United States
Environmental
Protection Agency
Solid Waste and
Emergency Response
(5305W)
EPA530-R-99-061
PB2000-101 901
February 2000
RCRA, Superfund & EPCRA
Hotline Training Module
Introduction to:
RCRA Financial Assurance
(40 CFR Parts 264/265, Subpart H)
Updated October 1999
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DISCLAIMER
This document was developed by Booz-AUen& Hamilton Inc. undercontract 68-W 0-0039 to EPA. It is intended to
be used as a training tool for Hotline specialists and does not represent a statement of EPA policy.
The information in this document is not by any means a complete representation of EPA's regulations or policies.
This document is used only in the capacity of the Hotline training and is not used as a reference too Ion Hotline calls.
The Hotline revises and updates this document as regulatory pro gram areas change.
The information in this docume nt may not necessarily reflect the current position of the Agency. This document is
not intended and cannot be relied upon to create any rights, substantive or procedural, enforceable by any party in
litigation with the United States.
RCRA, Superfund & EPCRA Hotline Phone Numbers
National toll-free (outside of DC area) (800) 424-9346
Loca I num ber (withi n DC a rea) (703) 412-9810
National toll-free for the hearing impaired fJDD) (800) 553-7672
The Hotline is open from 9 am to 6 pm Eastern Time,
Monday through Friday, except for federal holidays.
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RCRA FINANCIAL ASSURANCE
CONTENTS
1. Introduction ". 1
2. Regulatory Summary 2
2.1 Applicability 2
2.2 Closure/Post-Closure Care 3
2.3 Closure/Post-Closure Financial Assurance Mechanisms 4
2.4 Liability Requirements 9
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Financial Assurance -1
1. INTRODUCTION
Owning and operating a hazardous waste treatment, storage, and disposal facility
(TSDF) is a costly venture that requires financial stability from the beginning of the
permitting process through the cessation of the post-closure period. Mainly, an owner
and operator must demonstrate that funds will be available to properly close the facility
and provide post-closure care. A TSDF owner and operator must also have the
financial resources to compensate third parties for any injury or accidents that might
result from facility operations. The requirements for such financial assurance appear in
Part 264/265, Subpart H.
In order to demonstrate that they have the financial resources to operate a hazardous
waste facility, an owner and operator must use one or more of a set of financial
assurance mechanisms designated by EPA. This training module addresses the
financial assurance standards, explaining first the allowable financial assurance
mechanisms and then the extent of financial coverage required. This module may
introduce some unfamiliar legal and financial concepts.
After completing this module, you will be able to explain the financial assurance
requirements for closure and post-closure care. Specifically, you will be able to:
• Identify the types of facilities subject to the financial assurance requirements for
closure and post-closure
• Calculate cost estimates
• Describe the allowable mechanisms for financial assurance, including which
mechanisms can be used together and under what conditions.
Ad'ditionally, you will be able to explain the financial assurance requirements for
accident liability coverage. Specifically, you will be able to:
• Discuss the applicability of sudden and nonsudden liability provisions
• Specify the amount of liability coverage required for single facilities and multiple
facilities
• List allowable mechanisms and combinations of mechanisms that can be used to
satisfy financial assurance liability requirements.
Use this list of objectives to check your knowledge of this topic after you complete the
training session.
The information in this document is not by any means a complete.representation of EPA's regulations or policies,
but is an introduction to the topic used for Hotline training purposes.
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2 - Financial Assurance
2. REGULATORY SUMMARY
EPA established specific closure and post-closure care requirements to minimize long-
term environmental and health threats posed by hazardous waste TSDFs. These
requirements alone, however, do not guarantee that owners and operators of TSDFs
will have sufficient funds to properly close and maintain the site. EPA promulgated the
financial assurance requirements to ensure that owners and operators could not default
to federal funds because they were unable or unwilling to cover significant closure and
post-closure costs. Part 264/265, Subpart H, outlines the mechanisms an owner and
operator may use to prove that funds will be available as well as the amounts that must
be provided. Subpart H also establishes minimum amounts of liability coverage for
accidents during the active life of the facility. Together, these requirements comprise
the RCRA provisions known as financial assurance.
2.1 APPLICABILITY
According to §§264/265.140(a), the requirements of Subpart H apply to owners and
operators of all hazardous waste TSDFs. The requirements of this subpart are not,
however, applicable to state and federally owned or operated facilities
(§§264/265.140(c)).
