3) of the Clean Water Act (payment for re-
pair or replacement of innovative and alternative technol-
ogy in waste water treatment facilities);
• Sec. 113(b) of the Clean Air Act (reimbursement of
attorney's fees and court costs for unreasonable enforce-
ment actions); and
• Sec. 15 of FIFRA (compensation for loss of inventory
due to emergency suspension and cancellation of pesti-
cide registrations).
The legislative goals and major issues of the legislative
debate for each of the four were ascertained. Then inter-
views and research explored how the programs have
worked, whether the debate was accurate in its considera-
tion of advantages and problems with indemnification,
and whether the existing programs should be modified.
The resulting detailed descriptions of the EPA programs
comprise Section III of the Background Report.
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Phase Three Based on the information gained from prior work, Phase
III reviewed all major EPA programs to determine whether
there have been or might be instances in which in-
demnification was or would be appropriate. First, situa-
tions analagous to existing programs were evaluated,
then entirely new situations were considered. Industry
complaints about environmental regulation and adminis-
trative enforcement, rulemaking comments, and dis-
cussions with EPA officials and outside experts were ex-
amined for patterns of loss that might justify indemnifica-
tion. To focus the search, six categories of potential los-
ses were defined as those most likely to contain in-
demnifiable losses. In addition to being concerns of reg-
ulated industry, they presented many of the factors earlier
identified as supporting decisions to indemnify. The six
categories are:
• disclosure of confidential business information;
• delays in issuing permits;
• conflicting and overlapping regulatory requirements;
• emergency actions;
• unreasonable administrative enforcement; and
• changes in policy.
All major EPA programs were screened for possible los-
ses, with particular attention to those in the above cate-
gories. Then real, potential, and hypothetical losses were
analyzed by applying the factors which are discussed in
more detail below. Most indemnification has been
granted in response to an industry appeal for it; so it was
important to determine current industry attitudes. Major
trade associations were consulted for knowledge of partic-
ular incidents for which indemnification might be appro-
priate, and for their opinions on the desirability of in-
demnification in general. Trade association representa-
tives often referred us to specific industry contacts. In
addition, some industry representatives were called to
discuss specific issues or incidents involving their in-
dustry. A few environmental organizations, ex-EPA offic-
als and congressional staff were also consulted. Although
there were many informal discussions, they did not
amount to a formal survey. The list of organizations con-
tacted is provided as Appendix C of the Background Re-
port.
The investigation of past and existing indemnification
programs included information on their cost and details
of the financing. Section 25(a) of TSCA required this study
to include an estimate of the probable cost of any in-
demnification programs which may be recommended.
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Therefore, efforts were made to develop a method of es-
timating the cost of indemnification programs, should it
be decided to recommend a program. The indirect im-
pacts of indemnification as well as the direct costs were
considered. The statute also requested an examination of
all viable means of financing any recommended pro-
grams. Building upon the information gathered about past
programs, a full range of alternative financing mechan-
isms was explored. Because the report does not
recommend establishing a new indemnification program,
there is no specific estimate of cost or financing. How-
ever, the results of the general analysis are contained in
the Background Report (Appendix D: Indemnification
Financing Systems and Appendix E: Costs and Impacts of
Indemnification).
This Report to Congress was prepared by EPA primarily
from the information and analysis in the Background Re-
port prepared by the contractors and is the official Agency
response to the TSCA mandate.
Outline of the Report
Section 2 of the report discusses factors that seem to
have been important to indemnification decisions in the
past, and how these factors can help make similar de-
cisions in the future.
Section 3 describes the existing programs at EPA and
the reasons for not recommending expansion of any of
them.
Section 4 evaluates the six most likely loss categories
and explains why no new indemnification programs are
needed to respond to them at this time.
Section 5 discusses the problems of estimating costs of
indemnification programs, the possible impacts of the
costs on recipients and the agency, the range of options
for funding indemnification programs, and some con-
siderations in choosing a particular method.
Section 6 contains conclusions and questions for furth-
er study.
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Factors Supporting
Indemnification
Decisions
Introduction
and Legal Background
Compensation for the consequences of government ac-
tion has historically been rare, and remains an exception.
Sovereign immunity was an important principle in the re-
lationship between the U.S. government and its citizens:
the government could not be sued without its consent or
otherwise held liable for the consequences of its policy or
the actions of its employees. The Fifth Amendment to the
Constitution contains one of the few original exceptions
to sovereign immunity. It requires the government to pay
compensation when it takes private property for public
use. Until the middle of this century, if a citizen was in-
jured in any other way, virtually his only recourse was to
ask Congress for a private bill of relief.
For equitable and practical reasons, Congress has cre-
ated standard procedures for granting compensation for
many of the claims previously brought to Congress as pri-
vate legislation. The Federal Tort Claims Act (FTCA, 28
U.S.C. sec. 1346{b); 28 U.S.C. sec. 2671) is a broad au-
thorization for injured parties to sue the government for
damage caused by negligent government employees
acting in the scope of their employment. Most suits under
the FTCA have nothing to do with regulation. They con-
cern negligence in the operation of government vehicles
or air traffic control towers, for example. The Tucker Act
is another broad waiver of sovereign immunity. It con-
ferred jurisdiction on the Court of Claims to hear cases
founded on the Constitution, statutes, regulations, and
contracts, including most money claims except pensions
and those founded on tort.
The core governmental activities continue to be pro-
tected from suit. The Supreme Court explained one of the
reasons in a recent case:
government regulation—by definition—involves the
adjustment 06 rights for the public good. Often this
adjustment curtails some potential for the use or
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economic exploitation of private property. To re-
quire compensation in all such circumstances would
effectively compel the government to regulate by
purchase. Andrus v. Allard, 444 U.S. 51 (1979)) at
65, emphasis in original)
While there is some controversy over what should be
included in the protected core, there is general agreement
that judges should not interfere in the policy-making of
the executive branch. The objective legal standards usual-
ly used to evaluate the facts of a tort case can not be used
to judge the wisdom or political expediency of policy de-
cisions.
The line of cases interpreting one of the exceptions to
the FTCA waiver of immunity balances the need to protect
core government activity and a desire to make equitable
relief more broadly available. The exception says that the
government may not be sued for damages resulting from
a "discretionary function". The courts have steadily re-
duced the number of activities regarded as "discretion-
ary". Execution or implementation of most policies are
now considered operational, even when professional
judgment must be exercised; for example, in the audit of
a federal credit union or inspection of a batch of polio
vaccine. However, policy decisions such as setting stan-
dards or budget priorities are still clearly discretionary,
and thus protected from tort liability.
The line of cases interpreting the Fifth Amendment re-
quirement to pay for "takings" also shows a protection of
regulatory decisions. The regulation of property, even
regulation severely affecting its value, is generally not
considered to be a taking. Actual title must be transferred,
or almost all of the benefits of ownership removed for a
compensible taking to be found. Property which is a pub-
lic nuisance, causing a threat to public health or safety,
has always been considered within the power of the gov-
ernment to eliminate without compensation.
One result of the general expansion of the statutes
waiving sovereign immunity is a reduction in the number
of private bills. The statutes waiving sovereign immunity
authorize suits against the government for many of the
claims that formerly could only be made to Congress.
Now that torts by government employees and breaches of
contract by the government can be the basis of court ac-
tions, the majority of the remaining private bills are peti-
tions for relief from immigration restrictions. However, a
few private bills have granted indemnification for losses
caused by regulatory activity. (See Background Report p.
A-12).
This background discussion of legal history and princi-
ples is important to the study in several ways. It identifies
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situations in which compensation is already available,
making indemnification redundant. It also provides guide-
lines for decisions in other situations in which in-
demnification may be appropriate. The legal principles de-
veloped in years of statutory and case law are the only
objective measure available. This study could not simulta-
neously evaluate the criteria for judgment and the in-
cidents themselves.
The fact that indemnification is an exception to some
basic and longstanding principles of law means that cir-
cumstances must justify making each exception. There is
no formula, mathematical or legal, that can predict which
circumstances will justify indemnification, but our analysis
of past programs has resulted in factors that clarify the
decisions. The most important are the existence of
alternative ways of mitigating the loss and whether in-
demnification would be equitable. This section will ex-
plain and illustrate the following factors:
• Availability of alternatives,
• Equity,
• Incentives,
• Impact on behavior,
• Need for a program, and
• Cost, financing and administration.
Summary charts of EPA and non-EPA indemnification
programs at pages 45, 46, and 47 provide descriptions of
the indemnification programs mentioned in the following
discussion as examples.
