BAC?Ef*X13> DCCUMSNT
RESOURCE
C"-' HAZAHnnUS'WASnS MANAGEMENT
Section 3004 - Stan&g&t .^pplicabYe .£p Owners and Opcftatoro of
Vfastia" TtMtfhent , "xtoraga; and Disposal Facilities
Part 265 ^
Interim Status Financial Requirements
Final and Reptpposed
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Class IT (cont.)
Mercury (Metallic)
Mevinphos
Parathion
Pentachlorophcnol
Phthalic Acid Esters
Picloram
Rotenone
Toxaphene
Trichloroethylene
Tr ichlorophenol
Tetraethyl Lead
Class III
(quantity limitations are on a monthly basis)
Acid and caustic wastes (unless otherwise classified) with
a PH less than 4.0 or greater than 10.0 and in quantities qreater
than 50 gallons, chemical wastes referenced in Regulation
.04D(l)-(3) (unless otherwise classified) in quantities qreater
than 50 gallons or 500 pounds. Combustion ash wastes (fly ash),
in quantities greater than 2,OOO pounds, excluding pozzolans as
defined in Natural Resources Article, $7-464, that are used or
stored for less than 5 years.
Pathological and medical wastes from hospitals, la*orn-
tories, and similar operations.
Pesticide wastes (unless otherwise classified) in
concentrated quantities areater than 5 gallons or SO pounds.
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Attachment 3_
Response to Additional Comments
Comment
With a degree of "hazard system the opposition from the public to
siting hazardous waste management facilities for the "less
hazardous" wastes would be reduced because those wastes could be
presented and labeled as not being "extremely hazardous".
Response;
EPA seriously questions that public opposition would be
significantly reduced for less hazardous wastes, and could become
heightened for more hazardous wastes to the point where siting of
those facilities would be nearly impossible. Thus, the Agency
does not believe that a degree of hazard system would significantly
reduce siting problems overall.
Comment
Considerable precedent exists within the Agency for developing a
degree of hazard system. Several commenters pointed out that in
EPA1 s recently reproposcd regulations under Section 311 of the
Clean Water Act, a S-tiered approach is used in setting "reportable
quantities" of hazardous substances 144 FR 10271, February 16,
1979). As stated in the preamble, the commenters argued, the
volume of each substance which is "reportable" was determined
based upon EPA's estimate as to the amount which "may be harmful"
when discharged or spilled. Commenters also pointed out that
under TSCA the Agency has developed a list of up to 50 substances
which by reason of their relative toxicty, persistance, and
presence merit closer scrutiny.
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Response;
EPA doea not believe that the considerations of hazard or risk
in the other referenced EPA programs are at all parallel to the
issue of establishing degree of hazard of hazardous wastes. The
other EPA programs referenced are under other (non-RCRA) mandates,
deal with different: types of regulations, and are concerned wAth
different substances. Among other differences, in the two situa-
tions mentioned, the regulation was dealing with relatively pure
substances of generally known environmental effects. Furthermore,
in neither case did the regulations actually develop a degree of
hazard system as proposed by comments for the hazardous waste
regulations.
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SAOGROUMD
RESOURCE CONSERVATION AND RECOVERY ACT
SUBTTTUB C - HAZARDOUS WASTE MANAGEMENT
Section 3004 - Standard* Applicable to Owners and Operators of
Hazardous Wist* Treatment, Sujrage and Disposal Facilities
Pert 265 Sutooart H
Interim Status Financial Requirsmenta
Final ard Reprpposed Pegulaticns
UNITED ST3VHS ESVIK>KEOTAL PROTECTION AGENCY
OFFICE OF SOLID
APRIL 25, 1930
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CONTENTS
Pago
FOREWORD
PART I FINANCIAL ASSURANCE FOR CLOSURE AND POST-CLOSURE CARE
I. H/TRODUCTTCN ..... ........................................»•...•..••.•.. I.I
May Definitions . 1.2
II. RATIONALE POR REGULATICN 1.6
A. EPA Authority and Basis for Regulation * 1.6
B. Oarage cases 1.10
C. Federal, State, and Local Precedents 1.16
III. SYNOPSIS OP ORIGINALLY PROPOSED FINANCIAL REQUIREMENTS REGULATION 1.23
TV. ANALYSIS OF COWEOTS AND RATIONALE FOR FINAL AND REPROPCSED INTERIM
STATUS STaNDARDS 1.96
A. Applicability 1.7.7
B. Cost Estimate for Closure 1.32
1. initial cost estimate and revisions by owner/operator 1.32
2. Regional Administrator's review cf the closure cost estimate ... 1.36
C. Closure Trust Fund 1.38
1. Objections to requiring Imp-sun trust fund 1.33
2. Other features of the closure trust fund • I«49
D. Cost Estimate for Post-Closure Care 1.57
E. Post-Closure Trust Fund I-58
F. Alternative Mechanisns for Demonstrating Financial Assurance 1.65
1. Surety bonds 1-67
2. Bank standby letters-of-credit 1.71
3. Financial test *nd guaranty I."!*
4. Financial test for public entities I.fl5
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Kigc
5. Financial mechanL-ms *A*ich were not included in the reproposal . 1.92
6. ttiltiple facilities and ntultiple mechanisms 1.94
G. Applicability oC State Findmcial Requirements I .V>6
II. Transfer of Ownership 1-93
I. Partial Compliance in Case of Insolvency 1.99
J. Access and Default 1.101
References 1.102
PART ii rjABUjnnr RBOUTREMEOTS
I. INTRODUCTION" ir>1
A. RCPA Mandate for the Regulation H-l
B. Key Definitions I1>2
II. RATIONALE FOR THE PROPOSED REGULATION II.3
A. Need for Liability Insurance H-3
B. Apolicability to Interim Status Facilities II-4
C. Alternatives to Liability Insurance "-5
D. Availability of Insurance ZI'6
E. Amount of Liability Requirements JI'8
F. Qsst and Affbrdability of the Insurance Requirement 11.12
G. Discussion of Specific Requirements 11.13
III. REQUEST TOR PUBLIC CXMEJTS n-17
Appendix A: Stannaries of Damage Cases
Appendix B: Review and Analysis of Hazardous Waste Sites
Clean-up ao3 Third-Party Damage Costs;
\vailability and Cost of Third-Party Liability Insurance
_or Permitted Hazardous Waste nisposal Sites
Appendix C: Description of Court Suits Against Hazarious Waste
Site Owners and Operators
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FOREWORD
This Is one of seventeen Background Documents accompanying the first
set of. regulations promulgated under Subtitle C of the Resource Conservation
and Recovery Act. these regulations represent SPA* 3 initial efforts to
control hazardous waste generation, transportation, treatment, storage and
disposal.
These Background Documents explain why EPA developed the regulations
and Why they are written as they are. In so doing, EPA addresses (1) the
Congressional mandate for regulations, (2) the need for the regulation
including documented threats to human health and the environment, (3)
precedents set by State regulation, and (4) the many public coments on
the proposed version of these regulations which was published in the
Federal Register on December 18. 1978 (43 FR 58946 - 59028).
This Background Daoanent is In two parts. Part I addresses requirements
for financial assurance for closure and post-closure care and related issues.
Part II addresses requirements for liability coverage.
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PART I. FINANCIAL ASSURANCE FOR CLOSURE AND POST-CLOSURE CARE
I.
P*rt T of this doorrwnt address«»s the prnn-jlg^t*^ requirersnta for
estimates of closure and post-closure coats in the interim status regulations,
Part 265. In addition, it addresses the rcproposal of requirements for
financial assurance for facility closure and post-closure care for interim
status, Part 265, vihich the Agency expects to promulgate this fall. The
Agency intends also to pronulgate comparable requirements for cost estimates
and financial assurance for closure and post-closure care for general
status. Part 264. this fall. These regulations are directly dependent
upon the closure and post-closure plans required in the Subpart G regulations
(Closure and Post-Closure Care).. It.wilL.not,be possible to fully understand
the financial responsibility regulations or this background document
without a basic understanding of the function and content of the closure
and post-closure plans. (The reader is referred to the background document
entitled "Closure and Post-Closure Care.")
The requiraaents for financial assurance fbr closure and post-closure
care are being reproposed because the Agency has added letters of credit,
payment bonds, perfbtrance bonds, guarantees, a financial test for the
private sector, and a revenue test for local governments to the trust
fund mechanism originally proposed. Furthermore, the trust fund provisions
have been restricted. The Agency sees these as major changes fron the
original proposal.
As was the case with the proposed technical closure and post-closure
care regulations, many readers of the originally proposed financial regulations
I.I
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and the accompanying support documents reached a ccniion misunderstanding
concerning which facilities were subject to the closure financial requirements
and which to the post-closure financial requirements. The Agency wants
to make this clear at the start of this docurent to avoid further confusion.
Facilities owned or operated by a State or the Federal Government: have been
exempted front all of thV financial requirements. Otherwise, all treatment,
storage, and disposal facilities which manage hazardous wastes subject to
these regulations, must ccnply with all of the requirements except $$265.144
and 265.14S. These sections apply only to disposal facilitica (Uuse at
which wastes will retain after closure) since they deal with post-closure care.
Key Definitions
The definitions of cccounting and financial terms used in these
regulations make reference to the standards of "generally accepted accounting
principles." To avoid confusion, the following note of explanation is
offered.
"Generally accepted accounting principles" is a technical term in
financial accounting.- Generally accepted accounting principles encompass
the conventions, rules and procedures necessary to define accepted
accounting practice at a particular tire. These incorporate the consensus
as to which economic resources and obligations should be recorded as
assets and liabilities by financial accounting, which changes in assets
and liabilities should be recorded, how the assets and liabilities
and chanaes in th«rn shoiM b» mnaswre^j what information should ho
disclosed and how it should be disclosed, and which financial statements
should be prepared.
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The standard of "generally accepted accounting principles" includes
not only broad guidelines of general application, but also detailed
practices and procedures, m use, the independent auditor's report
gives the auditor's f opinion as to whether the financial statements
"present fairly the £--.-vncial position ... and the results of ...
operations, in conformity with generally accepted accounting
principles ... "*•
In recent years Opinions of the Accounting Principles Board have
received considerable emphasis as a major determinant oC the composition
of generally accepted accounting principles. In Octcber 1964 the Council
of the American Institute of Certified Public Accountants adopted a
resolution that provides in essence that accounting principles accepted
in Opinions of the Accounting Principles Beard constitute, per se,
generally accepted accounting principles for Institute mercbers.
For these regulations and this background document, the following
definitions apply:
Assets means debit balances carried forward upon a closing of books
of account representing property values or rights acquired that are
recognized and measured in conformity with generally accepted accounting
principles**
Current assets means cash and other assets that are reasonably expected
to be realized in cash or sold or consumed during the normal operating cycle
of a business or within one year, if the operating cycle is shorter than one
Current liabilities means liabilities expected to be satisfied by either
the use of assets classified as current in the same balance sheet or the
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creation of other current liabilities; or those expected to be satisfied
within a relatively short period of tine, usually one year.
Liabilities means obligations carried forward upon a closing of books
of account that are recognized and measured in conformity with gflner^lly
accepted acc«Tntirig principles.
Marketable securities means securities that are traded on recognized
established securities markets where there are independent bona fide offers
to buy and sell and where payment will be received in settlement of a sale
vithiri i rcls-ivsly chert time ecnfomirsg to tra5o custom.
Net working capl«-*i means the excess of current assets over current
liabilities.
Net worth means the excess of total assets over total liabilities and
is equivalent,to owner's equity.
Starve letter of credit means an irrevocable engagement by an issuing
bank, at the request of an owner or operator, that it will honor demands
for payment nade by the U.S. Environmental Protection Agency for the period
of the letter of credit and under tenna specified coc letters of credit in
these regulations.
Surety bonds n»an3 a contract by which a surety company engages to
be answerable for the default or debts by an owner or operator on
responsibilities relating to closure or post-closure care, and agrees to
satisfy these responsibilities if the owner or operator does not, in
accordance with the terms specified for surety bonds in these regulations.
Ttotal-liabilities-to-net-worth ratio neans the value of total
iidfailiU.es, which includes tha sun of short-tern; and long-tern obligations.
divided by the value of net vorth.
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Trust fund means a fund established by an owner or operator and held
by a financial institution as the trustee with a fiduciary responsibility
to carry out the terms of the trust as specified in these regulations for
the benefit of the U.S. Qiviromental Protection Agency.
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II. RATIONALE FOR REGULATION
A. EPA Authority and Basis for Peculation
Section 3004 of Subtitle C of the Resource Conservation and Recovery
Act (RCRA) of 1976 (P.L.94-5«n) requires that the Environmental Protection
Agency promulgate regulations establishing such performance standards
applicable to owners and operators of .facilities for the treatment,
storage, or disposal of hazardous waste identified or listed under this
Subtitle, as may be necessary to protect human health and the environment.
Section 3004(6} aUUs that thccs =^r£-r*5 r^-.ll irel^e reTuire-v-r.tg
respecting ". . .the maintenance of operation of such facilities and
requiring such additional qualifications is to ownership, continuity of
operation, ... and financial responsibility as may be necessary or
desirable . ..."
The Agency believes that compliance with its statutory mandate necessi-
tates the promulgation of regulations that will assure the protection of
human health and the environment from potential adverse effects due to
improper closure or lack of post-closure monitoring and maintenance as a
result of an owner or operator not having adequate financial resources when
needed to perform closure and post-closure monitoring and maintenance.
Congressional Intent that financial responsibility requirements"
should be applied to the long-term care needs as well as the active operation
of hazardous waste facilities is indicated in the Senate report accompanying
the bill, the Solid Waste Utilization Act of 1976, which was the Senate
version of what was to becone RCRA. The Senate Public Works Committee
report noted in describing the bill:
One of the specific conditions ... is the requirement that
facilities providing treatarfint. disposal, or storage of
hazardous wastes meet ninicun qualifications on CMitactAu-ti,
financial responsibility, and continuity of operations. In
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a situation where the best accepted method of dealing v/ith
a hazardous waste inay be long-term stabilized storage, a permit
nust contain provisions to assure that the storage site will
be maintained over that period. In addition, there rust be
adequate evidence of financial responsibility, not only for
the operation of the site, but also to provide against any
liability if U» material escapes the toLoracje. (Soliu "«asLe
Utilization Act ot 197G. Report of the Connittee on Public
VRjrks together with Individual Viewa to Aeccroany S.3622.
Senate Report, 94-988, 94th Congress, 2d Sess., 1976, p.16)
In the past it has been common practice to abandon or cease operations
at hazardous waste management facilities with little or no effort made to
close, or "secure," them in such a way as to minimize potential adverse
effects on public health or tho environment. Seldom was any monitoring
or maintenance work carried out after closure of disposal sites. The
reasons for this failure in environmental and health protection are
probably several: lack of understanding of the potential problems and
how to prevent or minimize them; lack of closure and post-closure
requirejwnts; and, rost specific to our concern here, lack of funds to
pay for proper closure and post-closure care. Furthermore, as the
instances of "midnight dirrping" make clear, there are also those who
would deliberately and illegally avoid the responsibilities connected
with disposal of hazardous waste.
Today, there is available a large and increasing body of knowledge
about potential health and envirormental problems and how to prevent or
~,-r,,-nri-»» adverse effects. Requirements for closure and post-closure care
are established by Subparts G, J, K, M, N, and O of these regulations (see
Background Document entitled Closure and Post-Closure Care). Enforcement
acticns should central violations of the requirement.-;. We arc therefore
left with the problem of owners or operators arriving at the point of
clcsure with inad«Tiate 'inancial resources to pay for proper closure and
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post-closure care.. As illustrated by cases discussed in this document,
necessary closure and post-closure activities have not been undertaken or
have been delayed or disrupted as a result of the failure of owners or operator*
to make funds available when needed Cor closure and post-closure activities.
Furthermore, society often has had to bear the costs of these activities
because owners or operators did not. have the funds to perform them when needed.
The risk of failure of owners or operators to provide for closure and
post-closure activities is increased by the fact that these activities
begin when a facility has ceased to be an economic asset, at least as
a provider of treatment, storage, or disposal services, rs.3t--clesur«
care extends to 30 years or longer under §265.117; over such a period
some ccnparu.es will fail, suffer severe economic reverses, or disappear
for any of a nuntoer of reasons. AccordJuTgly, the Agency believes that
society should be assured that owners or operators have adequate financial
resources available when needed to close a facility and that owners or
operators of disposal facilities have adequate financial resources
available for post-closure monitoring and maintenance after the facility
closes. Indeed ERA believes that closure and post-closure costs should
be recognized and provided for as necessary costs of owning and operating
hazardous waste management facilities and that such financial assurance
should be established during the active operating life of the facilities.
EPA's authority to promulgate "necessary or desirable" standards
under Section 3004(6) is qualified by the last paragraph of Section 3004:
"No private entity shall be precluded by reason of criteria established
iTxter TwfOrT*! (6) frci" the own.er«hfp or operation of facilities
providing hazardous waste treatment, storage, or dispc«*al services
where such entity can provide assurances of financial
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and continuity'of operation consistent with the degree and duration
of risks associated with the treatment, storage, or disposal of
specified hazardous waste."
EPA interprets this paragraph to mean that private companies cannot
be arbitrarily precluded ao a result of criteria established by the /Vjeticy
frcra the ownership or operation of hazardous waste management facilities
where such coipanies can provide assurances of financial responsibility
and continuation of operation consistent with the degree and duration of
risks associated with their facilities. An example of an arbitrary exclusion
would be a regulation which provided that only States could own and operate
hazardous waste management facilities.
the degree and duration of risks associated with the treatment, storage,
or disposal of hazardous waste is reflected in the cost of closure of tho
facilities for treatment, storage, or disposal and in the cost of post-
closure nonitoring and maintenance for disposal facilities (as required
in the regulations of Subpart G and parts of Subparts J, K, M, N, and O).
In its regulations the Agency is requiring owners or operators to estimate
the cost of closure and of post-closure care in order to provide for
financial assurance based on these estimates. The estimates will be
based en Individual closure and post-closure plans as required by Subpart G.
Accordingly, EPA believes that the level of financial responsibility
required of owners or operators will be consistent with the degree and
duration of risks associated with the treatment, storage or disposal
cf cpccificd hazardous vaste, as randatad by Socticn 3004.
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B. Damage Cases
jfcny of the caaos in the Agency's files of damage to health and the
environment from irpreper hazardous waste management have involved
problems of inadequate closure and post-closure care. In the eight
cases summarized below, closure and/or post-closure care was not provided
for in a tiirely wanner by the responsible parties. When problems were
discovered by the local community and funda were needed, the parties
were found to have gone but of business, had vanished, simply did not
have enooqh money, or disclaimed responsibility because they were no
longer the current owners of the sice.
The oases also illustrate other problens of hazardous waste manage-
ment which should be greatly reduced in the future when the regulatory
pcogctfa is cully established, e.g., massive contamination of ground waters
and streams due to poor siting and operation of the facility. Most of the
cases described involve high cleanup costs. Coverage of such costs is
not the intent of the final and reproposed financial assurance regulations,
however. The costs to be covered are those incurred to meet the closure
and post-closure requir«dnents of these regulations.
Meeting the Agency's technical requirements for closure and post-closure
entails costs* but doing so should help to prevent various other coots,
including avoidance costs, direct damage costs, indirect damage costs,
administrative costs, and environmental costs.
.Avoidance costs are those incurred in mitigating the threat from
hazardous wastes at a facility that has not been closed properly or
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maintained adequately after closure, including building bcrms or diXes
or stabilizing the movement of a plume of leachate in ground water by
tssspirs groans: -water upgraoient trom normal flow, Direct damage cuata
include out-of-pocket expenses such as replacing a veil supply or medical
a^pan.Mvp- indirect damage costs range from inconvenience while the water
supply is interrupted to the anguish suffered from birth defects. Adminis-
trative coats include the expense of determining the extent of contamination,
plans for remedial action, and supervising the implementation of those plans.
Finally,' environnental costs, or degradation of natural resources, include
the contamination of soil, air, surface water, and ground water. By
ensuring availability of funds for carrying out closure and post-closure
requirements, the financial requirements should reduce huge cleanup coats
caused by the unavailability of funds for adequate closure and post-closure care.
The Agency feels there is a need to have access to funds quickly for
closure and post-closure care if the facility operator is in violation of
closure or post-closure requirements. The mechanisms proposed in tfrie
regulations allow for effective access to sources of financial assurance
following notice and a hearing. The Agency feels that it would defeat
the purposes of the'reVJatioha~and'ini»se an undue burden if the
Agency had to sue as a creditor against the unencumbered assets of a
defaulting owner or operator. This should not be necessary if a
facility in the meantL-ae poses a public health risk. The cases illustrate
the need not only for the existence of adequate and secure financial
resources to provide for closure and post-closure care but also for
predictable access to the funds when they are needed.
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The case sxznnaries are as follows:
At Love Canal the failure to contain toxic wastes has severely affected
the physical, psychological., and economic well-being of families in the
surrounding area. One aspect of the problem was the lack of adequate
monitoring and maintenance after a nearly chemical company ceased disposal
operations at the Orvil in 1953. The site was sold to tho city, then to
the school board, then to a developer, and finally to the residents. No
financial or other provisions ware made to assure that the migration* of
toxic chenicals would be watched for and prevented. It has been estimated
that if site decontamination measures such as those described in the study,
Analysis of Grouncwater Contamination Incident in Niagara Falls, New York,
had been undertaken in 1953, and the site had been properly monitored end
maintained, the total costs for the years from 1953 to 1978 would have been
about $3 million.2,3 in contrast, $36 million in State and Federal"funds
has already been committed for cleanup and for evacuation of families, and
danage claims totaling over $14 billion have been filed.4
In Stringfellow, California, a hazardous waste disposal site established
in 1957 by a quarry company ceased operations in 1972 as a result of objec-
tions raised by the California Water Quality Control Board. Toxic contamin-
ants were being dispersed in the ground water via leachato and through
surface runoff. The Water Quality Board took over the site in 1975.
The cost of cleanup will range from about $5 to 58 million, depending on
whether chemical fixation is used on the remaining liquid and sediments;
annual maintenance arvl ronitorinr; costs are estimated at $36,000. On
March 5, 19SO, the Regional Response Team determined that Stringfellow was
leaching to the .Santa Ana River, and in mrinent danger of major structural
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failure. A total of 5290,000 was spent over ten days to remove 4 million
gallons of wastcwatcr, reinforce containments, and repair the access road.
Leachate was controlled, and there were no major discharges. Since no
funds were set aside by management to assure that closure and pest-closure
monitoring and maintenance would take place, the public must bear the
total cost. The Regional Board has been granted $370,000 from State
funds for remedial action.5
_ln Elizabeth, Kew Jersey, approximately 35 to 4O thousand drums of
toxic, explosive, corrosive, and flairrnable chemical wastes have been
sitting on a 4-*cre site. A chemical firm was licensed by the State to
incinerate and neutralize certain hazardous wastes, until its operation
was shut down by court order in January 1979. The estimated costs for
r1«wuip of the site are now set at 510 million. T*e State Department of
Environmental Protection has taken the Chemical Control Corporation
to court in hopes of obtaining soma'noney fron either its parent corpany
or fron its officers. The company was subsequently placed In receivership.
Chemical companies that consigned their wastes to the firm have been asked
to reclaim them, but only 20 to 30 percent of the containers are traceable;
the rest ray have to be disposed of by the State. While the legal
*nd financial processes are worked out, the facility continues to be a
serious hazard to the surrounding area.5
Ifear Byron, I"inoist a salvage yard was established in 1970 over a
10-acre area and was run as a family operation. TOxic wastes were dumped
or buried with and without containers, resulting in the contamination of
surface water and ground water. The family who ran the operation Ikis no
funds for site closure. Up to $625,000 in public funds will be needed
to close the site safely. Tlie family had also used an adjacent 5-acre
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area for dipping and burial of wastes. This area, however, was purchased
in 1973 by Connonwealth Bdison who proceeded to contract for removal
of wastes, other remedial measures, and a program to monitor surface and
ground waters at a total cost'of'over"$25C,000.5
In Gary, Indiana, two facilities were established by the same owner
to accept general industrial wastes. Both operations were managed im-
properly, resulting in. surface, and ground water contamination. The owner
subsequently vanished, leaving at both sites the debris of firea and
explosions. The costs to clean up the sites could run up to $6 million.
Since the owner has disappeared and no funds were set aside for closure
or post-closure nonitoring or maintenance, the public could end up paying
a substantial portion of both the cleanup costs and the costs associated
with proper closure anrl post-closure monitoring and maintenance.*
In Portage County, ^Ohio, an' incinerator at an industrial waste treat-
ment and disposal facility ceased operating in 1976. The facility currently
has no method of disposing of the liquid industrial wastes it has on hand.
However, in October 1979 the State of, Ohio appropriated $1 million for
various containment measures at the site including dike construction, .
grading, and carbon filtration to treat recovered pond water. The estirated
cost to close the facility properly could exceed $1.8 million. The
State is working with the owner to cover this cost.5
In Grand Prairie, Texas, an industrial waste treatment facility was. shut down
in 1978 by the Texas Departnent of Water Resources for environmental violations.
The facility includes: the remains of an incinerator which burned up during
a fire, acid and alkali recovery basins with a "homemade" fitoerglass liner,
waste oil basins excavated cut of ourficial clay deposits, a clay-lined
chemical landfill containing chromium sludge, a variety of storage tanks
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and processing areas* and a number of containers of chemicals. The owner
declared bankruptcy and the court awarded 528,000 to the State to help fund
surface containment, the State is left with the remaining costs. A full
cloir.'jp cr.d closure program which woulu au^keaa tht* yrourxlwater contamination
problem is estimated to cost $90,000. Monitoring costs are estimated
at $1,200 per year.3
Between 1917 and 1972, a company producing and applying creosote
operated on an 80-acre sits in St. Louis Park, Minnesota. Creosote wastes
were discharged into open trenches on the property. In the early 1070'a
complaints were filed against the ccnpany by the Minnesota Pollution
Control Agency (MFCA), and the plant ceased operating in 1972. At the
same tine, part of the property was being considered for redevelopment
by the city of St. lauit ParV. -The company transferred ownership of the
rty to the city, which in turn agreed to accept responsibility for
any legal action which the State of Minnesota might bring relative to
the site. Teats have since shown widespread contamination. According
to the MFC*, the company contributed nothing to the investigation or
cleanup of the site. The city and State have spent in excess of $500,000
for contaiianent, ground water monitoring and pollution studies, and the
city has incurrod costs of J»IT«.T«-. Sl,flno,ono for various remedial measures
including wall closures and for road construction on the site. Total
cleanup costs are estimated at $20 to $20O million. If financial provisions
for proper closure and post-closure core had beer, race and transferred
to the city, the extent of damage could have been dramatically reduc«1.6
Tnese cases are presented in greater detail in the compilation
Hazardous Haste Damage Cases.7
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C. Federal, State, and Local Precedents
As discussed earlier, RCRA contains a clear mandate for establishing
financial responsibility requirement* fr>r haxantaus waste treatment,
storage' and disposal facilities. Their application to closure and post-
closure activities is justified by the risks to health and the environment
posed by inadequate closure and post-closure care and by the uncertainties
in whether owners or operators can or will carry out their closure and
poatclosure obligations, which may extend many years into the future,
unless they «ire ceijuiceu to proviue for them outing LJie period of active
operation of the facility. Actual cases of abandonment and other failures
in financial responsibility, such as those summarized in the previous
section, have led to inadequate or delayed closure and post-closure care
and to the need for government to seek or provide the necessary funds.
In gathering information to use in developing the financial
requireEKits, EPA examined Federal, State, and local requirements that
have purposes similar to that of the closure and postclosure financial
requirements. These requirements provide not only precedents for the
raw, regulations but also provide the Agency with alternative regulatory
scenarios and help ensure that no financial instrument which might be viable
would be overlooked by~the Agency. In a few cases, information about
experience in inplenenting these programs was valuable in pointing out
the strengths and weaknesses of the various alternatives. The following
is a sunnary of relevant regulations which the Agency examined:
1. Federal MaritLne Conuission
Under Section 311 of the Clean Water Act, the Federal Maritime
Gonaissicn has issued regulations "whereby vessel operators can demonstrate
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that they are financially able to meet their liability to the United
States resulting from the discharge of oil or hazardous substances" into
waters over which the United States has jurisdiction (46 CFR §542.l(b)). The
regulations require veat»ei operators to select a. financial mechanism
approved by the FTC to ensure that they will be able to meet potential
obligations arising from spills.
these regulations are similar to other FMC regulations implementing
two other statutes involving financial responsibilities for water pollution.
They allow the following mechanisms for meeting the financial responsibility
requirement: (1) insurance, (2) surety bonds, (3) self-insurance, based
en maintaining specified levels of net worth and working capital in the
United States (4) a guarantee, where the guarantor meets the specifications
for self-insurance, and (5) ether evidence of financial responsibility.
In practice, no acceptable method other than the first four has yet been
found*
There are significant difterences between the EPA's regulatory task
and the CMC's, since the EMC is requiring operators to assure payment to
the United States for cleanup in case of spills, while the EPA is requiring
owners or operators to assure financial responsibility for follow-through
operations that-mist be carried "out. Spills nay or may not happen while
carrying out required closure and post-closure functions should be a
nornal part of operations.
Sous rMC regulations concerning financial rcspcr-sibility for water
pollution have been in effect since 1971. By far the most frequently used
aachanisa is insurance, followed by self-insurance, the guarantee, and
surety bonds. To determine threshhold eligibility of surety companies.
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FMC uses the U.S. Treasury list of surety companies (Circular 570).8
EPA in its proposed financial requirements is allowing all the
noninsuranee mans of financial assurance that FMC had allowed in its
9 aa of March »980.
2. Federal strip mine regulations
The U.S. Department of the Interior issued regulations (30 CFR POO-
rit>9) In March 1979 under authority of the Surface Mining Control and
Reclamtion Act of 1977, requiring that surface coal mining companies
obtain a. performance bond as certification that the mining activities
will be conducted in accordance with certain performance standards.
Perfbxmnce bonds as defined in these regulations include surety bonds,
collateral bands, escrow accounts, self-bonds, or a combination of the
above. Collateral bonds ray be supported by: cash;'certain negotiable
bondsr certificates of deposit; irrevocable letters of credit; or a
Bortagage or security interest in property, granted to the regulatory *
authority, equal in value to the bond obligation. Conianies nay establish
a self-bond if, arong other things, they can danonstrate a history of
financial solvency and continuous operation for 10 years.