CLOSURE
All TSDFs, except those exempted in §§264/265.1, must fulfill certain closure
requirements. As specified in §§264/265.142 and 264/265.143, these TSDFs must
demonstrate financial assurance for closure. The closure requirements in Part 264/265,
Subpart G, detail steps for safely and permanently ceasing operations at active TSDFs.
According to these requirements, owners and operators must submit a closure plan that
details the steps necessary to close or partially close the facility. In addition to the
general facility closure obligations of Subpart G, owners and operators must also
comply with closure and post-closure requirements for specific hazardous waste
management and disposal units (e.g., surface impoundments and landfills) in Parts 264
and 265. Even those surface impoundments and waste piles that the owner and
operator intends to clean close by removing hazardous waste at closure are required to
have contingent closure plans (§§264.228(c)(l)(i) and 264.258(c)(l)(i)).
POST-CLOSURE
Post-closure care for inactive facilities entails long-term maintenance, monitoring, and
recordkeeping to ensure continuing protection of human health and the environment
after a TSDF has ceased operation. The financial requirements for post-closure care in
The information in this document is not by any means a complete representation of EPA's regulations or policies,
but is an introduction to the topic used for Hotline training purposes.
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Financial Assurance - 3
§§264/265.144 and 264/265.145 apply to all owners and operators of disposal facilities
as defined in §§264/265.140(b). Disposal facilities subject to these requirements include
not only landfills, but waste piles, surface impoundments, and tanks that cannot be
clean-closed, and therefore must be closed as landfills. These units are then subject to
full post-closure care. As part of the post-closure care requirements, owners and
operators must submit a post-closure plan that details the operation and maintenance
measures needed to ensure that no hazardous waste will migrate off-site. Financial
assurance for post-closure care is not required for units that will be clean-closed (see
§264.197 for tank systems, §264.228 for surface impoundments, and §264.258 for waste
piles). On the other hand, most owners and operators will be required to prepare a
contingent post-closure plan to ensure that funds will be available to monitor any
migration of waste left on-site in the unforeseen event that a tank system, surface
impoundment, or waste pile cannot be clean-closed.
2.2 CLOSURE/POST-CLOSURE CARE
After an owner and operator completes the written closure and post-closure plans for a
facility, they must determine the implementation cost for both plans by preparing cost
estimates based on the cost of a third-party contractor performing closure activities.
These estimates provide the base figure for the amount of financial assurance a facility
will need to demonstrate.
COST ESTIMATES
According to §§264/265.142 and 264/265.144, cost estimates must reflect the cost of
hiring a third party to conduct all activities outlined in the closure and post-closure
plans. If a contingent closure or post-closure plan is required for a permitted surface
impoundment or waste pile, the cost of its implementation must be calculated into the
final cost estimate for the facility. Closure cost estimates are based on the point in the
facility's operating life when closure would be the most expensive. Post-closure cost
estimates are based on projected costs for a post-closure period of 30 years, which can
only be reduced or extended by the Regional Administrator or state director.
COST ADJUSTMENTS
Closure and post-closure cost estimates are adjusted annually for inflation until closure
is completed. Since a dollar this year is not worth as much as a dollar last year, stating
that a facility will cost one hundred dollars to close raises the question, "which dollar
should we use to make cost estimates?" There are two ways owners and operators may
address this issue. The more obvious and more cumbersome method would be to
recalculate the cost estimates completely each year. To save time, however, a simpler
method may be used. The Department of Commerce, Bureau of Economic Analysis
The information in this document is not by any means a complete representation of EPA's regulations or policies,
but is an introduction to the topic used for Hotline training purposes.
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4 - Financial Assurance
(BEA), publishes an official figure, called the Implicit Price Deflator (IPD), which
summarizes what a certain group of goods and services costs during that year. An
owner and operator can then use the IPD to determine how much prices "went up" (the
inflation factor) and make a percentage adjustment to the previous year's closure and
post-closure cost estimates. For example, the 1998 IPD is 112.64 and the 1997 IPD is
111.52. By dividing the 1998 IPD by the 1997 IPD, the inflation factor is determined, in
this case 1.01. An owner and operator who estimated closure/post-closure costs at $100
in 1995 dollars would multiply $100 by the inflation factor of 1.01 to find an updated
estimate of $101 in 1998 dollars. (Note that some states require the use of the most
current quarterly IPD to calculate the inflation factor while others require use of the
annual figure. In addition, all IPD values are subject to change by the BEA.)
This calculation is illustrated by the following equations:
IPD current year . „ .. e .