Availability of Alternatives
There are numerous ways that losses potentially ad-
dressed by indemnification can be avoided, shifted,
spread or the impact otherwise reduced. (See Background
Report Appendix B). Indemnification as a relief mech-
anism is quite rare in federal statutes, but the alternatives
to indemnification are commonly used. Examination of
the statutes administered by EPA clearly demonstrates
that Congress has taken potential losses seriously, and
has attempted to prevent or respond to nearly every one
by some alternative. The instances of loss avoidance are
frequent; even primary statutory objectives are at times
compromised to prevent losses. Indemnification seems to
be a measure of last resort when compromise with the
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Agency's mission is impossible and no other alternatives
are available.
Legislative and administrative alternatives, such as
granting waivers, public participation in agency decision-
making and postponing regulatory deadlines often do not
work if those suffering the losses are not regulated by the
agency or if the agency's range of action is very limited.
When the government is not responsible for the action
causing the loss, it can not prevent it. For example, the
government could not prevent cattle from contracting
brucellosis, nor could it endanger the public health by
waiving the prohibition on selling such animals for con-
sumption. Granting an extension of time or allowing
participation or review of the inspector's decision will not
reduce the loss. Similarly, the risks for which defense con-
tractors, NASA contractors, some Superfund clean up
contractors, and museums request indemnification are
beyond the ability of the government to prevent. The risks
to the contractors and museums result from the inherent
hazards of what they are doing, and the right of third par-
ties to sue them under contract or tort law for the con-
sequences. The agency cannot change the tort or contract
law, or reduce the hazards of cleaning up chemical waste
sites (except by providing good advice); it can only decide
to absorb some of the financial risks itself.
When the loss is caused by Agency action, there are
generally alternatives other than payment of compensa-
tion available to prevent or reduce the loss. For example,
many product bans are phased in, rather than made im-
mediately effective. The ban on use of chlorofluorocar-
bons for aerosol propellants is one example, and many of
the pesticides bans are handled this way too. The transi-
tion prevents owners and distributors of the product from
being caught with inventories that they cannot sell. It also
gives the processors and users time to find substitutes.
Depending upon the product and its dangers, "disposal
by use" may actually be less risky than collecting a large
quantity in one place to bury or burn.
Although the administrative alternatives of participation
and review, waivers, exceptions and postponement of
deadlines can reduce many inequities and prevent many
errors for regulated parties, there are occasions when
these mechanisms are not available. Emergency action
forecloses many administrative options. Thus, it is not
surprising that several of the examples of indemnification
result from emergency action. The Mizokami Brothers spi-
nach growers lost most of a harvest before they could
successfully prove that the FDA's determination that their
spinach was contaminated with heptachlor was
erroneous. (Background Report p. A-20).
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Other alternatives involve spreading the loss among
other private parties either through insurance, restoration
funds (such as Superfund), or through the market (so that
those who benefit from the product share in the full cost).
The cost of regulation generally can and should be inter-
nalized and passed on in prices. One reason for in-
demnification is the complete absence of ways to share
the cost.
Another alternative to indemnification is provided by
existing procedures for private bills in Congress. Histor-
ically, private bills have been used to provide relief when
jurisdictional barriers or other factors prevented use of
the court system. Thus, they have constituted a safety
valve for exceptional cases.
There are three types of private legislation presently
used by Congress. All can provide relief from the strictures
of sovereign immunity in exceptional circumstances.
The largest category consists of private bills handled en-
tirely by the legislature, and funded by special appropria-
tions. Congress enlists the help of the U.S. Claims Court
for the other two categories of private bills. Congressional
reference cases are referred to the Commissioners of the
Claims Court for hearings, findings and a recommenda-
tion to Congress. The cases are later transferred back to
the legislative body for final decision, and for special
appropriations if a claim is awarded. The Marlin Toy case
was a congressional reference. Bills of special jurisdiction
provide relief indirectly by lifting a procedural barrier.
Special jurisdiction is conferred upon the Claims Court for
that case only, and it then makes a final decision. Judg-
ment, if any, is paid out of the Court's Judgment Fund.
The Mizokami Brothers spinach case (Background report
p. A-20) was a private bill of special jurisdiction.
Equity
The most common argument for an indemnification pay-
ment or program is that equity requires the government
to make a payment. The equity of a situation is rarely
clear; usually there is fault and merit on both sides. It is
impossible to evaluate equitable factors in advance of an
actual loss, because they depend so heavily upon the par-
ticular facts of a situation. It is helpful to breakdown the
broad category of "equity" into four more specific in-
quiries concerning: procedural inequity, substantive in-
equity, fault of the government, and contributing fault of
the party claiming indemnification. Each of these is ex-
amined below.
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Procedural
Inequity
This factor is the easiest to evaluate. Denial of a hearing
or insufficient notice are usually obvious. The relief for a
procedural inequity is more often to repeat the procedure
than to pay compensation. Procedural inequity is a fre-
quent argument in challenges to agency regulations and
enforcement actions, for example. If a court agrees, it
usually requires the agency to re-propose the regulation
or drop the enforcement action. Statutes governing con-
tracts with the government provide some relief for pro-
cedural mistakes or inequities in contractual situations.
Substantive
Inequity
Substantive inequity is a more elusive concept. In the
indemnification context, substantive inequity often refers
to a situation in which one party absorbs more than its
share of the cost of a socially beneficial action. For ex-
ample, the ban of children's sleepwear containing tris be-
nefited all children who would otherwise have worn tris-
treated pajamas and risked developing cancer. However,
due to the provisions of the law, and the way the ban was
written, a small part of the commercial network that pro-
duced the sleepwear absorbed a large proportion of the
total cost of the ban. (Background Report p. A-22). The
law's repurchase provision required clothing manu-
facturers to purchase inventory from the retailers and
the distributors. However, the ban did not extend to fabric
or the yarn, and thus the clothing manufacturers could
not resell their (augmented) inventory to anyone further
up the manufacturing chain. The clothing manufacturers
are relatively small firms who merely purchased cloth
treated with the harmful chemical, and could not reason-
ably be expected to foresee the hazards of the chemical
or the possibility of government action. In contrast, all but
one of the tris manufacturers, which had primary respon-
sibility for the safety of their product, had ceased man-
ufacture before the ban.
Substantive inequities are not necessarily the fault of
the government, they often have more to do with the
market situation or the hazards to which the government
is responding.
Fault of
Government
Another important factor in deciding whether the gov-
ernment should pay indemnity is whether the government
caused the loss. The case for indemnification is naturally
stronger when the government is responsible. Errors are
the most obvious example of this. The government agen-
cies which caused the losses supported private legislation
for the Marlin Toy Co. and the Mizokami Brothers.
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Contributing
Fault of
Claimant
Of all the equitable factors, perhaps the most useful is
whether the party requesting indemnification has contrib-
uted to his own loss. Every existing indemnification pro-
gram denies indemnification to those who have been
negligent or otherwise contributed to their own loss. A
person who caused an oil spill is obligated to clean it up
and is not entitled to reimbursement. (Background Report
p. 78). if a farmer's negligent or illegal use of a pesticide
results in contamination of his cows' milk, he is not eligi-
ble for indemnification when the milk is destroyed. (Back-
ground Report p. A-19).
The questions of equity rarely have clear answers, and
a careful investigation of the facts is needed to determine
what would be equitable in each situation.
Incentive Effects
Indemnification and the promise of indemnification has
been used to encourage certain actions by private parties.
One clear example is the contractor who would not other-
wise agree to perform work that the government needs
done. Other parties, not under contract to the gov-
ernment, can also be influenced by the provision of in-
demnification to reduce certain risks. The innocent dis-
chargers of oil clean it up more quickly because they
know they will be reimbursed for the clean up. Congress
and the State Department regard international exchanges
of art as beneficial to international relations, but many
museums would not be able to afford commercial in-
surance on foreign art exhibits without the art and arti-
facts indemnity program. (Background Report p. A-25)
There is some evidence that indemnification is also
used by Congress as a disincentive, to discourage an
agency from taking actions with which Congress dis-
agrees. Two of the EPA programs seem to be partially in-
tended to affect EPA officials. The Clean Air Act provision,
in addition to redressing an inequity of unreasonable en-
forcement, reinforces the Agency's care to avoid "unrea-
sonable" enforcement actions. The FIFRA program poses
direct choice: either the Administrator must allow a rea-
sonable time for use of a pesticide after cancellation of its
registration, or he must provide indemnification. The de-
terrent effect of both programs is muted by the fact that
the indemnification payments may not come out of the
Agency's budget.
The use of indemnification to prevent operational errors
should be and appears to have been minimal. Since mis-
takes are randomly made by individuals who have other
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reasons to avoid them, the fact that the agency or gov-
ernment would have to pay for a mistake would probably
not prevent their occurrence.