The permanent regulations are scheduled to become effective in 1991.
At present, interim programs are being operated by States. It seems
clear that strip mine operators have had difficulty obtaining performance
bonds to ccaply with the State programs.9 The surety industry has suffered
Sov»r» los«5«»«i in th« past five years from defaults due to inflation - induced
financial failures. The net effect is increasing difficulty in obtaining
bonds without stringent collateral requirements.
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EPA" s rcproposed financial requirements allow performance bonds, letters
of credit, and a financial test, which is roughly comparable to self-bonding
without the contractual involvement between the operator and the regulatory
agency. Pledges of collateral are not included since they appear to be
less reliable and administratively burdensome compared with, trust funds or
ether methods that are allowed. Escrows per se are not included because
•ails* would involve the Regional Administrator as a principal in a contract.
The Agency believes that as an administrative matter it is more productive
for Agency resources to be concentrated on the permitting process rather
than on working out detailqs of escrow agreements.
3. state hazardous waste regulations
ECirjas V--v-"-^ou3 -waste regulations. Kinsas requires lui/xtnloua waste
nanageoent facility owners or operators to submit a closure and post-closure
plan. . The regulations specify closure and post-closure responsibilities.
Owners or operators are responsible for care of a site .for 10 years after
closure. Tha State nay, however, extend the care period as necessary to
protect the public health and safety of the envirornent. Kansas
requires a trust fund or performance bond to assure substantial compliance
with facility closure and monitoring requir enents. Tne amount of
financial coverage which the owner or operator must obtain is specified
by the State in the pecnit. In lieu of a trust or surety bond the
State will accept a deposit by the owner or operator of cash or U.S.
Treasury notes to the State treasury or to an escrow agent deemed
satisfactory by the State. The State may allow the owner or operator to
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build the required financial coverage over the life of the site. The
State also has the authority to require an owner or operator to increase
the amount of coverage if it appears inadequate. 1O A 1979 amendment
to the Kansas Solid '.festc Management Act set up a statewide fund that
will pay for additional cara an3/or monitoring at a site after the
owner or operator's responsibility has ended. The fund will also pay the
costs of repairing a site or repairing environmental damage caused by a
site as a result of a post-closure occurrence not anticipated in the plan
of operation.11
Mary^nd h^ardous waste regulations. Maryland requires owners or operators
to descRStrate evidence of financial ability to provide closure and post-closure
care at a hazardous waste management facility. The owner or operator must
obtain a surety bond in an amount specified by the State, or transfer
ownership or operation of the site to the State~prior to closure.
If an owner or operator chooses to obtain a surety bond, the anount of the
bond is set by the State in an amount to cover any costs for rx-nitoring,
maintaining and closing a facility, ensuring the security of a facility
after its closure, and guaranteeing fulfillment of all permit requirements.
The minimum amount of the bond is $1O,000.12
Oregon h^rqr^^ia waste management rules. Oregon requires owners or
operators to submit a closure and post-closure plan as part of a facility
permit application. The State reviews each plan individually for oomplete-
ness and estimates closure and post-<:losure costs from cne plan. Oregon
has not developed specific cost estimation procedures as there is only
one disposal site located in the State. Oregon requires an owner or operator
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to obtain a cash bond in the name of the State to cover closure and post-
closure costs. A cash bond is a surety bond which is gradually replaced
by cash over time. Before Oregon will issue a permit to an owner or
operator, the owner er operator rrjst deed to the Shate all r*?r^i.c-.s cf.
his disposal sita in or upon which hazardous waste will be disposed. 13
Wisconsin hazardous waste regulations. Wisconsin requires hazardous
waste facility owners or operators to submit a closure and post-closure
plan with facility permit applications. An engineering estimate of
closure and post closure costs must accompany the plan. The State'allows
the owner or operator to obtain surety bonds, trust funds, escrow accounts
and/or certificates of deposit as evidence of financial ability to provide
proper closure and post-closure care. The owner or operator must set aside
all funds necessary to close his facility before he may begin facility
operations. However, payments may be made into the post-closure fund at
regular intervals during the life of the site. The owner or operator is
responsible for long-term care of his site Cor either LwenLy or thirty
years after closure. After that, the State assumes responsibility. The
State Waste Management Fund is us«l to pay Cor costs of long term care
of a site occurring after the owner's or operator's responsibility has
ended. The Waste Management E\ind is supported by fees collected fron
facility owners or operators. 1*
4. other precedents
Many local governments require the use of various financial instruments
by their contractors to assure financial responsibility. For example, in
Virginia, Fairfax County's Department of Public Utilities has allowed
its contractor to post escrow acounts, letters of cored it, and surety
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bonds. The escrow account is held by the county and is the most frequently
used instrument.15
The perrjat"fli care of cemeteries is generally assured by trust funds.
Tn itnst States, a trust fund is the only mechanisn allowed for establishing
a perpetual care endownent. the State of Virginia, for example, requires
that a cemetery corporation start with a minimum initial deposit of
$25,000 in a perpetual endownent fund. With the sale of each lot, a
mininun of 10 percent of the sale must go into this fund. The interest
from this fund provides for maintenance, security, and perpetual care. 16
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Ill. STODPSIS OF ORIGINALLY PROPOSTO FINANCIAL REQUIREMENTS RBGKIATION
The regulation proposed en December 18, 1978 (43 FR 58995, 59006-7)
Included financial requirements for interim status (§250.40(c){2){viii))
and for general status (5250.43-9).
The proposed interim status financial regulation required owners or
operators of hazardous waste facilities to: provide a cash deposit
equal to the entire amount of the estimated closure costs of the facility
in a trust fund. This fund was to be incorporated into the closure fund
required in the general status requirements once a permit was granted.
If closure occurred prior to permitting, any excess funds were to be
returned to the owner or operator upon completion of closure requirements
after written mncnrrenee by the Regional Mmijiistrator.
Owners or operators of disposal facilities were required to estimate
the cost of ccmplyirq with the requirements for post-closure monitoring
and maintenance for a period of 20 years after closure. Tnis amount was
to be deposited during the operating life of the facility in equal annual
payments into a trust fund which would be incorporated into the post-
closure monitoring and maintenance trust fund once a permit was granted.
If nrwt-closiir*» rmi boring and maintenance expenses were incurred prior
to permitting, funds could be released from the trust by the Regional
ftfadnistrator if the expenses were incurred in accordance with the post-
closure plan and/or were justified.
If tte Regional Airinistratcr dctcrr-ined that there was a violation
of the closure or post-closure requirements, he coulrl use part or all of
the closure trust fund or post-closure trust fund, respectively, to carry
out the requirements. The Regional Administrator or his representatives
could enter the facility to carry out closure and/or post-closure requirements
-------
if the Regional Administrator determined that the facility was in violation
of those requirements.
The Regional Administrator vias authorized to consider the financial
status of an owner or operator as a mitigating factor if full compliance
with the regulations would render hisi insolvent. If such wero tha case,
the regulation provided that partial compliance could be allowed in
a written agrcenont between tho Regional Administrator and the owner or
operator.
•Hie general status financial requirements differed from the interim
status financial req-jirtT-.CTts as foll:y.;s:
(a) The Regional Administrator would evaluate both the closure and
post-closure coat estimates when a permit application was
considered *nr1 cau«v» them to be revised, if n«v-pss*ry. 1**
amounts to be deposited in the trust funds were to be adjusted
because it was assumed that monies in the trust funds would
have a real interest rate of 2%. That is. the rate of interest
would exceed the rate of inflation by 2%.
(b) If
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proposed regulation referred to the closure and post-closure
financial requirements under the heading, "continuity of operation."
Since this term could also refer to the technical requirements for closure
and post-closure care, it ha* been dropped from the financial requirements
regulation to avoid confusion.
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IV. ANALYSIS OF COEMaTTS AND RATIONALE TOR FINAL AND REPROPOSED INTERIM
Garments on the originally proposed interim and general status
reqairerssnts for financial assurance of closure ar.d pcct-clooure core,
the Agency's responses, and the rationale for s. chosen actions are
discussed in this section. Cotitnenbs on the requirement for liability
coverage during operating life are dealt with in Part Two of this document.
Ccmnents on post-closure liability will be discussed when this issue is
dealt with in later proposals.
This -tsjticn is ucgonizcJ by die following topics:
A. Applicability
B. Cost Estimate for Closure
C. Closure Trust Fund
D. Cost Esttaate for Post-Closure Care
E. Post-Closure Trust Fund
P. Alternative Mechanisms Sac Demonstrating Financial Assurance
G. Applicability of State Financial Requirements
H. Transfer of Ownership
I. Partial Compliance in Case of Insolvency
J. Access and Default
As explained in the previous chapter, the term "continuity of operation".
has been dropped.
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A. Applicability
Proposed Regulation and Rationale. Under the original proposal
for both interim and general status, financial requirements to assure
closure were applied to hazardous waste treatment, storage, and disposal
facilities. The financial requirements to assure post-closure care
applied bo a "landfill or other facility where hazardous waste is not
rotovcd as part of closure," i.e., only to disposal facilities. The
only exemptions were the categories of facilities which were exenpted
in §240.40 from many or all Section 3004 requirements, e.g., publicly
owned wastewater treatment works. Public entities in general were not
exenpted because the Agency believed that they should set aside funds
to a«»«ire that money for closure and post-closure needs will be
readily available when needed and not depend at the time of need on legisla-
tive or budgetary processes- Also, the Agency believed that local
public entities, 'especially fee-supported Independent authorities, may
not necessarily have greater financial stability and strength than
private entities.
Catments and Responses. Numerous cotrenters suggested that various
categories of facilities be exenpted from, or allowed variances to,
financial assurance requirements:
• Public entities should be exempt frcn closure and post-
closure financial requirements because they can be expected
to provide for closure and post-closure care.
The Agency f*gre-3 that Stctcs s^d the Federal yovernnent can
reasonably be expected to provide in advance for closure and post-
closure obligations of their facilities without the imposition of
financial requirements. Facilities owned by States or the Federal
fVjverment are therefore exenpted in the final regulation.
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Reproposcd provisions' that allow use of State-authorized financial
mechanisms and State guarantees to meet these financial requirements
are described in "Applicability of State Financial Requirements."
Local public entities with general-revenue taxing authority can
comply with the reproposed requirements by meeting simple criteria assuring
adequacy and availability of tax receipts for meeting closure and post-closure
obligations (see Issue F). EPA believes that public entities supported
•
entirely by fees are subject to some of the same risk as private entities,
and may «*• te able to provide financial assurance without special measures.
Accordingly, the Agency believes that such public entitites should meet
the same financial assurance requirements as private entities.
* Exemptions should be made based on the financial strength
of the operator.
The Agency agrees that, with the technical requirements for
closure and post-closure in plaee7""owners""6r operatbrc'of adequatcTfimhclal
strength can be expected to meet the requirements. The Agency has
therefore in its reproposal included financial tests for closure and
post-closura (see Issue F) based on levels of working capital and neb
worth and the ratio of debt to net worth. Owners or operators demonstrating
the specified characteristics are considered to be in compliance with
the «na>nflai requirements. Corporations meeting the financial test may
guarantee another corporation's compliance by providing financial assurance
fur that entity's performance of closure and post-closure obligations.
• "On-site" facilities (those owned and operated by waste
generators) should be exemot or treated differently.
If hazardous waste management facilities are part of
larger manufacturing or service operations, the hazardous
waste facilities per se are not likely to be abandoned.
It is burdensome and unnecessary for firms to cct up
financial mechanisms to assure responsibility for a segment
1A««
• 4O
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of their total plants. Congress meant financial requirements
to be imposed only on firms in the hazardous waste management
business* — thus the phrase, "facilities providing hazardous
waste treatment, storage, or disposal services" in the last.
paragraph of Section 3004 of the Act.
The Agency disagrees with this ccranent. On-^tt-^ and off-site
facilities have the same needs for closure and post-closure care.
Owners or operators of either type of facility can be subject to financial
problems. The damage case at St. Louis Park, Minn., illustrates the
point that on-aite facilities can suffer frcm failure to provide funding
for closure and post-closure care. Thus no exemption io allowed on the basis
that a facility is "on-aite".
The Agency's interpretation of the last paragraph of Section 3004,
as presented in Chapter II of this docunent, is that Congressional intent
is to avoid arbitrary exclusion of private entities from providing
hazardous waste management services if they can assure financial
responsibility consistent with the degree and duration of the risks
involved. As the Agency understands it. Congressional ijitent was not
to li.iiit financial requiren«nts bo off-site facilities.
• Exemption* or different requirements should be considered
for incinerators, other treatment facilities, storage
facilities, and small land disposal facilities because of
the low risks they pose.
The Agency believes strongly that closure should Vxj assured for
treatnent and storage as well as disposal facilities. The potential
risks when such facilities are not properly closed cannot be ignored.
There have been numerous cases of abandoned storage and treatment
sites which have caused or threatened to cause environmental and safety
problems (e.g.. see cases at Elizabeth, M.J., Portage County, Ohio, and
Grand Prairie. Texas, in Chapter H of this document). If the facility in
question is small, the cost estimates for closure and post-closure care
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and the burden of financial requirements are likely to be small also.
Nevertheless it la a burden that should be carried as a cost of operation
and not left until the point of closure when financial resources may
be found to ba lrsdcquati&.
* During interim status, financial requirements should be
imposed only on those facilities vhere there is reason
to suspect that a future closure problem might develop.
Many operators might apply for permits only to discover
they are unable to comply with the permit requirements.
In the meanwhile their compliance with the interim financial
requirements could cause great hardship.
EPA knows of no reliable, feasible way to detect future closure
problems. The Agency believes it is reasonable to require all facilities
except those owned by States or the Federal government to provide financial
assurance during interim status that closure requirements will be rnet.
If the owner or operator meets interim status financial assurance require-
ments* and then fi»*i«» to obtain a permit, at least some funds for closure and
•post-closure will be assured through the financial mechanism he has
employed. Thus the application of financial assurance requirements
during interim status will certainly be justified by such cases, as
well as by the more cannon situation in which owners or operators will
receive a permit and as a condition of receiving it', will have to assure
«»fc funds will b» avai!»M«» v*>«n n<*ed?d for proper closure snd peat
closure care.
Final and Reproposed Regulation. The final interim status regulation
exerots facilities owned by States and -the Federal government ($265.140).
Also exempted are categories of facilities listed in §265.1, which
makes general exemptions from Section 3004 regulations on the basis
that the facilities are regulated under other laws or for other reasons,
as explained in the background docunent for Subpart A. The reprcposed
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regulations also Include other provisions which reduce requirements
for sane categories ot owners or operators; these include: facilities
whose closure and post-closure obligations are assured or guaranteed
by the State, local public entities with adequate general rwpnues
legally available for closure and post-closure costs, and owners or
cp-sratcrg v*»o can meet a financial test or whose perfornur.ee cf closure
and post-closure obligations is guaranteed by a corporation mreting
the financial test (sea Issues C, E. and F for discussions of these
provisions).
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B. Post Estimate for Closure
1. initial Cost EstJjmte and Revisions by Owner or Operator
Proposed Regulation and Rationale. The proposed Interim status regulation
required the owners or operators to provide a cash deposi*. equal to tho
entire amount of the estimated closure costs of the facility. The proposed
general status regulation required the owner or operator to file an estimates
of the costs of closing the facility after capacity was reached or operations
otherwise terminated, in accordance with the closure requirements
of Section 25O.43-7. Th» Ary«icy required the owner or operator'to estimate
closure costs as the first step in a process which would provide adequate
assurance that owners or operators would have sufficient financial resources
to meet the closure technical requirements in a timely manner in order to
protect huaan health and the environment.
Comments and Responses. The following conroents were received on the
role of the owner-or operator in estimating the cost of closing a facility:
• Costs cannot be calculated accurately until a permit has been
issued which defines the permissible extent of operation.
During interim status, the owner or operator must prepare a closure
plan which will discuss the planned extent of operation and the times when
Tiieis of the operation will be closer?- 'An own«- or nr*»Kihr>r, thon, vdll
have a basis for estimating closure costs in the absence of a final permit.
The permit application anticipates a particular extent of operation. When
a final permit is issued, adjustments to the closure cost estimate can be
made, if necessary.
• Kb criteria are mentioned to giva cwr.ers or operators guidance
in making their estimates.
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The Agency is preparing a guidance document to assist owners or
operators in linking estimates of closure cost. The owner or operator must
submit closure cost estimates with the annual report. The Agency feels
that detailed criteria in the regulation would be inappropriate because
of the diversity of wastes handled, tacility configurations, and environmental
conditions which might apply.
• Cost estimates should apply only to portions of the site not
yet closed.
The Agency agrees with the eatreent that cost estimates should apply
only to portions of the site not yet closed. The Agency intends that
sufficient funds be available for final closure whenever that beccnes
necessary. The owner or operator must consider those periods during the
plarr.3d operating life cf his facility vhen, ** ln/Ucat~1 +y th«? olcwur*
plan, closure would be rest costly. The cost estimate should equal the
maximum cost of closure assuming normal operations. The closure cost
estimate, is not intended to .cover, the^cost.of cleaningjiR. operating.
accidents.
The owner or operator can influence the closure cost estimate by planning
his operation to ninLTtize inventories of waste and by routinely closing
active portions of the facility as capacity is used up. Such a plan
would reduce the closure cost estimate as well as the degree of exposure
of people and the environment to the hazardous wastes. For example,
a land disposal facility could be closed trench by trench or cell by
cell. Sirdlarly, the inventory of wastes at treatment or storage facilities
could be minimized, thereby limiting the amount of financial assurance
required for disposal of these inventories at closure
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This regulation does not apply to parts of existing facilities which
were abandoned or closed prior to the effective date of these regulations.
EPA interprets its mandate as prospective. It does not cover actions and
activities which occurred prior to the effective date of these requirements.
* EPA should havo procedures for annual or periodic revision of
the closure cost estimate.
The Agency recognizes that inflation could seriously erode the
purchasing power ot che funds provided by the chosen financial assurance
mechanism. Foe exanple, suppose a trust fund were selected to provide
financial assurance:
If payments of $1,000 a year are calculated initially based on a
cost estinate of $10,000, and a lO-year site life, and both inflation and
the return on the trust fund are 10 percent per year, there will be an
expected zero rate of return. At the end of 1O years, the nominal value
of the first-payment' into the fund will have grown to S2,590 but the
purchasing power will still be only $1,000. The last SI,000 payment,
however, will have a purchasing power of only $385, resulting in a total
fund size that would be 40% less than the amount needed to cover the
required expenditures.
A number of price Indexes which might be used to correct for
Inflation have been in use for years. The three leading candidates are
the Consumer Price Index, the Wholesale Price Index, and the Implicit Price
BejJl&Lor Cor the Ciro&b National Product. Each of these liaa its merits and
deficiences. J3»A has chosen the Price Deflator, published by the Department
of Commerce in its Survey of Current Business, to account for inflation in
the closure cost estimate. TiPA will have price deflator information
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available at its offices. This index is more indicative of the economic
activity likely to be encountered hy a hazardous waste management facility
in complying with these regulations than the Consumer Price Index or the
Wholesale Price Index.
In addition, changes in the closure plan, such as changes in the type
and amount of waste received or in the type and exterfjT of operations, could
affect the attount of money needed for closure. The final regulation requires
preparation of a new closure cost estimate whenever a change in tho closure
plan would change the cost of closure. To minimize paperwork requirements
during interim status, the Agency is not asking that such revised closure
cost estimates be submitted to the Agency. Rather, the owner or operator
rust sinply keep such revised estimates on hand for inspection by regulatory
authorities.
The Agency thus agrees that annual and other revisions to the closure
cost estirnta are necessary, and prcvirtes procedures in its regulations
for carrying out such revisions. Detailed procedures for such revisions
would be inappropriate (except for inflation indexing) because of the
diversity cf waste and facility types as well as environmental conditions
that are possible.
Final Regulation. Tne final interim status regulation requires
each owner or operator to prepare a closure cost estimate in accordance
with the requirements of Subpart G and the closure requirements of Subparts
J. K. M. V, and O. The estiiwfce musfc be sufficient to clos«» th»» facility.
given the operating assumptions in the closure plan, whenever closure
beggres necessary. A new closure coat estimate must be prepared and
retained at the facility whenever a change in the closure plan affects
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the cost of closure.' On each anniversary of the effective data of these
regulations, the closure cost estimate must be adjusted for inflation
using the Gross National Product Implicit Price Deflator.
2. Regional Administrator's Review of the Closure Cost Estimate
Proposed Regulation and Rationale. The proposed general status
regulation indicated that the Regional Administrator would evaluate the
closure cost estimate and either accept the estimate as made or revise it
in accordance with his evaluation. The purpose of this review by the
Se^lory.! Al-suVoLstracor waa to assure Uiat adequate funds woulil be oat
aside for closure whenever closure might becone necessary.
Garments and Responses. Comments received suggested that:
• the Regional Administrator had too much discretion in
'evaluating the cost estimate'.
* EPA should provide procedures for challenging the Regional
Administrator's revisions to the cost estimate.
The final interim status regulations do not require the Reqional
AirJL-iistmtor to evaluate the closure cost estimate, the
owner or operator will submit his closure cost estimate with
each annual report. At his discretion, the Regional Administrator
nay review this estiisate. If during interim status the Re^iciial
Administrator and the owner or operator disagree about the anount of the
closure cost estimate, this disagrcor-cnt could be settled in a proceeding
brought by the Regional Administrator pursuant to Section 3008 of the Act.
During general status, the owner or operator could challenge the
Regional Admiristrator's evaluation of the closure cost estimate
during the permit process. If the permit applicant and the Regional
Administrator disagree about the amount of the closure cost estimate.
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this disagreement will be resolved pursuant to the procedures in the
Consolidated Permit Regulations, 40 CFR Part 124. . The Agency, therefore,
feels that sufficient procedures have been provided for challenging the
regional Administrator's revisions to the closure cost estimate and,
therefore, the Regional Administrator will not have too much discretion in
evaluating the closure coat estimate.
• EPA should specify criteria which the Regional Administrator
would use in evaluating the cost estimate to make sure that
there it. equal treatment of owners or operators within different
Regions.
The Agency feels that is is inappropriate to develop specific criteria in
the regulation because of the tremendous number of possible combinations
of waste type, facility designs, operating plans, and environmental
conditions, all of which liroact on how the technical r«riiiranents wHl
be net and the cost of closure. The Agency will provide the Regional
Administrators with guidance vftuch will estimate closure costs Cor typical
sizes and types of facilities. This quidance will provide a basis for
consistency airong Regions.
Final Regulation. The final interL-a status regulation does not require
the Regional Administrator to evaluate the closure cost estimate. Ifte
owner or operator must submit his cost estimate as part of the annual report
(§265.75).
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C. Closure Trust Fond
1. Objections to Requiring Lump-Sum Trust Fond
Proposed Regulation and Rationale. The proposed interim status
regulation required tiidt by the effective dace or the regulations
the owner or operator make a cash deposit to establish a closure trust
fund in the entire amount of the cost estinate -for closure. For general
status, the closure estimate was to be multiplied by the "present value
factor" for the number of years of operating life retaining for the
facility. A table of present value factors was included in the reoulatJon.
The product represented the amount of the trust fund required at the t±ne
of permitting—an amount which, with a real interest rate assured at 2
percent, would grow to the full closure cost estimate by the end of site
life. (The real interest rate is the interest gained from investment
minus inflation.)"
The' trust fund was'selected'as"the required mechanism of financial
assurance because, compared with other methods, as we then understood
them, it was more reliable, available, and posed less of an administrative
burden to the Agency. Establishment of the fund in a lump nt=a was required
to provide substantial assurance for closure costs whenever closure occurred.
The difference in the payment conditions between interim and general status
was based on the assumption that the fund under general status represented
a longer terra condition and the owner or operator should have the benefit
of adjusting his payr«nt for the expected long-term real growth in the
value of the fund.
1.38
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Conronts and Responses. Cements received on the requirement of a lump-
sun trust fund were' as follows:
• Many ccoranters said the exist would be too burdensome. It would
be 2 dicir.ccr.tivc to the cScvelopnaiit oE heuiaxOuus waste management
services. Ihs solvency of many firm, especially small ones,
would be threatts»eJ if they had to put up all the noney up front.
Significant amounts of funds vould be tied up in trust where they
would be put to less productive use than could probably be found
if they were "retained by the'owners or operators. Che way to
reduce the cost is to allow the trust fund to be built up over the
life of the facility. Also, since landfills, undergo closure of
- parts of the site as they are used up, only the amount, of funds
necessary for closure of the landfill at any one point in tine
should be required. Other means of assurance besides a trust f\irr\
should be allowed.
Under the reproposal, closure trust funds nay be established over
the life of the facility, up to a maximum pay-in period of 20 yearn.
Ihia period is consistent with the maximum tine' allowed for accumulation
~ TTT * - . .-r»'.-m»--v-ii «•». . * -..•*. ij&. .
of the post-closure trust fund in the originally proposed regulation.
EPA believes that this change would eliminate the need for firms to
suddenly divert a large amount of cash into a trust fund and instead
will allow then to keep their funds rare productively enployed in thoir
businesses. However, funds that are thus built up gradually will not be
large enough to support closure until the end of the life of the facility;
Or 23 years; whichever cane* uooimr. This may create * ueriuut* prubltan
if closure occurs much sooner than expected and the owner or operator is
not able to pay the difference between what has accunulated in the fund
and the cost of closure. The Agency has decided for the present time that
this risk should be accepted sirro the Ivrp-cor. trust f-jr.3 nay threaten
the life of seme smaller facilities. The size of the closure trust fund
would be highly variable, depending on size and type of facility and what
specifically needs to be done at closure. For example, the Agency estijnates
closure costs for a 1000 metric tons per year incinerator at $223,000
1.39
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and for a 50,OOO metric tons per year incinerator at $320.000 (both with
scrubbers). 17 The teiency estimates closure cost for a 1000 metric ton
per year landfill at about $20,000 and for a 50,000 metric ton per year
landfill at about $272, OOO.17
Cost for some owners or operators will be reduced by the change
discussed under Cost Estimate for Closure by Which only the costs of
closure at the maximum extent of operations would have to bo Included in tho
estimate. This change nay not affect the cost of the financial requirement
at sore facilities such as incinerators which do not undergo continual
closure, but it can reduce the requirement for landfills by as much as
80 to 90 percent. 18 this change is most beneficial to long-lived
landfills which are continually closing old sections and opaning new
ones. ' It will' no longer be necessary to assure funds for closure of
the entire facility all at once if the facility is closing as it
'operates. Because the amount of funds needed for assurance of closure
in these cases is reduced, the opportunity cost of tying up these funds
in possibly less productive investments is also reduced.
Mechanisms for financial assurance other than trust funds are provided
for in the reproposed regulation (see Issue F, Alternative Mechanisms) .
• The proposed requirement does not taKe into account the degree, of
risk presented by individual facilities. Note the phrase, "assurance
of financial responsibility . . . consistent with the degree and
duration of risks" in the last paragraph of Section 3004; a variance
mechanism is ™n«d for.
fjs ezplainpd in Chapter IT , the Agency believes- that the degree and
duration of risk will be adequately reflected in the financial requirements
for each owner or operator. The levels of financial assurance required
depend on cost estimates which in turn depend on closure and post-closure
plans developed for each facility by the owier or operator in accordance
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with Subpart G. The-amount of the closure estimates will be affected,
for example, by the types and amounts of wastes managed, by the extent
of the land disposal area to be closed, by how many nonitaring wells are
required, by whether leachate collection and treatment are required, by the
inventory of wastes that will need to be removed from a treatment or storage
facility, by the steps necessary in decommissioning and decontaminating
equipment, etc. As noted earlier, estimates prepared by EPA indicate the
variability of closure costs. The estimates relate directly to what will
npcd to be done at the facility in order to protect human health and the
envirorram:. The Agency therefore believes that a variance nechanism
is unnecessary.
• The last paragrabh of Section 3004 calls only for the owner or
operator to "provide assurances of financial responsibility." EPA
has no justification or legal authority for requiring trust funds.
A demonstration of financial responsibility is all that can be
required.
The statutory basis for these regulations is discussed in Chapter II of
this docuaant. Tha Agency has the tasfc of determining what constitutes
-assurances of financial responsibility." and believes that trust funds
would qualify as such assurance. The Agency recconizea, however, that
the oriqinally proposed regulation may be unnecessari ty Unrfted. The
other n»ans of financial assurance allowed in the reproposed regulation
includes financial tests for private and public owners or operators,
surety bonds, letters of credit, and guarantees. State and Federal owners
and operators are exempted by §265.140 of the final regulations.
• Section 3005 of the Act (permit requirements) does not include
financial requirpfwnts. In the absence of a direct authorization
to require closure and post-closure trust funds, EPA should not
inpose this burden.
The basic statutory authority for the financial requirements is
Section 3O04(6). which specifically calls for financial responsibility
1.41
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requirements "as nay be necessary or desirable." Section 3005(c) calls
for cerpliance with requirements under Section 3004: "Upon a determination
... of compliance by a facility . . . with the requirements of this
section eitl section 2004, tha /\cfcrdnistrator (or the State) shall issue
a permit for such facilities."
• we strongly object to the requirement for a closure trust fund on
the basis that the Regional" Administrator has control wer city
funds. There ray be legal problems in the city abrogating control
of revenue entrusted to it by its citizens.
Because local public entities face a potential for financial
insolvency, the Agency believes that they too must meet the requirement
for financial assurance of facility closure. In the reproposed regulation,
cities and other local public entities may meet the requirement by having
general-revenue tax receipts of a specific level which are legally
available to pay for closure costs, ($265.143(f)). Local public entities
that do not fall in this category must meet the requirements"with other means
provided in the regulation, which include trust funds. The choice to
manage hazardous wastes entails certain obligations just as does the
choice bo undertake any other commercial activity. The Agency believes
a public entity which engages in the management of hazardous wastes has
an obligation to provide financial assurance of facility closure just
as other entities have. A trust fund or other financial mechanism for
this purpose is not an abrogation of public funds but rather a
financial arrangement vhich is a direct and necessary consequence of
the decision to manage hazardous wastes.
• The Agency should consider the rule against perpetuities
relative to its requirement that regulatory trusts be
established.
