Section 3004 - Standards Applicable to Owners and Operators of
 Hazardous Waste Treatment, Storage, and Disposal Facilities
                 Parts 264 and 265, Subpart H

                 Interim Final Regulations on


                    OFFICE OF SOLID WASTE

                      November 2, 1981


     On May 19, 1980, financial responsibility requirements

for closure and post-closure care of hazardous waste manage-

ment facilities were reproposed.  Under the reproposal, the

following mechanisms were allowed as means of satisfying these

requirements:  trust funds, surety bonds, letters of credit,

a financial test, and a revenue test for municipalities.  In

the preamble (45 FR 33264) the Agency requested suggestions

and information on other possible mechanisms.

     EPA explored the possibility of insurance as a mechanism

for assuring funding for closure and post-closure care in

telephone conversations in June and July of 1980 with a

representative of the insurance industry,1 who in turn raised

the question with his clients.  Although no definite conclusions

were reached at that time, it did appear that this application

of insurance might be feasible.  Such a policy would assure that

the full costs estimated for closure and post-closure care would

be paid whenever closure and post-closure care occurred.  In

effect, such a policy would protect the public against abandon-

ment of the facility or bankruptcy by the owner or operator.

     Shortly thereafter the subject was again raised in a

discussion of insurance with a representative of the brokerage

firm of Alexander and Alexander, who agreed to assess the feasi-

bility of such a mechanism.2  The concept was discussed briefly

in the Background Document accompanying the January 12, 1981,

interim final regulations (Background Document dated December 31,

1980,  pages 1-133-134).


In subsequent meetings, telephone conversations, and letters,
the needs of the Agency were outlined to the insurance industry,
which responded by creating a plan which insures payment of the
estimated closure and post—closure care costs covered by the plan
whenever these funds are needed.
When it was determined that closure and post—closure
insurance could be made available to the regulated community,
the Agency, with the cooperation of a wide segment of the
insurance industry, developed regulations and a certificate
of insurance.
The issues involved in that development are defined and
explained in the following discussion.
Need for insurance mechanism
The Agency was aware that smaller, less creditworthy
firms would not be able to pass a financial test or obtain
an unsecured letter of credit or surety bond to assure
funding for closure and post—closure care. To these firms
would remain only the option of the trust fund. The trust
fund has a build—up period of 20 years or the remaining life
of the facility, whichever is shorter, during interim status,
and the term of the permit or the remaining life of the
facility, whichever is shorter, during permitted status.
There is a substantial risk that the fund will never be fully
paid up, either because of abandonment of the facility or
bankruptcy of the owner or operator. It was mainly to eliminate

this risk that the development of thea insurance option was
sought. The expected high cost of the trust fund to owners
and operators, due largely to current tax policies which
apparently do not allow deduction of the payments or exemption
of trust earnings, was also of concern. If the premium for
the insurance is tax deductible, this would likely cause the
insurance to be cheaper to the owner or operator than the trust.
The Agency is requesting clarification of the tax treatment of
these instruments from the IRS.
Limits on insurers
The Agency believes it is clearly important that the
insurance companies writing the policies be reliable. The
regulations state that the company must be licensed to transact
the business of insurance, or eligible to provide insurance
as an excess or surplus lines insurer, in one or more States.
The Agency understands that these are minimal qualifications,
but at present it has insufficient information to support
more stringent standards. The preamble to the regulations
refers to possible additional standards such as the rating in
Best’s Insurance Reports and suggestions received from the
National Association of Insurance Commissioners (NAIC). The
NAIC recommendations are as follows: Policies must be under-
written by an insurance institution which:
(1) Is domiciled in the United States and authorized to
transact the business of insurance as an admitted or
nonadmitted insurer in the State where the insured
facility is located, or
(2) Is a captive insurer licensed under a state law autho-
rizing the formation and operation of captive insurers,

(3) Is an alien insurer in good standing on the Non—
Admitted Insurers Quarterly List published by the
Non-Admitted Insurers Information Office of the
National Association of Insurance Commissioners.
The Preamble requests public comment on this issue.
Evidence of Insurance
Evidence that an owner or operator has obtained closure
or post—closure insurance to satisfy the financial requirements
must be submitted to the Regional Administrator in the form
of a certificate of insurance. An owner or operator of an
interim status facility must submit this certificate or, if
no policy is issued, evidence of having established alternative
financial assurance, within 90 days after the effective date
of these regulati ns. If an owner or operator plans to use
the insurance option, he need only submit to the Regional
Administrator, by the effective date, a letter from a qualified
insurer stating that the insurer is considering issuance of
such insurance to the owner or operator in conformance with
the regulatory requirements.,
An owner or operator of a new facility must submit a
certificate of closure or post—closure insurance at least 60
days before the date on which hazardous waste is first received
for treatment, storage, or disposal. This insurance must be
effective before this initial receipt of hazardous waste.
Determination of face amount of policy
To assure the necessary funds for closure and post—closure
care, the insurance policy must be issued in an amount equal to
the adjusted cost estimate, unless it covers only part of the