Impact on Behavior
In addition to the intentional effects of indemnification it
can cause unintended side-effects. The existence and
severity of such side-effects on the behavior both of pri-
vate parties and the agency should be evaluated as a fac-
tor in the decision whether to grant indemnification.
One potential effect on the behavior of regulated parties
is sometimes referred to as "moral hazard". The promise
of indemnification might reduce the self-regulation of pri-
vate parties. For example, some feared (though there is
no evidence that it has yet occurred) that the pesticide
manufacturers would continue to make products they
have reason to suspect will be regulated, rather than test
them and perhaps voluntarily withdraw the product.
There is no compensation for the loss of inventory in-
venjory excluded from the market by emergency suspen-
sion and cancellation.
If an indemnification program is not intended to be a
disincentive to the Agency, it must be carefully designed
to avoid unintended disincentives. The prospect of having
to pay money for the result of an action might well hinder
an agency's response to a problem.
Programs
Once a decision has been made to provide indemnifica-
tion in a particular situation, it is relatively easy to decide
whether a program is needed or a single payment will
suffice. Clearly it is more efficient to deal with a cluster or
series of losses generically rather than individually. Sever-
al of the indemnification programs began as individual
payments, and evolved into broad programs later. The
Federal Tort Claims Act was the result of Congress being
overwhelmed by the number of private bills for negligent
behavior of government employees. The FTCA allows
citizens to sue the government as they would any other
person (with certain limitations). The Arts and Artifacts In-
demnification Act followed two private bills to indemnify
museums for two particular foreign exhibits. (Background
Report A-25).
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The other advantage of a program is that It can act as
an incentive. Because those who might benefit will know
about the program in advance, and are more certain of
obtaining indemnification, it will be more likely to in-
fluence them. The mere possibility of pursuading Con-
gress to pass a private bill after a loss has occured will
not encourage risk taking. Several of the EPA programs
are designed as incentives. The CWA 311(0 oil spill in-
demnification provision encourages parties to clean up
immediately rather than argue about responsibility be-
cause the government will pay for the cost of clean-up if
the party did not cause the spill.
Administration and Cost
Although there are some potentially severe administrative
problems in implementing indemnification programs, and
the costs can be very high, it does not appear that either
administrative or cost factors are absolute barriers to esta-
blishing programs.
There are different administrative problems associated
with the different bodies that might make indemnification
decisions. Congress would be a suitable body for de-
cisions that are unpredictable and unique, particularly
those that are difficult to settle by traditional concepts of
fault and equity. Congress is not a suitable decision-
making body if consistency is important, or if numerous
similar claims are expected. On the other hand, the courts
can provide consistency so long as the dispute concerns
facts or the applications of law. Courts are neither
equipped nor expected to decide matters of pure policy.
Administrative agencies can often make decisions faster
than either a court or the Congress. However, if the agen-
cy is the same one responsible in some way for the loss,
there might be a conflict in having it decide the in-
demnification claim. There almost certainly would be a
lack of staff having the skills and the resources to decide
such questions. A separate specialized administrative
agency could be established to handle indemnification
claims, but there would have to be a great many claims to
make it worth while.
In addition, there are the common problems of conflicts
between the amount of information needed to protect
against fraud, and stifling the claims by too great a de-
mand for documentation. Further, there is great difficulty
in valuing some of the losses, particularly release of con-
fidential information.
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As discussed in more detail in section 5, there are
many ways of limiting the costs of indemnification pro-
grams. One disadvantage is that too great a limitation
would provide insufficient compensation, thus under-
mining the purpose of the indemnification program.
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Need to Expand
Existing
Indemnification
Programs
In considering whether any new indemnification pro-
grams are needed for EPA, it seemed logical to begin with
possible extensions of the existing programs. Congress
had decided that the programs were justified, and the
concrete details of an existing program are easier to an-
alyze than the vague details of a hypothetical one. The re-
sults of the research into the existing programs, the
search for analogous situations into which they might be
expanded, and the evaluation of the expansion are con-
tained in this section. Each situation is different, but for a
variety of reasons, no expansion of the existing programs
appear necessary at this time. The conclusion is bolstered
by our conversations with representatives of industry and
the fact that none of them recommended expansion of
these programs.
Oil and Chemical Spill
Cleanup
One incentive program at EPA is section 311(5) of the
Clean Water Act. (Background Report p. 78) This section
restricts one-time or episodic discharges of oil and
hazardous substances, both accidental and intentional,
that are not susceptible to regulation by permit. The stat-
ute requires immediate notification when a spill occurs,
and imposes strict liability on the discharger for the cost
of clean-up. If the discharger is able to assert one of the
few defenses allowed (that the discharge was caused
solely by an act of God, an act of war, negligence of the
United States Government, or an act or omission of a
third party) he is not required to pay for clean up. If he
has already done so, he is entitled to reimbursement. The
indemnification provision encourages prompt action by
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the party In the best position to know of the spill rather
than waiting until after the questions of liability and
causation have been decided.
Claims are made in the U.S. Claims Court, with settle-
ment payments or awards made out of the fund es-
tablished by 311(k), from appropriations, penalties, and
recovered costs. Between 1973 and 1981, 45 cases were
brought all involving oil spills, and totalling $6.3 million.
The average payment has been $39,000 for those not dis-
missed by the court. (Background Report p. 84) Although
311(i) has only been used for oil spills, it could also be
used for chemicals if funds were available. (Background
Report p. 79)
Chemical The Comprehensive Environmental Response Liability and
Spills Compensation Act of 1980 (CERCLA) covers virtually every
type of hazardous substance release. Although the pri-
mary approach of the Superfund law is to hold the party
responsible for the release liable for remedial costs, there
is also a provision similar to 311(i). This section of Super-
fund authorizes the government to reimburse the clean up
costs of non-liable parties, provided the clean up had
been certified in advance by federal officials and was in
accordance with the national contingency plan. The dif-
ference in approach is due to the extreme hazard of the
substances covered by Superfund, and the possibility that
an inexperienced person would aggravate rather than
alleviate the dangers posed by the release. Furthermore,
the government must ensure that the CERCLA funds are
spent on the priorities it has identified which would not
be possible if there were no control over the spending of
private parties.
CERCLA and 311(i) address releases of hazardous sub-
stitutes analogous to oil spills. Until there is evidence that
these provisions are inadequate, no additional in-
demnification is needed.
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Innovative Waste Treatment
Technology and Other Demon
stration Grant Programs
Section 202 of the Clean Water Act is the other incentive
indemnification program connected with water pollution.
(Background Report p. 53) It gives EPA the discretion to
provide indemnification to owners of wastewater treat-
ment plants to repair or replace failed innovative or
alternative technologies. Most of the plants built under
this grant program have not begun operations, thus it is
not surprising that there have been few requests for in-
demnification. At least one claim has been paid: approx-
imately $30,000 to replace several experimental sensors.
The money for the indemnification comes from the same
fund that pays for the initial construction of plants. There
is no guarantee that there will be a sufficient amount for
indemnification when claims are made in the future. Fur-
thermore, each indemnification payment reduces the
amount a state can spend on new construction, making
them reluctant to authorize truly experimental technology
with a high chance of failure. The increased amount of
subsidy received from the federal government for inno-
vative technology is probably a more powerful incentive.
Other
Demonstration
Grant Programs
The incentive provided by indemnification against failures
of innovative and alternative technology in wastewater
treatment plants does have theoretical application in other
EPA programs. For several reasons, it does not appear to
be currently needed.
One of the few other demonstration grant programs is a
limited one under the Clean Air Act, which supports de-
velopment of innovative pollution control technology.
Grants under this program help private businesses not
otherwise subsidized by EPA to demonstrate a new pollu-
tion control device in an industrial setting. Frequently
these are "end of the pipe" devices that can simply be re-
moved if they do not work. However, some devices re-
quire alteration of production processes which threaten a
plant in the event of failure of the pollution device. In one
such case, EPA purchased commercial insurance for the
host source for a new type of burner and related equip-
ment in a demonstration contract at Utah Power & Light
Co. (Background Report p. 62) If it were anticipated that
there were going to be a number of air pollution demon-
strations in which the host source would demand protec-
tion from EPA, EPA should examine the relative cost to
the government of purchasing commercial insurance or
providing indemnification.
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Government Contractors'
Indemnity
EPA has a minor example of indemnification provided for
government contractors doing unavoidably hazardous
work. (Background Report A-26) Several of the contractors
hired to clean up abandoned waste sites under Superfund
demanded indemnification against liability claims by third
parties. They were concerned about their liability to those
living near the sites for any real or alleged contamination
resulting from the cleanup. Commercial insurance would
have cost as much as $300,000-$400,000 per year for $10-
25 million of coverage.