EPA believes that the trust fund does not violate the rule against
perpetuities. This rule io a principle of law which pertains to how
1.42
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long funds can be held in trust without payment of the principal to a
beneficiary. In legal terms the rule deals with remoteness of vesting
of interests and not with the duration cf vested interests (see Scott
on Trusts, §62.10 3d Ed. 1967)). In the Agency's view, the interests
of the parting in the closure trust fund are vested. If the owner or
operator closes the facility in accordance with the closure plan, the
closure trust fund will revert (i.e.. be paid back) to him. If he does
not close in accordance with the closure plan, the monies in the trust
fund will be available for such purpose and will be used for such
purpose. In either case the trust fund will terminate after the
Regional Administrator notifies the owner or operator that he Is no
longer required to maintain financial assurance for closure or the facility.
• The assumption Cin the general status regulation] that the trust
fund will grow at a * percent real interest rate is mistaken. A
zero interest rate is more realistic, considering probable
inflation factors.
• A 2 percent real interest rate is unrealistically low.
EPA believes that the 2 percent real interest rate figure is too
high and has lowered it to zero to adequately account for the effects of
long-tern inflation, trustee fees, and possible taxes on trust income.
In the preamble to the proposed regulations, the choice of 2 percent was
justified "... on the assumption that the nominal interest rate and
the rate of inflation will move up and down together . . . and the rate
of increase of real purchasinq power of the funds in the trust will
therefore remain constant at 2 percent." Further examination of historical
data has found this assumption to be untrue. Moreover, the earlier
analysis ignored the inpact of other costs such as trustee fees.
T.41
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Table 1 shows the actual real rates of return for 10-year U.S.
Government bonds. Tltesa real interest rates have fluctuated over a 25-
year period from -2.89 percent to 4-2.36 percent, with an average rate
of return of approximately zero for this period. These fluctuations in
realized real rate of return for long-term securities are, in essence,
due to the failure of the market to accurately anticipate long-term
inflation rates. Thus, both of the periods which had negative real interest
rates coincide with periods in Which there was very low inflation at the
time of the issuance of the bond, with inflation increasing rapidly over
the life of the bond. On the other hand, the period for *,Mch there
were the highest positive interest rates was one in which there was a
higher inflation rate at the time of the issuance of t-he bond than
there was over most of the" life of the bond.
Table 2 shows real interest rates for. a variety of securities for
the periods 1960 to 1975. ' As'can readily be seen from t-ha table, rate
o€ return on given securities are very sensitive to the period chosen.
It la notable, however, that for the period 1965-1975 none of the
securities shown achieved a positive real rate of return. It would bo
a mistake to assume a negative real rate of return in the future; it is
clear, however, that real rates of return significantly above zero also
cannot be assured.
The effect of trustee fees on the real rate of return of the trust
must also be considered. Many banks chanje a rdnijnin trustee fee of
§500 to $1,OOO per year.19 Fees beyond the minimum vary on a sliding
scale, and for funds of the size anticipated, the fees will average from
0.5 percent to one percent of the value of the principal. 20 TJrjse fees
can thus be expected to reduce the actual rate of return of the trust
I.-M
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Table L
Real Zasorost: Racn cs ten
U.S. Gcvexssaac Securities
Tear of
Issue
1943
1944
1945
1946
1947
1943
1949 -
1950-
1951
1951
1953
. . 1954
1955 '
1955
" 1957
- 1953
1359
I960
1961
1962
19S3
1964
1965
1966
1967
*
Seal
laceresc
3acea
-2.89
-2.45
-2.34
-2.79
-1.74
- .15
- .04
— .76
- .59
.28
.53
.41
,62
.77
--1.32 - .
1.01
!.99
2.36
1.11
1.10
.55
.43
- .38
- .77
-1.14
t
i
a. Derivacicas ' real iacarasc rasa aqua Is acoisal intsresc raca
sistss cia izdlatiaa race dividad by L plus tie isiLsrioa race.
Ibis forsala Is aa aparaslsaclea which scsevha: uzdaresrlrarss
the real lazaresz rara vhea ihe bcli of she isflacica occurs
ia cbe firai vears asd overssricacss vhea ;is Isilailoti occurs
early la ihe llfs of =aa bocd.
Source: !fc=l=al Israrzss Races fros Moody1 s Lrrestar Servtcas, laflaiioa
2a=es frss. ic=ns=ic Eepor: of che Prasicear (1S77), 'cerivacioa
' of real lacereac races by I3.&7.
1.45
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Tabla 2
Seal-Iacaraac dates oa 7aricus Securities
•
Long-Tara Covemcer.c 3cads*
Seaea and Local Sonds^
Corpora ca 3ond*3
Cat=oa Stoei4
1S6C-1975
- .17
- .44
.52
4.3
1965-1975 1
I
-1.23 (
1
-2.12 |
I
-2.01 j
1
Derivacioa: lailasica ri:e based upoa CS? iailacar, acnisai rasss «f
recira as indicated is foocaocss belov.
•Federal
-Scondard « Poor's 15 Sosds.
Goody's Corporara acnd.
rd a Poor's Ccaposice (iidudas dlvidasds a=d capital
1.46
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fund from 0.5 percent to one percent below the real interest rate of the
securities themselves.
Given these factors, an effective rate of return of zero should be used
in the initial calculation!* of fund size and fund pa>—«nts. TMs rate is
approxiaately correct for many periods of recent history and has the
further advantage of simplifying calculations associated with the trust
fund. Because of the uncertainties surrounding interest and inflation
rates, the Agency is proposing that payments be adjusted annually in
accordance with the inflation rate. Mditionally, each year the owner or
operator would determine the value of the trust fund; if that value has
decreased, a new payment level must be estimated to make up for the
d~cr»*««l wine. Paw*-** m*y K. r*c».lculat»d also if the value cf the
fund has increased, ttiis approach ensures that the inability to accurately
predict the economic future will neither penalize the owners or operators
nor cause the value of the funds to erode over a long period without corrective
adjustments.
Reproposed Regulation. The reproposed regulation (§265.143(a))
allows owners or operators to build up the closure trust fund over the
life of the site, up to a maximum pay-in period of 20 years, in
payssents adjusted far Liflitics-.. The trust fusi is r.sw cr-ly G.-.S cf
several mechanisms owners or operators may use to provide for financial
assurance (see Alternative Mechanisms).
If an owner or operator fails to make the annual payment within 30 days
of the scheduled date, the trustee must notify the Regional
Administrator within 5 days. The Regional administrator may then
order the owner or operator to begin closure, since he has failed to
1.47
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meet the financial requirement, the 30-day grace period seems adequate
in the Agency's view — owners or operators should be able to plan
ahead for a regularly scheduled annual obligation.
The amount of any change in the coat-estimate must be distributed
equally ancng the retraining annual payments. Each year the owner or
operator mist determine the value of the fund. If the value has deceased
since the previous year's valuation; he nust recalculate his payments/
just as he would if his closure cost estimate increases. He nay also
recalculate his payrsnts if the value of the fund has ir-creascd.
Owners or operators may pay in the entire amount of the estimate at
once or in accelerated payments if they wish to do so.
If an owner or operator establishes a trust fund having initially
used one of the other financial assurance mechanisms, the amount deposited
in-the trust must equal the amount.that would have been paid in had.the.
trust been established on the effective "date of these regulations.'
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2. Other Features of the Closure Tnist Fund
Proposed Regulation and Rationale. Under the originally proposed
regulations for both interim and general status, monies frcm the closure
trust funs! were to be released to the owner or operator only after closure
requirements had been net. Disbursement of the funds was permissible
only on written approval of the Regional Administrator. The Regional
Administrator had the right to direct the use of the funds to carry: out
closure requirements if he determiner! that the owner or operator was in
violation of closure requirements. The trustee was to release the funds
to the Regional Adninistrator'upon receipt from bin of a copy of a Notice
of Violation served pursuant to the Consolidated Rules of Practice
Governing Administrative Assessment of Civil Penalties or the Revocation
or Suspension of Permits, (43 FR 34729, et. 363.). The trustee of the
closure trust fund had Jto bet a. bank .or other financial institution approved
by the Regional Administrator. Upon the granting of a permit, monies.in
the closure (and post-closure) trust funds established during interim
status were to be incorporated into general status trust funds, with
adjustments as appropriate.
Release of ncnies fran the trust fund to the owner or operator was not
allowed until all closure requirements were met in order to maintain
financial assurance at its full level pending the Regional Administrator's
determination that satisfactory closure had been accomplished. If it
was cleterciir^d t^at the owner or operator had failed to meet closure
requirements, the Regional Administr-.tor had the full amount of the
trust fund available to carry out the requirements.
The reason for allowing the Regional Aaniniscrator to initiate
use of the funds to carry out closure requirements upcn service of a
1.49
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Notice of Violation to the owner or operator, rather than at a later stage
of the enforcement process, was to assure timely availability of closure
funds to carry out activities needed to safeguard hunan health and *$ie
environment.
The Agency required that the trustee be a bank or other financial
institution to" assure continuity in management of the trust to the extent
possible, and required approval of the trustee by the Regional' 'Adminis-
trator to protect against use of institutions and/or individuals that
might not be desirable as trustees of closure trust funds.
Oorments and Responses. The following comments were received s
• The owner or operator should be reimbursed for closure expenses
on ^ p»rc*nt: of ormpletfon or ywrty b*si«»
The Agency agrees that it would be preferable to reimburse owners
and operators as closure is acccnplished, so long as financial assurance
that all closure requirements will be met is not seriously dininished.
While the proposed regulation protected the level of financial
assurance provided by the trust fund, it in effect required the owner or
operator to pay out the full amount needed for closure twice before he
was reimbursed— once in establishing the trust fund and again in paying
for actual coats a« incurred.
Under the reproposal. therefore, the Regional administrator would
direct the trustee to reiirburse the owner or operator for closure bills
submitted before closure was completed if (1) the Regional Administrator
found that the bills were in accord with the approved closure plan or
were otherwise justified and (2) the amount remaining after payment
would be at least 20 percent of the value of the fund before any closure
bills were paid. The first conditic.1 is intended to assure that the
bins were incurred in implementing the approved closure plan. The
1.50
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Regional Administrator may also allow reimbursement of bills "otherwise
justified" so that necessary closure activities that were not foreseeable,
'.
e.g., replanting of vegetation necessitated by weather conditions, could
be paid tor. The second condition (20 percent withholding) maintains a
significant level of financial assurance until closure is found to be
satisfactorily accomplished.
Hie Regional Administrator must release' all" funds 'remaining in the
trust fund after receiving certifications that closure has been acccrplioheJ
in accordance with the closure plan from the owner or operator and from an
independent, registered professional engineer, unless he has information
indicating that the closure may not have been satisfactorily accomplished.
This provision is essentially the same as the originally proposed procedure for
releasing the funds after closure except that the owner or opsrator need
not apply for the return of the-funds since the certifications of-closure-
submitted by him and an independent registered professional engineer
serve that purpose.
• The Regional Administrator should not be able to use trust
funds without demonstration, consistent with due process of
law, that the owner or operator has failed to meet closure or
post-closure requirements. The owner or operator should nave
an opportunity to demonstrate full ccnpliance prior to use
of the funds by the Regional Administrator.
m view of the ccranento regarding the Regional Administrator's
authority to direct the use of the funds to carry out closure requirements
in the event of a violation of those requirements, the Agency is now proposing
to nalce such action by the Regional Administrator contingent upon a legal
determination of a violation pursuant to Section 3008 of the Act rather
than upon a Notice of Violation as in the proposed regulation. Ttvis
provides the owner or operator receiving a Notice with an opportunity to be
1.51
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heard before the decision to use the funds is nade. It will also mean
that, compared with the originally proposed procedure, more tine nay elapse
before funds can be obtained for closure activities in case of violations.
However, if the Regional Administrator misperceivca a situation, he may
ijiprcperly or unnecessarily order payment fron the closure fund, and the
Agency recognizes that owners or operators should not be subject 'to this
risk,.
The Consolidated Roles of Practice Governing Administrative Assessment
of Civil- Penal ties, or the Revocation or Suspensions of Permits, referred to
in the originally proposed regulation as the basis for the Notice of Violation,
are in turn based on Section 3008 of the Act. Section 3003 contains the
enforcement previsions applicable to all requirements of Subtitle C of tho
Act and includes Agency authority to commence civi ' actions against violators
in the U.S. District Courts. Section 3008, rather than the Consolidated'"
Rules, is cited in the reproposed regulation to make clear reference
to the basic, broader authority for enforcement. Wider Section 3008 (and
under the Consolidated Rules), persons receiving a compliance order nay
obtain a public hearing by requesting cno within the period specified in
the order.
•She change in the required condition for using trust funds in response
to violations (frcm the Notice of Violation to a legal determination of a
violation pursuant to Section 3008) has also been made with regard to use
of post-closure trust funds.
ne Regional Administrator should be bonded and held legally
liable if he has unlimited authority over trust fund disbursements.
With the lijnits that would new be Lrqaosed on the Regional Administrator's
authority to direct the use of trust funds, the Agency believes that the
1.52
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catroent that he should be bonded if he has unlimited authority over
disbursenents is not applicable.
• The trustee of a closure trust fund should not have to be
approved by the Regional Administrator, rt is unclear how
such approval is to bo obtained. The Agency is already
bogged down in Coras and red tape, and the approval process
would add to the administrative burden. The requirement
would also create a bad precedent.
The Agency in its reproposal does not require approval of trustees by
the Regional Administrator. (Aider the reproposed regulations, the trustee
must be a bank or other financial institution. The Agency believes this
provision affords adequate assurance that the trustees will bo institutions
that will carry out their duties in a responsible manner, since they will
be institutions allowed to serve as trustees by the State, This avoids
the delay to owners or operators and th«» administrative burden to the
Agency that are likely to result from instituting an approval process.
• An owner or operator should be allowed to act as cc—trustee or
otherwise retain control of fund investments.
The Agency is not allowing owners or operators to be co-trustees or
have control of fund investments because of the possible conflict of Interest
which could arise between an owner's or operator's financial interests
and his duty, as co-trustee, to assure the availability of funds for
closure. In addition, the Agency believes that administration of the
trusts will be simplified by having one trustee as opposed to several.
• Several oonroents were received regarding tax treatnent of
trust funds t Payments into the closure and post-closure
trust funds should be tax-deductible, and the trust income
should be tax-exenpt. Tax legislation should be enacted
such as that enacted for the Black Lung Disability Trust
Fund. An IRS ruling should be obtained.
1.53
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EPA, which has ra Jurisdiction or responsibility in tax matters,
has no current plans to recaiinend tax legislation or to obtain an IRS
ruling regarding closure or post-closure trust funds. *nie Agency
would encourage owners or operators to explore tax questions with TPS
or tax consultants.
The Black Lung Disability Trust Fund is a national fund created by
Federal legislation (30 U.S.C. "934 et seq.Jr the trustees ere the Secretaries
of the Treasury. Labor, and Health and Human Services. Mining operators
make mandatory, tax-ieduetible contributions to this fund, which is used
to aid black lung victiws This type of fund is not comparable to the
closure and post-closure funds, which are private funds to be used to
meet the obligations of the. settlors and which are to be returned to
them if they corply with the regulations.
• An essential element of a trust is the designation of a
beneficiary. The beneficiary to be designated is not clo^r
in the proposed regulation.
The Agency agrees and specifies in the reproposed regulation that the
U.S. Environmental Protection Agency should be designated as beneficiary.
Reproposed Regulation The reproposed regulation states that the
trustee of the closure trust fund must be a bank or other financial
institution. The beneficiary mast be the U.S. Environmental Protection
Agency.
Owners or operators may be reintoursed for closure expenses
before closure is completed as follows: if the Regional Adrdnistrator
determines that bills for closure are in accord with the closure plan or
are otherwise justified, he must approve such disbursement as long as
monies equal to 20 percent of the value of the fund before any closure
1.54
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bills were paid remain in the fund. Upon a legal determination of a
violation of the closure requirements, the Regional Administrator may
direct the trustee to disburse the funds to designated parties to carry
ouc closure requirements.
In order that the Agency will know Where to obtain the cloaure funds.
if necessary, the Agency is requiring the owner or operator who selects
the trust fund as a form of financial.assurance for closure to submit a .
properly executed trust agreement to the Regional Administrator within
10 days after the effective date of the agreement. Tto allow further
flexibility in this regulation the Agency 'is allowing marketable securities
to be piaoprf in trust as well as cash. For securities to be "marketable,"
there must be a ready market as defined in the Securities and Exchange
Contdssion regulation, 17 CFR §240.15c3-l. The value of such securities
is to be established by the Internal Revenue Service rnethod of valuing
securities for estate tax purposes, 26 CFR §20.2031-2.
The owner or operator may submit a request for return of funds in
excess of the total amount of the adjusted closure cost estimate. Such
an excess ray develop due to the earnings of the funds or a change in
the closure plan that reduces the cost estimate. For example, if an
incinerator operator were able to cut inventories in half, thereby
substantially reducing the total estimated closure cost, and this reduced
cost estimate was less than the amount already in the closure trust
fund, the operator nay apply for a return of the excess funds. If .the
value of the trust fund falls below the adjusted closure cost estimato
after the 20 year pay-in period, the owner or operator must add the
shortfall to the trust in cash or marketable securities. Finally, if an
1.55
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owner or operator substitutes another form of financial assurance for
all or part of the trust fund, he imy apply for release of funds. In
all cases where the owner or operator applies to the Regional Administrator
for release o£ excess funds*.the .Regional Administrator has 30 days to
direct the trustee to release excess funds unless he finds that, the
closure cost estimate was not prepared and adjusted in accordance with
§255.142.
The originally proposed requirement that monies in the trust funds
established during interim status be carried over into trust funds for
general status has been dropped, 'me provision is inappropriate since
we expect that several mechanisms for financial assurance will be allowed
both in interim and general status regulations, and an owner or operator
employing the trust fund in interim status nay decide to switch to one
of the other mechanisms.
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n. Post Estimate for Post-Closure Care
Proposed Regulation and Sationale. The proponed interim status
regulation required the owner or operator of a disposal facility to
estimate the cost of corplying with the-technical requirements for post-
closure monitoring and maintenance under"§250.43-7. The proposed
general status regulation also required this estimate to be filed with
th« permit application for subsequent evaluation and, if necessary,
modification by the Regional Administrator. The purpose of this
regulation was to see that an estimate of post-closure monitoring and
•
maintenance COSTS was cade which was sufficient to assure that the
technical postclosure requirements of §250.43-7 were met.
Several of the issues surrounding the closure cost estimate also
apply to the post-closure cost estimate. The reader is referred to the
discussion in Issue B for a review of the ccmnents and responses.
There were no issues raised which were specific to the post-closure
care cost estimate.
Final Peculation. " The Agency recognizes the need to revise the •
post-closure cost estimate for the effects of inflation and when changes
in the pest-closure plan causes changes in the cost of post-closure
care. -Thus fchs final regulation requires that a revise-?. e«tir«te r"»st
be prepared whenever a change in the post-closure plan affects the cost
of post-closure care. This might include the type and amount of waste
received or the type and extent of operation. The cost estijnate must
also be adjusted eacn year for the effects of inflation. (To provide
consistency among Regions in evaluating the post-closure cost estijnate,
the Agency is providing guidance for making the estimate along with costs
for typical sizes and types of facilities.)
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E. Post-Closure Trust Fund
Proposed Regulation and Rationale. The originally proposed interim
status regulation directed the owner or operator to establish a trust
fund for post-closure nonitoring and maintenance in the same way that
the proposed general status regulations prescribed. The fund would be
built up in annual payments over the operating life of the facility or
20 years, whichever was leas, and be sufficient to support 20 years of
post-closure care. The proposed interim status regulation directed
that this fund be incorporated into the post-closure nonitoring- and
maintenance trust 'fund required in general status once the permit was
granted. The payments to this fund would be adjusted appropriately
if the e»ti*SEH'"co«TblrT^¥«IcKiri^^
for the pemit. Finally, the proposed interim status regulation called
for reimbursement of post-closure expenses in accordance with the pro-
posed general status regulation if closure occurred prior to granting
of the permit.
The proposed general status regulation called for the owner or operator
to establish a prwt-clowirft trust fund with a bank or other financial
institution approved by the Regional Administrator. The proposed regula-
tion provided that the Regional Administrator nay release funds annually to
reimburse owners or operators who submit an itemized list of costs incurred
for that year. Any funds remaining at the end of the twentieth year of
post-closure nonitoring and maintenance would be released to the owner
or operator. The trustee would also release funds upon receiving fron
the Regional Admiiustrator a cupy of a properly served Nc^ica of
1.58
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Table 3
Post-Closure Care Trust E\ind Costs
(art-site landfill, 20 year site life, zero real interest rate)
1000.
Annual Capacity (Metric Ton)
2000 5500 20000
50000
20 year -post-closure period;
30
40
Annual Cost ($)
$ Per Metric Ton
year post-closure period t
Annual Cost ($)
$• Per Metric Ton
year post-closure period;
Annual Cost ($)
? fc-r Metric Ton
3,650 4,070 5,510 11,730 16,400
3.65 2.04 1.00 0.59 0.33
5,225 5,855 8,015 17,345 24,350
— 5.23 • 2.93 1.46- 0.87' 0.49
6,800 7,640 10,520 22,960 32,300
6.80 3.82 1.91 1.15 0.65
Source: Derived from data developed by Arthur D. Little; Inc., for EPA; April 1980.
1.62
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earned en trust funds). Pot exanplo, at a 1000 metric ton annual capacity
on-site landfill with a 20-year site life, increasing the post-closura
period 5O percent fron 20 to 30 years increases the'dollar cost per
exttric ton"frcia~y5jfii"to $5.23, or'also almost SO percent (s«« table 3).
•*« * *»*nt*t*i>ri* - . v t_ y»^~w,*v-#* -*- - - • —*> —
Thia $5.23 is LiXely to be the very highest per metric ton incremental
«T» ••• * «*Tt«M* *— «»».J>M"M«M*. f A* ( -V • •*» >^M» -*•**-'
UJSU-OuHj eny ienimi will nom-nlly fee*. An otherwise tdenticnl landfill
wlth*ah*a»ual ««>adLty of 50.000 natrie tcna would havo an incremental^
cost per »*tric ton of only $0.49 due to thU 30-year requirement.21
If a Regional Adrdnistrator ver* txs «»rterrl the post-closure period
with cause to say, 40 yeare, the unit cost would Increase aL-noat
prcp?rticnal!y>i <-»«. Ptor tho l«0 aetrie ton annw>l capacity on-site
Landfill the coat would be Sfi'.SO per oitttlc ton artl for thw 50,000 iwtrio
ten annual capacity on-site landfill the cost would bo SO.65 per metric^
tcn.21 Fee technical reaaona It has been decided that a 30-year
post-clocuro perLort of ncnitoting and nalntcnanco will normally bo
* ll" * *"- •* -+»f • • • -» ' . t-v •«-, t+ f+ . - .^v^t^^j* ^f*«»y*i'w •*• »£ ""• '."Tr^*!
required of all disoosal sites. EPA believes that the costs of this
" • . -i i iji t ii,^nriiirmu-rrwtt»Li«
-------
Reproposed Regulations. The reproposed interim status regulation for
the assurance'of past^ciosTire activities allows a msttoer'br' alternatives
to the trust fund, these are discussed in depth in the section, "Alternative
Mechnni sun. *
the post-closure trust fund has not changed in nature from the originally
i i Jb**? Jyrt.i»T«H» -•-.
proposed version, but there .have .been, a number of refinements. The reasons
for these changes are th« sane aa for similar changes to the closure
regulations and thus they are discussed in the Closure Trust FVtnd section
of this document. - the poefe-closure trust fund, at tha end of site life
-. -.i*.**,.,* f. ..- — '- ~ •— ». -«•«• ...... »J»»i ia. imn i ~,-f*r' -, -,^.---. . - -«^, -,». — 4,. . — .-
or 20 years. Whichever cones first, cust equal the expected costs of 30
years of pcaL-closur* oust*. Rills presented in accordance with the post-
closure plan rust be authorized 'fbr"pay«nenf by "the Regional' Administrator.
Any excess funds cust revert to the owner or operator at the end of tho
post-closure period.
1.64
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P. Alternative r^echanisss -for Demonstrating Financial Assurance
Sumary and Rationale of the Proposed Regulation. In the originally
"prcpcSSdtr^latl;ira*(?2S0.40fc)(2){vlll)). the Agency required that
each regulated facility establish trust funds bo assure the availability
of finds to carry out closure and post-closure responsibilities. Ma
provisions v«r* nod* for the ua« of other financial nwchanisns. With -
tho information vJhich was on hand at the time, the Agency concluded that
•»
other mechanism suffered from one or more of the following shortcomings
Which made their use inadvisable:
• - » « • * M •VWM******* 1*1*1. . ••»•» - 4 f WM»> -«
(a)"'Theyrelle**C5rtaxJerlying investments-subject to •long-term-
instability.
(b)-^-7hey would ispose aAafcantial. continuing., aad unrcaaonabla, 1
administrative burdens on the Agency.
(c) They could be cancelled quickly providing no long-tem guarantee
of protection*
(d) "n*ey depended on long-term solvency of the owner or operator.
Publicly owned and privately owned facilities were treated no
differently on the premse that even governmental entities can beocma
insolvent.
OoBcenta. Response, and Rationale for Reprocosed Regulation. A mrrber of
nts were received to the effect that:
< Limitation to a trust fund mechanism is too rigid - more
flexibility should be incorporated to allow for use of
different instnjrvfncs. Instruments suggested were surety
bonds, bank letters of credit, escrows, self-insurance,
gisararbww, allowing a controlling corporation to act as
a guarantor or surety, pledges of securities, liens against
land and real improvements, interest-bearing accounts in
financial institutions, sinking funds, and demonstrations of
net worth or other measures of corporate financial strength.
1.65
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The oonments received generally addressed both the closure and post-
closure financial mechanisms and since the issues are largely the sane,
, they arejiLscussed together Jhere^
Th»
-------
(1) Surety Bonds
Surety bends appear bo be a viable option for financial assurance of
closure roquirecienta, of post-closure perfomanco, and of a plan for
lunp sua payment by owners or operators Into a post-closure care fund at
the tine of facility closure. This conclusion was reached after consul-
tation with representatives of the Industry trade association, analysis
' • ' •— * • • • *• * -*t" inpose
oreat administrative burdens on the Agency. Frcta thr* Agency' a point
of view, surety bonds have another advantage in that they not only can
provide indesnification in a financial sense, but also, in the case of
psrfsrrsincs bends, establish a respOtoiul«» poccy to drrange for performance
of the required vork in the absence of the owner or operator.
In the preartole to the proposed regulation the Agency noted that many
of the facilities v/hich might want to use surety bonds would not be eligible
to obtain theo. Further, the Vjency thought that surety bonds
were subject to year to year renewal and therefore could not provide long
tern assurance. As a result of additional inquiry and study the Agency
1.67
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haa concluded that surety tends can be written to cover long term obli-
gations, and cancellation provisions can be built in which provide the
necessary financial assurance. Although the availability of surety bonds
is still questionable, the Agency believes that no viable mechanism>,ahould
be excluded if it might be available to sonw owners or operators and provido
assurance that funds ,will,be,^yailable.>Aen needed tor. closure and ppstr-cloauro.
.To be ftilly acceptable. Iwwcver, i.e., to prcvLSc sufficient aasurancw,
certain restrictions rust be placed on these bonds and they mint annfenin
certain clauses and provisions.,-The reprcposed regulations require that
the following safeguards be included.
- Surety conpanies nust be listed by the U.S. Department of the Treasury
'in the'^Clrt^ar'S^rerffl'tledr "Surety Ccnpariies-Aa*ptabl6'cn"FVxJeral
Bonds," to be acceptable to the Agency for writing bonds for hazardous
wasta «M«pr»«mi operations. ~ In addition, the underwriting limitation
according to the Treasury list must be adequate to enable the surety
ccnpany to write bend* in the face value amounts that will be required
to cover the closure and/or post closure cost estirates entablinhed by
the owner or operator. This requirement will not reduce the availability
of surety bonds for hazardous waste disposal purposes, since the
Treasury list includes over 250 companies with underwriting limitations
which should be large enough to cover virtually any cost estimate which
can be expected from thin program. The Treasury list provides a standard
for reliability of surety ccrpanies thus relieving the Agency of the need
to scnehcv evaluate their financial strength. Listing in the Treasury
and adequacy of the underwriting limitation are given as
1.63
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minimum criteria.in .the reproposed regulations, however, in case the
Regional "Aflalriistrater 'ray wish to limit the writing of these bonds
by sureties whose financial status has changed since the last
Tresury circular, or on the basis of other eyldwice. Regulations
of the Ftoderal Miritime CBnmiasion'also use listing in the Treasury '
circular as a minium criterion.
The bond oust b» written in an amount to cover the closure and/or
the post-closure cost estimates and must be maintained in the amount.
of the adjusted estimstes.^-Since, at a minimum, cost estimates
oust be adjusted annually to keep pace with inflation, the surety
booi»£aoa.«BiJunt,will,, in all.liXttlihocd,..increase annually.
- Ghee closure activities have begun, the bond coverage must include
completion of closure and/or the post-closure care period, or, in
the case of the bond for luap-sua payment into a post-closure fund,
coverage must Include completion of the payment obligation. Ihis
prevision is not likely to limit the aval I ability of bonds for
closure activities, but nay reduce their availability somewhat
for perfoxnance of past-closure- care. The nnrwM?ion Is necessary,
however, to prevent the surety frca cancelling coverage just: when
it ray be needed most, i.e., when the owner or operator is in
trouble financially, the facility is in trouble technically (in
violation of permit or has had an accident), or when the scheduled
closure date approaches.
- A second cancellation clause is fbrrulated in such a way that the
Agency and the owner or operator will have adequate lead time after a
-------
cancellation notice for the processes involved with replacing a
mirttfcy bowl, -nils r*Tiiir«n«nt stipulates that the surety rey
cancel a bond with 90 days' notice to the owner or operator, and the
Agency. The regulation allows 30 days for the owner or operator
to ofr**-^*n^lthfffLflno*j>ffc surety bond or^another^financial rnechanJLsni
allowed under the regulations. If the owner or operator is unable to
obtain an alternative financial assurance mechanism, tliere will still
be 6O days for the Agency to order closure. Then, in accordance
with .the previous stipulation, the bond must Terrain in effect until
closure and/or past-closure responsibilities have been met. As
"with^'previous requironenta, 'this stipulation-is necessary tcr
prevent the surety from caiicelling coverage just when it nay be
needed most.