= inflation factor
IPD previous year
(inflation factor) x (old estimate) = new estimate
Inserting the figures given:
112.64/111.52 = 1.01 = inflation factor
(1.01) x ($100) = $101 = new cost estimate
Historically, the Department of Commerce emphasized the use of the IPD derived from
the Gross National Product (GNP), but since December 1991 the Department of
Commerce has focused on the use of the Gross Domestic Product (GDP) to derive the
IPD. There is only a slight difference between the numbers, and owners and operators
may use either to derive the IPD as long as they are consistent in their use of GNP or
GDP. If an owner or operator switches from using GNP to GDP, then previous cost
estimates must be adjusted accordingly.
Owners and operators must adjust cost estimates following any changes to their closure
or post-closure plan that would raise the costs involved. For example, expansion of a
surface impoundment might increase the amount of contaminated soil to be removed at
closure. The closure and post-closure estimates must be recalculated to reflect the
additional expenses.
2.3 CLOSURE/POST-CLOSURE FINANCIAL ASSURANCE
MECHANISMS
An owner and operator must use one or more of the specified financial assurance
mechanisms to demonstrate that funds are available to pay for closure and post-closure
care of a facility.
The information in this document is not by any means a complete representation of EPA's regulations or policies,
but is an introduction to the topic used for Hotline training purposes.
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Financial Assurance - 5
MECHANISMS
An owner and operator may demonstrate financial assurance for closure and post-
closure by choosing from the following financial assurance mechanisms:
• Trust Fund • Letter of Credit
• Surety Bonds (two types) • Insurance
- Payment Bonds • Financial Test
- Performance Bonds • Corporate Guarantee.
The wording of each mechanism, or instrument, must be identical to the examples in
§264.151. The criteria for using each of these mechanisms are discussed below.
Trust Fund
A trust fund serves as a way to set aside monies specifically earmarked for closure and
post-closure costs. Owners and operators pay money into the trust fund during a
specified period. By the time a facility closes, the money accumulated in the fund
should be adequate to cover the necessary closure costs. The pay-in period for interim
status facilities is 20 years, or the remaining operating life of the facility, whichever
period is shorter.
For permitted facilities, the owner and operator must make payments into the trust
fund for the term of the initial permit or the remaining operating life of the entire
facility (as estimated in the closure plan), whichever period is shorter.
The annual payment for the duration of the pay-in period may be calculated using the
following equation, where the annual payment (AP) equals the current cost estimate
(CE) minus the current value of the trust fund (CV) divided by the number of years
remaining in the pay-in period (Y):
AP = (CE - CV)/Y
Surety Bonds
A surety bond is a guarantee by a surety company that certain specified obligations will
be fulfilled. If the owner and operator fail to pay the closure or post-closure costs
specified in a bond, the surety company is liable for the costs. The owner and operator
must also establish a standby trust fund into which any payments made by the surety
company will be deposited. EPA then uses the trust fund to cover closure costs. There
are two types of surety bonds:
The information in this document is not by any means a complete representation of EPA's regulations or policies,
but is an introduction to the topic used for Hotline training purposes.
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6 - Financial Assurance
Payment Bond
A payment bond will, in the event an owner and operator fails to pay, fund a
standby trust fund in an amount equal to the value (penal sum) of the bond.
Performance Bond
A performance bond guarantees that the owner and operator will perform the
final closure in accordance with the requirements of the facility's permit.
Performance bonds may be paid into a standby trust fund. Interim status
facilities can not use performance bonds.
Surety bonds only pay when the owner and operator fails to either pay for or perform
closure and post-closure activities. An owner and operator is generally obligated to
repay the surety company.
Letter of Credit
To use a letter of credit assuring financial coverage for closure and post-closure care, the
facility owner and operator must satisfy the following requirements:
• The owner and operator must obtain a letter of credit that is irrevocable and
equals the amount of the cost estimate
• The owner and operator must increase the letter of credit within 60 days
whenever the current cost estimate increases
• The owner and operator must establish a standby trust fund into which any
payments made by the issuing institution will be deposited
• If the owner and operator fails to fulfill closure or post-closure requirements,
the Regional Administrator is entitled to direct the issuing institution to
deposit funds into the owner and operator's standby trust fund.
Insurance
In order for the owner and operator of a facility to use insurance as the financial
mechanism covering the cost of closure and post-closure care, the following
requirements must be satisfied:
• The owner and operator must obtain an insurance policy for a face amount
(the total money the insurer is obligated to pay under the policy) at least
equal to the cost estimate for closure or post-closure care
• The owner and operator must increase the face amount or obtain other
supplementary financial assurance if the cost estimate increases
The information in this document is not by any means a complete representation of EPA's regulations or policies,
but is an introduction to the topic used for Hotline training purposes.