The Anti-Deficiency Act prevents executive branch offi-
cials from promising to pay contingent and uncertain
sums or any money not specifically authorized for the
purpose. Thus, a clause in the contract agreeing to in-
demnify against third party claims would have been ille-
gal, even if EPA had wanted to do it. To avoid the prob-
lems, EPA requires the contractors to purchase one mil-
lion dollars in insurance, which it pays for through the
contract. For liability in excess of one million, EPA agreed
to indemnify the contractor if funds are available at the
time a claim is made, with no commitment to seek funds
for the purpose. Apparently this was sufficient to satisfy
the contractors.
Any effort to expand indemnification for EPA con-
tractors should be coordinated with the task force led by
NASA and the Office of Federal Procurement Policy,
which is considering the problem in government-wide
context. (Background Report p. A-26) Therefore, no in-
demnification program for EPA contractors is recom-
mended.
Unreasonable Clean Air Act
Enforcement Action
Section 113 of the Clean Air Act allows an award of court
costs and attorney fees when the court finds that EPA's
enforcement action was "unreasonable". (Background Re-
port p. 66} Only one payment has been made and no
others even requested since enactment in 1977. A manu-
facturer of explosives in Arizona had been in violation of
Arizona law and a negotiated compliance plan for some
time when EPA initiated a suit to require compliance and
recovery civil penalties. During the consideration of a pre-
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trial motion, attorneys at the Department of Justice found
that EPA had not approved the State regulation as part of
the State Implementation Plan, and therefore had no
jurisdiction to sue. The DOJ filed a Confession of Error
and agreed to pay costs and counsel fees totaling
$10,000.
One explanation for the paucity of awards is the small
number of judicial enforcement cases. During the fiscal
years 1978-81, EPA initiated 455 cases under section
113(b) but only five required court action. The rest were
settled before trial or were dropped at the administrative
stage. The CAA only allows fees for court costs; adminis-
trative costs are not eligible.
If unreasonable enforcement is a problem under the
Clean Air Act, then it makes sense to investigate the ex-
tension of the indemnification program to other enforce-
ment provisions at EPA. However, the recent Equal Ac-
cess to Justice Act (EAJA) provides coverage to many of
the people who might suffer from unreasonable enforce-
ment, and is available for administrative as well as judi-
cial hearing costs. Under the EAJA the government must
provide attorney fees and court costs for small businesses
and individuals in any formal administrative or judical
hearing in which the private party prevails and the gov-
ernment's position was not substantially justified. Until
experience shows that there are unreasonable enforce-
ment actions that are not remedied by the EAJA, there is
no reason to extend the CAA provisions to other EPA sta-
tutes.
Indemnification under FIFRA
Section 15 of FIFRA provides that when the registration
of a pesticide is suspended and then canceled without an
opportunity for the owners of the pesticide to sell or use
it and if other statutory criteria are met, the owners will
receive an indemnity for the cost of the pesticide they
own. There have only been three cases which met the
conditions since the provision was enacted in 1972. Two
of them resulted in minor payments which EPA was able
to make out of its own funds. The first totaled approx-
imately $53,000 for three people after vinyl chloride was
banned for use as an aerosol propellant in pesticide cans.
The most recent were two small payments to farmers
after the cancellation of most uses of D6CP. The suspen-
sion and cancellation of DBCP was done in stages over
several years, allowing use of most existing inventories.
The largest payments have come as a consequence of
the suspension of many registrations of products con-
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taining Silvex. The suspension was made immediately
effective just before the spring growing season of 1979.
The suspension was based on new human epidemiology
information indicating a correlation between spontaneous
abortions and 2,4,5-T spraying, in addition to extensive
animal test data which demonstrated that exposure to
2,4,5-T, Silvex, or TCDD results in oncogenicity, tera-
togenicity, ferotoxicity, and other adverse reproductive
effects.
A substantial number of the registrants opposed the
cancellation and requested a hearing. However, some of
those holding registrations on products for home and gar-
den uses containing Silvex did not and cancellation for
their products became effective automatically. Nineteen
companies, led by Chevron, signed agreements with EPA
stipulating that it would not be feasible to reuse the Sil-
vex for a non-suspended use, confirming EPA's statutory
obligation to dispose of the banned pesticide, and de-
scribing the process for processing claims and de-
termining cost of the pesticide.
EPA relied heavily on the registrants in processing
claims. Chevron alone had over 11,000 distributors and
retailers of lawn and garden Silvex who were entitled to
make claims. Chevron in fact reimbursed its distributors
who had given cash or credit to retailers, and Chevron
submitted a claim for the total to the government. The
claimants also collected the huge amount of Silvex prod-
ucts for disposal. EPA sent each claimant a letter stating
the amount it considered appropriate, but explaining that
the Agency had no funds to pay. The registrants sub-
sequently filed in the Court of Claims, where the seven
largest claims have been settled for $18.7 million, roughly
equal to the amount that EPA found appropriate. They
were paid out of the Court of Claims Judgment Fund.
The Toxic
Substances
Control Act
For the sake of analysis, we considered a hypothetical ex-
tension of the FIFRA indemnification program to TSCA be-
cause TSCA is the only other EPA statute under which
products may be banned. However, there are several
reasons why the FIFRA program may not be a good model.
It is the only indemnification program paying directly
regulated parties for the cost of valid regulation, none of
the statutes covering food, drugs or other consumer prod-
ucts do so. Congress has not added such a provision to
any legislation since the FIFRA program was enacted, in-
dicating that in spite of the difficulty in distinguishing the
pesticide situation from others, that Congress intended to
treat it as a special case. In any event, we found no evi-
dence that TSCA will cause losses beyond the cost of
24
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compliance normally allocated to the regulated party, or
for any other reason requires an indemnification program.
The statute and the subject matter of TSCA allow the
Administrator considerable flexibility. The stark choice
presented in FIFRA between allowing inventories of
dangerous pesticides to be used, or having the gov-
ernment pay for them is not presented by TSCA. There
are more alternatives, even for emergencies, and more
gradations of regulatory action than FIFRA allows. Under
TSCA the Administrator must balance the risk of the
chemical against the cost of regulation, resulting in the
least burdensome requirement consistent with
safeguarding public health.
The nature of the chemicals under the purview of TSCA
also allows regulatory flexibility. Industrial chemicals are
often used in a vast number of ways, giving the Agency
many ways to reduce risk, for example, by mandating a
closed system of production, requiring a label, or banning
use in consumer products. If only some uses or processes
are banned, there will continue to be a market for the
chemical thus reducing the impact on the manufacturer.
TSCA also gives the Administrator authority to request
a judge to issue a repurchase order. This would com-
pensate the downstream processors and users of a chem-
ical for their inventory, accomplishing many of the aims
of an indemnification program. These are often people
who could not be expected to anticipate the Agency's ac-
tion, and who had less responsibility for the chemical. Re-
purchase orders might also encourage compliance with a
ban and disposal order, another argument for the FIFRA
indemnification program.
There is also a danger that indemnification under TSCA
could counter the efforts to encourage voluntary reduc-
tion of risk, rather than mandatory regulation. These
efforts on the part of EPA and the chemical industry have
been increasingly successful. Establishment of an in-
demnification program might encourage a company to
wait for EPA action, rather than take voluntary actions
that could not be compensated in any way.
TSCA affirms the continuing responsibility of chemical
manufacturers and processors for the safety of their prod-
ucts. Thus, indemnification could not be justified by
general equity arguments based on the Agency's respon-
sibility for registering or evaluating hazardous chemicals.
Any individual inequities or errors that might occur under
TSCA are difficult to foresee, and impossible to plan for
under one indemnification program. Existing indemnifica-
tion mechanisms, such as private bills, are available for
individual incidents until there is evidence of a need for a
comprehensive program.
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Need For New
Indemnification
Programs
The final step in the study was to search all of the laws
and regulations administered by EPA to find any poten-
tially indemnifiable losses. Six categories of actions that
seemed more likely to result in an indemnifiable loss
focused the search:
disclosure of confidential business information;
delays in issuing permits;
conflicting and overlapping requirements;
emergency actions;
unreasonable administrative enforcement; and
changes in agency policy.
The search for potentially indemnifiable losses was not
limited to these categories, and the categories themselves
were refined as additional incidents were discovered.
Some were chosen for their similarity to existing pro-
grams (unreasonable administrative enforcement), some
because they were clearly sources of concern to industry
(disclosure of confidential business information), and
some because they represent a convergence of several
important factors (emergency action presents an in-
creased risk of error due to the speed with which de-
cisions are made, and may also suspend procedural due
process).