• Par bonds assuring performance of post-closure activities, the
Agency has provided that the face value cay be reduced as the
own«r or operator corpletes his obligations, i.e., as the years go
by, and the owner or operator discharges his responsibilities, the
asount needed to cover activities for the remaining years bwaomos
less, therefore the face value of the bond nay be reduced oorrmen-
surately. This provision nininizea the economic Lrpact of these
——.-*.-.?• *.-=-.•» to ally Ukit amount wlixch is necessary to protect
huaan health and the environment. The pro-/ision is not included
for closure performance bonds since closure occurs over a very
short period (usually about 6 months).
1.70
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- Should a surety becune liable on a bond obligation, the surety
has two broad options in discharging its responsibility. First,
the surety may see to it that the closure and/or post closure
plana'artTfulfilled. The 'surety most likely'wbuld~
-------
documents are presented by the third party. The party drawing upon the
credit is drawing directly against the credit of the baric. In other
vjerds. the risX of insolvency of the custcser of the bank is borne by
the hank, but not by the drawing party. Tha Agency believes that standby
letters of credit nay be extremly reliable instnanents that have the
additional advantage of relatively lower costs than.Uuat_§jridg_or surety
bonds.23
Agency's concern witn lattora-of -credit in tho peat, was based
on a mistaken belief that they could not be written for extended periods
*v* M .-*,<-* .v * . .,*.*, *-. <*. 4^rr*'t *«-*•,
and that they could be cancelled on short notice, when their coverage
was likely to be needed irost. Letters-of-credit con be written for
jfc __
longer than one year and can be extended autoratlcaliyT The final
regulations require an "automatic extension" clause and a 60-day notice
of nonrenewarclause? Ths'60'days will allow the owner or operator to
seek an alternate financial assurance nechanisn and will giv» the Regional
flrtninistrator ti»e to draw on the credit line if the owner or operator is
unsuccesi.rul. These provisions will satisfy the Agency's concerns, and,
based en extended discussions with banks,. provisions cf .thia^typp are not
unconnon.23 funds withdrawn following a notice of nonrenewal would be
put into an interest-bearing escrow account by the hank. Disbursements
would he made in the sane manner as specified for trust funds. If the
anount in escrow falls below the onount of the cost estimate, the owner
or operator nust make up the difference within 30 days by adding to the
account or obtaining other financial assurance; otherwise, the Regional
Adcdnistrator nay order him to begin closure.
1-72
-------
Many of the other provisions of the letters-of-credit requirement
are also similar to those for surety bonds and are inducted for the same
reasons:
Tfcs src^r.t of credit zust bo cufficicnt to cover tho closure and/or
post-closure cost estimates and must be increased if the cost
» ' * *-***'**
estimate rises Above thw amount of tha credit.
As the owner .or operator discharges Ms post-closure responsibilities,
th« credit line may be reduced coimensurate vdth the cost of post-'
closure activities ever the rcrciining years of the pest-closure
period.
Issuing bonks are lif****** to nerber banks of the Federal Reserve
System because of the relative stability of member hanks, the
extensive reporting 'they must make to Ftoderal regulatory authorities,
and because only Federal Peserve markers can issue letters-of^credit
for more than one year.
ETA nay draw on the credit if there has been a legal determination
that the owner or operator has not carried out his closure or
post-closure responsibilities. Th« baiik discharges its obligaaon
by transferring the funds to an interest-bearing escrow account.
•Rte funds will be disbursed to parties designated by the Regional
fe&ainistrator for completion of closure or post-closure care.
In the case of a letter-of-credit assuring luop-sun payment
for post-closure activities, an owner's default en his obligation
to provide the required funds is not subject to a due process
proceeding - the owner or operator either established the trust fund
or he did not. The Regional administrator may therefore draw on
1.73
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the credit if the Owner or operator fails to establish the
fund. Th* money will ba put into an interest-bearinq escrow
- ,•» •
.account by,, the, .borJe... and disbursements, .will bo made as fron ,
a post-closure trust fund.
- The owner or operator may cancel the letter-of-crcdit with
30 days' notice to the bank if tto^^ional^dn^strwtor, ._
has given written'consent-bated on his having received evidence
* of other financial assurance as. allowed, byjthe, regulations. .
(3) Financial Test and Guaranty
Many ccnseriters on the draft""regulations suggested the use'of some
i -*4**U*-r- ** ,* • - •n-<*-i«..
-------
regulations. Federal strip mining reclamation regulations. Federal
• liability regulations-for passenger ships, some state hazardous waste-
programs, and cany State vorJcncn'a compensation insurance programs.
the financial responsibility obligations for closure and post-closure
«ir« soBCfehat difrtfiteil. £KO*-UM«« oC other program*. CUw* F«*Wol
programs are usually designed to ensure that money will be available to
meet possible obligations or liabilities in the ensuing year. - Financial •
responsibility for closure, however, represents an obligation that may
+• - - * -,*F^*f * «V-^*tf *• - -^"""^ - «»**»*. ^-.^* , i.jto- *-» — ,*•.•• • f . rf S™
i occur-1O -to-3O-years.or-aora,in~.the, future.... Etost-closura obligations.
would extend for deowte* hwnnd cl«ntr*». It is r-nerally agreed that
even with the best of data it ie virtually irrposaible to predict
*
failures of fioas beyond an outer limit of 3 to S yeara^ Nevertheless,
if stringent enougli, a financial test could provide assurance equivalent
to or greater than that of other instruments. The purpose- of the proposed
financial test is not to predict whether a specific firm will go bankrupt,
but rather to ensure that it will be able to establish a trust fund for
closure and post-closure care any time its financial position deteriorates
beyond the required level. * The'financial "test* proposed "contains" three"
kinds of financial criteria. The first requirenent is that the firm
must have at least $1O mUH*»* in net worth in the United States.
•n*e F*"ond requirement is that the total-liabilities-to-net-worth ratio
be not nore than three. The third requirenent is net workincr capital in
the United States at least twice the adjusted closure and/or post-closure
cost estimate to h
1.75
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(a) The Net Worth Requirement
The addition of a net worth requirement serves four basic purposes t
(a) to ensure that adequate unencumbered assets exist so that the firm
can readily establish a trust fund when and if it should fail to meet
the net working capital testr (b) increased firm size reduces both the
probability of failure and the consequences of that failure; (c) significant
*~ «« -•*-,* •»» ^r , ,*•* m - , it .ft !*<•• -fc r- ***** rf»« I — t <— - »•*-* v » - I i I r I- • •*•-«!* i
size.enables the firm to reduce the special probabilities of failure
associated with the risks anrt liabilities in owning a hazardous waste
disposal', site;. andr(d). this requirement .will tend to exclude firms dependent
on a singl*~cperatiffl£i'"site Where*both" net worth arid "het^workli^"capital
could be «npnct«d to disappear vrith the closure of that site.
With'respect to the first purpose, S1O million in net worth is
clearly large enough to enable a firm to generate extensive funds through
* - •*'
sale of long-term assets, even if current assets are insufficient to
neet the net working" capital test. With respect to the second purpose,
there is a variety of evidence indicating that larger firms have a lowered
probability of failure. Thus, one authority has sveraarized this issue by
stating, "the Large firm viability issue is clouded by the observation
that irany of these companies are not permitted to fail. Except in tha
event of fraud, or vhere the failing cai^any is au-fly too large, we
rarely observed in the decades before 1<>7G fires of over $25 million in
total assets actually going bankrupt. In many cases, the.financially, .
troubi*»? Cixm can expect U> i^e wOued by «i "li^S^ly liqul-* aiij/wr managarLally
rich fina. usually resulting in a merger or absorption before insolvency
in a bankruptcy sense occurs" (Altnan. 1971).26
1.76
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If a firm is too large (in the sense indicated above) to avoid
bankruptcy/ obligations such as closure and post-closure.care, still
might be mat; for exaople, although Peon Central filed tor bankruptcy,
successor organizations were in place to meet environmental requirements.
, *• * *• - » • - ,
Other examples of large firms in the 1969 to 1974 period that came close
to bankruptcy hut were" not pcraltted to fall inclu3c: Douglas Aircraft;"
Ling^Terco-^bught; Lockheed Aircraft; Mohawk Data Sciences .27 A long-tern.
study of large fiLrrs found that, during the period from 1919 to 1969.
i W^.* «.«*-' mff , , , •( * v *• --MAV"*.-*-*'***-*-*-** *•,,«* — - * -• - I -• -• ' I «-* \** -
only-10 percent,of all,firmsjAtt.greater.than $50^«illicn in assess in
1919 had failed by 1969.28 TMs 10 percent represents liquidated firms,
not all of which were failures in the sense of failing to meet all credit
**•* * n I ***•"*» I
obligations. If such large fims had failed at the same rate^as ordinary
business failures, 33 percent could have been expected to fail.29
sff*r~f,— > - •'••>'-•;» •*» • • '-•»•• - * '•• •-•*!*« *'•*• •:•••'. • • ^^
^ In.1970, 12 fines ofover $10 ndUion in assets filed for bankruJ
-------
that liability insurance for non-sudden accidents associated with
hazardous waste disposal sites will he generally ^obtainable, it
is possible for serious events of this kind to lead directly to —
business failure when finns assume these risks without * j»Vv-v • i - v
public to cover closure or post-closure, it is necessary and desirable
" that a firsi have sufficient net worth to be able to cover ouch incidents.
A requirement of $10 nillion in net worth can be seen to be sufficient
to cover zest, though not all, cleanup incidents of the types cited in
the rtarwje cases.
The effect of this net worth requirement is to severely linit the
number of both manufacturing finns in general and of hazardous waste
managensnt firsa in particular that uould qualify for the financial.
* -* •»*- -...».-- .r-«^. ^ * »..v<-fr.r«- *, ^.,».-,, .„ ^. >-^ t „ •, -*-^-«^ t.
test, in l*T/sr less then two percent of manufacturing firms in general
had assets of over $10 million. Only 3,000 of the 211.000 manufacturing
finns filing incoas tax returns could have qualified for this test.30
Relatively few firms specializing in hazardous waste management •could
readily nv>et this requirement.
If the net worth requirement is adopted, the S10 million level may
have to be revised at a later tioe to account for effects of inflation and
perhaps ether changes in the economy.
1.73
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(b) The Total-Liability-to Net-Worth Ratio Requirenent.
The purpose of this requirement La to exclude firms which arc large
enough to meet the net north test but so highly leveraged as to present
potential Insolvency problems:"'" While most manufacturing fims iraintaln a'
ratio of total liability to nut worth of approximately one to one, a
study of 33 firns that vent bankrupt showed that, on the average, they
exceeded a ratio of three to one during the* four years prior to bankruptcy
- -,-••••• • -j - - . • .-•-» . - .- - ^ '— '•>•«• iniimmm ._ 1,1,11... in -„f
and continued to exceed this ratio up to the tinu of bankruptcy. 24 Another.
study found that this ratio "was not exceeded for the sample of firms until
one year prior to bankruptcy.-" Hawever, thxire is a danger of excluding
financially viable fires if too low a ratio test is used. Table 4
shows average financial ratios for various asset classes in a variety of
industries, ttiile nest nanuSacturing industries show,ratios below two to
one, many kinds of utilities which may engage in hazardous waste disposal
would be -Mrln'JyS by a cuo-to-one. test. As a result,, a three-to-one
test w»« «*>-nwr1 sufficient to provide notice of serious financial otrcaa"
for many firms, without excluding potentially viable firms in non-manufacturing
industries.
(c) The Het Marking Capital Requirenent
* **-•» - - - *- <* » -w- <• ,-.>-- % 4 (V<'»<»
The purpose of tnis requirement is to ensure tnat unencumbered
liquid assets are immediately available for closure or post-closure
purposes whenever they should be needed. Net working capital is required
to be twice the potential requirement rather than equal to it because of ,
the rapidity vith which net working capital can change in >/alue. It
should also help to ensure that neither the perfbrnance of closure nor
the establishment of an alternative financial instrument would cause
1.79
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1UU*
AVDJkCf TOTAL LLUItZIT TO MR WOtn IATIOS
ret scicro> cecstuts n 1972.
nocsrvT
KIZ or xisrrs xa TBOCIUQS er
10.000 ce U.OOO to 50.000 co
«.ooo 33.000 loo.ow
(009 OXtTia)
100.000 to UO.OOO
250.000 Md
CeU Wains
IteU)
lucU* Mil JrodttCt*
T««U« Kill rrodosu (OUMX
olll ptoducu)
Q.«3iC*l« Md AllUd ftOduCCl (bMlC
OMalemU ud Alltei fradattl (drag*)
ud «lli^ ycoAuets)
ad Allied fradiicu (cb^UU
product*. oa£ *U«b«x« clu»ifi*d)
?tcnl*ua uflaiag
Staul
dcecrlc CanpuU*
CM Cae?«nl« rad
Wat«t Sajfiy cad
Serrle**
.1
1.1
.1
.T
MUM.,
1.8
.8
.ft
1.1
Equljtaat ni SoppLtM .1
(raUrMd cnakportidM) U.8
l.i
1.1
1.2
1.2
1.4
^ teale ffsdaeti. Bed
actAl producu aec •!»•>*«»•
aad Srtcns
.7
.9
1.5
1.1
1.1
2.2
3.1
2.0
.8
is
.&
1.0
.9
1.6
1.2
'l.O
.1
.7
I.J
*•*
1.4
.9
Ta
.6
I.)
.5
.7
••"
!•>
.8
.8
.r
.»
1.4
.1
.8
l'4
Seozu: Troy. Uo.
lac'.. So>
T Busia*«t and laduitxlml fli*nei»l latlo«. 1975 EdltXoa. ft«aclc«-Bftll.
. 19 7*.
-------
insolvency. One clear illustration of the volatility of net working
capital is a study of 32 failed firms curing the period 1964 to 1970. in
which it was found that net working capital for the average firm that
failed declined 33 percent b*tw«»«»n the fourth and thlnl y^ara prior to
failure and disappeared entirely between the third and second years
prior to failure. 24 These data clearly suggest the need for net working
capital in excess of the actual closure or post-closure requirements.
in addition, because negative working capital is rcrrally a sign of
serious financial distress, it is essential that net working capital
significantly exceed closure requirements in order to ensure that the
closure itself does not cause insolvency. If .the net working capital
requirenent were exactly equal to the closure requirenent, the firm
would inaadiately find itself with an extremely awfcward short-term
credit prcblen at closure. The specific choice of a multiple of two is
justified, therefore, en the basis of both ensuring enough net working
capital rtsaainiug so that closure itself will lot cause insolvency, and
ensuring against sudden disappearance of working capital. *me study
cited above suggests that, if a firm originally qualified under this
. require&Kot, the choice of a multiple of two would mean requiring „,
the firs: to shift frcsr. a fir.ar.cisl test to aether fcrr. cf fir.ar.cial
assurance scraewhere between two and four years prior to actual bankruptcy.
Based upon data in a 1976 EPA study, 25 this requirement would
probably serve to bar nost firms engaged solely in hazardous waste manage-
ment froa using a financial test. According to this study, the average
net wotking capital of firas cngagcrf sclaly in hazardous vaste nanagoncnt
was $40,000. This would not be equal to twice the costs of closure or
I.fll
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cost-closure care for any but the very smallest sites, the effect on
* * _ •- * • - —•• -' -«-.*•. »*.vt - .. . - .
other industries is more difficult to determine as it would depend upon
the masher and nature of the hazardous waste disposal sites owned or
cporated lr/ the firs. Hcy-wer, any firn seating tho othar two rcquire-
mants could probably be expected to have net working capital equal to
two tiraes the costs of closure and post-closure care for several sites.
' "According to the reproposed regulation, a multi-site firm may use
the financial test to meet aa many of the financial^responsibility ^ ^
requirements as the net working capital permits. A firm with 10 sites,
for'exacple, might have net'working capital only sufficient to meet the-
-«•«*•*-• -*, ... —• -*»* - •«•••*"* - — -***>« . * -»*i r T f - i • »» • «••.-' . -.* , * - -*.„, i-» „
closure and post-closure financial requirements at some of its sites..
Such a fira would be allowed to choose which requireraents it wanted bo*'
meet; for example, it could choose to meet closure requirements at five
sites through a financial test and provide other instruments for the
remaining closure and all nost-clo«mre requirements:'" Alternatively, "it
could choose to meet closure and post-closure requirements at two or
three sites through a financial test, while establishing other instruments
to meet the requirements for the othar sites. The firm is. in this way,
' provided with maxteun flexibility as to which requirements it will meet
through U« ?^na.y!.--l trst — 3rd tha p-jhlie r«rair.s fully nmtnctert.
In response to several cormentera, the reproposal allows firms that
meet the financial test to provide guaranties of compliance with closure
and/or post-closure requirements by other firms; normally the other firms
would be subsidiary corporations. The guarantor provides financial assurance
for ccrplianc* equal to the airount of the closure and/or post-closure
cost estimate. LDce the surety bonds, tha guarantor nay cancel with
r.82
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90 days' notice unless closure has taken place (in the case of a guarantee
of post-closure care). has begun, or has been ordered to begin by the
Regional fcfcunlatrator. Within 30 days of notice of cancellation, the
owner or operator must find other financial assurance; otherwise, the
Regional Afalnistrator nay order closure, the guaranty may be cancelled
... t. . - •• . +* *»• * i • »•• . - . •> • •*•#***
at any tine by the nutual consent of the owner or operator, the guarantor*
and the Regional A±r.irJLstrator.
In the course of this analysis, the Agency considered other criteria
besides those now incorporated in the financial requirements test. It
is vorthwhile to describe these additional criteria to indicate the
breadth of options.
1. The present criterion for determining a firm's degree of dependence
on creditors in providing funds for operating the business is the
firm's ratio of total liabilities to net worth. An alternative
gauge for this purpose is interest payments as a percentage of
net sales, vi/here net sales are defined as gross receipts arising
from the sale of goods or services from the principal business
activity, less allowances, rebates, and returns: .and interest is ..
the arount paid or accrued in connection with business indebtedness.
This ratio is an operating factor v*tich also expresses the degree
of leverage of a given firm in terms of the pre-conrnitment of
business receipts for conproniso of debt. This ratio vas not
selected for this financial test primarily because of the difficulties
of reflecting net sales by firms recently entering the disposal
business.
1.83
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2. Working capital is the measure of liquidity of a firm and is
intended^tp_reflect. therfinn'us .ability to respond promptly to
contingencies. An alternative approach is to use the "quick
ratio" of a flan: that is, the relationship of cash, current
receivables, and marketable seeurljticMi to ^jfT^^J^aWlf^C3/-
By including these factors, it demonstrates a firm'o ability to
discharge sudden or current obligations without resortingjo_
th» ««!«» of Irventorles.
3 fet worth is the standard of the financial test which" reflects'
•** ., . . .. , , • —- ~.«-*«- .. . . *>>»•' •*»»« ~-..M.JM»»I
a fin's ability to discharge obligations to creditors. Other
standards considered include the current ratio of current assets
to current liabilities, indicating the ability of the jompany to^
meet its current obligations; and size of total assets of the firm,
defined- to Include current assets (cash, notes and accounts
receivable, .total inventories, investment in government obligations,
other current assets, less reserve and bnd debt), plus land, plant,
equipment and other fixed assets.
4: Tine has been proven to be a critical factor in predicting the
likelihood of continued solvency of finns, e.g., in 1978, 53
percent of all failures were firms which had been in existence
for 5 years or less.29 it might be significant to include in
the financial test some criterion **\ich can be referred to
as an indicator of the aqe of a firm. Retained earnings as a
percentage of net incore, expressing the percentage of earnings
in the business, might be another possibility to consider.
1.84
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(4) Financial Test for Public Entities
—»«~ Several ocroenters suggested that financial responsibility requiremenLs
of the Mini! appropriate for private owners or operators \%ouW bo Inappropriate
for public entities. EPA found merit in this argument. As previously
•JiflCTiMtrt States and the Federal government are exempted from any financial
responsibility roquircnenta. There ia 'aloo merit in granting special
treatment to local public entities* or municipalities, in view of certain
fundamental differences between them and private owners or operators.
' - *1 • - fc •*• fi^N*.**- +• •• • - *
the most- important of these differences ares
(1) Public entities ray have access to a tax base base from vMch
the revenues necessary to maintain * site can be raised at
at will and. ara.not. dependent .upon, revenues ..from .the. site
itself.
(2) htest public entities are institutions of indefinite longevity.
(3) One of the basic purposes of goverrments is to look after the
u.ii-tv»
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TABLES
MUNICIPAL DEFAULT EXPERIENCE UNDEH CHAPTER IX
Recovery face
Total Business
Period
1938-40 •
1941-50
1951-59
1960-72
197J-79 *
thuber of
• C««»9 Viled*
210
115
27
.-.-r.-r. W ,
fc»M«l.4.- • < ,
7
For Cases Filed
and Concluded"
662 .
65Z
75Z
. 95Z . ......
-
Bankruptcy
Filed*
—
56,766
' 897880" *"
. 211.3/.0
195.785
aSouxce: Heopel. George 11. The Postwar Quality off State and
Debt. Coluabia University Press, New York, 1971.
- • r * .
bPorcentage of addicted debt in default ulcioately paid for cases
. filed aad concludod.
cSource: Tables of Bankruptcy Statistics. Adainlstrative Offices of
the Doited States Courts, 1980.
1.86
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of Runicipal bankruptcies la low. and the recovery rate in extremely
high, particularly in recent years. It is also useful to examine the
* i * *•
wider record of total default* on State and local debt, since not all
defaults are dealt with through Chapter IX. Table 6 snows the total
default recotrl for the period 1920 to 1965 (Heapel, 1971 ).*31 RJ,.
th« period 1945 to 1965, there were a total of 329 defaults of any kind.
Of these, 266 defaults were recorded only in the records of banks, and
* .-.»»*.»« ~.*i ***•**- ^' ff - *. , Mr-* P*»S"»M»«I«»»»P* mm •* *-»«»^*«
many of these wen* considered by the compiler of these data to be purely
temporary or technical defaults resulting from inexperience on the part
of municipal finance officers rather than representing any serious financial
distress.31 Table 7 oceperes the default record of various kinds of
municipalities to the failure records of businesses for the period 1960
i IJI.IBU V „ V. < "• " " «•*"*'•*• •N^waPWW'-J
to 1965. It can be readily noted that the local default record is considerably
better. This is in spite of the fact that all defaults front municipalities,
even those that are ultimately paid off, are counted as part of the State and
local default record, while business failures include only businesses which
failed to aeet all of their obligations to creditors.
record of defaults prepared by Herpel is the result of a careful study
of the runicipal default record examining a variety of sources of default
data. In part because of the rarity of default events, there is no single
data base frcci which the total mxrfoer of municipal defaults can be gathered,
and this record could not, therefore, be brought up to date.
1.87
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TABLE 6
DEFAULTS ON STATE AND LOCAL DEBT
se=w
• • j- - . . »
Counties and
Parishes
Incorporated
Municipalities
Municipalities
Special Districts
Other
1940-49
0
6
31
7
5
30
1950-59
0
t^w **4
12
31
4
23
42
1960-65
0
,
17
70
20
41
44
Numb or of
Govuriunaiital
Onits-1962
50
.....
3,043
iKsSf
17.144
34,678
18.323
Source: Beapel. George H. The Postwar Quality of State and Local
Debt. Colucbia University Press, New York, 1971.
1.88
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TABLE?
LOCAL GOVERNMENT ANNUAL DEFAULT RATE COMPARED
TO AVERAGE BUSINESS FAILURE RATE (1960-65)
(defaults or failures per 10,000 entities)
Xncorpo- Oolncpr-
Counties ' raced "pirated
and— ' Kuaiel- Munlci-
Pariahe* policies palities
Special- Busineas
Districts Other Failures
57
D«riTa=ioa: Local governs»ncs froa Table I; business failures from
• * • ~ • <
Source:--Dun &-Bradstreae, The>Failure Record Through, 1978..,New.York:
Dua & Bradstreet, 1979.
1.89
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Not all public entitles, however, are structured the same. Those
that are entirely dependent for their revenues upon fees were considered
essentially Identical to private entities and must therefore meet the
scene financial responsibility requlrenents. These arc usually referred
to as "public enterprises" or "authorities" (e.g. , sewage and water
authorities). The. greater financial weakness .of such authorities is
illustrated by the fact that all six defaults "of rated bonds were for
»
bonds Issued by public enterprises of -this- type. 31 -.public entities
with revenue sources other than fees could also have difficulty meeting
. ffU* •
tha special costs associated with closure and post-closure financial
responsibility for a hazardous waste facility. This could occur if
either its total revenues were so lew that allocating funds for closure
or post-closure care would cau&a serious financial distress to the ccmnunity
or if significant portions of revenues were legally designated for purposes
other than closure or post-closure care.
As a result of these considerations, EPA is proposing that* in order-
to fon?go other iws»s^i«Hi - • *. . . <***•*-
sibilities and which total at least 1O tines the adjusted cost estimates.
Legal availability in this case means that the revenues are not specifically
dedicated to other purposes and that there exists no prohibition against
usir>7 t*!- revwjes 5sr closure ani pcst-clcsurc en re. The multiple of 10 is
to ensure that obligations for closure and post-closure can be met without '
diversion of a large portion of the undedicated revenues and an unreasonable
cutback in other public services. Neither fees nor intergovernmental revenue
1.90
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sources are allowed as part of the revenue test- because of their potent in I
volatility and because in many cases the ccRnunity cannot con mi t these
funds in advance. Although a multiple of 10 is not the only one which
might be appropriate, the Agency considers this number to be reasonable
after examining data concerning public entities.
Various kinds of public entities can be expected to meet these tests
with relative eosa. £1 1974 the average 'municipality of under 50,000 persons
had tax revenues of $P7 per capita* Assuming- closure costs of a medium
to large hazardous waste disposal site are approximately $100.000, this
• • » *IT ••• - *
would Iflply that t2io average connunity of over 12.000 would have sufficient
tax revenues to pass the revenue test. Data from the County and City Data
Batik for 1977 (U.S. Department of rorrsrcc, U.S. Bureau of Census) 32 showed
that only 17 cities with a population over 25,000 had tax revenues of less
than $1 million. A somewhat larger share of all county govemnents might
have difficulty meeting a revenue test for a mediun to large hazardous. .
vasts disposal site, because county govemnents can be extremely small in
population and vary enorrously from State to State in their responsibilities.
Data frco the County and City Data Book for 1977 showed that 7 percent or all
om cities had revenues of less than $500, OCO and that 14 percent had tax
revenues of less than SI million. However, virtually all of the counties
with revenues this snail had very small populations and vould not, for
their own hazardous waste generation, normally need a large hazardous
waste facility.
«3>A considered the possibility of using private bonrt rating services
instead of a revenue test as a nochanist for determining which oanrunitles
could be expected to be able to meet closure and post-closure financial
1.91
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responsibilities. Several disadvantages were seen to this approach, however.
FirstV_ it was not considered appropriate to rely on private rating services,
which in --any cases charge fees Cor their service, for a government
determination of financial viability. These rating services are not
required to Justify publicly changes in ratings, and as a result, it io
— ' rf-• •• • i • * -r f-f****** •*••*>• •* t •* ^ -1 •*•**•• • —*Mi r n '«-.4^H.»i-AA V—W*«^»-*.*-^«.»»v*-*« * * >XW •«-!•• » -*•»•»•« ^*'«»i *»•».••
not clear how. the EPA could defend itself from accusations of having been
arhitrary and capricious in denying a public entity the right to moot
' - - • . . * . ,**««•
closure and n>»t--<-lr««nir«» flnancta! re-wrnslbllity r*»«iiirenv»nts fron
their own revenues. It is also not. clear that the rating services can,
V •>.... . • - »!
in fact, predict financial distress with accuracy; for exarple, New York
City bonds were rated A by both major rating services in 1974. In. .the.
major municipal default era/of-19»"to*1937r 7fl percent of-all" defaulted
issues and 94.4 percent of the dollar value of all defaulted bond'issues
were rated in the top tvo categories by both rnjor rating services.31
(5) Financial .'techaiiisr.s »
-------
Pledges of securities were rejected as a mechanism because the EPA
docs not want to itave the burden of possessing collateral. If a third
party is to hold collateral. *_ha Agency prefers the trust mechanism
described in the regulations, which calls Cor adjustment in value of the
trust fund in response to inflation, changes in the cost estimates, and
changes in the value of the fund. Further, the status off a securities
pledge in the event .of financial, failure of. the pledger is uncertain^and
night differ substantially with variations in State law.
A national fund based on assessments on owners and operators And used
to cover defaults would clearly require special legislation. EPA is .
considering proposal of legislation for a national fund that may include
coverage of defaults in providing post-closure care, as well as coverage
of post-clcstrra liability.
Liens against land and real inpccvements would require tho EPA to
first foreclose and then sell the property before any funds would ba
Jv
available fr>r r\c*«m and post-closure. As such, land is the opposite
*
or a liquid asset and inappropriate for the purposes of assuring timely
availability «* *r»te fr cl'^ir* or rest-closure care. Liens Also cufJC^L*
. from an uncertain status in the event of financial failure.
Interest-bearing accounts in financial institutions also suffer from
uncertainty in the event of a financial failure off the depositor. The
account night easily be pledged against other obligations, ba depleted
without warning, or Inadequately funded'. To' guard against" such even'tual-
ito.es would be a costly and uncertain task.
A sinking furri is a fund established (usually on the books of a
business) to produce a desired amount at the end of a given period of
1.93
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tinw by neans of a scries" of periodic payments to it. The Agt-ncy prefers
the security and reliability of a trust fund under the independent control
of a trustee to the potential disagreements that nay arise over the internal
financial practices of different owners or operators who desire to use
sinking fund*.
' (6) Multiple Faciii ties and Multiple Mechanisms
In addition to suggesting a number of alternative financial mechanisms,
nters suggested that more flexibility could be provided in other ways.
• Allow owners or operators of multiple facilities to aggregate
two or more under one instrument as a means of reducing the
administrative expense on the regulated ccmmnity.
* Allow oner« or ojy»ratr»r?» to use miltinle instruments for the
•one facility, e.g., cover part of the total requirement with
a surety bond and part with a trust. .This will allow owners or
operators to use the lowest cost combination.