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Financial Assurance - 7
• The owner and operator must allow assignment of the insurance policy to a
successor owner and operator
• The owner and operator must send a copy of the policy to the head of the
hazardous waste program in the state, if the state is authorized to administer
the RCRA base program. In unauthorized states, a copy is sent to the
Regional Administrator
• If the owner and operator fails to pay the premium, the insurer may cancel,
terminate, or decide not to renew the policy
• The insurer must be licensed by a state, as off-shore insurers are not
acceptable.
Financial Test
The owner and operator may satisfy the requirements for financial assurance by
meeting the financial test criteria for either of the following alternatives.
Alternative I
• The owner and operator must meet each of the following criteria:
- Net working capital equals 6 times current closure, post-closure, plugging,
and abandonment cost estimates
- Tangible net worth is greater than $10 million
- Ninety percent of total assets are located in the United States, or at least 6
times the current closure, post-closure, and plugging and abandonment
cost estimates
and
• The owner and operator must satisfy two of the following three ratios:
- Liabilities to net worth ratio less than 2
- Current assets to current liabilities ratio greater than 1.5
- Net income (plus depreciation, depletion, and amortization) to liabilities
ratio greater than 0.1.
Alternative II
• The owner and operator must meet each of the following criteria:
- Tangible net worth at least 6 times current closure, post-closure, plugging,
and abandonment cost estimates
Tangible net worth is greater than $10 million
The information in this document is not by any means a complete representation of EPA's regulations or policies,
but is an introduction to the topic used for Hotline training purposes.
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8 - Financial Assurance
- Ninety percent of total assets are located in the United States, or at least 6
times the current closure, post-closure, and plugging and abandonment
cost estimates
- The current bond rating for the most recent bond issuance is AAA, AA, A,
or BBB as issued by Standard & Poor's, or Aaa, Aa, A, or Baa as issued by
Moody's.
The owner and operator must pass one of the two financial tests specified in the closure
and post-closure financial assurance requirements. If the owner and operator chooses
to use a financial test to meet financial assurance requirements, this must be
documented in a letter to the Regional Administrator, signed by the company's Chief
Financial Officer, and attached to an independent Certified Public Accountant report
examining the owner and operator's annual report.
Corporate Guarantee
In order for the owner and operator of a facility to use a corporate guarantee to ensure
financial coverage for closure and post-closure care, the following requirements must be
satisfied:
• The guarantor must be a direct corporate parent (a corporation that directly
owns at least 50 percent of the voting stock of another corporation or
subsidiary), a corporate grandparent (a corporation that indirectly owns over
50 percent of a company through a subsidiary), a sibling corporation (a
corporation that shares the same parent corporation), or a firm with a
substantial business relationship with the owner and operator
• The guarantor must meet the financial test requirements outlined above
• The guarantor must perform the required closure and post-closure care
activities or establish a trust fund to pay a third party to perform them if the
owner and operator fails to carry out final closure or post-closure care in
accordance with the approved plan.
COMBINATIONS
An owner and operator may combine several financial assurance mechanisms to cover
the cost of closure and post-closure care for a facility. For example, an owner and
operator can combine trust funds, payment surety bonds, insurance policies, and letters
of credit may be combined to meet financial assurance requirements. Performance
surety bonds, financial tests, and corporate guarantees cannot be used in combination to
demonstrate assurance.
The information in this document is not by any means a complete representation of EPA's regulations or policies,
but is an introduction to the topic used for Hotline training purposes.
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Financial Assurance - 9
An owner and operator may also use a single financial assurance mechanism to meet
the cost of closure and post-closure care for more than one facility. The dollar amount
of the funds available through the mechanism must be no less than the sum of funds
that would be available if a separate assurance mechanism had been established and
maintained for each facility (§§264.143(11), 265.143(g), 264.145(h), and 265.145(g)).
PERIOD OF COVERAGE
Within 60 days after an acceptable certification of final closure is received, the Regional
Administrator notifies the owner and operator that financial assurance for final closure
is no longer required. Within 60 days of receipt of acceptable certification that the post-
closure care period has been completed, the Regional Administrator notifies the owner
and operator that financial assurance for post-closure care is no longer required
(§§264.143(i), 265.143(h), 264.145(i), and 265.145(h)).