Industry sources were consulted for identification of
potentially indemnifiable losses. (Background Report
Appendix C) This included a review of surveys and re-
ports on regulatory problems in general, including many
that had not specifically addressed indemnification as a
solution. Some major trade associations were contacted.
Association representatives often referred us to particular
members who also provided comments and information.
Although the contacts did not amount to a scientific sur-
vey, they did offer a fairly broad perspective on industry
attitudes toward EPA regulation and the need for in-
demnification.
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Confidential Business
Information
The possibility that EPA will disclose confidential business
information causes concern to those who must report in-
formation to EPA. (Background Report p. 122) The
greatest cause of concern appears to be authorized dis-
closures, either under the Freedom of Information Act
(FOIA) or some other statute. Although there have been
many attempts to amend FOIA and FIFRA to restrict cur-
rently authorized disclosures, there seems to be virtually
no industry interest in monetary compensation for such
disclosure. Firms appear to believe that prevention is
more important than compensation for loss of a business
secret. Nor is indemnification warranted for disclosures
authorized by Congress. If industry concerns become
more pressing a more appropriate solution would be to
attempt to change the policy by amending the relevant
statutes.
A lesser cause of concern is unauthorized disclosure,
which may be either negligent or intentional. Erroneously
including the formula of a successful Monsanto herbicide
in a response to a FOIA request from a presumed com-
petitor was a negligent disclosure. Such a loss is difficult
to value in monetary terms. Indeed, Monsanto did not sue
for money damages. It asked for and received EPA's
promise to screen applications for new registrations to
catch any that might have been based on the confidential
material.
There are alternative ways to reduce the risk of loss
from unauthorized disclosure. One is prevention of in-
advertant disclosure by established procedures to safe-
guard confidentiality. There are such procedures in the
FOIA regulations; and security manuals, locked file
cabinets, and layers of review under TSCA. Deterrence is
another approach. Employees can be administratively dis-
ciplined for violating the security procedures, and there
are criminal sanctions for wrongful disclosure.
There are some administrative problems with in-
demnification for release of confidential information,
under the FTCA or by some other means. It is extremely
difficult to calculate the value of information, and es-
pecially the loss of confidentiality. Clearly some releases,
such as allowing the production volume of a particular
chemical to get into the public reading file for a week be-
fore it is excised, are less serious than others like the re-
lease of the formula of a successful chemical to a com-
petitor. Furthermore, some companies would not want to
make a claim even if they are aware that information has
been released because the claim would draw attention to
28
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the information, perhaps disseminating it further. This
could endanger its status as a trade secret and thus any
chance for collecting damages in a law suit.
Should it be decided that there was an undue amount
of disclosure and that providing tort liability would in-
crease the care with which confidential information is
treated, or provide necessary compensation, one solution
would be to clarify the FTCA to allow such suits.
Evaluating an amendment to the FTCA is beyond the
scope of this report, as it would have important im-
plications for the rest of the government. However, this
study found no evidence of a compelling need for or
interest in such a change at this time.
Delays in Permit Processing
Indemnification does not appear to be a good solution to
whatever problems are due to delay in granting permit
applications. (Background Report p. 126) Studies have
shown that delays usually can not be primarily attributed
to regulatory problems. The average processing time for
Prevention of Significant Deterioration (PSD) permits at
the writing of the Background Report was less than six
months from the submission of a complete application to
the decision.
Both EPA and industry parties concerned with the prob-
lem have focused on ways to speed up the process rather
than compensating afterwards, and there is no evidence
of industry interest in indemnification. Furthermore, the
administrative problems of such a program would be con-
siderable. It would be very difficult to prove that a delay
in a construction project was caused by EPA's delay in
issuing the permit, rather than some other factor. Even if
it were clear that EPA was taking longer than usual to re-
view a permit, it would be difficult to decide whether it
was due to the defects in the permit application, the com-
plexity of the issues presented, or to negligence. Also, in-
demnification would establish counter-productive in-
centives for the Agency. The allowable time might be in-
adequate for controversial or difficult decisions and thus
might foster poor decisions in the most complex cases.
EPA might spend too much time documenting its de-
cisions, or become reluctant to involve the states for fear
that their delay would result in EPA paying indemnifica-
tion.
In the absence of evidence of a problem, and evidence
that indemnification would be an effective response, there
is no reason to recommend indemnification for potential
losses associated with delay.
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Regulatory Conflicts and
Overlaps
A recent GAO report on conflicting and overlapping reg-
ulatory requirements found many fewer than might be ex-
pected. (Background Report p. 130) There were only four
examples involving EPA. One was a consequence of
water and air pollution control devices generating sludge.
The hazardous wastes in the sludge are then subject to
RCRA regulations. Unlike other overlaps, this does not
prevent the affected facilities from doing business,
although it does increase the cost of compliance with all
EPA regulations. The cost of complying with regulations
is almost never a basis for indemnification. (Some allege
that the tris situation fits the model of conflicting policies
because the government first required children's sleep-
wear to meet flammability standards and then banned
tris. However, there were many ways to meet the stan-
dards and not all of the sleepwear was treated with tris
even before the ban. Within months of the ban more
alternatives were developed, including inherently flame
retardant fibers as well as other chemicals.)
At least one of the reasons that there are so few ex-
amples of conflicting policies is that most of the statutes
administered by EPA contain provisions for coordinated
policy development. Many also anticipate conflicts by
assigning primary responsibility to one office or program
to prevent a deadlock. Such provisions appear to
represent an expressed preference by Congress on han-
dling the potential for conflict. Another reason for lack of
conflict in practice is formal agency and interagency re-
view of all actions and policies. One of the primary
reasons for review is to coordinate action and ensure con-
sistency. There is no evidence of conflicts that cannot be
resolved through coordination and concurrence, and thus
might justify indemnification.
Use of Emergency Powers
Errors or inequities resulting from the use of emergency
powers seemed likely candidates for indemnification, but
we found only one incident twelve years ago. (Back-
ground Report p. 134) It is worth describing because it
was one of the few concrete examples of loss of any kind
identified by the study.
In 1971, an air pollution emergency developed in Birm-
ingham, Alabama before state or federal air pollution con-
30
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trol laws were implemented or state officals had authority
to address the emergency. After efforts to obtain a volun-
tary reduction of paniculate emissions had failed, EPA
officials decided to use the emergency authority of sec.
303 of the Clean Air Act for the first time. A temporary
restraining order against 23 industrial sources was
obtained in the middle of the night without notice to the
sources. They were ordered to reduce operations to the
extent possible without damage to equipment. By the
time of the hearing for the preliminary injunction, the
weather had changed, the emergency was passed, and
the government attorneys withdrew their petition for the
injunction. Some of the attorneys for the sources chal-
lenged the ex parte hearing, and the inclusion of their
clients in the order. They argued that their clients had in-
stalled pollution control equipment, or were too far away
to be contributing to the emergency.
The order was only in effect for 32 hours and did not
result in any damage to equipment, so the losses were
limited, but it illustrates the problem with emergency ac-
tion. If it is true that some of the facilities were erroneous-
ly included in the order, there might be an argument for
indemnification because there are no other remedies. The
parties had no opportunity to participate in the decision,
or to argue for exemptions, and there was no advance
notice to allow them to prepare. The impact of the tempo-
rary restraining order was irreversible, since it could not
be appealed.
Another air alert occurred the following spring, after
regulations and phased curtailment plans had been writ-
ten with the cooperation of the industry. Inspections
showed that the industry was complying, and the particu-
late counts decreased markedly when the abatement
plans went into effect. The abrupt and drastic impact of
the first alert was not repeated because the industry had
helped plan its response.
Emergencies are more likely to raise problems than ac-
tions taken on a normal schedule. There are always fewer
alternatives available because there is no time for exemp-
tion applications to be made and granted, for example.
Procedural inequities may occur for the same reason. The
incentive effect of indemnification may be helpful in
obtaining quick compliance with an emergency order.
There are several reasons why an indemnification pro-
gram for emergency action is not necessary. It appears
that there will be fewer emergency actions than there
have been in the past. The development of com-
prehensive regulatory programs concerning air and water
pollution and spills and leaks of hazardous chemicals has
made it less likely that EPA would have to use emergency
powers. In addition, by participating in the drafting of
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regulations and issuing of permits, regulated parties will
have had an opportunity to modify the terms of the regu-
lation. They are less likely to be harmed unreasonably or
surprised by the required response to the emergency. Fur-
thermore, the Comprehensive Environmental Response,
Compensation and Liability Act (CERCLA or Superfund)
provides authority for the government itself to take direct
action to clean up or contain a spill without having to
order a private party to do it. Responsibility and liability
can be determined after reflection.