estimate and another instrument covers the rest. This is called
the “face amount.” Face amount is defined as the limit of
liability as set out on the Declarations Page of the insurance
policy. It is always the total amount the insurer is obligated
to pay under the policy. 3 Actual payments by the insurer do not
change the “face anount”, although the insurer’s future liability
will be lowered by the amounts of the payments. 4 Whenever the
cost estimate increases, the increase must be covered by the
policy or another instrument. The face amount may be decreased
in the event of a reduction in the cost estimate, following
written permission from the Regional Administrator. Similar
provisions are included in the requirements for the other
financial assurance mechanisms.
Availability of funds
The main feature of this insurance policy is that the full
amount of the adjusted closure and post—closure care cost
estimate, or that part to be covered, will be available
whenever closure and post—closure care occur——whether on the
expected date or when closure is required by emergency, by
termination or revocation of the permit or interim status,
or by court order.
This distinguishes the insurance policy from the trust
fund which can only provide the full amount at the end of the
pay-in period.
Reimbursement for expenditures
The Regional Administrator will direct the insurer to
reimburse closure or post-closure care costs, up to an amount

equal to the face a ount of the policy, incurred by any persons
authorized to perform closure or post—closure care as long as
the expenditures are in accordance with the closure or post—
closure plan or otherwise justified. The Regional Administrator
may withhold reimbursement of closure expenditures as he deems
prudent if he determines that the actual cost of closure appears
to be significantly greater than the face amount of the policy.
Any funds withheld from reimbursement will be released when
satisfactory certifications of closure are received by the
Regional Administrator. These provisions for payment are
the same as those for the trust fund.
Cancellation by owner or operator
The owner or operator may cancel the policy upon written
consent from the Regional Administrator based on establishment
of alternate financial assurance or when the owner or operator
is no longer required to maintain financial assurance. Other-
wise, failure to pay the premiums will constitute a serious
violation by the owner or operator of the financial responsibility
Cancellation by insurance company
Cancellation, termination, or nonrenewal of the closure or
post—closure insurance is allowed only if the insured fails to
pay his premium. The automatic renewal of the policy must, at
a minimum, provide the insured with the option of renewal at
the face anount of the expiring policy. If the cost estimates
to which the policy applies have increased, the insurer and
insured may agree to cover that increase in renewing the policy.

Cancellation, termination, or nonrenewal of a policy for
nonpayment of premium cannot be effected until 120 days after
receipt of such notice by the owner or operator and the Regional
Administrator. The policy will remain in full force and effect
if, on or before the effective date of cancellation, termination,
or nonrenewal, the facility is deemed abandoned by the Regional
Administrator; the permit or interim status is terminated or
revoked; closure is ordered by the Regional Administrator or
a court of competent jur isdiction; the owner or operator is
named debtor in a bankruptcy proceeding; or the premium is
paid. The Agency believes 120 days notice is necessary to
allow opportunity to the owner or operator and the Agency to
identify and carry out steps to maintain financial assurance.
Such steps on the part of the Agency may include compliance
proceedings, termination of interim status or the permit for
the facility, or a closure order.
Based on discussions with the insurance industry the Agency
expects that the policies will be issued on a yearly basis and,
in the normal course of events, will be fully paid up before the
post—closure care period begins. The insurer and the insured will
work out between themselves the dates premiums are to be paid.
The insurance industry has indicated that it may require premiums
to be paid at least 120 days in advance of the beginning of a
new term for a renewed policy, since in case of nonpayment of the
premium, the insurer must give 120 days’ notice before cancelling,
terminating, or failing to renew the policy. The insurer and