• Allow owners or operators to use one instrument to cover both
c'osure and post-closure obligations. This will reduce
administrative expenses.
The Agency understands the advantages of these recommendations and
has allowed them in the reproposed regulations. The other ouggestions
have been specifically addressed.
The first suggestion, eultlple facilities en the some instrument,
poses some logistical problems for the Agency in attempting to assure
that each facility is completely covered. This will pose the most diffi-
culties NAere the facilities occur in different Regions and are thus
- Kt^mnm »•*»•> U*i^», • v.
under the oversight of different Regional Adninistrators. Tne Agency can
cope with these adrinistrative difficulties so long as all documents and
ar,y reports cle«irly iiziicate whiuh £*cility or facilities are addressed
and provide a breakdown by facility of the cost estimate covered. Farther,
th«s financial institutions involved (e.g., trustee, surety, bank, etc.)
-------
will have to oonrwicabe with each Regional Administrator separately
(where irore than one is involved), although only one instrument nay be
used.
Reproeooed Regulation. The reproposod regulation allows use of
trust funds, surety bonds, bank letters-of-credit, and quaranties as
acceptable financial instruments. Additionally the regulations allow
multiple facilities to be «ggr*w*t-.«*1 iinrt*»r on* tnstnrvvit and multiple
instruments to be used to cover one facility. The same instrument may
be used to cover both closure and post-closure responsibilities.
Exceptions have been included for certain types of facilities.
Outright exemptions have been inducted Cor those facilities owned by a
State or the Federal governments*^A" conditional exemption has been
allowed for facilities owned by local governments provided they aro
backed by the taxing authority of the locality and the tax receipts
are at least 10 «•»"**• the costs to be covered. A three-part financial
test nay be net by large companies as a qualification for an exemption.
If at any tine an owner or operator fails to meet the tax test or the
financial test, he must obtain an alternate mechanism (e.g. bond, trust,
etc.) or close the facility.
T.95
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G. Applicability of State .Financial Requirements
Proposed Regulation and Rationale. In the originally proposed
regulation the Asency did not address the problem of differences between
State and Federal financial responsibility requirements that may cauco
difficulties tor owners or operators, since it was not seen as potentially
significant. •• In States that receive interim or final authorization front-
EPA to operate a hazardous waste regulatory program in lieu of the Federal
program, only the State's requirements *ill apply.—-to States that do-
not seek or obtain authorization the Federal requireryata will apply.
Ou'neut. Response, and Reproposed Regulation. The following cement
was madet
The regulation should provide for acceptability of requtr«n»ntfl
as nay' be "set' by1 State* lav and' regulatlonsr—***"' -,-«*-—«--.
The Agency has decided that rules should be established regarding
the applicability o€ State financial requiren>ent9 for the benefit of
owners or operators in States that have such requirements but do not have
federally authorized State programs. Some States ray not seek Federal
authorization, some may fail to qualify, and for some, authorization nay
be delayed. In such States the owners or operators would be subject to
Federal hazardous waste regulationa and also to any State hazardous waste
regulations that are in effect.
A nunfoer of States have adopted hazardous waste regulations which
require owns? or operators to demonstrate financial assurance for closure
and post-closure care. ISee chapter II for examples.) Several States also
reouire liability coverace for sudden accidents such as is required in
$265.147 of the reprcposed regulation. Like the reproposed Federal
I.9S
-------
regulation, many of these State regulations require owners or operators
to use specific financial mechanisms for these purposes. Although most of
the States* liav* calopted flr^ncial mechanissa v.Mch are: very oL-nilar to
those allowed by the Federal regulation, acme States require mechanisms
that are clearly different. Owners or operators using one of the latter
mechanisms could not satisfy the Federal retirements "unless theTpodferal
regulation had a provision allowing such substitution, without such a
provision some owners or operators my have to establ ish tvo financial
mechanisms.. .The Agency feels this would be an unnecessary burden on
owners or operators.
•me reproposal regulation thus allows an. owner or operator to use a
State-authorized financial mechanisn if it ia a mechanism allowed by the .
EPA financial requirements (§«265.143. 265.145, or 265.147) or if th*
State-authorized mechanism provides a degree of financial assurance or
liability coverage substantially equivalent to that provided by the
mechanisRS specifically allowed by EPA.
If the arount of assurance or coverage from the State .mechanism is
less than that required by EPA the owner or operator must establish
additiuoal £inar.cinl assursncc cr Utility ocver^** fr»r the remaining
arount using any of the raeans allowed in the Federal regulation.
The reprccosed regulation also provides that if a State assumes? the
legal responsibility for a facility's closure, cost-closure, or liahility
coverage requirements or assures that State funds will he availdble to
cover the requiresents, the owner or operator is in compliance with the
financial requirements to the extent that such State actions are
substantially equivalent. This is a logical extension of the exemption
of State-cunei facilities.
-------
H. Transfer of Ownership
proposed Peculation. Transfer of ownership or operation of a haza
waste management facility during the interin status period or during the
opera tincT life of the facility was "not addressed in th« oriqinally proposed
regulations. Those regulations contained only a general requirement
for the transfer o£ ownership of permitted. facilities during the post-closure
period.
Oonrants, Responses, and Final Regulation, the comments may be
summarized as follows:
o OonneiiLers wanted the regulations to cover transfer of ownership
or operation before'closure and stated that the regulations should
specify What happens to funds in a trust-(the only financial
assurance nechanisn allowed in the proposed regulations) if the
ownership or operation of a facility is transferred before closure.
Cassatcrs also said that the regulations should explicitly state
that if the transferor owner or operator's remaining interest in
the closure "or post-closure trust funds' is" not transferred5^ the
transferee owner or operator, any funds refraining in tho trust
after p?at-clcsure monitoring and maintenance is completed should
be returned to the transferor owner or operator.
EPA believes that under lying-these, comnents is.the^neeajfos>an,exn.licit.,
regulatory provision vhich sate cur"the~>igK^a^"respc™ibllitieVbf both
transferor and transferee owners or operators if a facility Is transferred
«t any point AarLng operation of a facility or after closure. EPA agrcea
that this issue should be addressed and accordingly has included provisions
for the transfer of obligations under the Consolidated Permit Regulations.
4O CFR 122, Subparts A and B.
1.
-------
. Partial Compliance in Case of Insolvency
Proposed Regulation and Rationale. Under the originally proposed
interim status requirements, the Regional Administrator could consider
financial status AS a mitigating factor and allow oartial compliance
with the financial assurance requirenenta if full compliance would rendnr
the owner or operator insolvent, this provision was intended to avoid
causing facilities to cease' operating solely because they were not able
to establish closure and post-closure trust funds in the full amounts
requlr**! by the *»ffecttveTdate of'regulation, ff the owners or operators'
had good prospects of meeting the full requirements during the interim
status period. The Agency did not wish to unnecessarily cause or contribute
to a shortage of treatment, storage, or disposal capacity.
Cements, Response, and Reproposed Regulation. ,/na_following
comments were received regarding this provision:
o This provision should be omitted since it allows the owner
nost susceptible to bankruptcy to provide the least financial
o -mis provision will only encourage facilities to seek exertions
in exchance for setting up businesses in regions where there is
a nerai Tot ulapuooi f«»*JLlitiO5.
We agree that without great care the provision could work against
tv_ «. A__»4~. «* ••>-» -»«.« —rs^ta — tc ass'^r* arte'j-jate financial
^(9 HmJL*** **mm i • • •• • «»• «••« •*"n1""" »——••—* *
responsibility on the part of owners and operators, the Agency has
decided to crdt this provision entirely fron the reproposal for the
following reasons: (1) Diploaenting the provision-would involve considerable
staff resources in examining the financial cfcatus of owners or operators
applying for partial coroliance and negotiating with such owners and
operators; this would be impractical, since Agency staff will be concentrated
1.99
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on the permitting process.- (2) The closure trust fund as specified in.
the reproposed regulation can be huilt up over the life of the facility
rather than established in th« full anount at the beginning; this places
a nucdi lighter burden on owners or operators at the outset. (3) In
addition, various other financial mechanisms are allowed in the reproposal,
several of whieh~are~considerabiy cheaper than the trust originally
required; this allows nuch greater flexibility to owners and operators in
meeting the requirements.
o The provision should also apply after interim status to
protect smaller owners/operators. Furthermore/ t>*» Regional
• A&ninlstrator should be required to mitigate the effect of
the standard In case of prospective insolvency.
Ftor reasons cited in the previous response, the Agency belelves
it is inadvisable to apply the'provla^Iardurlng or after1 Interim status.
1.100
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J. Access and Default
Proposed Regulation and Rationale. Under the proposed regulation -
for interim and general status, $250.43-9(a) (3), if the Regional
Administrator determined on the basis of any information that an
owner/operator was in violation of closure or post-closure requirements,
he and his representatives had a right to enter the facility and carry
out the requirenvnts. the Regional Administrator 'could use' monies in the
p^*—closure tnwt ftwd to carry mrt: th<»se requirements and could obtain
. - .*....*_, - H H.^^«-^»»l.fc •X^»M«Js>.•.•<».• •••MMSM*».M*MI. • 1^ m^+~l*,t+ »»•••» MJ^a» -
these funds by applying to the trustee. These provisions were proposed
in th* belief that rapid action nay be necessary in some instances to
carry out'closure ahd"|38^closure" activities.
Oounenta and Resem."*. Ksny canoenters objectat to the provisions
on the basis thati*
o Such entry and such use of trust funds violate the right of
owners and operators_tq due process of law.
The Agency has decided to drop these provisions from the financial
responsibility regulation since they are. not in accordance with Section ...
3007 of the Act, which provides for access, and Section 3008, which
contains the enforcener.t previsions. Sections 3007 and 3008 apply to all
regulations issued under Subtitle C of th« Act. and the Agency has decided
that special access and enforcerent provisions for financial responsibility
requirements would be inappropriate.
1.101
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References
1. "Statenent *4 of the Accounting Principles Board," American Institute of
Certified Public Accountants, Inc., October, 1970.
2. Infbnration on Love Canal case in Office of Solid Waste file of damage
cases. U.S. Environmental Protection Agency, Washington, D.C.
3. Analysis of Qroundwater Contamination Incident in Niagara Palls, New
York. „. Report prepared under contract for Office of Solid Waste, U.S.
Bivironmntal Protection Agency by Fred C. Hart Associates, Inc.', New"
York, JT.Y., Ally 2fl, 19TO. ' ' ~" * " ~ "
4. Mesorandua dated April 28, 1980,..from Kenneth Feldaan of.EPA to..the.
public docket for the financial requirements regulations, reporting
telephone conversations with (1) Jtorman NosenchucJc of tho New York
State Departiaent of Environmental Conservation en April 4, 1980,
regarding costs of remedial actions and (2) with attorney • — -—'• -
Richard Bexner of Grossman, 'tevlne anrt Cirrfletto^o^trfaqaiea^rtLllsV *
New York, on April 15, 1980, and with attorney Richard ULppes of
Moriarty, Allen, Lippcs, and Hoffrun of Buffalo, Sew York, on
April 28, i930;"regarflhg"clalJns for damages." "~"
5. Status of State Hazardous Waste Management Programs and Sunrnary Reports
on Sites/Incidents Involving Hazardous Waste Managenent. Compilation
of Infotraticn, mainly frcn EPA Regional Offices, for use of Office
of Solid Waste U.S. BivironrHntal Protection Agency, 1979.'
6. mforcation on St. Louis Park case In Office of Solid Waste file of
• U.S. Environmental. Protection Agency,. Washington,. D.C.
7. Hazardous Xaste Damage Cases. A ccnpilation. Office of Solid Waste,
U.S. 2r.-£r=rr.cntal Prctocticn Aijsr.c'/. '^Tr'*5—-^*^ PflTOrt. April 1900.
fl. Meetings between Federal Maritime Ccmisslcn staff and EPA staff on
" financial responsibility requirements, Novwfcer 16, 1979, and
March 7, 1980.
9. 8urt, Robert E-, et al.. An Analysis of Methods for Insuring Continuity
of Operations for Hazardous Haste Disposal Sites. Craft Report.
Prepared for EPA by International Research and Technology Corporation,
' ~ "'""' ' ' — "
10. »&ns^«i ftilid W^ste >tonagen^ent Standards and Regulations (28-29-1 et.
i.).
11. Kansas Spiv* *%ste !*f»3-!»ant Act, wnerriert 1979 (SB «17O).
12. i-faryitfiKl FMJkzardou» noste Reyul^Licas - Control oC Uve uisfxxt
-------
13. Environmentally Hazanious Hastes, Oregon .Solid V&ste Control, Section
459.600.
14. 19?7 Wisconsin Hazardous Waste Management Act (Assembly Bill 1024) .
15. Mmorandun dated March 12, 1980, f.rart Polly P. Neill of International
Research and Technology (EPA contractor) to George A. Garland of
EPA, Reporting on personal comnunication with John linger, Fairfax
County DopartRBftt of Public Utilities, and with Robert Shnron, Fairfax
County Attorney's Office on Noverrtoer 19, 1979.
16. Hazardous Waste Managenent Issues Pertinent to Section 3004 of the
Resource Conservation and Recovery Act of 1976. Prepared for EPA by
International Research and Technology Corporation, McLean, Va. Lawrence
de Bivort, project manager. Published by, Office of Solid Waste, EPA,
November 1979, report no. SW-183c, p. 264-265.
17. Estirei-s preparwl by Arthar D. T.lttlft, Inc., for EPA,- Oetober'4,
1979.
18. Burt, Robert E., et. ai.. An Analysis of Methods for Ensuring Continuity
of Operations for Hazardous. Haste Disposal. Sites... Draft Report. Prepared .
for EPA by International Research and Technology Corporation, McLean,
Va., October 1979, p. 2-5.
19.
20. Ibid., p. 4-14
21. *»rd, Stephen. Unit Costs of Closure, Monitoring and Maintenance and
Financial Requirenwits. Unpublished report. Office of Solid Waste,
April 1980.
22. Burt,' RobertTET et. ai; An' Analysis of Methods~for Ensuring -i~.-. '
October 1979, page 4-49 and 4-50.
23. Ibid, pages 4-62 to 4-68.
24. Deakin. E.B..rA Discriminant Analysis of Predictors of nusiness Failure."
Journal of Accounting Research. (Spring 1972) t 167-179."
25. U.S. Eovironnental Protection Agency. Potential for Capacity Creation
in the jfa??"-dou3 Waste Manacetnent Service Industry. Prepared for EPA
by Foster O. SneLl, Inc., August 1976.
26. Altonan, Edward. Corporate Bankruptcy Ln America.
Heath Lexington Books, 1971: 15-17.
27. Altnan, E.I.. P.G. Haldeman, and P. Narayanan. "Zeta Analysis: A Wew
*t3t?ol to Identify BahkruBtcv Risks of Corporations." Journal of Banking
and "Finance. (1977): ~
1.103
-------
23. Howards, Richard C. "Stages in Corporate Stability and the Risks of
Corporate Failure." Journal of Economic History. (.Tune 1975).
29. Dun & Brartstreet. The Failure Record through 1^78. New York: Dun &
Bradstreet, Inc., 1979.
30: U.S. Internal Revenue Service. Statistics of Income, Corporate Income
Tax Returns.
31. Henpel, George H. The Postwar Quality of State and Local Debt. New Ybrki
Colurtoia University Press, 1971.
32. U.S. Bureau oJf the Census:- County and City Data- Boole for 1977. 1978.
1.104
-------
Tbl* pact ot the background docuaant addeesses tha llabilit/
proposed~foc-
-------
x.
A. RCTA Mandate for the Regulation
I**-- ---.,„_..• ., |li »»•-.- ..._ * . • . ^
.Section 3004. of. the .Resource Conaervatlon^and Recovery Act of 1916 (P. I..
94-580) mandates that SPA proaulgate regulations establishing performance
standards, applicable to ovnecs and operators of facilities for the treatment,
storage, .and disposal of hazardous waste. Section 3004(6) states that the
standards to be promulgated by the EPA shall include requirements respecting}'
•t&a aaiAtcsanco of operation of such facilities and
requiring such additional qualifications as to ownership,
oooflmiity^of 'operation, training Cor personnel, and
financial responsibility as aay be necessary or desirable i"
Section 3004 (b) is modified by the last paragraph of Section 300 4 1
•So private entity shall be precluded by reason of criteria
established under 'paragraph (6) 'fron the ownership or ••
operatlon~of~facilitie« providing nasacdou* waste .....
treatment* storage, or disposal services where such entity
can provide assurances of financial responsibility and
ccstinuity aS sparatisrs cer.sist-rtt v!t«» t"» ««•«*•• •«*
duration of rlska associated wltn the tfeaUwnt, atorage,
oz disposal of specified hazardous waste."
f 4 «• — ^V^^i * , . f f .
SrA IMS ln{.erpc*tfeO the teca financial responsibility to include ttia
ability to pay for injuries to people and property which result from the-
operation of hazardous waste lunageaent facilities.
Ttoe Ageccy is th'erefore'proposing interla status regulations on- financial
responsibility requirements for liability during the operating life of a
site. 7J»e piopoacd cagulations e«quitc cic& o-v.ar or operator of a hazardous
waste
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XI-2
management facility to .show evidence o£ liability insurance for sudden and
accidental occurrences, as follows:
•An owner or operator of a hazardous waste treatment!
storage, oc disposal facility oc group oC facilities shall
have and shall maintain liability Insurance from an insurer
licensed or eligible to insure facilities in the
jurisdiction where any one facility is located, for sudden
and accidental occurrences In the aaount of SI million pec
occurrence wita an annual aggregate.o£ .*2 .million,, ,^...^_r
exclusive of^legal.defense^costs, for claims arising out of
injury to "persona or proV«rty*from the operations of each
such hazardous waste management facility or group of— • *-•
facilities. The deductible written into-the insurance-
policy shall not exceed 5 percent of the per incident limit
•ot liability of the policy.
B. Key Definitions
Definition* vblch are necessary to an understanding of the regulation and
this docusent are as followst
•occurrence" refers to an accident, including continuous or
repeated exposure to conditions", whlch'IcesuTtT'fir'Bodily"
.injury or property damage.
•sudden accident" refers to an accident that takes place at
a point of time causing immediate oe near-immediate damage.
•non-suddaa accident" refers to an accident that takes
place over a oeriod of time and causes Immediate daaaae
and/or damage over a period of time.
•occurrence-based policy" refers to a policy that provides
coverage for any event occurring during the term of the
policy regardless oe when the claim is filed.
-claims-Made policy" refers to a policy that provides
coverage if the claim is filed while the policy is in
force. This policy may cover events which occurred before
the date the policy was first "issued to a firm as*Vell~as "
events recurring while" the policy is in force, or may be
restricted to cover only events occurring while the policy
is in force.
"legal defense costs" refer to all expenses incurred by the
insurance company and all costs taxed against the insured
in any suit defended by the insurance company.
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II-3
IX. RATIONALE FOR THE PROPOSED REGULATION!
Based on a review of available Information, EPA has determined th^t
liability insurance-is needed dating interim status and that it is available
at reasonable cost to all facility operators who can meet the other interim
statue requirements, mis section discusses the need for insurance, its
availability* and its cost.
* -A". ~tieed"goT'Liability' insurance""
Sudden accidents that causa damage to third parties could occur during tftc
interim status operation of a hazardous waste management facility. If the
operator has insufficient financial resources, private parties or the
governMnt nay be forced to pay for these damages.
An analysis of the 90 daaage incidents occurring on hazardous waate
1 A • .* *|- ».. fcrf^.v»«*J« ii^« ~ «. i iL >nr" --*- - • . #. :*•' f— ••• — - - * --. i •—» •%'»-vrtfj^..V-«"'
management sites In the EPA daaage report files showed that damage occurred
from sudden iacidenta in IS of the incidents. Tnc atosv.fre.qo«nt damage.was.
contaaination of soil and water but soae incidents involved employee deaths
and sit'cTdaaager-*Since there have-not been thorough-investigations-into every
incident reported, many of the reports in the EPA files report potential
rather than actual damage. Scanty Information has also resulted in an absence
of cost'estimates*for the damages reported in the majority of incidents.
In five cases actual damages were reported. One case involved the
American International Refining Corporation of Bruin, Pennsylvania. The dike
on tne"wa*steVtbrage Lagoon" broke spilling chemical wastes into the Allegheny
* ' - «T-I ***** M. -•» - • -•« •**••••. (M-m vwk^iv i • . *i in I I'M' H *i r I** —*-• • i
River. Approximately 4.5 million fish, valued at $216,500 (1979 dollars),
were killed. The company was able to pay $20,000 in fines for damages. In
-------
II-4
three cases the spillage or leakage of wastes Into rivets killed fish and
other awatic life and contributed to water pollution. In the fifth case of
reported daMoe, twelve, tanks exploded at fch« Rollins Environmental Sccvicoo
sit* in Bridgeport. New Jersey and caused several deaths and danaga to
facilities;~ la th« fl*« Incidents where potential damage was reported, no
• •• .1 t •- •• -T.,.- - ^.-Si**—--•** -»*.*., f ,!*•«-•^»**<-M*»'*»«.>HI>*V«*
-------
II-S
the nation1t largest hazardous waste management firms. Oased on a review of
these cases, EPA has determined that with the exception of state "ana federal'
facilities, all hazardous .waste management firas should be required to .
salntain liability insurance Cot sudden incidents to assure chat some funds
are available to coopenstate third parties in the event that they are harmed
by a sudden accident.. The. reasons tor.exempting state and.federal.facilities
are discussed in "a later section?
C. Alternative* to Liability Insurance
Before deciding on liability insurance the Agency investigated alternative
mechanises foe ensuring financial responsibility. Three aechanlsaa, bonda,
H^A - T - • • t *•»•**••»•• r*» * ••-- * • - 4 «... -»•••«*-» *.- * - 4 »--, **•
•elf-insurance and a national fund were each examined and subsequently
rejected. The aajor problens with each aecnanisa are discussed below.
1 -*- •**,* ••« »* f , . »_,..». *. IA . V- i - I * ' - « MMMbWUU^tfeMV I •*».-*« V«- -a> *. ~» M»i * *«'•(«. J^*.' «M^.
Bonding is not perceived by surety coapanies as a form of insurance.
" V •• • - • '•"**:>-., I ,«.
-------
II-6
Self-insurance was given careful consideration as an alternative to
liability insurance. Tt»e Agency believes that nost, 1C not all, Clems
currently carry or can obtain Comprehensive General Llaoility policies with
coveiage for sudden accidents. Furthermore, Ccoa conversations with
representatives ot tits insurance industry and state insurance commissions, the
Agency understands tftat self insurance is rarely it ever used as a mechanism
• * . t , . j , * * »i».-^«^-~<» nO»e%l ft* *»'•.<• V"*"*** *«w*<-*i M - • d **^ i*
foe insuring general liability risks. Hence, the Agency concludes that., there
is no need to permit self-insurance for eheinteria status period.
Finally, the Agency considered A national fund. If such a fund is snt up,
the Agency or sons otber federal organization would have to undertake the task
of reviewing and paying out funds to injured third parties. 71»i3 is a task
the Assnsy la ill-c«uipp£ii.fca.?ec£ora.~..I£A insurance inUu»Lty, Uuwnvnr,
appears to be willillig"and"able"'to"provtde effective'coverage for sudden
accidents. Consequently, the Agency feels that a nationaVfund for the
purpose of covering damages froa sudden accidents would not be necessary.
D. Availability ot Insurance
Tbe proposed 9«neral at«nd«rd» financial c«*{x>iisibiiity regulations
required each owner or operator to maintain liability insurance for both
sudden and accidental occurrences as well as.for,.non-«ud
-------
IX-7
Analysis performed since the proposed rules for interim status were issued
(suggests that liability insurance coverage for sudden events is generally
available as part of the^candardjOMpreherisive General Liability (CCLJ policy
carried by almost all companies. Conversations with state and insurance
industry officials Indicate that most firms following good business management
practices already possess liability insurance covering sudden accidents.
, .. , 4 - • r-
These, are firn* that arc responsible aaaoaca,o£.Uio Industry that intend to
stay in business foe sone length of tine and see Insurance as a necessary part
" . * - I 1 *-»vV»M- • '. V W I - * - -• —»— - -
of doing- business. EPA believe* that, firms that follow good management
practices should easily be able to Increase their coverage to the requisite
amount or secure th« necessary aatount of coverage in the event that they do
noe currently carry any- liability insurance. » O»na««iuently, EPA haa uuacluO«4.
that Insurance^cove rage'of sudden "incidents wlll'be' available to all firm*
during the inter in status period.
Tne analysis has also confiraed that liability coverage for non-sudden
occurrences nay noc be available to all firms prior to compliance with tha
proposed general standards regulations. Most insurance companies do not
currently provide such coverage. The few companies that do provide coverage
.restrict ie.to-UMic well-managed clientsj other companies placeman additional
restriction that the flras they Insure be large, additionally, coverage is
likely to be available only after the completion at an engineering inspection
of UM facility which would necessarily be a time consuming process. Tlia
Agency, therefore, believes that insurance coverage of non-sudden incidents
would not be available to all flras managing hazardous waste during the
-------
Xl-8
interia status period. Consequently, foe the inter in status peciod, the
Agency has decided to propose at this tine that insurance coverage be
required, but only for damages from sudden and accidental incidents. (The
Ayttnuy i» considering requiring insurance coverage Cor gradual, non-sudden
occurrences during interia status and requests consents on the availability
and affordability of such .ovaraqe.)
it. Amount oi Liability Rtquiceroenta
Since EPA has information on only IS examples of sudden incidents and only
one of th- 15 -x*Brpl*9 has a damage cost estiaate, it is difficult to
determine the aaounc oC insurance coverage which should b« required to ensure
financial responsibility. The daaage cost eseiaate fro« the sudden incident
contained in the EPA files was approximately $200,000 (1979 dollars). Damages
occurred in cany of. the other cases,, but ?o»J^«i»^«»j;««J^.*»fj>?^1.V ,
EPA believes that non-financial RCRA regulations should reduce both the
likelihood of occurrence of a sudden accident and the potential damage from an
accident if one does occur. However, damage from a sudden accident, by its
very nature, is «uch less amenable to control than daaage from non-sudden
accidents. Non-sudden accidents cause daaage over a period of time and early
discovery"of the "accident*ctn"rosult In considerably reduced damage. • Sudden
accidents occur at a point of tiae and cause iaaediate damage. Consequently,
RCRA regulations, while reducing the likelihood of a sudden accident, may nof
change significantly the expected future daaage'Croa sudden accidents.
Therefore, past damage incidents may be valuable as a guide to the amount of
financial protection to require to cover future accidents. Based on a review
-------
11-9
of the convenes on the proposed full status regulations and the recent
analysis of the damage reports in the files, EPA believes that 51 million of
liability incurance per incident (with a 52 aillion annual A«jfjr«fj*e» p»r firm)
will provide adequate coverage for facilities during the Interim status period.
In an effort to get more information on the amount of liability insurance
that tu*y be a^pro^i**(.* to cv/¥«i »uOU«u LiiciUaaL«« Ilia Atjcik*./ contacted nvcny
insurance industry officials. They indicated that the amount of existing
coverage carried for sudden events- varies considerably depending upon the
needs or the particular firm and the coat u£ :>uch in&ucance and is usually
negotiated with an insurance agent. The amount of coverage depends upon the
receipts of the fira, the materials handled, and the magnitude of potential
third party 4a**ge. rn g«n*ral, ene**exiflefng coverage of the whole CGL policy
may range troa 5300,COO to 51 atlllb1rTlfo7'
-------
11-10
waste management sitess these states have closely tailored'the amount of
insurance coverage to the operational characteristics of the sites located
within their jurisdiction. The states, in most cases^have examined the sites
on A case by ease basis, investigated the typ* of facility *"rt Ch» i««nn«r of
its operation, the types of waste the facility handles, the type and value of
property adjacent to the facility and the consequent damages that could occur
tr^tM f • •.,..» -. t> •,.*..*.. A .--- v-•••»• ^ . w^ww ••»**'*-•*•*• * • - f » —i t-
in the event ot an accident. Table l presents state hazardous waste
regulation* »n«i any rM»v»nt face* known ab?ut theso regulations. Tnc lirgo
number of sites vitain toe nation precludes EPA froa using a site specific
approach to the degree utilised by the states. However, the fact that the
state* have conducted independent Investigations into hazardous waste damago
cases and are requiring amounts of insurance that conform closely to the _
aisount proposed by EPA further indicates th*t tne amount of 'insurance coverage •
proposed by EPA is appropriate.
Table 1
STATE HAZARDOUS WASTE SITE INSURANCE REQUIREMENTS
^^SURA^^C8 REQUIREMENTS
»Tne State of Washington.has. developed a classification
systea for wastes and uses th» type of waste accepted
by the site to determine the site Insurance
requirement. Any sice which avuepLa Lha ".uuaL
hazardous" materials would be required to have $1.2
million in liability insurance during the active life
of the site. At the current time, no such site
legally exists in Washington. This requirement was
enacted in anticipation of the state's acquisition and
operation of a hazardous waste disposal site. This
site im couplecely surrounded by federally owned land;
the nearest building would be seven miles from the
site.
-------
11-11
Table 1
STATES (continued)
Oregon
Oklahoma
Kansas
Oregon requires* that ~hazardous~waste sites catty $1
•11lion In liability insurance. This insurance would
cover sadden incidents daring tfio operation of the
sic*.
The Oklahoma legislature developed the insurance
raqulrenants which apply to both hazardous waste sites
. and injection n«ll« in Ui« »CAt«. "Kt obtain on
operating permit, waste disposal operators must have
liability insurance in an aco-jnt equal to two times
the value of all property within one mile of the sitej
it aust not be toe less than $100,000 and need not be
for aore than $500,000. The insurance must be for
damage occurring above or on th« surface of the ground
and nust cover damages resulting froa Uie operation oft
the site during and after closing. In lieu of
liability insurance, site operators can substitute a
deposit of cash or securities in an amount acceptable
to the state, provide that the deposit is maintained
' for five years after the site is closed. " Three "
disposal,sites and, 19. injection_we_lls must comply^.ith
these regulations. Additional liability insurance for
subsurface damage.can be required-but no site in-the. -
state .has had to obtain this additional coverage.