Of course, some emergencies will continue to occur.
Emergencies are, almost by definition, unpredictable
occurrences. They are difficult to foresee and plan for as
each is likely to be different. There are advantages to
addressing each separately, rather than attempting to
write a broad rule that covers all, but is too general to
assist in making a decision on an individual situation.
Unreasonable Administrative
Enforcement
The indemnification program under sec. 113 of the Clean
Air Act extends only to costs incurred in a trial, not to
those generated by administrative action prior to settle-
ment or trial. Thus, administrative enforcement seemed a
natural category to examine. (Background Report p. 139)
Constraints on enforcement action partially explains the
fact that we found very few complaints of unreasonable
administrative enforcement by EPA in discussions with
current and past officials, trade associations, and in
reviewing reports and congressional documents. For ex-
ample, the states are the primary enforcers of environ-
mental laws. Also, enforcement policy focuses on the
most significant violators, reducing the chances that the
action will not have a legal justification. Enforcement ac-
tions require several levels of concurrence and approval,
further reducing the possibilities of harassment or mis-
take.
The Equal Access to Justice Act (EAJA) provides costs
and attorney's fees for individuals and small businesses
who prevail against the government, if the government's
position is not substantially justified. (Background Report
p. 70) This covers many of those presumably most vulner-
able to an unreasonable enforcement action because they
are less capable of defending themselves. The EAJA
should provide relief in most of the incidents in this cate-
gory. Certainly there is no need to recommend additional
indemnification until shortcomings are discovered in the
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new law. However, if the EAJA proves insufficient another
approach would be to ensure availability of judicial review
of the enforcement order before the company must com-
ply, where this review is not already available. A new in-
demnification program should not be proposed unless a
pattern of abuse becomes visible, and these steps are in-
adequate.
Changes in Agency Policy
Consistency and predictability of government action are
important to regulated parties. Unexpected changes in
policy can disrupt planning and cause losses beyond
those attributable to the new policy itself. Further, since
industries are not homogenous, a change can affect the
relative competitive positions in ways that may not be in-
tended, or even foreseen by the Agency. A hypothetical
relaxation of effluent standards might be generally re-
garded as a benefit to industry, but firms that had in-
vested in equipment or process changes to meet the old
standards would be at a competitive disadvantage com-
pared to those who had never come into compliance.
However, the study did not find any actual cases of
changes causing a loss that might justify indemnification.
Alternatives are helpful in reducing the cost of changes
in policy. Advance notice and phased-in compliance can
allow those involved to make an orderly transition. Partici-
pation of a representative sample of firms during the
decision-making can help avoid unwitting impacts on
some segments of the industry- Exemptions and waivers
permit flexibility in application of new regulations. Most
of the statutes administered by EPA allow variances or ex-
emptions for various reasons.
Another powerful alternative to indemnification for poli-
cy changes is review of the decision by administrative or
judicial tribunals. The remedies sought are typically not
money damages, but modification or retraction of the
policy action. This partly explains why we found so few
actual losses. If a projected loss is severe or unreasonably
allocated, it can often be prevented by obtaining a stay of
the action during review.
An abrupt change might constitute a procedural inequ-
ity, if made in the absence of compelling public health
reasons, but the government rarely acts abruptly. Even
the emergency decision to suspend the registration for
some uses of Silvex and 2,4,5-T just before spring
planting came after eight years of regulatory action and
research, including one previous cancellation of home
and aquatic uses of 2,4,5-T. The manufacturers of the pes-
33
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ticides were surely aware of continuing Agency concern
and the potential for regulation. However, the sellers and
users may not have been as well informed. This points to
a possible substantive inequity: that the cost of the action
would fall on those least responsible for the public health
risk, and least able to bear it. Such an evaluation cannot
be made generically or theoretically, but must be based
on the facts of a particular situation.
Policy decisions are the core of government activity that
has always been immune from suit to protect the
objectivity of the decision-makers. Changes in policy re-
quire the same protection so that the Agency can respond
to new information.
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Costs and Financing of
Indemnification
Estimating the Cost
This report does not recommend any new indemnification
programs, and therefore does not contain a cost estimate
or discussion of alternative means of financing a particu-
lar program as Section 25(a)(1) and (2) of TSCA requested
for any programs that might be recommended. However,
a general discussion of cost and financing adds an impor-
tant dimension to the report.
The cost of an average or hypothetical indemnification
program is difficult to estimate because the programs
vary so widely and so much depends upon the discretion
of Congress in a particular case. No formula or universal
measure is available in part because so many of the in-
demnification payments are made in exceptional situa-
tions, those that are unusual and difficult to foresee.
Errors by the Agency and product bans fall into this cate-
gory. No statistical analysis of the frequency of such los-
ses can be made. In other cases the problem is estimating
the magnitude of the loss, rather than its frequency. For
example, valuing losses that are not financial, such as
loss of confidentiality or time lost due to EPA delay in
granting a permit, is more difficult than measuring those
that are concrete, like lost inventory. Another unknown
element is the proportion of the entire loss that Congress
would indemnify. Most of the programs do not attempt to
reimburse for one hundred percent of the loss. Under the
Tris bill, for example, no claim may be made for interest,
attorney's fees, or lost profits.
Examination of the costs of existing programs is not
useful in defining an average because they vary so wide-
ly. The arts and artifacts program has required no gov-
ernment outlays (except administrative costs), while the
swine flu and pesticide programs have cost millions of
dollars. Even within a program the costs can vary in ways
that are hard to predict. The dairy products indemnity
program declined from a peak of $350,000 in annual pay-
ments to about $30,000. Last year a very costly incident
35
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ocurred in Hawaii that may require up to $7,000,000 in
payments.
The inability to predict the cost of a program might
have a profound effect on support for it and certainly
would affect planning and implementation. Congress is
naturally reluctant to establish a program without a defi-
nite idea of what it will cost. It is also difficult to make the
necessary decisions on how the program will be admin-
istered and by whom unless the types and frequencies of
the losses are known. There are, however, ways to in-
troduce more certainty. One is to wait until after the loss
has occured to make the indemnification decision.
Obviously it is easier to compute the size of a loss that
has occurred, than to predict one. Indemnification pay-
ments authorized by Congress in response to specific
situations have this advantage. In fact, nearly all of the in-
demnification programs (with the exception of FIFRA sec.
15) were enacted after some loss had occured. This fur-
nished a concrete basis for designing the programs.
There are other ways to reduce the uncertainty about
future costs. One method is to set a limit for individual
payments. A limit may also be placed on total annual ex-
penditures. The Arts and Artifacts Indemnity Act, which
allows the federal government to promise to indemnify
museums for losses they might suffer while exhibiting
foreign-owned art or artifacts, limits coverage for an ex-
hibit to $50 million, and the total at any one time to $400
million. (Background Report p. A-25) Another method is to
provide for review and corrections after a period, as in the
Equal Access to Justice Act. (Background Report p. 70).
Impact of Indemnification
There is very little empirical data from which to judge the
impact of indemnification on the actual and potential re-
cipients, and upon the government. Thus, it is hard to
evaluate the conflicting theories on the subject.
Impact on
the government
The financial impact of indemnification on the gov-
ernment depends to some extent upon the method of
financing used, and on the size of the indemnification pro-
gram. There is no evidence that the current indemnifica-
tion programs funded by general revenues are large
enough to have an impact on the national economy or on
the national budget, even in the aggregate. Where the
money comes out of a specific agency's budget, it might
have an impact For example, there is reason to believe
that builders of waste water treatment plants use the
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minimum amount of innovation necessary to get the extra
10 percent grant, but not so much innovation that there is
really a risk of failure. The money for indemnification
would come out of the same fund that is used for the
original grants. Thus, every indemnification claim paid
will reduce the amount left to subsidize construction.
(Background Report p. 57)
The theoretical impact of indemnification programs on
the government gives rise to arguments both for and
against it. One argument made in favor of indemnification
is that it would restrain regulatory agencies from over-
regulation. Some of the programs we examined appeared
to have restraint as a partial goal. FIFRA is one example,
as seen in the explicit choice posed between the special
rule allowing use of a pesticide whose registration has
been cancelled and indemnifying the owners of the pesti-
cide. The Clean Air Act (sec. 113) payments for unreason-
able enforcement actions were also intended, in part, as a
disincentive.
Opponents of indemnification fear that the disincentive
effect might be more powerful than intended, disuading
the government from taking proper regulatory actions, for
fear that indemnification claims would be made against it.