the insured can determine the extent of credit the insured may
receive for providing the insurer with the use of the premium
noney for the 120 days.
Assignment of policy
If a new owner or operator takes over management of an
existing facility covered by a policy, it might be to his
advantage to be able to assume tile policy rather than establish
a new mechanism. The regulations therefore require that the
insurer allow assignment of the policy to a successor owner or
operator. Such assignment is subject to the approval of the
insurer, provided such approval is not unreasonably refused.
Growth in post—closure funds
The regulations for the insurance plan have a provision
to assure that funds for post—closure care will continue to
grow apace with inflation. The face amount will increase
annually. The increase must be equivalent to the face amount,
less any payments made, multiplied by an amount equal to at
least 85 percent of the most recent investment rate (also known
as the equivalent coupon—issue yield) announced by the U.S.
Treasury for 26—week Treasury securities. Yield on the
Treasury bills was selected because it is competitive with
other low—risk investments and is widely published. 5 Also, for
these long—term policies, a standard that can be expected to
be available far into the future is preferable. Since issuance
of 26—week Treasury securities is a well—established practice,

having been done for alx ost 50 years, the rate for these secu-
rities is also a suitable standard because of its expected
long—term availability. 5 The investment rate was chosen
above the discount rate because it reflects the true return
realized by the seller. 6
The 85—percent standard sets a minimum rate of growth and
allows what the Agency believes to be a reasonable payment to the
insurer for administrative costs. The insurer and insured may
agree on a higher rate of return.
The cost of the insurance to the owner or operator will
naturally be a key factor in determining whether he will purchase
it rather than establish a trust fund or other mechanism. The
Agency expects that the cost of the insurance will be signifi-
cantly cheaper than that of the trust fund if payments for the
premiums are tax deductible and payments into the trust are not.
During nost of the period of development of the insurance plan,
the Agency believed that such would be the case. However,
recently an insurance company representative and a representative
of an insurance brokerage firm expressed uncertainty about
the deductibility of the premiums. 7 On the other hand, a tax
specialist for the American Insurance Association expressed
the belief that the payments would be deductible. 8 Informal
discussion with an IRS staff member tends to support the latter
view. 9 To clarify the tax treatment of the premiums, however,
EPA intends to ask IRS for a written opinion. The Agency has
already asked IRS for review of the tax treatment of the trust fund.

Aside from the tax treatment, there can be a cost advantage
to the owner or operator of a permitted site in using the
insurance plan over the trust fund because payments into the
plan may be scheduled over the expected life of the facility
rather than the 10—year permit life, which is the maximum
pay—in period for trusts under Part 264. If the policy spreads
the payments over a 20- or 30—year expected facility life,
this may represent substantial savings to the owner or operator.
Another possible advantage to the owner or operator in using
insurance as the means of financial assurance is the effect on
his financial statements. With the other methods of financial
assurance, the estimated costs of closure and post—closure
care will probably show as a form of liability on financial
statements, but with insurance coverage of the costs, they
will r iot. 10
One company, the St. Paul Insurance Company, has indicated
its present thinking on premiums that would be charged on this
insurance using a hypothetical case of a facility with an estimated
closure cost of $100,000 (current dollars) to be funded over
20 years. If a 10 percent inflation rate is assumed, then the
closure cost would be $670,000 in 20 years. Calculating 11.2
percent interest on the payments and then equalizing the payments,
the annual premium would amount to $12,000. This may be compared
to a trust fund established in the same case where the initial
payment would be $5,000 under interim status or $10,000 under
permitted status and would increase by 10 percent a year. The

company said that about S4,000 of the initial premium for the
insurance would be for covering the risk of early closure.
This anount would probably be reduced as the years went by,
while the portion for expected costs of closure or post—closure
care increased correspondingly. The company would also allow
larger yearly payments for the first few years and smaller
ones later on if the insured so chooses. One example it
gave was $15,000 for the first 5 years, then $12,000 for the
next 5 years and $7,200 for the last 10 years. 7
The cost of the insurance should also be affected by growth
of competition anong insurers. The regulations set forth only
the requirements that affect assurance of funds for closure
and post—closure care whenever such funds are needed. Other
aspects of the policy are left to the insurer and insured.
Therefore, specifications and premium rates are likely to
differ from one policy to another.
The closure and post—closure insurance regulations were
not sufficiently developed for inclusion in the previously
proposed regulations for the financial requirements. The Agency
is promulgating the insurance regulations without going through
the proposal stage because it believes that the insurance plan
should be an option available to owners and operators on the
effective date of the regulations. The insurance mechanism
provides strong financial assurance for closure and post—closure
care. It may furthernore provide cost advantages to owners

and operators, especially those who would otherwise esta-
blish trust funds. This option does not impose additional
burdens on the owner or operator but rather expands his range
of choices. Because the financial requirenents are being
issued as interim final regulations, there will be a 60-day
comnent period. Any inadequacies in the regulation may be
called to the Agency’s attention during this tine, and any
corrections that are necessary and feasible will be made.