Kansas' has* one legal' hazardous waste site in the state
operated by Kansas Industrial Environmental Services
(KI2S), and the current insurance requiresent is
tailored for this site. Even before the insurance
requirement became state law, KTRS WA« required to
provide proof of liability insurance as part of its
Application., f or ,.an_operating permit^, .After evaluating
the cnaracteristics'of the KIES "site"and the cost and
availability of Insurance, state officials required
Luc iit.e OviieCd to OuUiin «.cvet««je £oc not less than
$300,000 for each occurrence: this coverage includes
not less than $100.000 for each person affected and
not less than $100,000 for property damage for each
occurrence. (In 1979, KIES1 annual revenues totaled
$2 million.) Por comprehensive general liability
coverage of $3 million, KIES paid $20,000 in
pteaiuins. Yhite policy covers suouen ur.»l noa-Budilen
incidents occurring during the operation of the site.
Kansas is currently Devaluating its insurance
requirements.
-------
11-12
Table 1
STATES (continued)
South OaroH1** T« ««vim f*»r«Hi». » «p**?1al cw!«itt«e la sandlnq Its
reconsflndatlona on Insurance requirements to the
legislature foe consideration thla aeaaion. The
coaalttee plans to recommend that Sooth Carolina
require sit* operators to obtain liability insurance
'for not less than- $1 million per occurrence and $1,, .
Illinois Illinois h»s recently begun an investigation of the
cost and availability of liability insurance.*. They
•re considering a proposal that all landfills carry
liability insurance.
p. Cose and Affordability of the Insurance Requirement
Zt is quit* difficult to isolate the cost of sudden accident coverage
because suca coverage is normally Just one component of the CCL policy.' The
cost varies considerably with the inherent r i sk InesT'of 'the^bus'lnelWi' l the**"
I - t 1- ' •• I . - «H^«'*«f«*«4».^» >"1 mltiHt. •« WMkn^VHl.1 ^-^v-^4
management practices of the flrn, and the past accident record of the firm.
Cost is sensitive to the level of coverage as well as the size of the firm (in
terras of revenue) and rises less than proportionately with an increase in the
level of coverage or the size of the firm. Table 2 presents rough estimates
TABLE 2
COST OF CCi SCLIC7 SSSSaiKS CCVS.'V.CS FOR S'JDSEH POLL'JTION EVENTS
(1979 dollars per year)
Annual Revenues _ SSOO.OOO _ - $1 million -
Liait of Coverage SI Billion $10 million $ 1 million $10 million
Cose of Preniua 8-12.000 12-16,000 10-15.000 15-20,000
Percent of Annual Revenue 1.5-2.5% 2.5-3.5% 1.0-1.5% 1.5-2.0%
SOURCE: ICF Incorporated.
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11-13
of the cost of a CCL policy Cor small wast* disposal firas (revenues of $1
million and less) with •average" risk and the relationship of the coat to
total revenues. A small firn which is deemed to'pose greater risks could
easily end up paying 5-10 p-rcent of its rev-ri'-s for et incioenc byecitied in tne
-------
11-14
proposed Cull status regulations. An extensive analysis of the EPA damage
case files snows that damages caused by sudden incidents may be much smaller
in magnitude than EPA previously believed. Consequently, the Agency la
pcofc/waliry chat only »i Million o£ liaoilicy insurance per incident oe required.
(Many conenters on the proposed full status regulations argued that EPA
should not specify any one anount of required insurance coverage, that tho
- i •*• -w^t^fMaor*** - - ••• .-• . * »•* » •*, ^« ,.,v 4. ~~ -- ^*Mw-k.4. -m M-. *.—- --,- •>..* .1 M * r < • .
amount should be decided on a casacby-casevbasis afterj» review of the 'degree
•>
and duration of risk" posed by the operations of a hazardous waste management
facility. EPA agrees that the degree and duration of risk are of signal
importance in setting an appropriate level of insurance coverage. EPA
believes that SI Billion is a reasonable minimum level of coverage for sudden
AIM! accidental occurrences tot all firas managing hazardous wastes* and that
many firas will choose to~obtain coverage in greater amounts baaed on the
risks innerent in their operatlonsT"" Pur"th"ermore*,'EPA Sell eve's that~"the'
preaiuos paid by facility owners and operators for a given level of coverage
wltFTe'flect" the'degree and duration of risk posed by the operations of the
facility.)
Liability insurance is to be maintained on a per firm basis with an Annual
aggregate liability limit. Liability insurance is required on a per firm
basis rather than a j—r ««f» h»«i? s«rr»tjs» ir»«yf9«« cfjr-paniea aenerally
provide coverage to all facilities owned or operated by a firm under a single
policy. The insurance industry provides coverage in this manner because
through the use of an annual aggregate they are able to take into account the
risk of multiple incidents occurring at a firm wnich owns one or more
facilities. EPA has reviewed all IS incidents of sudden damage in their files
-------
11-15
and have not discovered i single case of multiple incidents occurring at a
hazardous wast* management firn in a given year. The risk of multiple
accidents occurring at a firm in * glv»n ye»r increases, though At a
diminishing rate, with the number oC facilities owned or operated by a firm.
1C appears that tne nuabec ot facilities owned by a firo must be very large
before the probability.of .two.or..more^accidants at a firm becomes
significant, "conse'quently, the Agency'Relieves'that an'annual aggregate twice
th«e of the liability, llaifc pee .occurrence, will provide adequate coverage .for,
sudden incidents.
Ttoe liability insurance Bust be obtained froa an insurer licensed or
eligible to insure facilities by the appropriate state authority in the
jurisdiction where any on* of the facilities ovned or operated by the firm is
located. This new provision ensures that the insurer providing the required
,i . .r • laniimmmi i i T."U" IT\r__-jux i m—• '- " m luji.
coverage is subject, to oversight by state .insurance regulatory comnlssions and
is approved by these coaaisalons as a financially secure insurer.
The amount of liability insurance carried oust exclude legal defense
costs. Legal defense costs are excluded froa the liability Units because the
costs of legal defense could be consideraole and, it included in the limits,
'could consume the aajor portion of insurance coverage and leave little
coverage for actual damages, the exclusion of legal defense costs is also
consistent with standard Conprehensive General Liability policies.
An added requirement is that the deductible in the Insurance policy must
not exceed 5 percent of the per incident llait of liability of the policy.
maxlaua liait has been placed on the deductible in order to prevent firms
-------
11-16
lacking adequate financial rvnources from carrying policies with very high
deductible that they could not at ford to pay should an incident occur. The
maximum deductible has be«n set at S percent because conversations with
Industry officials indicate that firms with a policy ot 31 million are
unlikely to carry a deductible In excess of $50,000; 'In fact, most firms
,f »r t >*»wii» , *- * , *
probably carry deductible moeh. sroaller^than $50, COO. Uswayac ,
carry insurance coverage in excess of $1 million. tnese firms may-cur re ntly*
carry deductible* in excess of $50,000. Since the maximum deductible is
• • *i « _ * • —» -> • - * t v -*
raotrictfceS as 2 percentage of the liability limit of the policy, firms with
greater cororase than SI sillier, woold haw« th« flexibility to carry
deductible* of Higher than 450,000.
The Agency proposes to sitinpt' s'tate' and federal fael'lttiea from th«"
financial responsibility requirenants because state and federal facilities
- i •»miiMii»»nj. ....... ^»^n mi ....... ••,•.-•«..• . --~~>— *- •— ••••
have powers to draw upooVtax revenues in the event that there are third party
•* • . »% •*.-*• *•» •rHMJ »-*» • ,«-•>•••- -• -9* «.-» «*«.^.r~i. . , — . t »^-^.. n-.
claims which oust be paid.
Finally, self-insurance is not permitted as an alternative .to liability.
insurance. Self-insurance, as proposed in the December, 1978 full status
standards, was defined as thft absence of insurance and tho sufficiency of
equity to cover potential cl«i«s.-"Th« Agency believes that most, if not all,
f irss currently carry or can obtain CGL policies with coverage of sudden
accidents and hence sees no need to permit self -insurance for the interim
status period.
EPA invites public coaeints on whether the Agency should require insurance
coverage for non-sudden incidents during the interim status period. Otie
-------
11-17
Agency also requests comments on the desirability of allowing the use of
alternative liability requirement mechanisms to liability Insurance for either
sudden oe non-sudden Incidents during the Interim status period.
ITT. RFQnEST PTMt PfWr.TC rpuMPMTS
The Agency is reopening Che consent period for the proposed general
*tanJ*£^» isolation*. The Agency received many comments on the proposed foil
status regulations, and has identified the following, issues.
• Should the Agency require Insurance covorago foe non-sudden
incidents during th<* infcerla status period?
Kill such coverage be available on a continuing basis, oe may the
insurance industry withdraw such coverage in the event of large
d*n»ge suits?
It it desirable to allow the use of financial responsibility
aechanlsas such as Indemnity funds as alternatives to liability
jAsuranca . foc^L.tha r guddenuojcj>inong»uddeni incidents?^ Ho^ would
such alternatives*worK?
• Is the anount of coverage specified In the regulations
• Should the Agency specify separate requirements for bodily- injury
liability and property damage liability? If so, what should
these requirements be?
• can we tailor the amount of required insurance to reflect better
... the degrees of risk posed by the operations of partlcularjBitcs?_
Bow can this be done?
• Hbat will be the likely annual cost of insurance for non-sudden
incidents?
* will all firms be able to afford insurance for non-sudden
Incidents?
• Can a useful self-insurance alternative be specified which will
ensure financial responsibility? What criteria should EPA use in
establishing an allowable level Js) of sail-insurance? Hhae
should the level (s) be?
-------
11-18
Since the Agency proposed the general standards financial responsibility
regulations, it has obtained additional information pertaining to the issues
listed above. This inCoraation is attached as appendix B to the background
rineuiwe. EPA requests cs=ents «r. ths ir.fesaatler. presented in the
background docoaent and requests additional evidence to support new or
previous coeaeAts relating to tne'issues idontitied above.
-------
APPENDIX A
This appendi* piovitles bcleC auiwadtiea of the 15 damage incidents caused
by sudden occuccencea At hazardous waste oanagenent facilities. Tne
information presented on tftese individual incidents has been culled from EPA
filesi the infoVttttfon'sources In'the"files'range fcora short"newspaper
clippings to conplete reports on EPA on-site investigations, tn *ome cases an
effort was aade to add'to the informationTava'lialile<"thrbul|h' cohversatlona with
state EPA officials.
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A- 2
Sitet GVfOSY REFntTKG CO.
Location! West Memphis, Arkansas
Year of Beportt 197$
Sourcei EPA file
3&L«J Cwe*e^US •»£ ?* **^_^*^_^*^*_^^**JS.
Type of Sites Refiner*s onsite disposal lagoons
Operations Active
Problems In 1978, heavy rains caused lagoons containing oil and other refinery
wastes to overflow into surrounding faraland and bayou. Waste spills
and other problems have occurred several times and the company is
reported to be negligent in site maintenance.
Cleanup Action Taken: to 1978, Cueley asked for U.S. SPA,
assistance in cleaning up dump
site.
Damages Identified* Sooe damage to flooded areas.
Extent of damage was not reported.
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A-3
Site: ALLIED P5TPOLEUM
location: Whltehoua*, Florida
Year of Ripocti 1976
Sources: EPA Ciltf EPA Site Status Report
Site Status at Tina oC Incident
Type of Sltei Onsite disposal lagoons Cor waste oil reclaimer
Operation! Inactive—company went out of business In 1968
Problem: In June 1976, approximately 200,000 gallons oC oil spilled from an
abandoned waste oil pit when the side o£ the pit collapsed. Some of
the oil entered a nearby creek.
Cleanup Action Taken: SPA hired a cleanup contractor and conducted
gcoundwater monitoring.
Damages Identified! None reported.
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A-4
Sit«: APPALACHIAN POWER COMPANY
Locations Carbo, Virginia
Year of Report: 1967
Souseei SPA file
Site .Status at Tina of Incident
Type of Sites Company disposal site Cor fly ash waste
Operation: Active
Problems A dike of a lagoon containing.alkaline waste collapsed and released
400 acre-feet of fly ash waste into the Clinch River.
Cleanup Action Takens Dike repaired.
Damages Identified: Estiaated 220.000 fish killed and all food organisms
in river destroyed.
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A-5
Sltat DAINGERPIELD MANUFACTURING
Location: Morris County, Texas
Year of Reports 1974 .
Sources EPA file
Site .Status at Time of Incident
Type of Sitei Manufacturer's onsitw waste disposal pond
Operation! Active site
Problem Oalngerfield Hanufacturlng duaped wastes fcon the processing o£ felt
for shingles into onsite disposal ponds. A dike on a retention pond
broke during the construction of a sprinkler system.
Cleanup Actionjraxen: 2ik« icpaiirsd
Damages Identified: Potential contanination of groundwater.
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A-6
Site: MILL SERVICE COMPANY
Locations South Huntingdon, Pennsylvania
Year ot Report: 1974
Sourcet EPA file
Site Status at Tiae of Incident-
Type of Sites Off-site waste treatoant and disposal
Operation: Active
Problem The Mill Service Coopany treated and disposed ot pickle liquors and
other wastes Croa steel plants. A leak in a sludge pond allowed
wastes to discharge into nearby creek.
Cleanup Action Taken: Site closed until new pond walls and a new lined pond
ver« built.*
Damages Identified* None reported.
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A-7
Site: BROWMING-FEPJ.IS COMPANY
location: Whitewater township, Ohio
Year of Reportt 1978
Sources* EPA filei Ohio EPA - Dennis DenjLro (614) 466-8934,
Canali Cay (614) 456-8508, JanaarylMO
Site Status at flam ot Incident
Type of Sites Of£-»it«t dispoMl facility
Operation: Active
: This site is one c£ 13 Bsswniag-Fcrrls sites in Ohio. Styrofoaa,
sludge, plastic byproducts and other wastes from several manufact-
urers have been duaped at the site. The operators accept approxi-
nately 500,000 pounds of waste.pec week. Fires at the site have
aroused the interest of residents and government officials and
strengthened their suspicions of inadequate management practices.
large fire at the site could force the evacuation of 7,000 nearby
residents.
Cleanup Action Takent the Oalo EPA ia currently investigating the waste
MM^euent practices o£ 10 Biownlng-Fecria sites in
the state.
Damages Identified !»na reported.
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A-8
Sit*: ROLLINS ENVXROtttENTAL SERVICES
Locations Bridgeport, New Jersey
Year of Raport: 1977
Sourcesi EPA fil»i Region IX EPA, Mine Oebonis, (212) 264-1867,
January 1980
Site-Status at Tiae ot Incident
Type of Site: OCf-«ite watt* storage facility foe organic chemicals
Opacaeiont Activ«—Ordered shut after incident but was later reopened.
Probleat Twelve tanks exploded and burned when vapors ignited during th«
isstillaiisa =2 toilers a«! pi?!.-.?. Six esplaysca wcra hilled and
others were injured.
Cleanup Action Takent Cleanup ordered by state.
Oaaagas Identified: 5 «J*«th».
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A-9
SItoi U.S. DRUM
Locationi Chicago Illinois
Year of, Report! 1979
Sources: EPA filej EPA Sita Status Reports Illinois Department of
EnvironMntaL^Ptotect'ioh (217) 782-2829," Janbary"l980
Site'Status at Tine o£ Incident
Type of Site: Off-site waste storage facility
Operation: Active
Problem Spill of acid vaata caused a significant air pollution problem.
Investigation showed that over 5,000 barrels of unknown waste ACO
Improperly stored at the site.
Cleanup Action Ta«cen: State has filed injunecive suit. Operator apparently
is no lonqer accepting wastes.
Daaage Identified: Possibility of explosion and groundwater contamination.
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A-10
Sit.. MEASE CHEMICAL COMPANY
Location: college. Pennsylvania
Year of Report: 1971
Source: EPA file
Site Status at Tiae ot Incident
Type of Site: Manufacturer's oniite disposal facility.
Operation: Active
Problem In April 1971, 6,000 fish wece killed in Spring Creek after waste*
flowed froa a ditch on Keace Cheaieal Coapany property. Contam-
inants entering the creek included cyanide, iron, phosphates and
nitrates. M-Joc fish kills and pollution probleac had occurred 3
tiaes in 1963, once in 1963 and once in 1968.
Cleanup Action 1*ken: Due to pressure froa state officials, Kease began
packaging and shipping its wastes to its parent
facilities in Ohio.
Damage Identified: Cost of streaa water pollution and fish killed not
estiaated. Nease was fined $3,500, to be paid into
the Pennsylvania Clean Steeaaa Fund, for the 1971 fish
kill.
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A-ll
Sitet AMERICAN INTERNATIONAL REPINING CORP.
Location: Bruin, Pennsylvania
Yeac of Repocti . 1968 .
Sourcet EPA file
Site -Status at Time ot Incident
Type oC Site: Onslte wasto storage lagoons
Operation: Active
Problem: Dike on waste storage lagoon broke spilling chemical waatea into
Allegheny River.
Cleanup Action Taken: Company declared bankruptcy In 1972. Pennsylvania
spent over $20,JDOO Cor cleanup before a new owner was
foand~for site. New'owners posted"V$100,000 bond foe
cleanup.
. -• *^M» W* ~f tr f * .
Damage Identified: Killed 4.5 million fish valued at $108,000 ($216,500
in 1979 dollars). The cospany was in poor financial
shape and could only pay $20,000 in fines Cor damages.
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A-12
Sites bERXS ASSOCIATES
Location: Douglassville, Pennsylvania
Year of Reporti 1970
Sourcei EPA file
Site Status at Tine ot Incident
Type oC Sitet Onsite lagoon*
Operations Active
Problem: Dike broke on sludge lagoon spilling sludge into nearby rivoc.
Cleanup Action Taken: Berks Associates spent at least $100,000 to empty and
backfill the lagoon.
Danages Identified:
None reported.
Litigationi me State of Pennsylvania sued Berks Associates to recover
$187,000 in state J^unds expended on problem study and cleanup.
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A-13
Site i SHERWIN WILLIAMS 00.
Locaclont Gibbsboro, Ntw Jarsay
Ytar of Reports 1973
Sourcei EPA file
Site Status at Tin* of Incident
Type of Site: Onsite disposal o'£ manufacturing"wastes
Operations Active
Problems tn February 1973, the dike wall of a lagoon washed out. Approxi-
mately 280,000 gallons of water and 75,000 gallons of paint, sol-
vent* and other wastes entered nearby Milliard Creek.
Cleanup.Action Taken:.. Shervln.Hillias* CO. spent 55.569 on cleanup.
Damages Identified: No significant environmental damage reported.
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A-14
Site« ENVIRONMENTAL PURIFICATION ADVANCEMENT
Location: Sayou Sorrel, Louisiana
Year of Reporti 1979
Sourcest EPA filej EPA Sic* Status Report; EPA Damage Case Report; Louisiana
Ccpartser.t of Soil ar.d Water Conservation. Mo Garcia 1504) 342-6363,
January 1980.
Site Status at Ttae ot Incident
Typ« ot Sitet Oft-site waste disposal facility
Operation* Active"
Problea: After the death of a truck driver at the site, a U.S. EPA investi-
gation discovered that the site contained surface.impoundments and a
landfill cell. Dtspitt the fact tne site had a permit for landfill
operations orly, liquid wastes froa ehealeal and petroleum companies
bad been accepted at the site. The truck driver was killed when the
liquid eheaical wastes he was pumping into a surface impoundment
reacted with a previously di&posed wasta so fora hydrogen sulfide
gas. Cause of death was asphyxiation due to inhalation of the gas.
Th« Scat* of Louisiana revoked the site's permit and sought to force
site cleanup.
Cleanup Action Taken: Three of the surface Impoundments have been drained
and are being filled in. The Landfill cell has been
'filled in'and the rccaLilng surface lapoundment ia
being drained. The State is considering ordering
further cleanup. Th« Hart Associates' estimates for
site cleanup are:
Level I Level *1_
1. Surface Drainage Control * 11,000 $ 11,000
2. Pond En?tying and oeepwell Disposal
of Liquid Wastes 8.880,000 8,880,000
3. On-Site Secured Landfilling of Pond
Sludges 3,700.000 ».JJO,000
4. PSKSfiilis* a.vS Clay Capping 71C.OCO 710,CCO
S. Landfill Area Croundwater Protection via
Sludge Trenching 111,000
6. Landfill Clay Cover 111,000
7. Monitoring Wells 70,000
8. Study Analysis 1,350.000
9. Engineering Designs 1,350.000
10. Enforcement and Adainlstration 675,000 905,000
11. Landfill Excavation and Secure
Landfiliiag Disposal
GRAND TOTAL $16.862,000 $22,631,000
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A-1S
ENVIROK1ENTAL PURIFICATION ADVANCEMENT (Continued)
Identified? On* «1caeh. Potential groundwater and surface water
contamination. Citizens have coaplaincd about
pcobleiu with land and water.
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A-16
sty.L.».!n; TANNERY
Location! Blkland. Pennsylvania
Year of Repocti 1973
Situ Status at Tin of Incident
Type'of Sites Onsite waste storage
Operationi . Inactive
Problem: When the Slkland Tannery wen.-, out of business, the site was gtv<»n rn
toe city. Tanks containing sulCucic and tannic acids, line, and
•odiua hydroxide war* abandoned at the site. A flee damaged the r
facility and the town chose to level the site. . During the leveling,
20,CCS 9dllc.-V3 o£ chaatcal wastes ^«:e 2pili«d And dcainad Into the
Oovansgee River.
Cleanup Action Taken: City spent $140,000 on cleanup. Specific cleanup
actions were not reported.
bahages Identified: All aquatic life along a seven mile stretch of river
was destroyed. No cost estimate.
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A-17
Sitet
Location:
Year of Report;
Sourcest
SUMMIT NATIONAL^tXCUID SERVICES
Portage County,'Ohio
1976
EPA filei Ohio EPA Dennis Oenico (614) 466-8934; Ohio
Attorney General's Office, Terry Fey (614) 466-2766, January
1930.
Site Status at Tine of Incident
Type of Sitet of f-slte_ waste treatment and disposal
Operation. "Active"
Problem Until 1976, the Summit national Liquid Services facilltyr_treated_andu
incinerated liquid industrial wastes. Ti.« Incinerator WAS shut down
(n •«!•. T»7fi And WAR.* were stock oiled on the site. Although the
dee lacked storage facilities and was under investigation by the
Ohio EPA for unautnorlxed groundwater discharges, it accepted
scveVal tbWMi.d~dii.nVSnd filied'several"large drums with liquid
wastes. One 300,000 gallon tank cracked and WAS leaking fluid^to
>>». urfu.Mi wttwl --'•" i\r Him dcuos fcaifl cwC£d£j.n3 and looking. *h*
feMW *p fcW*.t>«* ^WW* MHMf vVM »«»^ ^~ -• ., • » ,T. iww . »- ^
site is within the Berlin Reservoir basin but it has not installed
any monitoring wells."-In-addition,..residences are located within .
200 fe«t of the facility.
Cleanup Action Taken:
T.
2.
3.
4.
S.
6.
7."
Ditching Around Site
Damages Identified:
In 1977, Ohio EPA'ordered site owner to stop-accept ing
wastes and to dispose of .all liquid wastes in a manner
acceptable to state authorities. The site was sold in
early 1979 and a state Investigation of tho slto ic in
progress. A cost estimate for transportation and
removal of present inventory is $360.00". The Ohio
EPA estimates that full cleanup oC the site will cuut
a minimum of S3-S million. The Hart Associates' Level
I coat «ati.itate is.
. $ . 6,000.
1,360.000
43,000
3,000
140,000
140,000
- 70,000
•total $1,762,000
Groundw.iter contamination cannot be confirmed because
the water was already damaged by past strip mining in
the area. Contaaination oE a stream which feeds the
river used by tne city of Youngstown for its drinking
water supply is possible. Site is also a fire hazard.
Security Fencing
Monitoring Hells
Study Analysis
Engineering Design
Mminlstration and Enforcement~
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A-17
SUMMIT NATIONAL LIQUID SERVICES (Continued)
Lltigationt The Actocney General of Ohio has filed suit against Summit on
behalf of the Ohio EPA. The suit asks for sits cleanup and
closure and for civil penalties of $10,000 per day for each
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APPENDIX B
Appendix B contains information from two reports prepared for EPA which
provide detailed support foe the conclusions presented in the main body of tne
background document. The first section provides an analysis of incidents that
have occurred on hazardous wast* management facilities. This section is drawn
from _a report titled, -Review and Analysis of Hazardous Waste Site Clean-Up
and Third Party Damage Costs.* March 14, 1980. The- second section summarizes
the availability and cost of third party liability insurance for permitted
hazardous waste disposal sites.
-------
RJEVIE* AI10 ANALYSIS OP HAZARDOUS WASTE
SXTB CLEAN-UP AND THIRD PARTY DAMAGE COSTS
March 14, 1980
Prepared for the
Office of Planning and Evaluation
Environmental Protection Agency
-------
INTRODUCTION
Many communities 'around-the country a re' currently- faced with the- costs of
cleaning up and preventing damage to residents from poorly, managed hazardous
waste management sites. Although sany manufacturers and comnerclal site
operators have assumed financial responsibility for solving the problems'
caused by their waste aanageaent practices, many others sold their property to
others who were unaware of the problems, went out of business before the
problems were discovered;- or declared bankruptcy when the problea was dis- •
covered.
• In the future, the federal government will use a attainting system to
regulate hazardous'waste management sites'." In" 'general', future waste manage-
ment praccicas on pernitted sites vill be Car superior to past practices.
Nevertheless, there is concern that financial responsibility for site clean-up
and third party danages could still be a problem iC unexpected accidents occur
the costs could potentially be quite high.
This report provides a preliminary examination of the potential magnitude
of clean-up and third party damage costs on permitted RCRA hazardous waste
management sites... Little information **as^ available on the likelihood^of
environmental and third party damage on RCHA-peroltted site's anil the cost" of
remedying problems on these sites. In order to develop some insight into the
potential magnitude of this problea in the future, this-report first examines
the costs of remedying problems on existing unregulated sites and then
discusses the likelihood of similar problems on^regulated sites and the
potential magnitude o£ ..their associated costs.
During the oast few years EPA has made an effort to keep ? record of eumv
of the hazardous waste incidents that have occurred a rout... the country. The
information available on individual Incidents ranges fron short newspaper
clippings to complete reports on EPA on-site investigation!!. This information
was reviewed and analyzed during December 1979 and January 1980 as part of
this investigation. and suanarlea.oC th« telWant information are included a«^
appendices to this report. The report is organized as follows:
I. Overview' of Types and Frequency 'of Different Types of Incidents in
Wast;T'Oa*age~Repdrt Piles
II. Analysis of Incidents on Hazardous Waste Treatment, Storage, and
Disposal Sites
A. Categorization of the Incidents
B. Findings About Frequcrsry of Different Types of Incidents
C. Ar..-.i-/3i3 -* -r~.\zi r=:t;- "cs-a-jcr 3--J ci^« C!ear.-"p Costs
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B-2
III. Discussion of Likely Impact of RCRA (Non-Financial Responsibility)
Permitting Requirements on Frequency and Severity of Environmental
-Problems and-Third-P«cty..a*»au.es-.
IV. Summary and Conclusions
I. OVERVIEW OP REPORTSO INCrOESTS IN EPA HAZARDOUS MASTS DAMAGE REPORT PILES
In December 1979, the EPA hazardous waste damage report files included
reports on 791 Incidents. !n^de~n^sTnvolvlng"'lmprbp^T~nTnagement of hazar-
dous waste are continually being dlscovaced around the country, and more
Information will be available on the extent and severity oC the problem in tho
future. However, the incidents already reported to EPA compose a large sample
and indicate where poor hazardous waste management has caused the worst Prob-
lems.
Table I presents a summary of the frequency of occurrence of different
tyoes of hazardous waste aanaaesent Incidents. Ot the 791 cases. 11 oercent
(90 cases)•involved incidents in which hazardous wastes were knowingly
received on a storage, treatment, or disposal site by the slto o-*ner or
operatocr"Tft'"=any"o£" th«*e "fncldentsT'lIttle or no effort was made to follow-
good hazardous waste management practices. These incidents would be affected
•by-RCRA regulations if the operators chose to obtain permits^ they would not
be affected if operators or owners chase (illegally) to continue to receive
hazardous waste witnout a permit.
The vast majority of the Incidents (89% of tfiSTEStfal) did not occur on d
hazardous waste treatment, storage, or disposal site:"-
o 661 cases reported transportation accidents. llleq.il dumping
incidents in which the property owner or manager had not
authorized, usu.of the_land^for. hazajtdous._waste..storage>or _
disposal, or other incidents not Involving a disoosal site.
o 40 incidents involved landfill sites {e.g.. municipal dumps) where
the site owner or operator probably did not know toxic wastes were
being duaped and had no procedures to deal with toxic wastes.
The extent of these daaage reports indicates that EPA enforcement oC lawn and
regulations requiring that hazardous waste -aanagenent only be allowed on
permitted sites will be an ieportant component oC the hazardous waste
environaental control program.
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3-3
TABLE I
SUMMARY OP HAZARDOUS WASTE MANAGEMENT'INCIDENTS REPORTED TO EPA
Type of Incident number of Incidents
1. Illegal Dumping, or Other Incidents
- Not Occurring on • Mute Management
Site ««1
2. Dumping Wastes at a Non-Hazardous
Waste Management Site without •
Op-re tec's Xr.cwleO^e o£ ndate's
Tbxicity 40
3. Problem Occurring On A Site Where
Hazardous Waste Was Knowingly
Received 01 !!ana{«0 ^0
Tbtai 791
-XI.-ANALYSIS Of INCIDENTS OH HAZARDOUS WASTE TREATMENT. STORAGE. AND DISPOSAL
SITES
Incidents on sites where hazardous waste was knowingly received or managed
were extremely varied. Incidents were both sodden and gradual; they occurred
both on manufacturing sites and on Independent commercial waste management
sitesr they occurred on abandoned and on operating sites. Based on a review
of the damage reports, the incidents have been grouped Into the following
categories to facilitate their analysis*
Sudden; 1. Overflow of lagoons due to rain
2. Collapse of dUea supporting ligoons
3. Explosion/fire or toxic funes
4. Spills or aaterial discharge to the ground
Cradualr 1.- Duoplng on ground or burial of untreated wastes.