2.4 LIABILITY REQUIREMENTS
The owner and operator are required to maintain accident liability coverage until
certification of final closure (§§264/265.147). This coverage ensures that, should an
accident resulting in a release of hazardous constituents occur, money will be available
to compensate third parties suffering bodily injury or property damage resulting from
the accident. Under §§264/265.147(c), an owner and operator may receive a variance
from the Regional Administrator if the owner and operator can demonstrate that the
levels of financial responsibility required by the regulations are not consistent with the
levels of risk associated with the facility's operation. For permitted facilities, this would
appear as a permit modification. Variances, however, are seldom granted. Liability
coverage is not required for state or federally owned or operated facilities.
TSDFs may be required to demonstrate liability coverage for both sudden and
nonsudden accidental occurrences. The applicability of sudden and nonsudden
coverage and the differences between them are explained below. The owner and
operator may use a combination of mechanisms as long as the amount covered equals
the total of sudden and nonsudden liability minimum requirements.
SUDDEN ACCIDENTAL OCCURRENCES
A sudden accidental occurrence is an event that is not continuous or repeated.
Examples of sudden accidental occurrences are fires and explosions. All TSDFs that are
subject to financial assurance requirements must have coverage for sudden accidental
occurrences (§§264/265.147(a)).
The owner and operator must meet the minimum financial requirements for liability
The information in this document is not by any means a complete representation of EPA's regulations or policies,
but is an introduction to the topic used for Hotline training purposes.
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10 - Financial Assurance
coverage of sudden accidental occurrences by using one or more of the following
allowable mechanisms specified in §§264/265.147(a)(6): insurance, financial test,
corporate guarantee, letter of credit, surety bond, and trust fund. The minimum
financial requirements include at least $1 million per occurrence and an annual
aggregate of at least $2 million. While a per occurrence amount limits the payment for
any one event, such as a fire, an annual aggregate caps the total dollar value of all
claims in one year. These funds will suffice to cover all of the owner and operator's
facilities. Table 1 demonstrates such a disbursement of sudden liability funds over a
one-year period.
Table 1
DISBURSEMENT OF SUDDEN LIABILITY FUNDS
Number of Accidents
1
3
6
Cost per Accident
$3 million
$1 million
$500,000 .
Amount Paid by Liability
Coverage
$1 million
first $2 million
$500,000 on first four
NONSUDDEN ACCIDENTAL OCCURRENCES
A nonsudden accidental occurrence is an event that takes place over time and involves
continuous or repeated exposure to hazardous waste. An example of a nonsudden
accidental occurrence is a leaking surface impoundment that contaminates a drinking
water source over time. The owner and operator of a surface impoundment, landfill,
land treatment facility, or miscellaneous disposal unit must have financial assurance for
nonsudden accidental occurrences (§§264/265.147(b)).
The owner and operator must meet the minimum financial requirements for liability
coverage of nonsudden accidental occurrences by using one or more of the following
allowable mechanisms specified in §§264/265.147(a)(6): insurance, financial test,
corporate guarantee, letter of credit, surety bond, or trust fund. The minimum financial
requirements include at least $3 million per occurrence and an annual aggregate of at
least $6 million. These funds will satisfy the requirements for all of the owner or
operator's facilities.
Note that these liability minimums apply regardless of the number of facilities held by
an owner and operator. Therefore, someone owning multiple facilities only needs one
set of coverage for $3 million/$6 million. Table 2 demonstrates such a disbursement of
nonsudden liability funds over a one-year period.
The information in this document is not by any means a complete representation of EPA's regulations or policies,
but is an introduction to the topic used for Hotline training purposes.
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Financial Assurance -11
Table 2
DISBURSEMENT OF NONSUDDEN LIABILITY FUNDS
Number of Accidents
1
3
6
Cost per Accident
$4 million
$4 million
$2 million
Amount Paid by Liability
Coverage
$3 million
$3 million on first
$3 million on second
$2 million on first three
COMBINATION OF LIABILITY COVERAGE LEVELS
Owners and operators who combine coverage levels for sudden and nensudden
accidental occurrences must maintain liability coverage in the amount of at least $4
million per occurrence ($1 million sudden plus $3 million nonsudden) and $8 million
annual aggregate ($2 million sudden plus $6 million nonsudden) (§§264/265.147(b)).
PERIOD OF COVERAGE
Within 60 days after an acceptable certification of final closure is received, the Regional
Administrator must notify the owner and operator that liability coverage is no longer
required (§§264/265.147(e)). Since final closure occurs before a facility begins post-
closure activities, liability coverage is not required during the post-closure period. The
Regional Administrator, however, may require liability coverage if closure was not
completed in accordance with the facility's closure plan.
The information in this document is not by any means a complete representation of EPA's regulations or policies,
but is an introduction to the topic used for Hotline training purposes.
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