Clearly, this could be disruptive to the agency's execution
of its mandate. There are other ways that Congress could
influence the regulatory decisions of the agencies: by es-
tablishing clearer statutory standards, by mandating cost
effectiveness analysis, or by other means that are more
precise and less disruptive than indemnification.
Impact on
the regulated
parties
Some have suggested that the promise of indemnifica-
tion for losses caused by a new regulatory program
would persuade the regulated parties not to oppose its
enactment and implementation, thus allowing faster gov-
ernment action. It is not at all clear that indemnification
could buy-off the opposition. Indemnification is almost
never justified for the cost of compliance with a valid
regulation, which is the main concern of industry. Further-
more, even where indemnification has been granted in
the past, it has often not covered the full amount of the
losses. Thus, firms would still have reasons to lobby
against the statute and to try to influence the regulations,
in an attempt to reduce their costs of compliance and
minimize other kinds of losses. Furthermore, public par-
ticipation is important to a rational regulatory process. It
is useful to encourage the comments and assistance of
those who have expertise on the subject, so that the reg-
ulations are as accurate and effective as possible.
There is also a commonly expressed concern that the
availability of indemnification could reduce self-scrutiny
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by the private sector. For example, if a company knows
that it will be indemnified for the cost of a hazardous
product when it is banned, it might be inclined to wait for
EPA to ban the product rather than to do tests, detect the
hazards, and voluntarily withdraw the product from the
market. There is no evidence in this study that the
availability of indemnification has had such an effect. In
many cases, the promise of indemnification was uncertain
or conditional, and in every case evidence of negligence
by the party claiming indemnification was sufficient to bar
a claim for indemnification.
Impact On The Background Report analyzed the impact of in-
investment damnification in a hypothetical FIFRA ban and a hypothe-
tical ban of a chemical under TSCA. One of the primary
arguments made for FIFRA indemnification was that it
was necessary to maintain investment in research and in-
novation. In the FIFRA scenario the cash flow of a pesti-
cide was analyzed by the net present value method to de-
termine the impact of indemnification on the initial in-
vestment decision. (Background Report E-11) The cash
flow of pesticides is negative for many years as the
manufacturer invests in research, development, produc-
tion and promotion. Thus, if a pesticide is cancelled soon
after registration, the manufacturer may suffer a heavier
loss than if it is later in the pesticide's life cycle. Also, the
inventories of pesticides fluctuate enormously over the
year, because use is seasonal. A cancellation just before
the growing season would result in a higher inventory
loss than one during the season. The possibility that EPA
might cancel a pesticide increases the risk to the manu-
facturer. The promise of indemnification for inventory
costs reduces that risk to some extent.
The cash flow analysis shows that indemnification
would raise the after-tax net present value by different
amounts depending upon the assumptions chosen. How-
ever, even when a high expected cancellation rate is
assumed, the expected net present value of the pesticide
is increased by less than one percent; probably not
enough to influence decision making for most companies.
The real loss is in the future profits that must be fore-
gone. This conclusion agrees with anecdotal evidence
gathered from industry representatives.
A similar, though less detailed, analysis was done for a
hypothetical "average" chemical in TSCA's jurisdiction.
(Background Report p.E-5) The conclusion agrees with
that for pesticides, that indemnification would not signifi-
cantly alter the initial investment decision. This again is
due to the fact that indemnification of inventory losses
would only cover a fraction of the total loss.
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The impact of indemnification on distributors and users
is even less. The primary users of chemicals are the man-
ufacturers themselves. They might hold smaller in-
ventories or be less likely to use those chemicals with
high probability of being banned. However, the dominant
factor is still likely to be the technical efficacy of the
chemical.
Financing
Like any other government program, indemnification
could be funded in a variety of ways. There are many var-
iations on basic options for financing a program and dis-
tributing the benefits. The four basic options for dis-
tributing government benefits are:
• cash payments;
• assumption of liability by the government;
• tax assistance; and
• credit assistance.
The four basic options for funding are:
• appropriations from general tax revenues (either by
regular or special appropriations);
• appropriations from dedicated revenue sources;
• revolving fund account (initially funded by general or
dedicated taxes, but perpetuated by repayments of loans
or recoveries of expended funds); and
• tax expenditures.
Several commentators have suggested that it would be
economically efficient if the beneficiaries of government
action compensated those who suffer losses because of it.
Although this principle might work for economic regula-
tions, such as the deregulation of an industry, it is not
generally applicable to health and safety regulation. In
economic regulation, a concrete and often monetary
benefit is transferred from one identifiable group to an-
other; for example from the owners of truck certificates
for certain routes to all the additional trucking companies
that are able to compete for business on the routes after
de-regulation. It is more difficult to value the benefits
from banning a hazardous chemical and to identify the
beneficiaries. There is also a question about the equity of
requiring victims to pay for the alleviation of a problem
they did not create. There are neither economic efficiency
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nor equity reasons to require those living next to an aban-
doned waste site to bear the cost of a government con-
tractor's negligence, or the cost of insuring against it. The
winners and losers scheme is even more difficult to apply
to non-regulatory actions including errors by the gov-
ernment and incentives to private actions.
Existing indemnity programs illustrate many of the pos-
sible combinations of funding and distribution options
and reasons for choosing them.
Cash payments from regular appropriations. An example
of this alternative is the USDA's payment of compensa-
tion for milk and milk products contaminated by pesti-
cides that were registered at the time of their use. USDA
includes a budget for this program in its request each
year. The payments are actually made by checks drawn
on USDA's general fund account. This alternative can be
relatively efficient in handling frequent and predictable
claims. The recent discovery of heptachlor in all of the
milk in Hawaii caused losses far beyond the amount
budgeted. However, it was a relatively simple matter, with
the program already in place, to appropriate the addition-
al funds needed.
Cash payments from special appropriations after the
event. This alternative works for less frequent events for
which annual appropriations are not necessary. By
seeking funding after the loss occurs, the recipient has
less certainty of being paid and probably cannot be moti-
vated by the more remote possibility of repayment. How-
ever, it can still reduce an inequity. The government may
find it easier to decide to pay the indemnity because all
the facts are known, and the amount of money needed is
definite.
An extreme example is the Arts and Artifacts In-
demnification Program, administered by the National En-
dowment for the Arts. The NEA is authorized to pledge
the full faith and credit of the United States to indemnify
museums for loss or damage to works of art while in ex-
hibit in the United States or overseas. No money is
appropriated until the museum suffers a loss which is in-
vestigated and certified to the Congress. A special appro-
priation will then be made.
For programs in which claims occur on an infrequent
basis (no claims have yet been made to Congress under
the arts program) and where the amounts of the claims
are upredictable, after-the-fact appropriations will be more
appropriate. Backed by statutory authority to ensure even-
tual payment this approach provides credibility while
avoiding unnecessary budgeting for funds.
40
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Cash payments from dedicated tax revenues. This
alternative differs from the previous two in that revenues
come from special taxes or fees assessed on a designated
class of individuals (i.e., the users of a certain product) or
companies, or a designated product (certain chemical
feedstocks). The revenues can be generated continuously
to meet routine and predicted requirements, or per-
iodically to meet non-routine needs or to replenish funds
from previous payouts. The relationship between the bene-
ficiaries and those from whom the taxes are collected
can create a variety of incentives and disincentives. Con-
gress could maintain oversight and control through con-
tribution of a portion of the funds.
Cash payments from a revolving fund. A revolving fund is
a pool of money out of which indemnity payments can be
made. It is regularly replenished through repayment or
recovery of expended funds. It is not unusual for such
funds to be initially funded and supplemented from
general or special appropriations. The key aspect is that
they are in some form self-sustaining. This characteristic
reduces the need for appropriations and provides in-
centives for good fiscal management by the agency re-
sponsible. However, a self-sustaining fund is somewhat
independent of Congress, circumventing one of the more
effective means of Congressional oversight.
Section 311 of the Clean Water Act (oil spill compensa-
tion) and Superfund both have revolving fund characteris-
tics. Funds expended for cleanup activities are later re-
covered if a responsible party can be found and if the
party is solvent.
Direct assumption of liability by the government. An
assumption of the underlying risk by the government can
provide a substantial economic benefit though no pay-
ment is made. The government might or might not es-
tablish a means of paying for the loss before it occurs.
The swine flu program is an example. Vaccine manu-
facturers were so concerned about potential suits that
they demanded protection before they would manufacture
the vaccine. The Congress finally agreed to make the sole
cause of action one against the government. (The gov-
ernment may, in turn, sue manufacturers for negligently
caused harms, but manufacturers are thus protected from
suits based on strict liability that some state tort systems
allow.) The cost of administering this form of indemnifica-
tion is very high. Over four thousand claims have been
filed with the Department of Justice, and each must be
assessed, denied, settled or litigated.