2. teaks frca unlined poncls
3. Continual overflowing of lagoons
4. Leading druas/tanks without back-uo containment for wastes
S. Leafcs during production or treatment of wastes
Subsequently, they were categorized hy site location and operating conditions
and the ckean-up costs and dawtges associated with each incident category were
-------
8-4
summarized. TJve results of tfc.e incident categorization «*Cfort at* shown In
Table II. A description of each of the 90 cases Is included in Appendix A.
Findings on Incidenc frequency of Occurrence
r.iti ildta in Table II 'indicate thaTorily 'l7'pVrcent"of"t'ne~'Tneldents"
occurred suddenly. Most of these incidents (13 of 15) took place on sites
which were operating at the tisse, and the majority (60%) were on sites
operated in conjunction with manufacturing operations. The most frequent
sudden incident (47%). involved the collapse of a dike ..support ing a waatcwater
lagoon and the_subseq«ient contamination of sot I or surface waters. The next
'most frequent" incident*( 271) Involved" spills 'or wastY discharges onto the "
ground* causing soil contamination. Reoorted explosions, fires, and toxic
fumes,- which were the only incidents causing Immediate deaths,. occurred in.
off-site htrardous waste sanaqesent facilities where different wastes were
mixed. Where sudden incidents were reported, groundwater contamination was
.- -icic
long periods of tiae. Although soil contaminated during sudden incidents
could eventually l«ad to contaalnated groundwater if appropriate site clean-up
actions 'are not ta«:»n, tb* <»«ount of hazardous waste released to the
envlronnent is generally ouch smaller than in the gradual~incidents._
""" " Most of 'the' hazardous waste site" incidents '(83M" were gradual in that the
actions and the damage occurred over a long period of tine. When the damage
•vas-discovered, .40 per cent, of- the -sites had^.alcsady, been clpaed or abandoned.
•The most^ frequent gradual incident (45%) involved improper, duaplng on the
ground or burial of untreated hazardous wastes. Leakages from nnlined settl-
ing or storage ponds (21%) and leakages from rusting drums .and tanks without^
any back-up containsent facilities (19%) were the next most frequent inci-
dents. As with sudden incidents, the majority of gradual Incidents in the EPA
files (56») occurred on sites operated in conjunction with manufacturing
operations.* Inevitably the result was contamination of the soil and either
surface or arounJwater or both- In both sudden and gradual Incidents, the
failure to clean-up contaalnated soil could eventually lead to contaminated
. g r oundwater . _____ „_„...«.__„. .^. . __ . ___ ^, ..„.. ^ . -t-,^.^_Jv.-^-..^n_ _____ - - _______ ..... , .-. ___ _
~* • " • ' * • * * •«••(• lyjp "•
IL Is cl«ac fcsa this review of th* Ha?»r''rt«V
-------
TMLC It
CAnOCtllATlON Of RATAJW013 VHSTC SITt ISCIOWB
I of
tudd>n Ineltfuntt
II Ova t Mow of Uoooni Ov* to bin
1) Oc.ll*pt* of Dl*«f Su?poitln<|
1] Dtplotloni Flct. or Tonic F\tn«t
Total
1
1
I
4) Spllli or Hatanal Otfiarq* to Croat* «
Subtotal 1)
Ine'.Jtntl
it
1) Ouaplnq on Cround/Butlal
1) UnltiMd fond U»«»
)) Overflowing Laooon*
It
"l
4) Ruttinq Dtuo»A*nt» Klihout B«C»-C? 14
Ganednntnt
}) t«ak» Dtirint Product loo oc 7r*at»«at _1
Subtotal
Total
Sit* Status Wh*n
of I 8U« Incident 81 icov.!•iji«««r alt*.
Uw
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3-6
site, to require continued aonltoring of water supolies, and to have medical
exams performed on residents who. may have been affected.
When sudden accidents- occur on
the most frequent result is soil contamination on the^site, which by
does not usually cause any third party' damages'. Contamination of surface
waters caused by sudden accidents nornally ends when the discharge vtoos, and
frequently the damage cannot be aeasured or consists of temporary fish kills.
•• In gradual incidents* long tera leaks or discharges into the ground may ..
eventually lead to contaminate* gcoundwater.ijjh_ic^!J5S?X or nay not ,*a5??.?At!I,Iy .
affect groundyatee'supplies outside the sit*. It groundwater supplies outside
the'site are not measurably daaaged or if they'are not currently being used,
there may be little or no iaaediate third party damages.- Even if groundwater
supplies being used are daaaged, the presence of numfirou.i waste dischargers in
the area nay aake it impossible to determine who caused the damage. In this
situation there may be third party daaages, out they may not be associated
with any claims which can be proven.' In the event,that the accident causes
personal Injury to employees of the site^th.^emgloyeea would be covered by
workman1a compensation and their claims would not be considered third party-
damages. - *
Even whsV.""there"arc'nb'Tssaeaiate"third"party damages or elaims'whlen'eari'
be proven, the poorly managed hazardous waste sites usually require clean-up
-»actions>- which -in sooe- cases nay. be very extensive- .EPA bas def Ined^twp^^^
levels of hazardous-waste clean-up actions:
Level It Miniisun acceptable clcan-u? activities Including actions on an
emergency basis (I yr.) designed to reduce-waste migration
into the enviccnnent. e.g., sit* investigation, stmiy and
design, wast* resoval or clay cover installation, perimeter
protection, cut off barriers and monitoring.
Level XZs A thorough site cleanup which includes complete waste removal
and redisposal at a secured facility.
Level I clean-up actions are designed to alleviate existing damage to ground-
water and thlrd'partles."v Level II clean-up actions are designed to prevent -
future damage-to groundwater or-third parties due to contaminant migration _,w
through the soil, the cost or, cleaning uo a site is generally not directly
related to or included in third party damage claims.
Review of Third Party Sanace and Site Clejn-Uo Costs in the Past
Since many of the incidents repotted to EPA are not thorough Investiga-
tions, damage and clean-up cose estiaates exist tor only a portion of the
reported incidents. Cost estimates ar«s generally «oee cosaolet* Cor the "5'c
serious incidents because those incidentsjjave heen_Bo^^fuj.ly_investigatedJjy
EPA. In order to Lnp'rcve the cost information available on the 90 damage
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H-7
reports in the EPA files, efforts were made to contact individuals in
organizations at the Federal, State, and local level -~ho wore directly
involved in the investigations of the incidents.
Table III contair.3 a sxsrary. of.the .costs_ina.19.79,dollarsjfran tha^.
52 damage reports for which clean-up or third party damage cost estimates
could be obtained. The cost estimates for each of the reports are included
in Appendix B. Nineteen of these incidents were the subject of detailed
case studies published by EPA".l/~ For these incidents. Level I and Level II
clean-up cost estimates ware available, the cost estimates available for
the other incidents included actual costs incurred*.damage suit settlement
amounts, and clean-up cost estimates for planned actions. Since the
incidents reported are often thjpse with the most serious damage, the cost
estimates generally represent the maximum level' of costs which would be
incurred to clean up and pay third party claims on unregulated hazardous
waste management sites.
An investigation of the IS sudden incidents identified only one report
of third party damages of any significance. Four million fish,, valued at
S216.500 (1979 dollars), were killed when the collapse of a lagoon diJce led
to a temporary contamination of surface water;^/— Since most- sudrten incidents
involve relatively small quantities of waste, discharges intoi the soil or.
surface water do not" cause the perraherit'surf ace oiTgroundwater "danage "
generally associated with major third party damage claim.
An investigation of the 75 non-sudden incidents identified many reports
of potential and proven groun*water ccntaninaticn. Although sone very large
danage suits have been filed to date, no significant health damages have Jjeen
awarded by the courts. Consequently, the significant third party danage costs
are associated with the cost of water supply replacement and to a lesser
degree with the loss in value of property adjacent to hazardous waste disposal
sites. Excluding the Hooker Chemical site cases,V the largest third party
damage cost to date is S3 sdllion at a site in Michigan. In this case, rany
years of dtrplng and burying untreated chemicals led to the contamination of
groundwater used as a source of drinking water.V Efforts to provide
'!/ EPA, Preliminary Assessment of Clean-up Posts for National Hazardous Vfaate
' "Problems, 1979. —'*- - -~ '
2/ The problen was discovered in 19W in Pennsylvania and involved the
~~ American International Pefininer Corp.
.V The cost estimates cited in the HooVer Chenical cases do not distinguish
~ between clean-up, nonitori/w, and third party daraces, liut third party
dosage clasps cxccoi 51". billicn at the Lsvc Canal =itc.
4/ The problem was discovered in 1977 in Michigan and involved the Story
~~ Chemical Caiz»ny. EfSsrts,.to..dcal -rfith therfirablera^zro still ongoing
-------
TAOtB III
SIMMARY OP EPA DAMAGE REPORTS FOR 4H:CH CLSAN-U?
AMD THIRD PARTY DAMAGE COST ESTIMATES OOJLD OB OBTAINED
(1979 dollar*}
Clean-Up Coet»
Cost of Dai*aqe>**
Total
Tyn* or Incident Incidents
Sudden
Gradual
15
IS
90
Hutbec o£ Average Range of Coit Ho»i>er of
Incident* Cost Incurred* EetiMtea* Incident*
6
42
46
$277,700 *£, 700-519, $00
1.64 million 24,800-200 rill.
1
-i
10
Average iRange oC Coat
Coat Incurred* Eatii»*t»e.«
$216,500
539,000
N/A
SI 1, '700- 3 nil lion
o
03
• Upptr bound of co«r. •atinat.ea ace Lovel II eotimatea foe ceraplote watte ceaoval and redlsposal at a eecucea
facility, whllo avorag* cont incurred relates to actions already taken or which are to be taken.
•• OO«B not include pending court auits, »ooe o£ which seek ovec SI billion in damage*.
COURCEi fcppendix B.
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B-9
affected individuals with uncontaminated water from new wells failed* and safe
water must now be transported a considerable distance to 36 homes 'in a
sparsely populated area. .- In other situations where- contaminated- wella have.
been replaced with new wells, the total third party tlasage costs have not
exceeded *U6,OPO (1979 dollars).' ..... ~~
Despite the lack of significant third patty damage cost awards in the
past, a growing nuaber of court suits aro being filed and some request damages
• in excess of SI billion.^- If any of these suits aro even partly successful,
tha potential. Uii^tMcjty^ddmjgc^cust^ assoeiated^witni^pperating hazardous
waste disposal sites cbuld"~bccoae~' extremely 'ia'rge'r^Traiuwtiary'bf the pending
suits filed to date is included in Appendix C. •
An analysis or the hazardous .waste damage reports in the EPA
indicates that in th* wjjorlty of cases vhen an accident har occurred, the
cost ot site clean-up has far exceeded the cost of provable third part'/
damages. Clean-up oust figures are available^ Cor 4d»oC-.- the- 90/ cases in- the«M
EPA files which involve sites where owners or operators , knowingly received or
managed hazar- dous waste. The costs actually incurred' ranged from 38, 700' to
$13 aillion, not including continuing monitoring costs. Level X cost .
estimates ranged froa $21 thousand to $20 million, and estimates for Level IT
ranged" froa $93 thousand to $200 million/
III. IMPACT OF RCU PERMiriTNG REQUIREMENTS ON EHVIROMIENTAt. PROBLEMS AND
THIRD PARTY DAMAGES
The environmental probleas which have occurred on unregulated tTaxardous
waste sanagcsont sites in the past have been due in aosc casos to poor orac-
tice*. Tn* nost prevalent IncHcnt in the files is siaalo du.-npinq or burial
of untreated wastes with no effort to prevent leaching of chemicals from the
site. The truly aajor costs in the past have been Hue to massive ground water
eonfan*nation *m1 th« oozing of liquid vastcs into horcc built on closed oc
.abandoned juaste .sites..
P?r =asj- rcs=cr.s. the 5rsqr-="~/ =* scsureance a.v! tha savsrity off damago
of hazardous waste site incidents should be ouch lower in the future. Even
without the BCRA regulations, increased public attention on the problem of
hazardous waste disposal is causing hazardous waste site operators to improve
their practices. Additionally, in order to obtain peraits to operate haurr.."
dous waste disposal sites, operators will have to a*ko a large, number of
changes in their sites' structural characteristics that will make the type of
incidents which have occurred in the past less likely. Xhen accidents or
unintended gradual incidents do occur, the new site structural characteristics
and periodic inspections by EPA personnel will greatly reduce the damage.
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B-10
Taoie IV presents a brief analysis of the effect of proooseri RCRA permit
requirements on the likelihood of hazardous wast* incidents. I/ The analysis
clearly shows that although some incidents could still occur, environmental
problems should b* Car fever in nunber and far less severe.
Serious proolems with sites in the future will primarily be associated
with groundwater contamination because unless a groundwater problem arises,
there rarely will be any way of knowing that a major problem exists on a
permitted site. Consequently, most site clean-up and third party damage costs
should be related to groundwater pollution control and remedial action.
The cost of clean-up and third party damages on RCRA-permttted sites will
be determined to » large extent by site characteristics and operations.
Because the damages that have occurred in the past have all been on sites that.
bear Little resesblance to HCSA-pe rait ted sitesf costs incurred in the past
ar* not a reasonable indicator of the artount of financial resource* required
to cover site clean— J? and payment of third party daiaag.es on RCRA permitted
sites.
RCRA requireaents concerning site location and operation will make it
extreiwly unlikely that incidents will occur of the- type that produced major
costs in the past. Nevertheless, even though hazardous wastes in RCRA-permtt-
ted landfills will be treated, will be acconpanied by absorbent material if In
a liquid state, will be over relatively iaperneable barriers, and will not be
sited over important acquirers, the possibility of. groundwater contamination
remains.
The cajority of incidents In the future will orobably involve accidental
spills and ainor leaching that would be discovered relatively quickly.
Consequently, In aost cases, the cost of clean-up is likely to be quite
saall. The cost of repairing t.v.j Impermeable aecbran* In a hazardous waste
landfill to'stop further leaching should not exceed 3500, 000. 1/ The
potential third party daoages will depend to a large degree on the peculation
density, the nature o* the aquifer beneath UH> landfill, anJ the availability
of . alternative drinking water supplier: however, damage should be loss
extensive than in the past. However, to the extent that an accident occurs on
such a site and contaminates groundwater that is used as an
.§/ RCRA perait requirements are currently being revised. If the new require-
ments ace considerably less stringent than the proposed requirements, the
conclusions of this section will no longer hold.
j6/ Telephone conversation with Dr. Eair fletry. I.V. Conversion Inc., llor~>iant,
Pennsylvania. February 1980.
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TWLX IV
crrccr or ntoiosn ROM IEANIT REQUIRDONIS on LIKELIHOOD i>r HAZARDOUS wot
II Overllow «.| (.. ;ow)« AM to Rtln
I) Cu>llii>te n( Olltt Cutpoiting Uqeoat
)) dpli.ilon. flie, or toila *»•*•
41
H4i«rUI
uetulilloni Ptopnied 14 P*4l Nllh Iff ldentt_
Mantled t» nun) dikei thet oil I («•«••! dlMlMiq* Of re)eee« O» «•••!•
fl••(•• U IB* (Mlllly «Kh>M«I> they My MI.OM •»••»!, «• (It) It
'
U«ellt»Md el Incident OccuciKS U|««
<7o»pl I«ftCe Mllh
MlnlBel lltellhflbdi reduced
Could ill 1 1 Occur, but' lea* likely.
MUCH leu Ilkellnoodi leituceil d40*jo.
Could ttlll occur, but'le** likely
vllh qccd BMwqeoeet ptectlce*.
Duvplng on Cfoand/B-ttiUI U*dln>|
10 Cioundi>*«/
h4«t dl»»» to .jitutitl tuilKt witti iinotr troa «nt«tlcwj'l«nd(lllj
bttt • alnlau* o( i Incnei, o( co»«i Mtirltl tppllnl 4*llyi ••«* •
llo»t tyntft Cuvtilivj tnili* lotto* 410 iU«« ol II.* landfllli ineludi
• Jciehit* collection •ihl^teocv*! »y»lf>.
It -tut » n*twi*l »oll ocifler lop«iMibl« lo th« d«,x»»ll»o w>t«t o*
in *rtl(tct*l Lln«r oyitto cove 1 1 nj lie (Dllr* Mtl'« *nd •toat; •
l»ik »nd lBper>e*ble dike* that vlll pfevoni dl4Cb*r9*
or tele^M o( »*•;• lie» tne («cllttyi (roebaoid ci|«bl« o( cooteln-
Croe> a 24-IWMr. 2i-yejc itarv.
Should b»«* • spill coaXInncBt •troctuto »1U • etpoolty *qu*l to
th» eotlre con:«n'.» o( the >•>«••« (to»4o tMk pUn sufficient
fctebccid Cor tne eontalnoeat of :pteclplwtlo» cetk'tlrg froo •
74-bour. J5-»ev>r itotai otiould to at (turtr *od Iti'proot cooauuc-
tleo.
Nlnlkil pontlollltyi lubitentUlly
Mucn'leei lUellhcodi refluced rtjMi
let* lltellhecsli teductd dM»)e.
Could ttlll occur, but »bb«tMllelly
feduc«d
',i) ' Uekt Ditln) Production or TwiM
Cojld itlU occut.
-------
B-12
important source of drinking water, the clean-uo costs could be quite slqnlfl-
cant. II clean-up actions Include the treatment and removal of contaminated
water* then 8-10 ailllon dollars or mote in costs could be incurred.!/
XV. SUMMARY AflO CONCLOSIOHS
Up to 11 ailllon dollars In costs have been incurred to clean up existing
sites* and estimates of the cose «f cleaning up existing industrial sites*
including complete waste removal ind redispocal at a secured facility, ruiujv
up to 5200 Billion. Third party damages from hazardous waste site incidents
in. the past (which do not include the Hooker Chemical sites) have reached S3
million, but pending court cases demand damages in excess of SI billion.
accident occur on a permitted site in compliance with the proposed RCRA
regulations* cleanup costs should be in the SO. 5-10 aillton'range and third
party damage costs should be less than S3 million in nost cases. Ultimately*
the potential cost* inmrr^l vill depend an whcce disposal facilities dre
allowed to be sited, it facilities are not sited over important aequifers and
if the population d-nsity is low, there will be a lov likelihood of
g round water daaaga* and clean-up and third party Damage coats will be low when
groundwater contamination does occur.
Telephone conversation with Mr. Jia Walker* O.ft. Materials* Fridley.
Ohio.. Maren 1980.
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AVAILABILITY AND COST OP THIRD-PARTY LIABILITY
ZNSpAANCE FOR PERMITTED HAZARDOUS WASTE
DISPOSAL SITES
February 20, 1980
Prepared Cor the
Office of Planning and Evaluation
-------
This pap«r investigates the likely availability and cost of third-oarty ,_
liability insurance from the insurance industry Cor permitted hazardous waste
disposal sites in the event that such Insurance is required by EPA.
The rest of the paper-is divided into five section*. Section I orovides
background information on innurance and the American insurance industry. It
outlines the statistical and economic considerations, as well as the institu-
tional and marketing arrangements, that determine the kinds of risks that
insurance coapanles aost like to Insure and discusses the arrangements made
for other types of'risk's'."' Section." ZZ'.iasessas th«"do5trablllty of hazardous
waste site accidents as an Insurance risk and the problems associated with--
providing Insurance foe those accidents. Section III Ouburibes Lhe current
availability and cost of insurance for sudden and non-sudden events on hazar-
dous waste sites. Section IV discusses the Hkelinood'bC'availability, the"'
like!-/ cast, ar.i the affarisblliv/ o? Insurance if required by CPA for
RCRA-pe rait ted sites. Section V presents a suaaary and the conclusions of the
anal/A!^«
XI. INSURANCE INOUSTR* BACKGROUND
In general, people"are risk-averse and would ideally like to secure
insurance against accidents capable of causing *evec« £ inane Ul.hardship as.
long as insurance is available at a reasonably low cost. The insurance
industry.would ideally like to provide insurance to cover an accidental event
if coapanfes can expect to nake a reasonable' profit with little or no risk of
bankruptcy. These two properties together determine an ideal insurable event.
Standard Risks; £!-.e Ideal Incurable Events^
Operationally, there are certain characteristics that can be used to
define an ideal insurable event. The set of ris«s that neet the ideal
characteristics are classified as standard risks, and there exists a large,
stable and isatuce industry thai pcovlJ«i> iui*ur«im.« 4
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-2-
• The transaction cost of providing insurance to cover It Is low.
• It is weU-deCInert and easily identified.
• It la independent of other events.
• it's probability of occurrence and the indemnity are known A
priori with great confidence.
•~ It's occurrence is accidental and unexpected and the insurer) has
no control over it.
The Cirac five characteristics of an ideal insurable ev«nt are desirable
because they enable insurance eoapanies to provide coverage at low cost and
make a reasonable profit. A certain portion of the company's resources hove
to be kept in a ca*h reserve Lo cover cx?s?t*«t claims. The larger the number
of policies written, other thinas reaainina contant, the saallec 1= th»
fraction of the coaoany's cesourcesthat must be kept as (non-earning) cash
reserves to achieve a specif fed "(evSITof "conf Hence thaffehe" firm will not be
caught without sufficient cash to cover claims.I/ Consequently* the larger
« Cirn, che lower ics costs or s faster than
ksl so that a fira with a larger policy base (larger n) can keep "a smaller
fraction of Ksl as additional reserves and still achieve the given level
of conf idenca,-k, -that its cash. reserve will be sufficient...
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-3-
Insurance. Similarly, a lower probability of occurrence of the insured event,
with all else constant, reduces the cash reserve requirement and consequently
impacts favorably on the cost of insurance coverage.2/
A constant indemnity, when an event occurs, is also desirable. Variance
in the amount of th« indemnity adds to the variance in the expected cash flow
and consequently raises the liquid reserve requirements. The smaller the
firm, the more serious is the problem of high variance in claim amounts.
Policies with the potential for very large clalas can be managed by putting: a
limit on the claim that can be honored. Sometimes the limited liability la
still too large a fraction of a company's policy base; and'part of the policy
muse be resold (reinsured) to another Insurance company. However, if the
reinsurance market is tight and the policy needs to be shared between several
reinsurance companies, the cost of coverage to the insured can mount
considerably.
Finally, the lower the transaction costs, the lower the premium and.
consequently the larger the number of policies sold. An expanded policy base
can allow a company to take advantage of economies of scale which could enable
them to further reduce,cos_ta>.—JThe^use of a deductible is a cost-reducing
feature oC nany types ot "insuTanceTpolicies. If a l«*rge part of t>ie
transaction costs cone from processing lots of small claims, then costs can bo
reduced by excluding froa coverage small cla las which the insured can afford
to pay. This feature preserves the policy's coverage for larger, more
Important claias and reduces overall insurance cost.
The scarce and the is?.»ct of the event should he well-defined to reduce
the likelihood of legal controversy over whether the event is covered by
insurance and how much should be paid. Legal controversy is extremely
»xp»n
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-4-
sufflcient liquidity or'posslbiveithout-suff Iclent-Jiss«cs to cover claims-
Consequently, insurance companies Avoid celling large number of policies where
losses aay be linked together through comnon characteristics. Fire insurance
provided to just one small-geographic area la A good example oC this problem.
Reliable estimate*, of both the potential monetary InJcnnlty and the
probability of occurrence 3rs needed to enahls an insurance company to
calculate the smallest premium that will cover their coats and provide a
profit coanensurate with the risk. In the absence of accurate and relevant
data, there is"little knowledge of the actual risk associated with the insured
event, and consequently little assurance that the premiums charged would-cover
the actual claims. -
The event should not be intentional because if It can be intentional or
affected by the insured'* actions, providing insurance could encourage
behavior on the part of the insured which increases the risk of accident. For
example, the insured aight spend less on ensuring accident avoidance If the
entire lt«hM»ry i« i-su-si. T^is sccbliSi .ia, »»««!iy !i«»riui»!« oy requiring a
large enough deductible to discourage "any counterprbduetlv'e"bohavtor".1
Insurance for the standard risks that meet the above ideal characteriatico
•cafi-Wprovided"*t the loveslt~coaT^Tfat
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-5-
co I lee ting and using this information is much nor* difficult, cumbersome and
uncertain. Since th« specialty risks are fewer and far more varied, it is
much harder to develop a standard methodology to which every case can he
applied. Since each risk is vastly different* it is difficult to cover tho
specialty risk as a package with a whole line of other insurance risks.
Consequently, th« transactions costs and therefore th« overall cost of
offering specialty insurance can bo quite high which further limits the demand
for such insurance.
Method Usrd to Insure Specialty Riska .
Eve-cTaY'the higher cost of lnMriWqJsapirc!('arty'7ls1c1r7'Ih«re "often is a
market (possibly Halted) foe this kind of insurance that will provide
sufficient profits to apre than cover the greater risk to the insurer of
bankruptcy that such risks entail. Circumstances that work towards reducing
the uncertainty characterizing the risks or place external pressure* on the
availability of surt Hs-irarcc (such .13 the inJu?tcy responding to political
concern) tend to increase the interest of insurers in supplying
insurance. Coverage for specialty risks is generally offered either by a
specialized pool of insurance companies set up for specific risks,' or -*-'*'
individually by. specialized companies (such as the excess/surplus lines . .
companies) or specialized <5*p^rtT«nts of a ssall number of sUoJard comu
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-6-
• The collapse of dikes supporting laqonns
• Explosion, tiro, and spills
• Material discharges to the ground
Gradual emnts ar« lively to cause soil and water contamination and could
cause hat a to human and ar.ioal life. They include:
• Rusting druas/tanks discharging materials to ground
• Seepage of toxic chemicals fron landfills and ponds into
g round water
The problaos involved with insuring the above two categories of risks
determine whether these risfcs are considered standard or specialty risks and
therefor* the extent and source of industry interest in providing- them with
insurance coverage.
Sudden »v*»t-dn>n''trr nature ~and nawor'have not-Involved haaardous waste)"; and
Bosely occur accidentally- and unexpectedly. Due to this general .experience
with the nature of sudJen hazardous waste site incMenc, insurance Cor these
events can be packaged together with other liability coverage and therefore
marketed at relatively lovTtransaction cost. Consequently* oven though the
risk of a sudden event at a hazardous waste site is somewhat more uncertain
than other events insured by the industry, it is treated as more of a standard
risk than a specialty risk.
Gradual events, on the other hand, do not meet any of the ideal insurance
characteristics and cl-arly belong in the domain of specialty risks. Gradual
pollution damage can easily result in cataatroohic losses. With a gradual
accident, the probability that the maximum claims permitted will be filed each
time Is much higher <*ue to Che potential for .greater dana«je before the
incident is discovered. Claims of -very high magnitude are possible on a . .
single policy. The catastrophic loss problem becomes even more serious given
the possibility of several policies requiring simultaneous settlement.
Setting limits of liability may ease the situation somewhat, but it does not
eliminate the problea.
The level of uncertainty associated with insuring gradual events is, very
high. Since relatively few accidents with hazardous waste management sites
have been thoroughly investigated and since permitted sites will be a new
institution, there is little credible loss experience. There is even less
experience with court awards from damage suits. Consequently, insurance
conpanies find it very difficult to specify either the probability of a loss
o^virring on « peiaici.«u »il« 01 tiie lively 01*911 ilii'ie if it do«±s occur*
Additionally, in the face of such uncertainty, they are worried about their
ability tc accurately price such a risk.
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-7-
GraJual incldenest by their nature* create problems of pinpointing the
ti.aing and soaetices even the source of occurrence ol the event. This results
In considerable uncertainty as to the identity of the leg.illy liable party and
increases th* livelihood of l»<3»1 "Hj»ll»n<;«s «ifi c*««r hloh level of
associated casts.
In the past gradual pollution "accidents" frequently have been Intentional
(or, at least, the result ot practices known to be inadequate) in nature.
Yet, spreading risk through insurance requires that the insured not have any
control ovar"the "accidental" event. Even iC the policy coverage ia •
restricted to cover only unexpected accidental events,-the Insurance companies
may have to involve tbeaselves in legal suits to prove that the occurrence was
intentional.
The lacv of knowledge regarding hazardous wastes and their potential for
danage- requires that each case be investigated individually by specially
ttUAiiBM AwaCT. Tula IttauA iv> hlyil i L.> CCOti i.~.d hig^ pr C~iu~C VhiCh
can severely liait the aarket for insurance. This perception of A United
•arket prevents aany insurance tiros from putting any time and resources .into
the developaent of an insurance program to cover hazardous waste sites.
• Use-etv Re insurance to aeduea-Riak-of-Cataatcooliic Losses.,
3ecau'se~ of the great uncertainty, mosf ftrns insuring gradual events may
be" forced'to "re Insure a portion of the rrsk~"wtth"~a riot her company better able
to absorb such risk. However reinsurance generally tends to be an expensive
proposition. Since reinsurers provide coverage of the least predictable
portions of loss, their cash-flowjnatch between pr«*nlijns.-recoived and claims
paid is highly uneven. They have to maintain aore liquid Investments than a
standard insurance coopany and consequently earn lower returns on their
investments. In addition, their risk of bankruptcy dun to catastrophic loaseo
is higher. In order to provide their investors with earnings consistent with
their greater risk, they have to charge higher premiums than firms insuring
standard risks. A snail firo wishing to reinsure part of its business must
convince the reinsurers of the'soundness of its underwriting practices.-• Even -
it a saaii tirn nas a good relationship with a reinsurer the reinsurers still
have to evaluate the risk of covering the loss, and the problem of
catastrophic loss is a real concern.
HI. CORRSrrAVAILAaiLtTY AKD COST OP HAZARDOUS HASTE SITE INSURANCE
Liability insurance coverage for sudden events is generally available as
part of the standard Conorehenslve General Liability (CGL) policy carried by
almst all companies. Representatives of the insurance industry felt that the
aajority of large Ciras dealing with hazardous waste currently have coverage
for sudden events and that a large nusber of the smaller, well-flianaqcd firms
also nave such coverage.
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-8-
The aaounc ot existing coverage cat tied Cor sudden .a
considerably depending upon tho needs of thft pact leu lac clrra and the coat oC
such insurance and is usually negotiated with an insurance agent. It depends
upon the receipts of the firm, the materials handled, and the magnitude of
potential third party danage. - In general, the existing coverage oC the whole
CCt policy say range £;rpa 3300,000 to 31 .•aillionj£ar saall firms and coo Id
easily extend up to sVo-uio million Cor the large firms.
It Is quite difficult to inolate the cost of sudden accident coverage
because such coverage is just one comoonent oC th« CGti policy. The cost
varies considerably with the.inherent riskiness of the business, the
iwiwgcsant.practicAs^i^hjur4xmWl^^ the flrnu
Cost is sensitive to the level of coverage as well as the size of the firm (in
teras of revenue) and in both cases rises less than Droportionately with an
increase in the level of coverage or the size of the-f irn. - Tablo I presents.
rough estlnates of the cost of a CGt policy for small firms with 'average"
risk and the relationship of the cost to total revenues. A small firm which
CGI. POLICY" IWfOJDlNG^OOVERAflS FOR 3UODE;Ti>'POt.tUTTOM BVENTS-
(1979 dollars per year)
Annual revenues _ 3500,000 - iin
Llait of coverage SI allllon S10 nillion $ I million 310 million
Cost of Pre«lu« 8-12,000 12-16,003 10-15,000 15-20.000
Percent of Annual
1.S-2.S1 2.5-3.3* 1.0-1. SI 1.5-2.0*
Sources Insurance agents.
is deemed riskier could easily end up paying 5-101 of its revenues for
insurance. However, the cost of a similar CGC. policy for a large "risky" firm
is likely to be less than 1% of its revenues.
Current'Availability'and Cost of Insurance ror crannai cvencs
Currently, three coopanies offer coverage for non-sudden or gradual events
on a liaited basis. The Travelers Insurance Coxpany provides such coverage.in
their CGI. policy by covering any "unintended and unexpected" event. Unlike
IT-PV insurance comoanies. th-y do not distinguish between sudden and gradual
events in all their policies. This coverage is available to a few.
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-9-
vell-aanaged chemical companies. The policy is occurrence-based..}/ does not
cover damage resulting frora an intentional act, and does not cover nite
clean-up costs. It only covers third-party liability claims.!/
The' Kemper Group currently insures «ne large comoany with two htiardoua
waste sites. .The coverage ls.occurrence-based,and_.ls provided, in. their CGC.
policy Cos both sudden and gradual events (though there are some limitations
on the gradual coverage).!/
Howdeh Agencies Ltd. currently offerVa claims'made'policy for both sudden
a~rtd-g^4daarevents bas*d on a technical- survey, and t*« coverage has been
puMha«ed»byn«everalvfiras.£/»The~pollcy,,wlllco«t-of-this,coveraqe^to^the>vfirna>.whojriaY«uiltJ..«-^.
likely to be quite snail.
Two"Insurance cocpanies, Alexander and'Alexander Inc. and American Home
Assurance Company, have recently expressed interest in providing insurance
coverage foe gradual events. . These Ciras ire developing clalns-aade policies,
but further details on these policies are not yet available.
3/ An occuc«nc«-ba»«J insucance policy ycoviuos coverage Cos any event
occurring during the term of the policy regardless of when Lhe claim la
filed.
4/ Conversation on January 9, 1980 with Mr. Tom Jackson, Travelers Insurance
Coopany.
S/ Conversation on January 14, 1980 with Mr. Arthur Webster, and Mr. Frank
Snook, The Keeper Group. ^
§/ A datas-aade, insurance policy.provides covera«je_lf the claim, as well an_
the incident on which the claim is based are filed while the policy Is in
force. Sone claias-eade policies also cover events t«hlch occurred before
the date the policy was first issued to the flrn. Howden'n policy
currently covers all clalas filed during the policy period regardless of
when the incident occurred.
7/ Conversation on December 26. 1979 with Mr.' John Tronzano, llowden
Associates Ltd.
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-10-
The cost oC Insurance coverage for gradual pollution incidents depends, in
general* upon the receipts of the flm, the materials handled, the type of
operation, the deductible amount, and the magnitude of potential third Darty
damage. Table 2 presents rough estimates of the cost of such coverage for an
"dVttCdS" tii*" coapan/ oanauing hazardous waste. The cost of insurance to
companies which *toce, but Jo not di^posa of hazardous wasca, should be
substantially less. Exhibit 1 graphs the estimated relatlonshlo between the
cost of insurance coverage and the annual revenues of the company. Cost of
coverage rises with annual revenues* though at a decreasing rate.
IV. AVAILABILITY, COST, AND AFfORDABILITy OP INSURANCE FOR..
RCSA PERHlTTgQ SITES
EPA aay require hazardous waste manageaent sites to obtain third party
liability insurance before a perait is issued. This section examines the
likely availability, cost, and affocdabllity of Insuring each sit« for 4S
aillio.t coverage per event with a S10 million annual limit.
EPA estimated in March 1979 that approximately 30,000 sites would require
and would be issued with permits. The 30,000 sites are disaggregated as
follows:
17,000 storage facilities
7,000 hospltal'sTEsbora'SStWa
5*800 treatment and disposal facilities on manufacturing sites* and
200 coaaercial, ofCsite facilities
Whether insurance industry capacity is sufficient to meet the insurance
demand froa the above sites is dependent on several factors. Liability cover-
age is generally «»xl«r*!»d or*, a corporate basis ratVir than for c.ich site.
Within the 30,000 sites, the number of firms involved and the number oC sites
they cwr. cr Icoic is not *no-u. :; <«vei. Line* uC Lhe large* couimif ccidl
landfill companies own or lease over 300 sites. It la not known how many of
these sit-s would handle hazardous wastes. Assuming a figure of 50», it would
appear th*t fh
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Company Revenues
* 1 million
$ 6 Bllllo.i
$30 million
$ 1 million
$ 7 million
$20 million
Sites
1
?
?
?
?
Coverage
$10 million
S5/10 Billion
(1979 dollars
noductihlft
?
$5-25,000
pec year)
Premium
$40- CO, 000
$46- 56,030
% of Hevenue
4-6%
0.8-0.9*
Stmrce of Estimate*
Insurance broker
State official
$2/4 Billion to
$5/10 Billion
$5/10 'Billion
$5/10.Billion
$5/10 Billion
$0-50,000
$0-50,000
$0-50.000
$84-100,000"
$14- 22,000
$26- 32,000
$54- 1.5,000
0.3%
1'. 4-2. 21
0.4-0.5%
0.2-0.3%
(llowdun)
IT Corporation
(llowdon)
Charles Humpstono*"
(llovrien)
• Although none of those cost faticatec were provided 1CP by Uowden directly, th«y *r« the costs for exiati<
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Ai.nual
Pri niuni
(in thousand
UoUarc)
Current Coat of Gradual Insurance for Hazardous
100 ..
eo ..
10
Wi3to
iSicos
Exhibit 1
Insurance brol.or
ootimato
IT Corporation
(70% oC total
premium*)
estimates*
20
30
Company revenues per /ear
(in rullion dollaxjs)
* T.iese estiaatas were taken from "Fulfilliny Financial Requirements,"
Charlos Huapstone, Haste Age, Dec. 1C79. p. 14. Ima subsoquor.t con-
versation with Hr. Kuropstonc, he indicated these estimates night be 30\ too low.
VOTE: The two bars in the graph represent different costj estimates for a Howdan or Uovden-type polic-/.
They have been put together fcoa six data points. | Theto is a kin* at tha 56 nillion point iecisc
that was the middle data point available. There is no raason to beliuvo that actual coats
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-13-
Total preil'J-s of illO billion could potentially b« wrtttpo
exceeding the 3 to I ratio. I.e. a potential increase of $40 billion In new
premiums. If the estimated number of firms are each Insured at an average'
premium ot (say) 340*000, the total additional premiums would be 30.4-1.2-
bllllon, i.e.i about 1% of current premiusa. Additionally, sinco firms would
.'-. - **- - - «-». — . — •• -• . - t-*-- '-• . -i.-*-MM *'A • _ »*•• - ' -JA • — •» •• —™ - -
first pbcain permits and therefore first require insurance over a five year
period as EPA gradually covers the entire set-of firms, the total new premiums
that would need to be written in the first year would be approximately
SO.1-0.3 billion. Clearly, there is sufficient industry capacity to provide
this much coverage in the aggregate.--The ceitical issue is whether the
industry Is lik«ly^to_be intecesjed^n^p.rp^iding this coverage..
Excess/surplus lines coapanles collected 31.2 billion In proaiuma in 1978
or only 1.4* of the total collected for property and casualty insurance in
that year.I/ Consequently, 30.4-1.2 billion in additional prcalnm demand
could exceed the capacity of the excess/surplus lines companies. Tf close to
30,000. firms *r» iovoltw»H art-* if the ctar.dsti cc=?;.-.Lc= 2s r.st provide a
substantial portion of the coverage requlriJ. there night not be sufficient
insurance available from excess/surplus line eoapanies for all the firms
requiring insurance to obtain permits.
Availability ot Sudden Accident Cove
As was indicated above, the fIras that are not currently insured Cor
sudden coverage ace likely to be some of the saillac firms. Of these,-the
poorly managed,., greater risk, facilities will probably..not get.JBPAjperjnita, r
operate unless they upgrade their facilities. If they arc in compliance with
ROW regulations, they should, in all likelihood, be able to secure insurance.
Aval lability of Gradual Accident Coverage
There is much less consensus in the Insurance Industry as to the
availability ot liability coverage toe gradual events. This lack of consensus
is a reflection of the numerous problems which are seen to characterize entry
. into. tbis. oacket.
The insurance companies that were cont-icted indicated vary fry? decrees of
enthusiasm and optimism with regard to tnelc entry into this market if
insurance is required by EPA. The broad consensus is as follows:
J/Conversation with official at the Insurance Information Institute.
10/ The following sections provide a consensus view of the Insurance industry
in regard to the availability and cost of hazardous waste site insurance.
?e.r»nt**n conpenles were contacted, among thea some large, standard _
invuance companies, some excess-surplus lines brokers and companies, and
the Insurance Services Office. A .list of the companies contacted Is
attached as an' appendix. "
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-14-
Tticre Is likely to be some Interest In pcovidlnq such coverage In
the near future, though It will develop slowly and cautiously.
However, it anything occurs prior to the provision of insurance
tot RCRA-pernlcted sites which indicates that the risk is gr-uter
than currently perceived (e.g.* if a major law suit awarded very
nigh damages), this interest could largely disappear.
Both large* standard companies and «xcess/surolus lines companion
are likely to »how interest. Recent profitable years have
increased capacity Cor the standard companies making them more
anenable to experimenting with specialty risks. The resulting
increased competition among surplus lines underwriter* has 'also
aided the availability of specialty coverage.
Hie extent ami timing of future availability is likely to
crystallize only after the companies have a precise idea of what.
the EPA oermt giiid*lin»* will
Tie likelihood of this coverage becoming available, at least
selectively, will increase:
Xf"cosipanies a7e not~iequired to cover the "love Canal""Jclhd
o'rtttuitianrH^?!c-l1r^urtrAe1it*-dcct3lon-niaktng- ref J neta'td"a
considerable extent their psychological fear of having to
cover such "post-closure" occurrences for an unspecified
period into the future- Consequently, any attempts to
clarify the situation in this regard and indicate the true
extent of potential damages will aid underwriter* in their
decision to take on the first risk.il/
If there is considerable demand for the coverage. This
aspect is likely to becoae clearer only with time. However,
EPA final regulations will provide considerable insight into
the true extent of likely demand.
iiy AS pace of cne permitting peocess eacn oc tneaa sites wuuW be requited to
meet stringent criteria with regard to site characteristics and
operations.-. Sine*.sites-already, closed.or.-abandoned..will,not., require.
insurance,. there.JLs..a,.need for sjte ^«£»£g^^lH2 •*?*..th.at_t__ ..
contamination occur ing from currently closed Portions of an operating sice
can be distinctly recognized and s-narated froa any contamination that may
occur on the operating portion of the site. TO the extent that this Is
difficult to ensure, insurance coiapanies will l>e reluctant to cover eych
sites. Additionally, if sose sites are given + variance from the
s'ringenc criteria for site characteristics and ooerations, they may have
ttouble securing insue-ncf. This ii-^er ^ssu^e-i th-t there will be no suca
sites and therefore the conclusions of this ?aper may not aoply to these
sites.
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-15-
lf coverage requirements approximate aa^closely as possible
the companies' current exposures. Consequentfy7"the more
restrictive the coverage and the lower tht» liability limits,
the 9reatar the possibility of a company accepting the risk.
Zf coverage is required only for the wdl-cianaged altos. The
standard companies ate inclined to offer insurance to either
the large, manufacturing companies managing their own waste
or to the large,"cowtercial waste management firms. Some oC
tbe other firms that ace not very large but use sophisticated
equipment and good-management practices are also likely to be
insured by the standard companies. The remaining firms will
probably have to get'coverage from the excess-surplus lines
companies.
If the Insurance Services Office (ISO) officially endorses*
the reaoval of the distinction between sudden and gradual
events. The ISO is currently considering such an endorsement
and there is a possibility that it may occur in their March,
I960 meeting.il/
• Soae companies that would not be interested individually are
ilke*iy~to'ehteT*tne*marke6' If there is a"concerted effort' by the
lnaas*ry>r**Thnsritthe*entry-o«. a few Boce~firaa.and official, lap
endorsement is likely to bring aore tiros into the market.
• The New York Insurance Exchange is likely to provide high amounts
of excess coverage for specialty risks. It may not bother with
snail accounts and therefore may have * very high minimum
premium It would therefore be of United ,use,Jn this situation.
• me surplus lines nacket is generally quite' volatile duo to the
high degree of uncertainty associated with the risks they
normally insure. Consequently, in Che event of cubstantial
adverse experience with hazardous waste incident.*!, It ts quite
possible that the surplus lines companies would either greatly
increase premiums or cease to provide insurance coverage on very
short notice.
Saall firms may have trouble obtaining insurance protection cor gradual
pollution events t* they appear to be poorly nanaged or seem unlikely to
remain in business for any substantial length of tiae. However, if EPA
regulations are stringent, poor management should not be a severe limitation..
12/ conversation on January 15, 1980 with Mr. Wally Hang, ISO, N.Y. A
subsequent conversation on April 16, 1980 with Mr. C. Boyd indicated that-
ISO has recently sene out the endorsement in the fora of an advisory to
ttve insurar.es ccspor.icc.
-------
Tvpe of Insurance Likely to be Made Available
In general, 1C appears that surplus-lines companies will prefer to provide
claims-made coverage whereas the standard insurance companies will provide
occurrence-based coverage. Surplus-lines companies accept the more unstable,
less desirable insurance risks and attempt to reduce -some of the risk by
restricting coverage. The standard companies are more selective in accepting
risxs, generally provide specialty coverage to existing, stable, very large
and hopefully long tern custoaers, and consequently feel pressured into
providing more comprehensive insurance coverage to their clients. The two
standard insurance companies (Travelers Insurance Company and Tho Kemper
Group) currently offering gradual coverage provide occurrence-based protection
tc-Very large rirras"r"'Jto"wden Agencies" Ltd."on the other hand/"provides
clains-aade coverage to saaller companies. Most oC the companies contacted do
not currently provide gradual accident coverage and were not certain of the
fora of coverage they sight provide. However, they did express the opinion
that occurrence-based coverage would be a better solution to the hazardous
Cost and At fordability of Sudden Accident Coverage
As discussed above, a CGI, policy that includes coverage for sudden
Jtr' *nt**>*"~*"~.
Thus, a large fin would have no significant problems in absorbing tho
cost of IriTCraace is tha event that SPA pcrsittir.g conditions lequica them lo
obtain coverage. The cost of coverage to a soall firn, though not substantial
in itself, would aggregate to a significant anount when added to .the costs of
compliance with the other proposed RCRA pemit requirements.
VI. SmMARY AMD CONCLUSIONS
This paper has examined the likely availability, cost, and af fordability
of third party liability insurance for RCRA-per»ltted hazardous wacte
oanagetoent sites If such Insurance is required by EPA. The analysis oerCormed
indicates that the situation is as follows:
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-17-
Sooe standard companies ate likely to provide gradual coverage 1C
there is a demand from tneir larger, more lucrative customer
accounts. The pressure to offer this coverage would arise from
their desire to retain their existing customers and is therefore
unlikely to extend to potential custor.*rs in general. However,
once they have provided this coverage and become more familiar
with the risks involved, it is likely that they would offer it to
other large, well-managed companies, especially 1C there Is other
business associated with providing this coverage.
There are some surplus-lines,.* ir»s,.thattara^likoly_tp.of for . .
coverage for gradual hazardous waste incidents. Excess /surplus
lines companies ara In the business of provMing; coverage for
risks hard to place with standard companies. Some of these
ceapanies could perceive an opportunity for profit and make an
er.Uy Ir.ta tho sarXct. TJ-.e ?rcs£u.-s charged for nuch coverage
--- lifcsly to bs ^jit? hilh £•? «?'*•««•««•*«» fnr ^» hlgS»r
transaction costs and greater risk of bankruptcy to the insurance
companies which insure specialty risks. Circumstances that
reduce the uncertainty of operating in this area or that
9uacant««'«.lAc9e»-dlv«rsif led- market will atrengthen their
- *. . ,
clains-aade coverage rather than occurrence-based coverage, the
insurance eoapanies can significantly restrict the range of
daaage incidents they will cover. The surplus-lines market is
quite a volatile natket and any adverse experience with such
coverage aay cause the surplus-lines companies to raise their
preaiums significantly or withdraw from the market. Since they
offer, in general, claims-made policies, this action would result
in leaving aany sites unorotected from damage suit* due to
incidents which had el ready occurred.
Large aanufacturing Cims would, in general obtain
occurrence-oased Insurance coverage Cor gradual •.•vents under
their standard CGL policies at relatively low .additional cost.
The companies that would supply such coverage are likoly to bo
~~»s nf *»•• la?**, star^ac'' ln«nr«nc* companies who currently
carry these fires' insurance accounts.
Sea 11 manufacturing firms would probably have to approach
surplus-lines companies to obtain clalna-oarte coverage for
gradual events in addition to their CCL coverage. This cost
co-j Id prove to be pro-ibitlv« for a small manufacturer who may
now find it norc economic to ship the waste to a large, oft-oite
commercial facility. If there are insufficient off-site
commercial facilities to manage this additional waste, the small
o«mifacfjrirrj ffrns ->>y «l»V;r b» forced to absorb the excessive
cost of managing its own waste site which may cause bankruptcy or
aay decide to dispose of its hazardous waste illicitly. The
extent to which saall firas choose not to seek RCRA permits and
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-la-
proportion of the 30,000 sites requiring permits which are
operated by small manufacturing firms will determine whether
there is sufficient capacity to insure all these firms in the
excess/surplus lines comoanies.
Large, off-site, commercial waste Management firms would Probably
be able to obtain occur ronce'-based-coverage under their CCt.
policies.-. The cost is likely-to.be relatively low.
Small, off-site, commercial facilities are likely to find it
quite-difficult to obtain any. insurance.^^ 1C,they do secuce^
insurance, it la likely to be on a claims-made basis from a
Wrplus-lines^coa^W.^'^tM'Mtfc^fs'd^itfirn-iitely to-be-hiqh'iind-
added to the cost-of*cc«pHanc«-wUh,other,-RCRA.regulations,
could b« prohibitive cslative to the company's revenues, '.rhcthcc
this drives than out of business will depend on the supply and
demand balance in the hazardous waste management market. The
small firn will be at a disadvantage because the economies of
scale cause the small firm to incur greater total costs
(including Insurance costs) per ton of waste handled. It arr
excess-supply situation prevails, these firms will cletrly not
survive. If there Is a .tight,,*UPP.|V 'ttnatipn, *om« of the 11 r«n«
whic'. are currently above""the"break-even margin may well survive
'by passing along a»: least-some-of-their^costs.
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APPENOtX
Companies Contacted for Information on HaaaHous Waste
Insurance Availability
Kaae
Scott ftipl«y
Jaoes Morrow
R. Whit*
Tba Valenzo
VilllM Sveala*
tba Jackson
Ambrose Kelly
Dick Moll
John Tronzano
John Kaufnan
John Bogard
Arthur Webster
Frank Snook
John Livers
Wally Wang, C. Boyd
Richard Knopp
Ciarles Humastone
Ooaoany-
The Hartford Croup
-*.,*- •*• «^
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Appendix C
Appendix C provides a description ot the court suits filed by
individuals and by state and federal governments against hazardous waste site
owner* and operators.
-------
APPF3TODC C
DESCRIPTION OP THE COURT SUITS FILED BY PRIVATE INDIVIDUALS AND
BY STATB AND PEBERAL. OOVEWMES/TS AGAINST HAZARDOUS
SITE OWriERS AND OPOWFORS
COURT SUITS FILED BY PRIVATE
The EPA files contain very little information about private lawsuits
brought as a result of incidents at hazardous waste management sites.
lor the nost part, newspaper reports were the only source of information
on these lawsuits; follow-up telephone work yielded little additional
Infiarrwtion. Because of tM«. t>» infbrmtion on l*vsuifcs is incomplete
and often dated.
There are four cases for which dollar figures for private lawsuitr
could be obtained; two cases have been settled and two cases were ongoing
at-last report. -These cases are»
1. Jones Industrial Lnadfill. South Brunswicx, New jersey
The leaching of chemical wastes front the landfill sito contaminated
the aquifer and residential wells. Financial and procedural difficulties
prevented local residents fron fully pursuing their complaint; an out of
court settlement of $10,OCO was reached.
2. Galaxy Chemical, Slkton, Maryland
Galaxy Chemical was involved In legal disputes with both their workers
and local residents over exposure to hazardous chemical substances. Reports
of the high incidence of cancar and other illncsaoa areng local residents
•received wide attention in local papers and led Galaxy to close down lagoons
used for waste disposal. One group of l«=al residents who filed a $2.2
million suit against OIIATV '«s awarded S35.OOO by a jury. In another
$4.2 million lawsuiC'^oTlarages'were awarded:"
3. Love Canal. Niagara fells. New York
Residents have filed suits asking for over $14 billion in damages.
4. Velsiool Chemical Go.
Local residents filed a class action suit asking for $2.5 billion in
damages. Kb further information was available.
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C-2
In addition to these four eases* there are reports that private cltixens
have filed damage suits against conpanles involved in the Story Chemical Co.,
HcKin Company* and Tipton Martin cases. No further information was available.
COURT SUITS PILED BY STATE OOVERfWENTS
In eight of the ninety cases studied, state governments have filed suits
against hazardous' waste sit* owner3'"and 'operators to: 1)' force~cleanu"p~and
closure of the sites and/or 2V recover state aonles spent on measures such an
problem identification* «lte monitoring* and remedial or emergency actions.
The eight cases are the following!
1. Berks Associates* Oouglassville, Pennsylvania
In' 1970. A dike on a sludge lagoon broke cr.» rclaatmJ sluJga iaLo a near by
river. The State of Pennsylvania spent S 187, 000 on emergency cleanup
actions. The State Attorney Uenerai filed s>uU to cc-avsc the State's «
ditures and to force Berks Associates to take corrective actions.
2. Byron Salvase^Yar^j Byroa^ , Illinois
g" InsTSur la I of 'drus&e'd "a"nd"urt3russ.'ncd"VaatQa hava*caua«d
surface and ground water contamination. Although problems at the site were
reported as early as 1973* Uie State Attorney General did not file a nuit
asking for injunctive relief until March 1979.
3. Chemical Control Corporation, Elizabeth, New Jersey
The 40*000 druas of highly flammable and toxic wastes carelessly stored at
this site pose a significant fir«», «xplos«on, and water pollution hazard. In
January 1979*- the State of New Jersey filed a suit f or • injunctive relief. A
Temporary Restraining Order was issued by the Superior Court of New Jersey and
required the isacdiate reaoval of 12.000 drums o£ wastes. The U.S. Kt»A had
been planning to file a federal suit* but it deferred to the State action and
became involved in the proceed Inq8[ra3ra friend of the court. A hearing on the
granting of a preliminary injunction was held in February 1979. After the
defendants to lieu to comply *ith~the-Temporary Restraining Order «*th« court
.appointed a receiver to supervise site cleanup and tg_handle the fepojs and
assets of the lira.
4. McKin Company* Cray. Maine
Wastes leaking from corroded drums and tan*s owned by the McKln Company* a
solvent and oil processor, contaminated the drinking water supply wells of
nearby residents. In July 1973, the State Attorney General filed suit asking
foe cum^eruxttuty daaaijes and tinea Cor water twllucion.
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C-3
5. Summit National Liquid Services, Portage County. Ohio
Several thousand driuu and various tanks containing chlorinated hydrocar-
bons are stored at the Submit site. The site f: located within 200 feet of
residences and within the* Berlin Reservoir basin. In 1979*-the Stats filed a
suit asking Cor injunctlve relief and seeking fines and compensatory damages.
The State asks th'e"court't6 order'site""cleanup'and closure* to assess fines of
$10,000 per day for each day during the last four years that the site was in
violation of state pollution laws, and to grant compensatory damages of not
more than one million dollars for the recovery of state Etonian spent on the,
site. The four defendants have few assets so the chance of actual recovery of
state money is snail. The State is also asking the court to confirm che rul-
ing of courts In other states that the original generators of wastes are
responsible Coc U>« ultimate disposal of wastes; the State wants the orignlal
generators, including Hooker Cheaical and Lakeway Chemicals, to reclaim,
repackage, and safely dispose of their wastes from the Summit site. In
another court action, the State fire aarshall has asked the court to order
actions to correct the fire hazard at the site.
6. U.S. Druca, Chicago, Illinois
Spills of acid wastes froa some of the 5,000 drums stored at the site have
caused significant air pollution problems. In 1979. the Illinois Attorney
General filed a suit foe injunctive relief.
7. U.S. Steel, Palls, Pennsylvania
Hater.and air pollution problems at thirteen U.S. Steel plants in
Pennsylvania led itate officials to file suit aqainst U.S. Steel in I97fi. Tn
1979, the court ordered O.3.> Steel to undertake corrective and preventive
actions at their plant locations.
8. Wurtsaith Air Force Base, Michigan
Hater supprSPweUs' oiTano^eTr^fre'^firVsffllth'-Alr-Ftorco Base"Rave" beerf-teon'*
taiulnateu bythe^cheaical triehloroethylene, a known»careinogen.t In August
1979, the Michigan Attorney General filed suit against the U.S. Air Force
charging the Air Force with responsibility for the'grbun'd "and'surface water"
contamination in the area and with endangering state lands and on and off base
drinking water supplies. The suit asks the court to order the Air Force to
clean up the contamination and provide drinking water supplies to all affected
personal The State filed suit after the U.S. EPA refused to take iction to
enforce a joint notice, of violation and order of compliance issued by Michigan
and the U.S. EPA. U.S. EPA is reported to have decided not to act ifter the
Department of Justice refused to condone a suit by one government a lencv
against another.
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COURT SUITS FILED BY THE FEDERAL- GOVERNMENT -
Since the beginning of 1379, the Justice Department, on behalf of U.S.
EPA, has filed thirteen suits aa part of EPA '3 hazardous waste enforcement
effort. It has oeen reported that the Justice Department and U.S. EPA plan to
file approximately fifty other complaint a within the coming year (1980). Of
these thirteen suits, eight involve, sites, included in che 90 case studies from
the EPA danago files examined in this report. The thirteen cases which have
been filed thus far ares
1. Kin-Buc fj»rir1fill, Srrkhch ^lains. Mew Jersey
OnJTebruary^, 1979, the Justice Department filed a civil suit against
Kin-Buc. "lnctT"Tts"'o~wner
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court to declare the site an imainent hazard, enjoin the dependents from stor-
ing or disposing materials at the site without EPA permission, and to plan and
implement removal of the wastes*
3. Laskin Greenhouse and Waste Oil and Company, Jet Carson, Ohio
On April 24, 1979, the Justice Department filed a civil suit against Alan
Laskin, operator of Laskin Greenhouse, and the Waste Oil Company charging vio-
lations of the Toxic Substances Control- Act, Resource Conservation and Recov-
ery Act, and Clean Hater Act. The suit alleges that Laskin hag, since 1966,
obtained, stored and disposed of waste oils by burning then to provide heat to
grow tomatoes and by using then foe, road, oiling. . The suit claims Chat
although Laskin was warned by Ohio officials of the high PCS levels in the
waste oil, Ine^contl'nued1 teTlburn" 2dO,~000 gallons' per year and spread 600,000
gallons per year on public highways. The Justice Oopartaent asked the court
to issue preliminary and peraanent in -junctions reouirino Laskin to te*t for
PCB's and to cease storing and disposing of the PC3 mixture. In addition, the
suit asks for a $10,000 civil penalty for each day of unauthorized discharge
into Cemetery Creek since October 23; 1972.
4. Cheaicals and Minerals Reclamation, Incorporated, Cleveland, Ohio
On July 10, 1979, the Justice Department filed a civil suit against
Chemicals and Minerals Reclamation, Incorporated charging it with Upcoper
storage of 6,000 dru=s off hazardous waste.- The suit alleges that the site,
two abandoned and fire daaaged warehouses in downtown Cleveland, poses the
threat of fire oc explosion. The suit as'ts the court to declare the site an
imminent hazard, grant preliminary and permanent inlunctions to enjoin the
• operators from storing, treating or removing any wastes, and appoint an
outside consultant to pl&a and diccct waste rc^cviL.
5. .Midwest Solvent Recovery (MXOCO) Cacy, Indiana
On November l«r~1979«-tb«. Justice
Section 7003 o£ the Resource Conservation and Recovery Act. Approximately
14,000*druas~of*waste's*hawrbe'e*nM'«OBped at these- two-sites-and^a-major-f ire-
has. occurred at each, location.. _The.jsuit asks that l)._the operators be
enjoined from activities at the site; 2) tne defendants prepare and implement
a plan for waste removal* and 3> the site be fenced and patrolled.--- The- owner
aiul Cuciaec i^ecawOi of U.a ftito Jiicppeicei tcfsrc the suit was filed and
still has not been located.
6; Solvents Recovery and Lori Engineering, Southington. Connecticut
On December 17, 1979', the Justice Department filed a civil suit against
Solvents Recovery. Incorporated and the Lori Engineering Con-pany. In the suit
the Justice Depactaent charges that the handling, storage, and disposat'of
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5) 'take steps t'6~cfeafiupT^3reiqatis and al£k"
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have a temporary or peraanent alternate water supply. The suit asks the court
to order the Jefendents to 1) supply the residents with a temporary water
supply until the dependents can provide a-peroanent water-supplyi 2)-abate the
aquifer contamination and restore the aquifer to its previous state; 3) main-
tain on «nd off-site monitoring of groundwaeer; and 4) pay all costs of th«
investigation oC the problem.
POI94I.8
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