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Special tax credit resulting in reduced tax revenues. A
number of alternatives involve foregoing tax revenues for
various purposes. Foregoing revenue has the same net
effect on the government as paying out an indemnity
claim.
Losses suffered by reason of agency actions are usually
eligible for deductions as ordinary business expenses.
Thus some tax assistance is always available. At times,
Congress has been explicit in declaring these losses eligi-
ble for deduction, though not for indemnification. The tax
bill of 1981 contained such a provision. (26 U.S.C. 165
note) Truck certificates which formerly had considerable
value were rendered worthless when the trucking industry
was deregulated. Congress used the tax bill to make clear
its view that the trucking firms could deduct the book
value of the certificates.
Tax credits provide a greater benefit. Eligible firms can
actually reduce tax liability by a specified amount. Firms
with taxes less than the amount of the allowable credit,
could be allowed to defer the credit to another year or sell
it to another firm.
Tax credit devices are relatively simple to operate,
reducing the complexity of transferring an economic
benefit to the indenmified parties. However, they should
only be applied to very large programs affecting many
people or firms. The required changes in tax forms and
reference materials can only be justified by the wide-
spread use of the new provision.
d2_
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Conclusions
There are no patterns of loss or potential loss which war-
rant a new indemnification program for EPA at this time.
This is due in part to the efficacy of the alternatives to in-
demnification that prevent loss and shift and spread the
losses that do occur. Other potential losses are similar to
those occuring under many federal laws and have been
addressed by general legislation applying to all gov-
ernment actions. Furthermore, programs will be better de-
signed if they respond to a loss that has already occurred
rather than to the hypothetical possibility of one. Because
we found no such losses, and none were brought to our
attention by industry, recommendation of a program is
premature.
However, two related situations merit further study. The
risks in experimenting with innovative technology and the
risks of government contractors doing hazardous work
may be addressed either by private insurance purchased
by the government as part of the grant or contract or by
indemnification. A quantitative comparison of the relative
costs and efficacy would aid decisions on which method
to use in a particular situation.
The fact that there is no current situation justifying a
new indemnification program does not mean that there
will not be one in the future. Even more likely are in-
dividual instances in which the government ought to
make a single indemnification payment. There are es-
tablished mechanisms through which Congress can grant
extraordinary relief, including indemnification. One is pri-
vate legislation, bills of specific rather than general
application. Another is a grant of special jurisdiction to
the U.S. Claims Court to hear and award claims which
would otherwise be precluded by law. Such procedures
allow Congress to make special exceptions for political or
equitable reasons without adding a permanent federal re-
sponsibility or establishing a new legal principle. This
appears to be the appropriate response as many of the
losses and potential losses are themselves exceptions
43
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resulting from unusual circumstances of an individual
case rather than the normal workings of an EPA statute or
program.
An analysis of the claim using the factors identified in
this report will help to shape a decision on whether par-
ticular incidents should be indemnified and whether an in-
dividual response will suffice or a program is needed. Ul-
timately, the decision to indemnify for regulatory losses is
a political one. By its nature as an idiosyncratic safety
valve and exception from general legal principles, in-
demnification cannot be reduced to a formula. Such polit-
ical decisions must be made by an elected political body.
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EPA Indemnification
Programs
Program
Sec. 311(i) of the Clean
Water Act
(Background Report p.
78)
Sec. 202 of the Clean
Water Act
(Background Report p.
53)
Sec. 113 of the Clean Air
Act
(Background Report p.
66)
Sec. 15 of the Federal In-
secticide, Fungicide and
Rodenticide Act
(Background Report p.
33)
Description
Reimbursement to innocent parties
for cost of cleaning up oil spills.
Funding
Claims filed in Court of Claims; pay-
ment from sec. 311(k) fund reple-
nished by appropriations, penalties
and recovered costs.
Payment for cost of repair or replace- Indemnification is by discretionary
ment of failed innovative or alterna- grant paid out of fund for construc-
tive technology in wastewater treat- tion of treatment works.
ment plants.
Attorney fees and court costs may be Awarded by judge in the enforce-
awarded to those against whom EPA ment case, paid out of Judgment
brings an unreasonable enforcement Fund.
action.
Payment to owner for the value of in- No funding mechanism in FIFRA.
ventories of a pesticide after
emergency suspension and cancella-
tion of the pesticides's registration.
Cases
45 claims between 1973-1981. Aver-
age payment for successful claim is
$39,000.
Few plants have been completed
under the program, and very few
claims made.
Only one $10,000 payment and one
claim since 1977.
Used three times since 1972 enact-
ment; for 3 small vinyl chloride pro-
peliant claims, a few small DBCP
claims and over 18 million dollars of
claims concerning Silvex.
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Non-EPA Indemnification
Examples
o>
Program
Incentives
Arts & Artifacts
(Background Report p.
A-25)
Diseased Animals
(Background Report p.
A-18)
Government
Contractors
Swine Flu Vacine
(Backgound Report p. A-
23)
NASA Contractors
(Background Report p.
A-26)
Non-Policy Error
Equal Access to Justice
Act
(Background Report p.
A-70)
Description
Full faith and credit of U.S. to insure
museums against loss connected
with international exhibitions. Limit
on coverage per exhibit and total
coverage per year.
Department of Agriculture pays
scheduled amounts for animals de-
stroyed because diseased or exposed
to certain diseases.
Funding
Financing by special appropriation
after loss is certified. Museums also
required to carry some commercial
insurance.
Financed as budget item, by regular
appropriations.
Government agreed to assume strict Claims awarded by judge or agreed
liability for making and administering to in settlement. Paid out of Judg-
swine flu vacine where state law rec- ment Fund.
ognized such claims. Suits filed
against federal government.
Users of space shuttle indemnified
above liability insurance. (NASA may
also indemnify contractors engaged
in activities that are "unusually
hazardous" or "facilitate the national
defense")
Individuals and small businesses get Statute ambiguous, but probably will
attorney's fees and court costs if they come out of Agency budgets.
prevail and the government position
is not substantially justified.
Cases
No requests for payment from Con-
gress yet made, but museums have
saved over $11 million in insurance
premiums.
Thousands of claims over many
years. Claims run in cycles as dis-
eases spread or are controlled.
Over 4,000 claims made for $3 bil-
lion. For 667 successful claims, $64.3
million awarded.
Over 14,000 administrative pro-
ceedings during first year potentially
covered, but only 103 applications
for fees filed; 49 with NLRB, 15 with
Armed Services Board of Contract
Appeals.
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Cranberry Incident
(Background Report p.
A-20)
Mizokami Brothers
Spinach
(Background Report p.
A-20)
Marlin Toys
(Background Report p.
A-21)
Pesticides
Beekeepers
(Background Report p.
A-19)
Dairy Products
(Background Report p.
A-19)
Ban
Tris-treated Children's
Sleepwear
(Background Report p.
A-22)
Growers of uncontaminated berries
indemnified for loss of sales
following HEW announcement about
some contaminated cranberries. An
administrative decision.
FDA test mistakenly showed con-
tamination of Mizokami Brothers' spi-
nach. Private bill conferred special
jurisdiction on Court of Claims to
award judgment.
Mistaken inclusion of toy on holiday
list of banned products. Agency sup-
ported private bill referring matter to
Court of Claims under Congressional
Reference procedure.
Because pesticides replacing DDT
were more harmful to bees, program
indemnified beekeepers for bees kil-
led by non-negligent pesticide use.
Program lasted from 1969-81.
Dairy farmers indemnified for milk
and milk products contaminated with
pesticides providing dairy farmer
was not negligent.
When tris-reated children's sleep-
wear was banned as a cancer hazard,
much of the loss fell on relatively
small cutters and sewers. Private bill
confered special jurisdiction on the
Court of Claims to award judgment.
Paid out of existing USDA fund from
customs duties to be used to "rees-
tablish farmer's purchasing power",
among other things.
Approximately $300,000 paid out of
Judgment Fund. Mostly for spinach
Mizokami destroyed while error was
contested.
Congressional Reference requires
special appropriation to carry out
recommendation of Court of Claims,
in this case to pay Marlin $40,000.
Apparently Congress never did
appropriate the money.
Regular appropriations.
A single case.
Regular appropriations.
Court of Claims Judgment Fund,
after award by judge according to
criteria set out in special bill.
A single case.
A single case.
Many thousands over life of pro-
gram. Payments according to sched-
ule, after certification of non-
negligence by beekeeper.
Many over the years. Annual pay-
ment now reduced to 10% of peak of
$350,000, but 1982 incident in Hawaii
may result in $7 million in claims.
Estimated total approximately $50
million.
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